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  • Adapting Finance to Islam

    November 22, 2007
    Adapting Finance to Islam

    By WAYNE ARNOLD


    KUALA LUMPUR, Malaysia — Rising oil wealth is lifting Islamic banking — banking that adheres to the laws of the Koran and its prohibition against charging interest — into the financial mainstream.


    Big banks, including Citigroup, HSBC and Deutsche Bank, as well as financial capitals like London, Tokyo and Hong Kong, are all going into the Islamic banking business. An estimated 300 Islamic financial institutions hold at least $500 billion in assets, an amount that is increasing more than 10 percent a year.


    In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and even Islamic derivatives. Loans and bonds that conform to the Koran are already available in the United States. Britain, Japan and Thailand are contemplating issuing Islamic bonds of their own.


    In Islamic banking, financiers are required to share borrowers’ risks, meaning that depositors are treated more like shareholders, earning a portion of profits. Financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.





    “This is an industry on its way from a niche industry to becoming a truly global industry,” said Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, the world’s second-largest Islamic bank, after Al-Rajhi Bank. “In the next three to five years you’ll see Islamic banks coming out in Australia, China, Japan and other parts of the world.”





    The stampede into Islamic finance is mostly an effort to tap an estimated $1.5 trillion of funds sloshing around the Middle East, largely from higher oil prices. While a lot of this oil money was parked in the United States, Britain and Switzerland before Sept. 11, 2001, bankers say many wealthy Arabs are investing closer to home, in part to avoid the hassle of increased scrutiny. At the same time, many Middle Eastern investors are eager to capitalize on Asia’s breakneck growth.





    By some estimates, as much as $800 billion of Arab money has moved from the United States and Europe to other regions. Those investments have helped ignite an economic revival throughout the Muslim world at a time of increasing religious conservatism among Islam’s 1.6 billion faithful.
    A result is expanding demand for financial services that adhere to Islamic law, or Shariah. “The middle class have the luxury of making these Islamic versus non-Islamic decisions,” said Nordin Abdullah, who runs KasehDia, a firm in Kuala Lumpur that advises companies on how to comply with Shariah. “They’re educated and have money.”





    Last year, Saudi Arabia’s largest lender, National Commercial Bank, overhauled its entire retail business to make it Shariah-compliant. Tunisia and Morocco authorized their first Islamic banks this year.
    And while the biggest Islamic banks are in the wealthy gulf states, the most attractive potential markets are in Turkey and North Africa and among Europe’s Muslims. Indonesia, the most populous Muslim nation, with more than 190 million Muslims, is the mother lode.





    Malaysia, a predominantly Muslim nation with a secular government and a fast-growing, export-driven economy, has emerged as a center for the industry’s development. Here, even non-Muslims are taking advantage of a growing range of Islamic products offering competitive returns.
    For instance, David Ong-Yeoh, a public relations executive tired of fretting over the rising interest rate on his adjustable-rate mortgage, refinanced to a 30-year fixed loan from an Islamic financial institution. Now, he pays regular installments that include a predetermined profit margin for the bank.
    “The terms are better than on conventional loans,” Mr. Ong-Yeoh, 41, said.
    Islamic finance also avoids practices prohibited under Shariah: Islamic bankers cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.





    Proponents of Islamic banking say these are limits any socially conscious investor can support, Muslim or not. They also envision wider appeal for Islamic banking’s ban on interest, which stems from the Koran’s prohibition against usury.


    That’s a view that has a long religious and historical tradition. Charging high interest rates to lend money is repeatedly condemned in the Bible. The Greek philosopher Aristotle denounced it, the Romans limited it, and the early Christian church prohibited it.


    Western theologians eventually distinguished interest from usury, and it was reintroduced to Christians and Muslims around the time of the Renaissance.
    But when Britain took advantage of Egypt’s mounting foreign debt in 1875 to buy Egypt’s stake in the Suez Canal and occupy the country, it generated a backlash against traditional banking in the Muslim world. The belief that all interest charges are unjust now underpins Islamic finance.
    “It’s about respecting the interests of the different parties, avoiding taking advantage of any situation of any counterparty and putting in place fair treatment,” said Rasheed Mohammed al-Maraj, governor of the central bank of Bahrain.





    Hoarding is frowned on in the Koran, so savings earn no return unless put to productive use. “Money should be used for creating better value in the country or the economy,” Mr. Maraj said. “Money cannot generate money.”
    Islamic banks cannot simply trade money either. “In the Islamic finance model, the banks are supposed to mobilize funds through a fund management concept,” said Rafe Haneef, head of Islamic banking in Asia for Citigroup.


    Indeed, Islamic banking is supposed to function more like private equity firms than conventional banking. “Private equity is an Islamic concept,” Mr. Haneef said.


    Industry proponents say this risk-sharing requirement helps reduce the kind of abuses that led to the subprime mortgage mess. Scholars consider it un-Islamic to overload a customer with debt or invest in a company with excessive debt.
    But this approach has inherent problems. Because Islamic financial transactions must have an underlying asset, Islamic bankers tend to have high exposure to real estate and construction projects. Hedging that exposure is difficult — though Islamic derivatives exist, scholars differ on whether they are permissible under the Koran.
    “There’s a general acceptance that risk needs to be managed and therefore some form of financial instrument needs to be developed,” said Zeti Akhtar Aziz, governor of Malaysia’s central bank. But “in Islamic finance you can’t have such securities,” he added. “We need to be able to look at some of the issues that revolve around this.”





    Islamic financial institutions have to depend on their own boards of Shariah scholars to approve every product. Shariah scholars are rare, and those with financial understanding even rarer, so many scholars sit on several boards, earning up to $100,000 in retainers.





    “If they’re complaining there is a shortage, what are they doing to solve this problem?” asked Sheikh Nizam Yaquby, a scholar based in Bahrain who sits on the boards of Citigroup, A.I.G. and HSBC, among others. He noted that Shariah scholars still earn less than accountants or corporate lawyers.
    As part of longstanding efforts to develop the industry, Malaysia has created scholarships and training programs. Governor Zeti’s father, Ungku Abdul Aziz, established the first modern Islamic financial institution, Tabung Haji, in 1962 to help poor Malays finance pilgrimages to Mecca and to mobilize rural savings.





    Later, the Malaysian government set up Islamic banks as part of a reformist platform to promote national development and blunt the appeal of fundamentalist Islamic political rivals.
    In early 2001, the government began offering tax incentives aimed at converting at least a fifth of the nation’s assets to Islamic finance by 2010. (Currently, they make up roughly 12 percent.) With China siphoning away some economic opportunities from Malaysia, Islamic finance has become part of a broader effort to lure tourism, trade and investment from the Middle East.





    “We are trying to position ourselves as being acceptable to the Middle East, to petrodollars,” said Wong Fook-Wah, chief executive of RAM Rating Services in Kuala Lumpur. “Hopefully they’ll fund economic growth in Malaysia.”
    In the early 1990s, Malaysia devised the first Islamic bond, or sukuk (suh-KOOK), an accomplishment it expanded on in 2002 by issuing the first global sukuk, raising $600 million. Now the global sukuk market totals $82.2 billion, with Malaysia accounting for two-thirds of it.
    But as the price of oil has rebounded, Islamic finance has boomed elsewhere.
    Sukuk issuance in the gulf is set to overtake Malaysia. Britain, which licensed its first Islamic bank in 2004, plans to issue its own sukuk. The Bank for International Cooperation in Japan is planning a $300 million sukuk. And in July, a Texas-based oil firm, East Cameron Partners, issued the first American sukuk, raising $165.7 million.
    Clearly, faith is not the only thing driving the market. At Kuwait Finance House’s Malaysian unit, Mr. Younis said, 40 percent of its depositors and 60 percent of its borrowers are non-Muslims.
    “We look at these things just like Apple or Berkshire Hathaway,” said E-lene Kee, a Buddhist corporate lawyer here who advises clients to use Islamic loans to finance construction projects.
    Mr. Ong-Yeoh feels the same. “It’s just taking advantage of the system,” he said. After taking out an Islamic loan for his home, he took another for his car.
    "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)


  • #2
    Re: Adapting Finance to Islam

    Whether these "Islamic finanical products" are actually HALAL or not, is debatable and questionable. As there is currently alot of difference in opinion on this at the moment .
    "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)

    Comment


    • #3
      Re: Adapting Finance to Islam

      It's just a way of wording the same riba based financial products and window dressing them to fool the awaam and those looking for an excuse to invest and make money by making them thinks it's shariah compliant.
      “Take Aqeedah from the Salaf, learn Adab from the Tableeghi Jamaat, and brotherhood from the Ikhwaan"

      Comment


      • #4
        Re: Adapting Finance to Islam

        Islamic Finance is Supported by Non-Muslims


        Source:Islamic Finance

        Non-Muslims Favor Islamic Finance

        Islamic finance, an industry picking up steam worldwide, is increasingly appealing to non-Muslims who find the Shari`ah -compliant service much fairer than traditional banking.
        "The terms are better than on conventional loans," David Ong-Yeoh, a Malaysian public relations executive, told the New York Times on Thursday, November 22.

        Islam forbids Muslims from receiving or paying interest on loans.

        Shari`ah-compliant Islamic banking operates by sharing profit or loss between the bank and its clients.

        Financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

        Ong-Yeoh, 41, is one of many non-Muslims opting for a growing range of Islamic products offering competitive returns.

        He first sought a 30-year fixed loan from an Islamic financial institution for his home. He later took another Islamic loan for his car.

        "It’s just taking advantage of the system."

        Ong-Yeoh is not alone.

        E-lene Kee, a Buddhist corporate lawyer, advises clients to use Islamic loans to finance construction projects.

        "We look at these things just like Apple or Berkshire Hathaway."

        At Kuwait Finance House’s Malaysian unit 40 percent of the depositors and 60 percent of its borrowers are non-Muslims.

        "It’s about respecting the interests of the different parties, avoiding taking advantage of any situation of any counterparty and putting in place fair treatment," explains Rasheed Mohammed al-Maraj, governor of the central bank of Bahrain.

        In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and Islamic derivatives.

        Islamic bankers cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.

        Booming

        Islamic finance is already one of the fastest growing sectors in the global financial industry.

        Hang Seng Bank, the second largest bank in Hong Kong and a subsidiary of global banking giant HSBC, launched on Thursday the Hang Seng Islamic China Index Fund, Hong Kong's first Islamic fund.

        "The Fund will help investors capture the potential investment returns generated by growing international interest in these markets," said William Leung, general manager of the bank's personal financial services and wealth management.

        Hang Seng is only the latest in a long list of international institutions, including Citigroup, HSBC and Deutsche Bank, going into the Islamic banking business.

        Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

        In Asia, Islamic finance is growing in double digits, with predominantly-Muslim Malaysia effectively establishing itself as a regional, if not global, hub.

        Indonesia, Thailand and Singapore are also among the countries promoting Islamic finance.

        In the Middle East, Saudi Arabia’s largest lender, National Commercial Bank, overhauled its entire retail business to make it Shari`ah-compliant.

        Tunisia and Morocco have also authorized their first Islamic banks this year.

        Shari`ah -compliant loans and bonds are already available in the US and Britain has decided to do the same.

        "This is an industry on its way from a niche industry to becoming a truly global industry," Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, told the Times.

        "In the next three to five years you’ll see Islamic banks coming out in Australia, China, Japan and other parts of the world."

        ISLAM ONLINE


        http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1195032536309&pagename=Z one-English-News/NWELayout

        Copyright © 2005 Journal of Turkish Weekly http://www.turkishweekly.net/news.php?id=50578
        "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)

        Comment


        • #5
          Re: Adapting Finance to Islam

          Islamic finance seeks independence from politics

          By Roula Khalaf in Dubai
          Published: November 18 2007 15:39 | Last updated: November 18 2007 15:39

          Islamic finance experts are trying to disassociate the industry from political Islam, fearing the amalgamation could create a backlash in the west as the sector surges forward in its integration into the global economy.
          Nasser al-Shaali, chief executive officer of the Dubai International Financial Centre Authority, on Sunday cited the need to disassociate Islamic finance from politics as one of the industry’s challenges.
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          “If we don’t demystify the industry, it will not be an alternative” in mainstream finance, he told a Dubai conference.
          The phenomenal rise of Islamic finance, a market now estimated at $750bn, with a growth rate of about 15 per cent a year, has coincided with a broader move among Muslim populations to assert their identity.
          While it is true that the global war against terrorism waged by the US and its allies has intensified the search for solutions within Islam, enhancing the popularity of Islamist political movements, Islamic finance experts insist that the factors behind the sector’s development have far more to do with economics than politics.
          “There’s a minority view that links political Islam with Islamic finance but that view needs to be eliminated,” Mr al-Shaali told FT.com. “We’ve sent the spectre of protectionism in the US and Europe and we cannot tolerate to see it spill over into Islamic finance.”
          Islamic financial products, he added, appealed not only to Muslims. “By some estimates, subscription levels for sukuks [Islamic bonds] are 50 per cent from non-Muslim investors.”
          Mr al-Shaali said there was a need to raise awareness about the industry and better communicate what it’s about to decision-makers abroad.
          The growth of Islamic finance, he maintained, was driven by the interest in more ethical investing. “In an age of greed, well publicised corporate corruption and increased awareness of the social role and responsibility of corporations, investing in Islamic finance is a refreshing alternative,” he said.
          Sheikh Yusuf Talal DeLorenzo, chief Shariah officer at Shariah Capital, a DIFC-based advisory company, said in a separate interview that the industry’s growth had most to do with its ability to compete with conventional banking.
          “In the last 10 years, we begun to compete with conventional institutions, we can provide the same levels of service and perform with the same bottom line,” he said.
          Humayon Dar, chief executive officer of BMB Islamic, a London-based advisory firm, said Islamic financial products are designed to appeal to moderate Muslims.
          “Islamic finance is a modernist movement in Islamic communities,” he told FT.com. “It has no political agenda – it’s about a new Islamic identity for moderate Muslims and an attempt to bring Muslims out of the mosque and into the market they interact and trade with people.”
          He noted that for the first time, Islamic clerics were dealing with the “torch bearers of capitalism.” If funds from the region are not going into the US as fast as in the past, he added, it was not due to a lack of interest by investors but is rather blamed on the difficulty of accessing the American market.


          Copyright The Financial Times Limited 2007
          "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)

          Comment


          • #6
            Re: Adapting Finance to Islam

            http://www.gulf-daily-news.com/Story...&IssueID=30240
            Islamic finance 'is seeing rise in global demand'


            LONDON: Delegates at a two-day conference on Islamic Housing and Real Estate Finance held in London heard how Islamic finance is set for a major boost over the next few years.


            Putting Bahrain firmly on the world map of Islamic housing finance, Sakana Holistic Housing Solutions chief executive R Lakshmanan spoke on global and GCC-specific housing segmentation trends. He said how the real estate market is undergoing constant change due to many diverse factors which are closely allied to economic, demographic and cultural influences.


            He also discussed how Islamic finance can develop the latent demand by using mortgage products as well as value-added services.
            "The GCC mirrors many of the changes we see in international property markets which are boosting the demand for Islamic housing finance," he said. "These include changes to property laws which allow more people to participate in the housing market; a greater variety of property including more affordable housing, and the increasing range and acceptability of Islamic mortgage products."
            Recent changes in the GCC real estate market - in particular the increase in availability of freehold property - are contributing to the steady growth in demand for Islamic mortgage finance.
            "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)

            Comment


            • #7
              Re: Adapting Finance to Islam

              Originally posted by Abu Mu'adh View Post
              It's just a way of wording the same riba based financial products and window dressing them to fool the awaam and those looking for an excuse to invest and make money by making them thinks it's shariah compliant.
              No, not all of them are like this. Sure there may be some that are but that doesn't mean that all Islamic banks are doing this. And this kind of attitude doesn't help. Those who bank with Islamic banks are at least trying to stay away from that which is haram. And this is a good thing. Whereas there are some who like to operate with Western banks and then try to make themselves feel good about this by saying that Islamic banks are the same and that there is no point in switching over to an Islamic bank (I'm not pointing any fingers). This is not the attitude we as Muslims should have. We should try our best to adhere to the commands of Allah (swt) and stay away from that which is haram. And if we cannot completely remove ourselves from haram then we should at least attempt to limit it.

              Peace.
              "And thus have We willed you to be a community of the middle way."
              (al-Baqarah: 143)

              Allahumma innaa na'udhu bika min an nushrika bika shai-an na'lamuh; wa nastaghfiruka limaa laa na'lam.

              Comment


              • #8
                Re: Adapting Finance to Islam

                Is Islamic banking in Pakistan really Islamic? ======================================= http://www.thenews.com.pk/print1.asp?id=83982 By By Sajid Aziz 12/2/2007 Doubts exist among consumers about the Islamic banking being practised in Pakistan, the growing popularity of this mode of banking and finance in the country and other parts of the world notwithstanding. People mainly raise the question, is it really Islamic? Those who raise questions about the authenticity of Islamic banking are, undoubtedly, firm believers in Islam, the Islamic economic system and the unity of the Muslim Ummah. Eminent Islamic scholar and the chief of the Tanzeem-e-Islami, Dr Israr Ahmad, says: “Islamic banking is no different from the interest-based conventional banking. The Islamic banking being promoted and practised in Pakistan is nothing more than a fraud.” He says second Caliph Hazrat Umar Farooq, in the light of Prophet Muhammadís (Peace be upon him) sayings, had ruled that any deal/business where there is a doubt about the involvement of usury/interest should not be accepted. The argument as to whether Islamic banking is really Islamic has two different facets. First, whatever is being practised under the name of Islamic banking is apparently quite similar to the operations of a conventional financial institution, so it creates doubts in people’s minds and they ask on what grounds we can call it Islamic? So they feel that it is merely a change of name and documents and, in fact, it is no different from conventional banking. The second facet of the question is more important and pertains to the socio-economic factors associated with the overall Islamic financial system. Due to significance of these objections, we will discuss these two issues before looking on other arguments. Merely a change of name and documents: Omar Mustafa Ansari, a prominent scholar and the author of a book on Islamic finance namely “Managing Finances ñ A Shariah-Compliant Way,” says the most common and most discussed argument against contemporary Islamic banking is that there is “no difference” between conventional banking and Islamic banking and it is merely a change of name and documents. The second argument, which is actually derived from the first, is that even in Islamic banking the most common products being used, eg, Morabaha, Musawwama, Salam, Istisna, Diminishing Musharaka and Ijara Muntahia Bittamleek are based on fixed return. Even the Musharaka and Modaraba based products are engineered in a way that the profits are ‘virtually-fixed.’ Ansari says that one should realise the fact that unless we can distinguish an Islamic bank from a conventional bank, it would be difficult for us to rely on the former. It has been observed that Islamic banks try to ensure that their products are similar to those offered by conventional banks in all respects, even if for that purpose they have to incorporate a few provisions in products that are not considered to be good or a few of them are considered Makrooh (permissible but undesirable). In addition, Islamic banks’ endeavours are geared towards minimisation of their risk in every possible way, thus the essence of Islamic finance which is based on risk-taking is killed. Most importantly, it should be borne in mind that in some areas there is a very thin line of difference between Haram and Halal. For example, by only saying aloud the name of Allah Almighty on an animal while slaughtering it makes it Halal and permissible and without pronouncing the name of Allah the meat becomes Haram. Likewise, by uttering a few sacred words in the presence of a few witnesses a man and woman become lawful man and wife. Similarly, if a transaction can be engineered in a way that it becomes Shariah compliant, then we should not conclude that it is Haram only due to its resemblance to the interest-based financing, he says. “Also, it is pertinent to note that since the Islamic financial services sector is in its infancy when compared with conventional banking, we unfortunately have to follow the conventional system in the pattern of financial products and are still not in a position to develop totally new financial services. Over several centuries, the conventional banking system has acquired a good understanding of human needs and psychology and has invented a considerable number of financial products. For example, if they have running finance and overdraft as a financing tool, we have an alternative to it in the form of Istijrar with Morabaha or Musharaka based running finance model. Similarly, if they use finance leases as a financing tool, we have made it Shariah-compliant through Ijara Muntahia Bittamleek, or Diminishing Musharaka. These are only two examples. The list is long and for each interest-based financial product, except for those explicitly Haram, more than one alternatives have been formulated,” says Ansari. No one can argue that fixed return-based banking, although being Shariah compliant, is not in keeping with the tenets of Islam. In addition, Islamic banking as being practised at present focuses more on consumer finance than on catering to the needs of SME and agricultural sectors and micro-finance, so it is not contributing enough towards a “just and equitable monetary system” that Islam desires, he explained. Is it Heela banking? It is being discussed at various forums that contemporary Islamic banking is based on Heelas. From the perspective of Shariah, people take recourse to Heela to circumvent what is proscribed in religion. Those having an insight into the industry cannot disagree with this argument to a certain extent, as it has been observed that certain transactions are based on Heela. The charge of Heela cannot be levelled on the entire industry. We should acknowledge that the industry is primarily based on the principles of the Holy Quran, Sunnah and Fiqh. It is worth noting that mostly a Heela is applied in the “execution of a transaction” rather than “designing of a transaction.” In other words, we can safely conclude that the application of Heelas in Islamic banking is not due to any weakness due any weakness in the theories of Islamic banking, but actually it is entirely a matter of misuse/ misinterpretation of basic Shariah guidance in respect of various Shariah-compliant financial transactions. So it becomes imperative that in order to support the growth of Islamic banking and finance on right footings, we should strengthen the Shariah-compliance mechanism for the industry. Also, there is the need to eliminate Islamic financial products that have the potential of misuse. Use of interest rate as benchmark: is it Halal? Critics, including scholars and economists, say that most International Finance Institutions, while providing financing by way of any of the ‘Halal’ transactions, determine their profit rate on the basis of the current interest-rate benchmarks prevailing in the conventional money market. Scholars are of the view that by applying these benchmarks the Islamic banking industry makes their transactions ‘similar’ to interest-based transactions and, as a consequence, these transactions become doubtful from the Shariah point of view. Economists say this makes these financial institutions a part of the prevailing capitalistic economic systems, so such transactions go against the tenets of Islam. This issue, however, needs to be addressed by the government as well as the market players. A strong Islamic inter-bank market may provide us opportunities to develop our own benchmarks for Islamic banking operations, Ansari concludes.
                "Closer and closer to mankind comes their Reckoning: yet they heed not and they turn away" (21:1)

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