ISFIRE | Volume 2 | Issue 2 | May 2012

Epistemology offinance: mitigating risk

The evolving needs ofBritish Muslims

The Goldman Sachsdiscord

Global Donors Forum

Interviews with Azmat Rafique andMohammed ShaheedKhan

Juristic differences inIslamic finance

Evolution of Islamicbanking in Pakistan

Islamic FinanceCountry Index

Revival of the Islamiccivilisation

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ustainability leads to immensereward. An idea or a product thatsurvives through the vicissitudes of

time deserves commendation as it hassuccessfully overcome the challengesplaced before it. Every business isdependent on a great many factors that gobeyond its initial remit.

To be in a constant state of flux, acase of action and reaction is necessary forany business survival. For the world is everchanging, ever growing, and neverpredictable.

Randomness can therefore alter theperceptions and directions of anyone. It isuncertainty that intrepidities man andmakes us feel nervous. Fortune tellers usedto be - and in many cases still are- the relieffor the uncertain man. Accorded asupernatural status, their portents couldcomfort or frighten but it led to a degree ofclarity. Today, in the financial markets, wehave our own fortune tellers. Statisticianshave replaced mysterious women at glassballs, producing their predictions throughmaths and diagrammatic assertions,comforting the investor who wishes tomitigate uncertainty.

How a business responds willdetermine its longevity; that is why brandssuch as Coke, Kelloggs, De Beers, etc. areso impressive. These brands have createdan idea and ethos which has embeddeditself in society. The consumer when hebuys a product ultimately buys an idea.

To explain this point, one onlyneeds to look at advertising. We see TVadverts and billboards publicising aproduct but we have not experienced it.How do we know what a drink tastes like,or how a car drives simply by looking at anadvert? Without experience, the advert hasto draw you in by appealing to yourvisceral emotions. It is the idea that isconveyed and it is the idea we buy.Longevity embeds the idea.

Islamic finance has ideas, it hasconveyed ideas, but can it last? Will presentconsumers remain attracted? Will potentialcustomers become impressed with theideas it seeks to convey?

The unique Edbiz-NASDAQ OMXShari’a Indexes is one type of product thatpromotes the idea of Islamic finance andsocially responsible investment. NASDAQOMX, as an international exchange, has beenat the forefront of innovation and forewardthinking in the markets. Edbiz Consulting isproud to partner NASDAQ OMX increating these unique Shari’a indexes. In thisedition of ISFIRE, John L. Jacobs, ExecutiveVice President of NASDAQ OMX, gives us

his viewpoints on the indexesand the Islamic financemarket in general.

On the topic of socialresponsibility, the efforts ofDr. Tariq Cheema and theWorld Congress of MuslimPhilanthropists is a step in theright direction for synergisingIslamic finance and charitablegiving. The Global IslamicFinance Report 2012 recievedan award at their annualGlobal Donors Forum, aspecial honour for the EdbizConsulting Team.

There is still much todo to push Islamic financeforward. The spirit of Islamicfinance is still a contentiousquestion. Replication re-mains a bugbear but forRizwan Rahman one needsto go deeper to understand the spirit. Look-ing at Goldman Sachs, he writes upon thepotential pervasiveness of greed in bankinginstitutions and argues that a focus on mak-ing money can lead to negative conse-quences. Changes in individual behaviourcan have huge changes in culture. Problemsof replication and juristiic differences lead touncertainty. Dr. Inam Ullah Khan exploresthe latter in a little more detail in this issueof ISFIRE, providing su!cient evidence ofthe differences between the Gulf andMalaysia on certain products. More harmon-isation is required and a rethinking of theway we conduct ijithad. Differences can leadto a weakening of the system especially intoday’s international connected market. Un-certainty and complexity makes Islamic fi-nance less palatable to a western audience.Maybe, precisiely for these reasons, in theUK, there has not been a su!cient uptake ofIslamic financial products. Islamic financialinstitutions need to understand Muslim fi-nancial needs in order to offer the rightproduct mix. Tariq Masood muses over theevolution of Muslim financial needs andwhat this means for Islamic finance.

Good ideas and principles cansustain this industry. The question ofprinciples is something Dr. AbbasMirakhor has been attempting to answer,looking at the epistemology of Islamic andconventional finance. In his final article forISFIRE, he discusses an approach to risk.While there will always be uncertainty, riskcan be mitigated through governmentaction, moral players and e!cient markets,particularly stock markets. The wayIslamic finance approaches risk is crucial to

its success.Nevertheless, many nations have

adopted Islamic finance and it is time thatwe compare and contrast fortunes. TheGlobal Islamic Finance Report 2012,released in April, contains the ground-breaking Islamic Finance Country Index(IFCI), a composite ranking indicating theperformance of Islamic finance in differentcountries. Rizwan Malik, Associate Editorof the Report, explains the IFCI in a littlemore detail and gives a breakdown of theranking. One country in the top 10 wasPakistan. Pakistan has had an interestingrelationship with Islamic finance. The StateBank of Pakistan’s Usman Ahmad looks atthe progress of Islamic finance in Pakistan.

Once upon a time, in the Islamicdynasties of old, the behaviour of its peoplecreated a magnificent culture. The GoldenAge of Islam was truly a golden age, onethat Muslims admire. For Dr. Sofiza Azmi,Islamic finance can be the vanguard of anew, vibrant and dynamic culture. Shewrites passionately about how Islamicfinance can act as the link between theGolden Age of Islam and contemporarysociety. This is really dependent on thepractitioners in the market; and bankers likeAzmat Rafique and Muhammad ShaheedKhan are leading the way in promulgatingthe best that Islamic finance can offer. In thisissue of ISFIRE we interview theseimportant figures in the industry.



ncertainty about future outcomes isa fact of human existence. If severeenough, it can lead to anxiety, deci-

sion paralysis and inaction. Lack of cer-tainty for an individual about the future isexacerbated by ignorance of how others be-have in response to uncertainty. Yet, indi-viduals have to make decisions and takeactions that affect their own as well as oth-ers’ lives. Making decisions is one of themost fundamental capabilities of humans;it is inexorably bound up with uncertainty.Facing an unknown, and generally un-knowable future, individuals make deci-sions by forming expectations about payoffs to alternative courses of action. Theycan do so using subjective estimates of payoffs to actions based on personal experi-ences. Alternatively, the person can useknown probability techniques to form anexpectation of returns to an action. Eitherway, the expected outcomes will form anexpression in terms of probability of occur-rence of consequences to an action. In

other words, uncertainty is converted intorisk. Risk, therefore, is a consequence ofchoice under uncertainty and exists wheremore than one outcome is possible. It isuncertainty about the future that makeshuman lives full of risks.

Risk can arise because the decisionmaker has little or no information regard-ing which state of affairs will prevail in thefuture. The decision maker does not or can-not consider all possible states that mayprevail in the future. In this case, even ifthe decision maker wants to consider allpossible future states, there is so muchmissing information that it is impossible toform expectations about pay offs to variouscourses of action. This situation is referredto as “ambiguity”. If severe enough, thistype of uncertainty too leads to reluctanceor even paralysis in making decisions. Peo-ple adopt various strategy of “ambiguityaversion”. One strategy is to exercise pa-tience and postpone making decisions untilthe passage of time makes additional“missing” information available. In a num-ber of verses, the Quran states: “Allah iswith those who are patient” and “Allahloves those who are patient”.

Dealing with uncertainty is a form

of examination from the divine overseer.A number of Quranic verses makes refer-ence to the fact that this temporary exis-tence is a crucible of constant testing, trialsand tribulations (see for example verses2:155 and 2:76). Not even the believers arespared. In verse 29:2 the Quran asks: “Dohumans think that they will be left alonewhen they say: we believe, and they there-fore will not be tested?” The fact that thistesting is a continuous process is reflectedin 9:126: “Do they not see that they aretried every year once or twice? Even thenthey do to turn repentant to Allah, not dothey remember”. (See also 2:155). To everytest, trial and tribulation in their life-expe-rience, humans respond and in doing sothey demonstrate their measure of beingself-aware and Allah-conscious. If the re-sponse-action is in compliance with therules of behaviour prescribed by theSupreme Creator, then it is considered the“best action” (11:7). The trial becomes anoccasion for self development andstrengthened awareness of Allah (swt).Even then, uncertainty remains. Muslimsare recommended not to ever assume theyare absolutely certain of the consequencesof their actions. They are to live in a state


of mind and heart suspended between fear(khawf) of the consequences of their ac-tions and thoughts, and the hope (raja’) inthe Mercy of the All-merciful Lord Creator.All actions are risky because the full spec-trum of future consequences of action isnot known. The Quran refers to this ideaof uncertainty by suggesting that “ … attimes you may dislike a thing when it isgood for you and at times you like a thingand it is bad for you. Allah knows and youdo not.” (2:216)

While life and freedom are gifts ofthe Supreme Creator to humans, and un-certainty and risk are there to test and tryhumans to facilitate their growth and de-velopment, humans are not left unaided toface the uncertainty of life. Books,Prophets and Messengers have broughtguidance on how best to make decisionsand take actions to mitigate the risks of thislife and to improve the chances of a felici-tous everlasting life. Islam, in particular,has provided the ways and means bywhich uncertainties of life can be miti-gated. First, it has provided rules of behav-iour and a taxonomy of decisions – actionsand their commensurate pay offs in theQuran. Complying with these rules re-duces uncertainty. Clearly, individuals ex-ercise their freedom in choosing to complyor not with these rules. That rules of be-haviour and compliance with them reduceuncertainty is an important insight of thenew institutional economics. Rules reducethe burden on human cognitive capacity,particularly in the process of decision mak-ing under uncertainty. Rules also promotecooperation and coordination. Second,Islam has provided ways and means bywhich capable individuals mitigate uncer-tainty by sharing the risks they facethrough engaging in economic activitieswith fellow human beings. Sharing allowsrisk to be spread and thus lowered for in-dividual participants. However, if a per-son is unable to use any of the marketmeans of risk sharing because of poverty,Allah (swt) has ordered a solution here aswell: the rich are commanded to share therisks of the life of the poor by redeemingtheir rights derived from the Islamic prin-ciples of property rights. Islam’s laws ofinheritance provide a further mechanismof risk sharing.

Individuals in a society face twotypes of risks. The first is the result of the

exposure of the economy to uncertaintyand risk due to external and internal eco-nomic circumstances of the society and itsvulnerabilities to shocks. How well theeconomy will absorb shocks depends on itsresilience which will in turn depend on theinstitutional and policy infrastructure ofthe society. How flexibly these will re-spond to shocks will determine how muchthese risks impact individual lives whenthey materialise. The second type of risk in-dividuals’ face relates to personal circum-stances. These include risks of injuries,illness, accidents, bankruptcies or evenchange of tastes and preferences. This kindof risk is referred to as idiosyncratic andwhen they materialise, they play havocwith people’s livelihood. This is becauseoften the level of their consumption thatsustains them is directly dependent ontheir income. If their income becomesvolatile so will their livelihood and con-sumption. Engaging in risk sharing canmitigate idiosyncratic risk and allow con-sumption smoothing by weakening thecorrelation between income and consump-tion such that should these risks materi-alise, and the shock reduce income,consumption and livelihood of the individ-ual do not suffer correspondingly.

It is important to note a nuanceddifference between risk taking and risksharing. The former is an antecedent of thelatter. The decision to take risk to producea product precedes the decision on what todo with the risk in financing the project.The decision to share the risk in financingdoes not increase the risks of the projectbut reduces the risks for individuals in-volved in financing it as it is spread overlarger number of participants. It is also tobe noted that the Islamic contract modes

that have reached us are all bilateral realsector contracts. The accomplishment ofcontemporary Islamic finance industry isto:

(i) multilateralise the bilateral con-tracts as the latter move from the real sectorto the finance sector; and

(ii) employ instruments of risktransfer available in the conventional fi-nance but made them Shari’a-compatible.

Instruments of Islamic financeallow risk sharing and risk diversificationthrough which individuals can mitigatetheir idiosyncratic risks. On the otherhand, mandated levies, such as zakat, aremeans through which the idiosyncraticrisks of the poor are shared by the rich asan act of redemption of the former’s prop-erty rights in the income and wealth of thelatter. Other recommended levies, beyondthose mandated, such as sadaqa and qardhasan, too play the same role. They helpreduce the poor’s income – consumptioncorrelation. In other words, the poor arenot forced to rely on their low level incometo maintain a decent level of subsistenceliving for themselves and their families. Itis possible that at some point in time eventhese levies can be instrumentalised to beincluded in Islamic finance’s menu of in-struments for risk sharing. Instruments ofrisk sharing will help blunt the impact ofeconomic shocks, disappointments andsuffering on individuals by dispersingtheir effects among a large number of peo-ple. Having a suite of Islamic financial in-struments available for all classes of peoplewill assist in reducing their idiosyncraticrisks and smooth their consumption. Itwill ensure that innovators, entrepreneurs,small and medium size firms have access


to financial resources without the need totake all risks on themselves or, alterna-tively, abandon productive projects alto-gether. Takaful instruments will not onlyprovide protection against health and acci-dent risks but also insure against risks tolivelihood and home values to protect peo-ple’s long-term income and livelihood.Only when such a full-spectrum of finan-cial instruments is available, without trans-ferring risks of any venture to a particularclass or to the whole society, can Islamic fi-nance be said to have “democratised fi-nance”. This would be in sharp contrast tothe results of the “democratisation of fi-nance” project which led to the recentglobal financial crisis in which the risksand failures of financial innovations wereshifted away from financiers to society atlarge.

The primary instrument of risksharing is a stock market. Developing ane!cient stock market can effectively com-plement and supplement the existing andto-be-developed array of other Islamic fi-nance instruments. It would provide themeans for business and industry to raiselong-term capital. A vibrant stock marketwould allow risk diversification necessaryfor management of aggregate and idiosyn-cratic risks. Such an active market wouldreduce the dominance of banks and debt fi-nancing where risks become concentratedcreating system fragility.

Idiosyncratic risks impact the liq-uidity of individuals and firms when theymaterialise. With an active stock market,individuals can buffer idiosyncratic liquid-ity shocks by selling equity shares theyown on the stock market. Firms too can re-duce their own idiosyncratic and liquidityrisk through active participation in thestock market. They can reduce risk to therate of return to their own operation – suchas productivity risk – by holding a well-di-versified portfolio of shares of stocks.Thus, incentives are created for investmentin more long-term, productive projects.Importantly, by actively participating inthe stock market, individuals and firms canmitigate the risk of unnecessary and pre-mature liquidation of their assets due toliquidity and productivity shocks. More-over, an active and vibrant stock marketcreates strong incentives for higher degreeof technological specialisation throughwhich the overall productivity of the econ-omy is increased. This happens because

without su!ciently strong risk sharing inthe financial system through the stock mar-ket, firms avoid deeper specialisation fear-ing the risk from sectoral demand shocks.The reason stock markets are such an effec-tive tool of risk sharing is because eachshare represents a contingent residual eq-uity claim.

It can be argued that the actual op-eration of Islamic finance market differsfrom its ideal. In essence, there is a marketfailure: missing markets in equity sharing.Strong government policy action can createan incentive structure for the Islamic fi-nance market to complete the spectrum ofits instruments. The market has developedan array of short-term, liquid and reason-ably safe instruments which are consideredShari’a compatible. This was not the casesome thirty years ago. Then too, there wasa missing market for Islamic instrumentsfor which there was substantial demand. Ittook considerable commitment of re-sources and credibility on the part of gov-ernments, notably Malaysia, to organisethis missing market to meet existing de-mand.

Malaysia’s success stems from notonly the top-down push by the govern-ment but also other ingredients that had tobe put in place for the venture’s success.The most important of these ingredientswere human capital, regulatory structureand financial infrastructure to allow theemergence of Islamic banks. (One of the

most important regulatory devises that cre-ated an effective impetus to the develop-ment of Islamic finance in Malaysia was the“no leakage rule”. This rule required thatthe financial resources mobilised by the Is-lamic banking window had to be utilisedin empowering financially Islamic con-tracts only). The success of the Malaysia ina relatively short span of three decades in-dicates it has adopted an appropriateframework for future progress. Specifi-cally, its model would suggest that thesame kind of intense dedication and com-mitment could successfully generate theways and means of pushing the agenda ofIslamic finance forward in terms of devel-oping medium – to – long-term instru-ments of risk sharing. One strategy wouldbe for governments to develop the long-term, high-return, riskier end of the spec-trum of instruments of risk sharing, i.e.stock markets. This would create theneeded incentive for the private sector todesign and develop instruments in-be-tween the short-term, liquid end of themarket on the one hand, and the stock mar-ket on the other.

A large number of theoretical andempirical studies have focussed on the in-


tives for investing in projects that havehigher returns but lower liquidity.

Empirical studies have demon-strated that countries with robust stockmarkets rely more on equity and long-termfinancing and less on banks and short-termdebt. Firms place greater reliance on exter-nal capital than on internal funds. With astrong stock market, venture capitalists canrecoup their capital investment in a projectthrough initial public offerings thus pro-moting faster roll over of venture capital tomake it available more frequently to fi-nance other productive real sector projects.Not only can individuals and firms benefitfrom existence of a vibrant and robuststock market that provides risk sharing op-portunities, countries too can benefit fromrisk sharing with one another. A largebody of empirical research in recent yearsin the area of international risk sharing hasdemonstrated that there are gains to bemade by countries when they trade in eachther’s securities

The question that arises is why is in-ternational risk sharing so low? This ques-tion is one researchers have been trying toexplain in recent years along with anotherrelated puzzle called the equity premiumpuzzle that has been attracting attentionsince it was first formulated in 1985, Itrefers to a significant differential existingbetween stock market returns and the rateof interest paid on a safe bond (US Treas-ury bonds) over an extended period oftime. Economic theory would assert thatthe differential should not exist. Capitalshould have left debt instruments andmoved into equities until the ratesequalised. Hence, the puzzle to be ex-plained is why this high differential contin-ues to persist? The differential cannot beexplained by the existing theory of behav-

vestment-employment-growth benefits ofstock markets. When risk is spread amonga large number of participants through ane!cient stock market, closer coordinationbetween the financial and real sector is pro-moted as well as better sharing of the ben-efits of economic growth and financialsystem stability. Risk transfer throughdebt instruments, in contrast, along withhigh leverage, weakens the link betweenthe financial and real sector thus posing athreat to financial sector stability. Espe-cially as the growth of pure financial in-struments far out-paces the growth of thereal sector activities a phenomenonemerges called decoupling whereby fi-nance is no longer anchored in the real sec-tor. The result is financial instabilityleading to frequent bouts with crises.

Aside from the fact that, throughrisk sharing, stock markets become an ef-fective instrument of financing long-terminvestment, they have an added benefit ofbeing an instrument which individuals andfirms can use to insure against liquidityand productivity shocks. While some indi-vidual idiosyncratic risks can be mitigatedthrough purchase of insurance policies,such as health, life, and accident, there arepotentially a large number of unforeseen,therefore unpredictable, personal or familyrisks that are not as of yet insurable and forwhich no insurance policy can be pur-chased. An individual can buffer againstuninsurable risks by buying shares ofstocks in good times and selling themwhen and if a liquidity shock is experi-enced. Similarly, stock markets can beused to diversify the risk of shock to assetreturns. Firms too can use the stock marketas a buffer against liquidity and productiv-ity risks. These insurance functions of thestock market create motivation and incen-

iour under risk. Researchers have used va-rieties of utility functions and risk charac-teristics, but the puzzle remains largelyunexplained. Similarly, there have been at-tempts to explain the low internationalrisk-sharing puzzle but formal modellinghas not been fruitful. It is suspected thatreasons which explain low participation inthe domestic equity market, hence theemergence of the equity premium puzzle,are the same factors that could explain thelow international risk-sharing puzzle. Theprime candidate is low trust levels and thehigh cost of entering the market.

Equity markets that are shallowalso have limited participation. Empiricalevidence suggests one reason for a low par-ticipation of the population in the stockmarket is that people generally do not truststock markets. Low level of trust, in turn,is explained by institutional factors and ed-ucation. Moreover, high transaction costs– especially information and search costs aswell as the high cost of contract enforce-ment – are crucial factors inhibiting stockmarket participation. These factors toostem from the institutional rules of behav-iour in the economy. Possible reasons forlimited stock market participation include:

(i) information costs;(ii) enforcement costs; and(iii) costs due to weak governance

structure of firms and markets.

If these costs are prohibitively high,firms will leave the equity market and re-sort to debt financing through banks. Butbanks are highly leveraged institutions thatborrow short (deposits) and lend long.This maturity mismatch creates potentialfor liquidity shocks and instability. Evenin the case of banks, there are informationproblems that lead to market failures suchas credit rationing which paralyse the op-portunity for risky but potentially highlyproductive projects because they are ra-tioned out of the market.

If the Islamic rules of market behav-iour – such as faithfulness to the terms andconditions of contracts, trust and trustwor-thiness – are in place in a society, the infor-mational problems and transaction costs,governance, and enforcement issues eitherwould not exist or would be at low levelssuch as not to create deterrence to stockmarket entry.



There is, however, a paradigm gapbetween what Islam teaches and the actualbehaviour in the market. For this reason,actions governments take and the institu-tions they create to remedy the deficit in in-formational, enforcement and governancebehaviour to reduce the cost of participa-tion in stock markets have to be strongerand more comprehensive than exist today.These policies, actions and institutionsshould have the competence, e!ciency andenforcement capabilities such that they canelicit the kind of behaviour the results ofwhich replicates or closely approximatesthose expected if market participants be-haved in compliance with Islamic rules.These would include, inter alia:

(i) policies to create a level playingfield for equities to compete fairly withdebt-based instruments. This means re-moving all legal, administrative, economic,financial and regulatory biases that favourdebt and place equity holding in a disad-vantage;

(ii) creating positive incentives forrisk sharing via the stock market;

(iii) investing in massive public ed-ucation campaign to familiarise the popu-lation with the benefits of stock marketparticipation; the kind of campaign that thePrime Minister Thatcher’s Government ranin the UK which increased stock marketparticipation substantially in a short spanof time;

(iv) investing in human capital toproduce competent, well-educated andtrained reputational intermediaries –lawyers, accountants, financial journalistsand Shari’a scholars – which means invest-ing in the creation of world class businessand law schools;

(v) limiting short sales and leverage(including margin operations) of non-bankfinancial institutions and the credit-cre-ation ability of banks through prudentialrules that effectively cap the total credit thebanking system can create;

(vi) developing strong and dynamicregulatory and supervisory system for thestock exchanges that not only continuouslymonitor the behaviour of markets and par-ticipants but stays a few steps ahead ofthose with penchant and motivation to useregulatory arbitrage to get around rulesand regulations;

(vii) finding ways and means of reg-ulating and supervising reputational inter-mediaries or, at least, mandating that theybecome self-regulating to ensure minimi-sation of false reporting or misreportingunder threat of liability to market partici-pants;

(viii) ensuring completely transpar-ent and accurate reporting of the day’strade by all exchanges; and

(ix) instituting legal requirementsfor the protection of the rights of minority

shareholders.The above policies and actions are

not exhaustive by any means, but even thisincomplete list will help reduce the cost ofmarket participation, invest the market


with credibility and reduce reliance ondebt financing.

Lack of good information aboutfirm’s true values and the existence of acompany self-dealing create the problemsof moral hazard and adverse selection.Both problems can be addressed by legalrules and procedures as well as by exis-tence of e!cient and credible public andprivate institutions that monitor the stockmarket and companies listed on the stockexchange. These laws and institutions canassure investors of the honesty of dealingsby firms and of the full transparency andaccuracy of reporting and information. Ex-tensive laws regarding financial disclosure;securities laws with strong sanctions of im-posing risk of liability (to investors) on ac-countant, lawyers, firms’ insiders,investment bankers in retaliation for falsereporting, fraudulent, misleading informa-tion or faulty endorsements can be power-ful tools of dissuading all concerned fromtemptation of defrauding investors by falsereporting and misleading information. Re-quiring reputational intermediaries to be li-censed by regulators and revoking licensesor imposing heavy fines and initiatingcriminal proceeding against misbehaviourweakens the incentive structure for abuseof reporting, endorsing, and informationprocesses. Strong listing standards whichstock exchanges enforce fully through im-position of heavy fines or even delisting ofcompanies that violate disclosure ruleswould discourage false information fromreaching investors. Existence of an active,dynamic, well-informed financial press canbe valuable in creating a culture of disclo-sure. A strong, independent, and dynamicregulatory agency would be needed tomonitor and supervise the stock marketand behaviour of its participants and pro-mote aggressively a culture of trans-parency by requiring prompt and accuratereporting on all trades in the market. Fi-nally, it bears repeating that governmentmust invest considerable resources on de-velopment of world class business and lawschools to ensure competent source of sup-ply of human capital to reputational inter-mediaries.

While the above policies and insti-tutions are crucial in reducing the cost ofparticipation in stock markets and thuspromoting widespread risk sharing, gov-ernments need to do more: they must leadby example. They could become active inmarkets for risk sharing. Generally, gov-ernments do share risks with their people.They share risks with individuals, firmsand corporations through tax and spend-

ing policies. They are silent partners. Theyalso share risk of life of the poor and dis-advantaged through social expenditurepolicies. They share the risk of the financialsystem through monetary policy and de-posit guarantee. They could choose to fi-nance part of their budget, at leastdevelopment spending, through risk shar-ing and direct ownership of developmentprojects with their citizens. This way theywould reduce the debt burden on thebudget. This reduction in government bor-rowing reduces the burden on monetarypolicy as well. Governments undertakepublic goods projects because the charac-teristics of these goods – importantly indi-visibility and non-exclusivability – prohibittheir production by the private sector andtherefore are undertaken by governments.However, their social rate of return is sub-stantial and much higher than private ratesof return. A recent popular proposal sug-gests that these projects should be under-taken jointly with the private sector, hencethe Public Private Partnership (PPP) label.The proposal has a number of problems:market distortion, informational and gov-ernance problems being just three of these.

Financing a portion of govern-ment’s budget though the stock market hasadvantages some of which are summarisedhere. First, it can energise a stock market –provided that all preconditions, in terms ofhuman capital, legal, administrative andregulatory framework – are met and helpsstrengthen the credibility of the market.Second, it deepens and broadens the stockmarket. Third, it demonstrates that stockmarkets can be used as a tool of risk and fi-nancial management. Fourth, it reduces re-liance on borrowing thus imparting greaterstability to the budget and mitigate the riskof “sudden stops”. Fifth, it has positivedistributional effect in that the financial re-sources that would normally go to servicepublic debt can now be spread wideramong the people as returns to the sharesof government projects. Sixth, it enhancesthe potential for financing of larger portfo-lio of public goods projects without the fearof creating an undue burden on the budget.Seventh, it makes the task of monetarymanagement simpler by limiting theamount of new money creation and limit-ing the number of objectives of monetarypolicy. Eighth, it promotes ownership of

public goods by citizens; thus have a salu-tary effect on maintenance of public goodsas it creates an ownership concern amongthe people, and to some extent mitigate“the tragedy of commons”. Ninth, it hasthe potential of strengthening social soli-darity. Tenth, it also has the potential topromote better governance by involvingcitizens as share-holder-owners of publicproject. Eleventh, it provides an excellentrisk-sharing instrument for financing oflong-term private sector investment.Twelfth, it is also an effective instrumentfor firms and individuals to use to mitigateliquidity and productivity risks. Thir-teenth, by providing greater depth andbreadth to the market and minimising thecost of market participation, governmentsconvert the stock market into an instru-ment of international risk sharing as othercountries and their people can invest in thedomestic stock market. Fourteenth, it willchange the basis of monetary expansionfrom credit to equity as economic expan-sion in the real sector maps onto the finan-cial sector. Finally, it will help demystifyIslamic finance and will create an environ-ment of cooperation and coordination withinternational finance.

The design of risk-sharing instru-ments to be issued by governments is notdi!cult. These instruments can be tradedin the secondary market if the shareholdersexperience a liquidity shock. Their rate ofreturn can be structured as an index of re-turn tied to the rate of return to the stockmarket. If the domestic stock market is notdeep, then an index of regional and/or in-ternational stock market returns can be in-cluded. The argument is that since socialrate of return to public goods are muchhigher than to privately produced goodsand services, the investment in publicgoods should have a rate of return at leastas high as the return to the stock market topromote e!cient resource allocation. Ofcourse since governments are usually lessrisky, the rate of return to government-is-sued shares has to be adjusted downwardto take account of governments’ risk pre-mium. Depending on the country and theinterest rate its government pays on bor-rowed money, it is not likely that the rateof return it would pay to holders of equityshares it issues – adjusted for the credit rat-ing of the government reflected in lowerrisk – would be any higher than the rate in-terest. Even in the unlikely event that a fewbasis points higher has to be paid, the tradeoff is worthwhile considering the positivecontributions the instrument would maketo the economy and the society.


rom their humble beginnings asmainly shop-floor workers during theUK immigration boom of the 1950’s

and 60’s, the British Muslim communityhas greatly evolved both economically andsocially. According to DataMonitor, in 2002Britain had well over 5000 Muslim million-aires with liquid assets in excess of £3.6bn.A large portion of Muslims in the UK areof Pakistani origin: the 2001 UK Censusrecorded 1,591,000 Muslims of which747,285 residents described their ethnicityas Pakistani, regardless of their birthplace.Using the British Pakistani community as aproxy, this article comments on the eco-nomic evolution of British Muslims, howtheir banking requirements have changedover time and the resulting implications for

contemporary Islamic finance.

As a result of the industrialisationboom in the UK in the 1950s and 60s, therewas a sharp increase in the demand for un-skilled and semi-skilled labour. To meetthis demand, the UK looked towards for-mer colonies and Pakistanis were amongthose invited to fill the labour shortageswhich arose. As Commonwealth citizens,they were eligible for most British civicrights. Almost all of them were males whohad left their families behind and relocatedsolely for economic purposes. The initial

mind-set of these workers was one of tem-porary economic relocation with the aim ofreturning to their country of birth, while inthe interim sending money back in theform of remittances.

They found employment in the tex-tile industries of Lancashire and Yorkshire,manufacturing in the West Midlands, andcar production and food processing in-dustries of Luton and Slough. It was com-mon for Pakistani employees to work onnight shifts and at other less- desirablehours. In Scotland, some landed jobs inthe shipping industry, and a considerableproportion took part in door-to-door salesof household/everyday items, highlightingtheir unique entrepreneurial and progres-sive characteristics. These traits have un-



provide such facilities which again forcedtop tier Pakistani businessmen to go tolocal financial institutions as alternatives.

3) From the 80s onwards, the per-sonality profile and demographic traits ofthe Muslims in the UK started to evolve aswell. British born Muslims who were com-paratively more embedded in UK societyas a whole than their immigrant forbearsbegan to achieve a critical mass. They couldcommunicate in English comfortably andwere more content with opening child/stu-dent accounts with local mainstream banks(a service not provided by Pakistanibanks), and with the long-term nature ofbanking relationships, few of these cus-tomers have since changed their bankingprovider.

So what can Islamic banks targetingthe domestic Muslim market learn fromthe experiences of the past? And why is itthat most traditional Pakistani banks thatalready have a high number of Muslimclients remain on the margins of the recentIslamic finance boom in the UK.

It is clear that retail Islamic bankingin the UK has been an exciting and chal-lenging experience over the past 15 years.The development of the sector effectivelyfrom scratch has had significant successeson various fronts (regulatory, taxation par-ity, increased awareness, etc.

However, UK stand-alone Islamic

doubtedly assisted the posterior generationin climbing the social hierarchy. Perhaps itshould come as no surprise that the UK’sfirst Muslim councillor and MP were bothfrom Scotland.

The main banking service requiredby the initial Pakistani immigrants wassending remittances to their families inPakistan. Pakistani banks were the pre-ferred financial service providers for mi-grants, as remittances could be easily, andcheaply, sent to remote locations in Pak-istan.

From the late 60s onwards, as immi-grants started to become more settled andfinancially stronger, the demographics ofUK Muslims also started to change frompredominantly men towards a familysetup. Their financial needs evolved due tomore financial independence and increas-ing economic aspirations. With respect topersonal finance, demand for home financ-ing increased, while commercially, Mus-lims wanted access to start-up capital in theform of soft loans for small corner shops.

Banks such as Habib Bank Limited(HBL) actively facilitated start-ups by dis-bursing loans on a 30% to 70% (LTV) basisfor small corner shops. Pakistani bankswere again preferred as they understoodthe mechanisms and the mindset of theAsian subcontinent. The initial entrepre-neurs were not as organised or professionalas was required for local banks to financethem; Pakistani bank managers on theother hand could identify with their clien-tele and could provide exactly for theirneeds.

Interestingly, even though the com-munity was growing, from the late 70s andcontinuing through the 80s, there was a de-gree of consolidation and branch closure asPakistani banks started to see a stagnationin their consumer base. Key reasons in-cluded:

1) In the case of personal fi-nance, Pakistani banks did not deal inlong term house financing i.e. mortgages,and this forced people from the commu-nity who wanted to buy houses to go tolocal banks. These local banks would thenrequire the opening of an account withthem to build a credit history, which inturn meant a further flight of money fromPakistani banks to mainstream UK basedbanks.

2) As certain Pakistani businessesgrew in the 80s, so did their capital require-ments with demands for financing in ex-cess of £100,000. However, due tomanagement policies limiting exposure torisk, Pakistani banks were not willing to

banks are nascent (less than 6 years old)and have struggled to demonstrate a con-sistent profitable model. Worse, there hasbeen the closure of the only regulatedstandalone takaful operator in the UK.Window/subsidiary operators have eitherpulled their Islamic products from the mar-ket or failed to successfully expand their of-fering which is particularly worrying asretail banking is very much a multi-prod-uct portfolio play. Along with the genericchallenges faced in any new, fledgling sec-tor, the prevailing financial market uncer-tainty adds to the challenge for the UKIslamic finance market. Overall, it posessignificant concerns for market penetra-tion.

In addressing these challenges to-wards creating a profitable UK Islamic re-tail market, it is useful to reflect on priorexperiences of servicing the Muslim com-munity by Pakistani banks. Extrapolatingfrom the experiences of Pakistani banksover past 40 years, select insights and les-sons are noted below for UK Islamic prod-uct providers to consider as they refinetheir business models:

As the community continues to rap-idly evolve, product providers need todemonstrate a dynamic approach and ex-pand and develop their offering in linewith market changes to meet the needs oftheir customers. Key services and productsneed to be provided competitively andthe offering gap reduced. The implica-tions of working in such a dynamic envi-ronment put additional emphasis on areassuch as:

1) Adaptability – to (re)train staff on


new products;2) The mindset of senior manage-

ment - needs to be dynamic and entrepre-neurial to reflect the undeveloped andindeed R&D nature of parts of the Islamicmarket;

3) Education and regular market re-assessments - to build a strong insight intoconsumer perspectives and how thischanges with increased education andawareness.

The Muslim community itself hasevolved vastly over the past two decades,from being mainly Pakistani andBangladeshi to having a more diverse eth-nicity, including Turkish, Somali, Arabs,etc. The British Muslim community nowmore than ever in its history represents areal cocktail of various diasporas from UKborn Muslims to economic migrants alongwith British converts to Islam. Detailedmarket segmentation analysis needs to beundertaken to genuinely understand thismix of ethnicities and the nuances withinthe behavior trends between each group.The clever utilisation of additional Non-Ex-ecutive Directors (NEDs) who are from theUK and have lived within and serviced thetarget customer community will enableproduct providers to utilise their under-standing and unique insights when design-

ing and developing products and the go-to-market strategies deployed.

When serving unproven nichemarkets, it is imperative to keep tight costcontrols and effectively managing thetiming of large fixed cost expenditureagainst utilising relatively lower cost solu-tions that can be easily changed or retrofit-ted. In the 80s, HBL and other banksreduced their branches as the fixed costbase for branch operations were proving tobe costly and ultimately many Pakistanibanks had to merge with other banking en-tities to remain viable. Consolidationwithin the Pakistani banks is still occurringto date as evident by the recent acquisitionof Habib Sons by HBL. With five stand-alone Islamic banks in the UK along withvarious windows operating within the con-ventional banks in the current di!cult eco-nomic conditions the market could see adegree of consolidation in the future.

Islamic bank managers requirestronger interpersonal relationships withtheir clients, as the majority of Muslimsfrom the Middle East and the sub-conti-nent historically felt more comfortabledoing business with an individual ratherthan an organisation. The strong relation-ships and the community cultural elementremains evident, particularly as a number

of people are migrants coming across asspouses or for work. Examples of the earlyPakistani banks that operated in the UKand their initial success can be used as auseful case study.

The need to learn from previous ex-periences is critical to future success. TheTurner review highlighted one of the rea-sons for the crisis is the lack of desire tolearn from previous mistakes. The UK re-tail Muslim market represents a dynamicmarket with a rapidly evolving mixed di-aspora. There are a number of nuances andsubtleties to consider when dealing inniche markets and the British Muslim com-munities are no different.

Islamic retail product providers cantake meaningful lessons from the experi-ence of Pakistani banks in developing astronger understanding of a large portionof the consumer market they are aiming tocapture.

For those who can successfully pen-etrate the market with a competitive andattractive offering that has a broad marketappeal and is based on ethical foundations,there is a significant commercial reward tobe won.



“I believe I have worked here long enoughto understand the trajectory of its culture,its people and its identity. And I canhonestly say that the environment now isas toxic and destructive as I have ever seenit”

hese words are from Greg Smith’snoxious email against his previousemployer, Goldman Sachs. It was

hardly a death knell to the globalmegabank. But it did reveal a subtle,worrying psychosis that may pervade theinstitution. Commentators on Smith’sresignation letter published in the NewYork Times earlier this year were quick tofocus on the supposed designation ofclients as ‘muppets’ by Goldman Sach’s

employees; mere objects from which toextract as much money as possible, even ifit meant offering substandard products.Smith’s main contention was that thecompany culture had shifted from meetingclient’s needs with ‘integrity’ and ‘humility’to encouraging an almost parasitic, moneygrabbing ethos.

If his letter had been written prefinancial crisis, it is unlikely it would havecaused a stir. Instead, in the ongoingrecessionary environment, the letterprovided added ammunition for thecongeries of the disconsolate,contemptuous of the “profit maximisationat any cost” culture that triggered the globalfinancial crisis. On the heels of the Occupymovement, the letter served to justify all

that is wrong with Wall Street. Money wasthe goal; money at the expense of civility;money making without conscience.

Scrutiny fell upon Goldman Sachs.They became the poster child of greed andunconscionable behaviour. There were callsfor the resignation of Lloyd Blankfein, theCEO, who many felt was responsible for theshift in culture. Banking was based on trust:the higher echelons had forgotten this.There had to be a rehaul, a change, arevival, a return to first principles, a returnto the words of John Pierpont Morgan thatcommercial credit was primarily basedupon character with money and property

discord


were secondary considerations. Many would argue that the letter

highlighted a culture which producedvultures, preying on the uninformed. Mr.Smith felt values at the bank had changed.However, the image of the rapacious bank,intent on profiteering is hardly new. Longbefore 2007, there was 1929, where financialmarket players were condemned for theirprofligacy (John Maynard Keynes hadcalled the financial markets a ‘casino’). The80s provided a characterisation of theyuppy, with expensive clothes and anoversized mobile phone, hurrying andscurrying in the traders pit, looking toexploit the differential.

However, for all intents andpurpose a bank’s purpose is to makemoney. Maintaining clients comes fromgenerating at least normal profits, buthopefully, supernormal profits. Therefore,the bank will look at possible ways inwhich this can be accomplished. An esotericproblem of today’s financial system is thatmaking money has become easier throughthe over reliance of computers. Moneymaking can be facilitated through themanipulation of numbers. The focus will beon numbers and not on the ‘integrity’ of theclient. They are rarely in front of you. Whennumbers on the screen determines thesuccess of both the bank and the client, thenfrom the beginning, the client isdehumanised. . As soon as their ability tomake profits is inhibited, the demand willalso fade. All clients really need is respectwhen spoken to and healthy returns butany invective behind closed doors does notnecessarily lead to a collapse in fortunes forthe company.

Greg Smith’s indictment, andsimilar accusations, is a public relationsheadache. It is the responsibility of PRdepartments to ensure that a good image isconstantly portrayed of the company. Forcustomer facing institutions, sellingtangible goods and services with manystore fronts, such as Apple, McDonalds, etc,it is a daily concern. Customer attraction,satisfaction and loyalty will be dependenton many things, from the quality of theproduct, the level of services, the behaviourof the employees, the interior design, etcOpaque financial institutions such asGoldman Sachs, have to worry about thisless. They may need to advertise, ensurethey are known, but maintaining clientsatisfaction is by and large limited toderiving a su!cient level of profits.

Consequently, there is everyopportunity of corner cutting and slight

knowledge. Success is begotten byachieving what you are greedy for. Yet,conventional ethics rails against thisconcept. In Catholic theology, greed wasconsidered one of the seven deadly sins anda slippery slope to the hellfire. Dante’sallegorical poem, “The Divine Comedy”,personifies greed as a purveyor ofselfishness. He exhorts “O avarice! Whatcanst thou more, who hast subdued ourblood so wholly to thyself, they feel no careof their own flesh?

The inference here is that greedconsumes the person/s to the point wherecompassion for kin disappears. As iscommon with poems and prose with amoral message, exaggeration, metaphors,bathos and other narrative tools areprecisely to make the reader ponder as tohis own flaws. For moralists, the concernwas always the wellbeing of society but theroot of any deterioration was flawedindividual. Making the flaw consensualand systematic in society, it begins to fester.The moral foundations of society are thenweakened and eventually societydisintegrates. In a quite remarkable passagein the Quran, it states “ God does notchange the condition of a people until theychange what is in themselves”.

Gekko’s ultimate philosophy was asingle minded focus on the accumulation ofmoney. Having an un-wiltingdetermination to achieve any particulargoal is a praiseworthy personality trait butthe impact of such ambition on third partiescannot be ignored. A pursuit for money infinancial institutions suffers especially asthere is little consideration for the assetfrom which the wealth is being created.Casino like behaviour in the financialmarkets has effectively created a financialsystem dependent on numbers building onnumbers. Making the number larger thenbecomes a primary concern.

Thus greed in the financial marketscan be thoroughly egregious, self indulgent

exploitation provided the end result is met.Only when the company or clients arelosing money will serious questions beasked. The financial crisis in part stemmedfrom sub-prime mortgages, inherentlyflawed and consequently exploitative ofbuyers. CDOs rushed through the system,even though there were obvious structuralproblems. But users were blindsided by theprofits it was generating. When the floorcollapsed, questions were asked but onemust ask why these questions were notasked before.

To answer that question, it would beexpedient to consider the words of thefictional character Gordon Gekko, theantagonist in Oliver Stone’s 1987 film “WallStreet”. The film is a morality tale depictingthe conflict between the working class andthe rich, ambition and loyalty, ethics andsuccess, power and corruption. Gekko,respected in the financial markets for hisshrewdness and success, delivers anemphatic monologue to an audience ofshareholders:

‘Well, in my book you either do itright or you get eliminated. In the last sevendeals that I've been involved with, therewere 2.5 million stockholders who havemade a pretax profit of 12 billion dollars...Iam not a destroyer of companies. I am aliberator of them! The point is… that greed,for lack of a better word, is good. Greed isright, greed works. Greed clarifies, cutsthrough, and captures the essence of theevolutionary spirit. Greed, in all of itsforms; greed for life, for money, for love,knowledge has marked the upward surgeof mankind”.

For Gekko, greed is good because itdrives mankind forward and thus it‘works’. Progress is achieved by having adesire to have, be it money, love or


and domineering. If ones goal is to onlybuild profits, with no real attachment to atangible product, then the potential tocircumvent the rules and exploit thecustomer increases. The culture ofGoldman Sachs is of making money. Whyshould it come as a surprise that theyregard the customer as avenues ofexploitation?

An inordinate focus on makingmoney can lead to strange outcomes. Thecredit crisis revealed how complex financialproducts can be traded but not fullyunderstood. The products still managed toexchange hands as the buyer could only seethe potential profits that could be derived.They had failed to see on what tangibleasset the product was ultimately basedupon. Subprime mortgages rested uponpoor buyer looking for housing. Aconsideration of this would have mitigatedif not avoided the crisis.

Would it be correct to say that theignorance of this boiled down to greed?Was there any real concern as to the affectof the debt on the person? For the bankersinvolved, was it all about the numbers onthe screen? This is a question that is beingposed by critics of the Goldman SachsSukuk. At first glance, the product isseemingly compliant with Shari’a and aboon for the industry as a leading globalmegabank will be issuing the product.However, critics have argued that thestructure stipulated in the prospectus is aruse. The returns the sukuk holder receivesis not generated by the structure but ratherfrom ribawi transactions, and thereforeforbidden activities, undertaken byGoldman Sachs. Moreover, since the sukukcan be listed, the problem of riba isextenuated as certificates begin to be tradednot on par.

In such a situation, critics arescratching their heads, wondering aboutthe essential nature of the product. A muchmore pertinent question is what is theintention of the parties? Is it to only makemoney by attracting Shari’a sensitive

investors though purporting to becompliant? These are questions that are notlimited to the Goldman Sachs Sukuk.Islamic finance in general has beencontending the law vs spirit dichotomy foras long as it has been in existence. There isan inherent tension between the need tocomply with the formalistic elements ofIslamic law while at the same time beingpractically relevant. The fundamentalparadox for Islamic finance is thatirrespective of the diatribes against theribawi capitalistic system, its frameworkhas been successful both in profitability andminimising risk. Many are asking: hasIslamic finance offered a better alternative?

The credit crisis could be consideredas evidence of the failure of capitalism butthe causes of the crisis was not so much thesystem, but more so the players within thesystem. They exploited the flexibility givento them. A desire to exploit then rests uponthe choices of the individual. In Islamicfinance, many would argue that there is noharm in utitlising commodities to constituteand Islamic finance product. However, ifthe intention is only on deriving profits,then just as with the CDOs, there isopportunity for an unexpected failure.Those who structure the product accordingto Shari’a may become less stringent in theapplication of the law. What is of greaterconcern is that only a nominal concern forthe Shari’a rules can dilute the spirit of thelaw. In such a situation, the industrybecomes a parody of the complexstructuring found in the conventionalmarket. It is a slippery slope.

Gordon Gekko was a fictionalcharacter but he was a composite of anumber of Wall Street traders, looking forthat quick buck. Greed for money hasalways been a vice. It is borne fromselfishness and a narrowness inperspective. One aggrandizes his ownworth, and the end goal becomes the onlygoal. Concern for those around himbecomes less of a concern. Systemising thisview in a culture can lead to devastatingconsequences. It is di!cult to conclude thatthe culture of Goldman Sachs is aspernicious as Greg Smith alludes. However,the point is in any profit making institutionthe potential for greed for money is great.Once embedded, it can lead to undesiredconsequences including creating strange,complicated financial products. Ultimately,the complexity will unravel.


The very fact that Oman is startingIslamic banking was enticing enough. Interms of Islamic banking and finance,Oman is a blank canvass. Entrants into themarket have an opportunity to create aunique model, which takes into accountany systematic weaknesses of otherjurisdictions and tackles them. To mouldand manage, create and executeaccordingly makes this new positionexciting and dynamic. For me, it isundoubtedly a remarkable growthopportunity for my career and one that Iwould have been foolish to refuse. Afterworking in established Islamic bankingmarkets in Pakistan, Bahrain and Qatar, Igained a comprehensive and valuableunderstanding of Islamic banking productsand systems. Oman Arab Bank has offered

me the opportunity to use both mybanking and Islamic finance consultancyexperience for establishing an Islamicbanking window. I am really excited toassist the bank in offering the best Islamicbanking products and services to Omanicustomers.

Product development for a newmarket is a sensitive and risky business. Weare gradually understanding the dynamicsof demand of Omani customers andcarefully choosing the product structureswhich can be tailored according to localneeds.

Supporting IT solutions is equallyimportant but we have the benefit ofchoosing from well developed andestablished IT systems in the market andare confident that this challenge will be metcomfortably. Similarly, the Central Bank of

Oman’s decision to follow AAOIFIAccounting and Auditing Standards hasgiven us a good starting point. Our team iswell versed in this area and so we do notsee any major di!culty in implementingthe Standards.

We have a well structured trainingprogram for our Islamic banking team andmay use a mix of internal and externalresources to implement this. Though wehave not started any marketing so far, wehave already conceived a structuredmarketing plan that will enable us to reachout to our customers in Oman.

This is first time that Oman willwitness faith based commercial offeringand so mindfulness of local sensitivitiesand religious values is a paramountrequirement for success. The majority ofOmanis are from the Ibadi sect, founded byJabir ibn Zaid al-'Azdi, which is differentfrom sects followed in other countries ofthe GCC. I highlight this point as modernday Islamic finance is very much driven bythe Sunnis, though ground-breaking worksby Shia thinkers - the most prominentbeing Baqir Al Sadr – has also played a partin the evolution and continuation of theindustry. Nevertheless, by being from adifferent sect with different legalconceptualisations, it would beirresponsible to ignore their laws, culture


and understandings of muamalat. We haveto be aware of certain sensitivities of thegrassroots in order for us to offer the rightproduct suite.

My personal inclination towardsIslamic banking is faith based. I left asuccessful career path in conventionalbanking when Islamic banking becameavailable in Pakistan. However, I do notthink I suffered in terms of my careergrowth. Islamic banking has given meequally good career growth opportunities.

There are definite advantages ofIslamic window model, especially in amarket such as Oman which has onlyrecently introduced Islamic finance. Anestablished bank, from which the windowwill stem from, has the significantadvantage of already knowing andfunctioning in the market. The bank willhave its own customer base with cross saleopportunities. In addition to marketingIslamic banking to new customers, thebank can target its own customer pool,offering and marketing a new range ofproducts. One cannot underestimatecustomer loyalty and if the bank hasdeveloped sizable goodwill, the Islamicwindow will attract existing customerswho have a preference for Islamic financebut previously did not have access to it. Inaddition, the bank can also leverage on itsexisting brand image. Even those who arenot the banks’ customers will know of thebank. To some extent, the bank can rely ontheir existing setup. The bank understandsthe regulator, their requirements and theiridiosyncracies. They have a greaterunderstanding of what happens behind

closed doors and the behaviour of policymakers. It puts them in a better positionthan someone new in the market.

At the same time, a fully fledgedIslamic bank has several advantages overIslamic windows. The do not face any issueof image conflict, no legacy and potentialrift within the organisation, and a focusstrategy to offer specialised products.

For the Omani market, the windowmodel seems more appropriate due to the

factors that I just mentioned. In Oman,Islamic banking windows will also benefitfrom the Central Bank’s decision tomaintain transparency and ensure thesegregation between Islamic andconventional operations. This will allowIslamic banking windows to enjoy benefitsof being a new vehicle and will help thembenefit from the profile, tenure andliquidity of the conventional bank.


Oman Arab Bank enjoys a legacy ofstability and sound banking practices. Wedefinitely want to grow and enjoy aprominent position in Oman’s Islamicbanking market; however, we will ensurethat we continue our legacy of prudentbanking practices. Our vision is to makeour Islamic banking offering a leadingbrand in Oman. There is still a long way togo with regards to Islamic banking andfinance in Oman. It was only in the lastyear that permission was granted, but thisdid not mean a change in regulations andan analysis of laws which would posee!ciency problems for Islamic banks. TheCentral Bank is still quite cautious withIslamic banking and is effectively adoptinga ‘wait and see’ approach. Its early days forIslamic finance in the country and just likein Malaysia and UAE, success willultimately depend on the efforts made bypolicy makers and regulator in Oman.

I cannot point out a singlepersonality but Dr. Mahathir Mohamad,Recep Tayyip Erdo"an, and Dr.Muhammad Yunus are amongcontemporary personalities I highlyregard. Mahathir and Tayyip have beenquite remarkable Muslim leaders. Theyworked off a platform that respected theIslamic identity and tradition and showedthat there are ideas and tools in Islamicheritage and law that can meet thechallenges of modern life. In many ways,they showed that Islam is not anachronistic

and is applicable to the social, political andeconomical problems of the modern day.Dr. Yunus is an extraordinary individual.His microcredit/Grameen concept hasrevolutionised approaches to tacklepoverty. The poor were no longerconsidered as those who were incapable ofhelping themselves, but rather they werehumanised as contributors to society. Hisstory is quite inspirational.

In my view, Islamic banking in theGCC is ready to ascend to the next level ofmaturity. Competition and an enablingenvironment will steer banks towardsadopting technologically advancedsolutions. We may also see new versions ofexisting products that are tailored to nichemarkets. Service quality as compared toleading international brands ofconventional banks certainly requiresattention. Islamic banks are aware of thisand we may witness improvement in thisarea. At a macroeconomic level, theindustry will continue its remarkablegrowth.

I believe the Islamic banking sectorin Oman will take 3-4 years before itachieves a respectful size. The country willdefinitely attract regional investors whoare willing to channel funds in Shari’acompliant investments. The Omaneconomy is quite stable and there arelucrative opportunities in the country. Wewill also see regional Islamic bankingplayers expanding their operations inOman.

People talk about standardisation,trained human resources, Shari’acompliance, and product innovation. Theseare essential factors for the growth ofindustry but in my view, at present, thegreatest challenge is to offer a world classservice similar to what recognisedinternational brands offer to theircustomers. It all boils down to customersexperience: if they are not happy with whatwe offer to them, we have not met ourultimate objective.

Muscat is an amazingly beautifulplace in the monotone landscape of theGCC, populated by friendly and culturallyrich people. The place has a significanthistory that has played a key role inshaping the social psychology of its people.Centuries of cultural and economicinteraction has made Muscat a veryhospitable place for expats. This is the onlyplace in the GCC where you find manylocals fluently speaking Urdu or Hindi. Weare really enjoying our stay in Muscat andlooking forward to explore the rest ofOman.

Inshallah, I see myself leading anIslamic financial institution. I also seemyself playing a dynamic role in thefurther development of Islamic bankingindustry through new initiatives.


he depredations of colonialism, theextrication of Shari'a from governinglaw and the destruction wrought by

the world wars are arguably theprogenitors of Islamic finance. Confrontedwith what appeared to be a dismantling ofthe social and economic fabric of Muslimsociety, Islamic finance was envisioned tobe the insoluble link between theimpoverished and the a#uent. Theambition was to appropriate the creativeand innovative spirit of capitalism and theunifying paradigm of socialism, whilejettisoning the negative aspects of boththese ideologies. By this synergy, eachmember of society would contribute to itshealth.

The catalyst for this synergy was tobe a philanthropic ideal that pervades each

member of society. Etymologically,philanthropy means a ' love of humanity'and the core paradigms of Islamic financewere intended to inculcate this mostimportant of moral tenet amongst offersand users. In some respects, Islamic financeis forgetting this essential characteristic butit is not to say it is forgotten. Theproportion of Muslims that are a#uentand give back to society is growing. Dr.Tariq Cheema saw that by harnessing thedesire and the willingness to give amongstMuslims, and creating a global network oflike-minded individuals, there is so muchpossibility for Muslims to contributeextensively to society. Hence, he createdthe World Congress of MuslimPhilanthropists (WCMP)

WCMP is a global network of

a#uent individuals, foundations andsocially responsible corporations,established to advance e!cient andaccountable giving. It brings togetherpublic, private and social sectors, offeringinformation and resources to link donorswith social investment opportunities. Eachyear, the WCMP hosts the Global DonorsForum (GDF) to promote effective givingand build strategic relationships andpartnerships for high-impact socialinvestment. Distinguished philanthropists,public and private sector leaders, socialinvestors and experts from across theworld congregate to offer pragmaticinsight and response to pressing global andregional challenges. To date, there havebeen five gatherings starting from Istanbulin 2008, Abu Dhabi (UAE) in 2009, Doha


(Qatar) in 2010, Dubai (UAE) in 2011 andthe latest held in Kuala Lumpur(Malaysia) in 2012. Previous attendeesinclude Tony Blair, Prime Minister RecepTayyip Erdogan, Dr Yusuf Al Qardawi andother leading personalities from aroundthe world.

The 5th annual gathering of theWCMP was held in Kuala Lumpur in thelast week of April. Over 40 distinguishedindividuals from around the worldparticipated and spoke at the GDF. Amongthem were: H. E. Tun Abdullah Badawi, theformer Prime Minister of Malaysia; H.E.Prof. Dr. Surakiart Sathirathai, the formerDeputy Prime Minister and ForeignMinister of Thailand; Ufuk Gokcen,Ambassador and Permanent Observer ofthe Organization of Islamic Cooperation(OIC) to the United Nations, New York;HRH Princess Sarah Al-Feisal; President ofGenerations For Peace; HRH Prince ZainAl-‘Abidin ibni Tuanku Muhriz, foundingPresident of the Institute for Democracyand Economic Affairs (IDEAS); HRHPrincess Astrid of Belgium, SpecialRepresentative to the Roll Back MalariaPartnership; HRH Princess Maha bintAbdulaziz, founder and Chair of Sawa’ed

CEO of Edbiz Consulting, ProfessorHumayon Dar.

These awards were presented byHis Royal Highness Raja Nazrin Shah,Crown Prince of Perak, Malaysia. As theKeynote Speaker, his speech focused on thechallenges of global governance. He men-tioned that although there has been a lot ofimprovement in the global governanceover the past century, the existing frame-work is becoming increasingly unsustain-able. Poor governance has resulted ininstability and insecurity throughout theworld.

In addition, two thematic lectureson "Impact Philanthropy and Investing"were delivered by UK’s Cass BusinessSchool and City University professors, Dr.Paul Palmer and Dr. Jenny Harrow.

Additionally, five innovative phil-anthropic projects selected from aroundthe world were showcased. These in-cluded:

• The Hasanah Trust Fund: A sus-tainable livelihood fund co-initiated by theWorld Congress of Muslim Philanthropistsand Islamic Development Bank's IslamicSolidarity Fund for Development;

• The Academy of Philanthropy: A

Atheeb, Kingdom of Saudi Arabia; Ms.Farah Kabir, Country Director ofActionAid Bangladesh; Dr. MohamedAshmawey, CEO of Islamic ReliefWorldwide and Mr. Tariq Al-Gurg, CEO ofDubai Cares.

As part of the GDF, awards fornotable achievements in philanthropy andhonours for a commitment to social justiceare presented at a banquet dinner. Thisyear, the Muslim Philanthropy Award forthe year’s outstanding grant-makinginstitution was given to the Al-BukharyFoundation, Malaysia; the award for themost outstanding corporation went toInternational Humanitarian City, Dubai;and the award for the individual with themost outstanding achievement in givingwas presented to Tan Sri Syed Mokhtar Al-Bokhary.

A Special Award for Research andPublications was given to the GlobalIslamic Finance Report 2012 published byEdbiz Consulting. The central theme of theReport was social responsibility andphilanthropy and contained articles whichaddressed the relationship between Islamicfinance and philanthropy. The award wasreceived by the Chairman, President &


vehicle to develop leaders in philanthropywhich introduced its various programsgeared towards board members, corporateand foundation executives, as well asyoung entrepreneurs interested in philan-thropy;

• The Al-Salsabil for EmpowermentFund: An attempt to bridge the gap be-tween Islamic finance, social responsibilityand philanthropy, which will provide em-powerment finance.

The GDF was a resounding successand continued WCMP’s excellent work inconnecting like-minded individuals com-mitted to the development of Muslim phi-lanthropy. It respresented a snapshot of thepotential of Muslim endeavour and inge-nuity. With the diversity of professionalbackgrounds and the variety of heritage,the fabric of Muslim society is indeedbight and mulitcolured. There is a pool oftalented individuals searching for a betterfuture. Linking Islamic finance and Muslimphilanthropy is imperative and necessaryfor the success of both fields. Contrary tomedia negativity, these are exciting timesand with such illustrious gatherings, thereis much hope and anticipation for Muslimsto contribute more to global society.

As part of the GDF, awards for notableachievements in philanthropy and honoursfor a commitment to social justice arepresented at a banquet dinner. This year,the Muslim Philanthropy Award for theyear’s outstanding grant-making institutionwas given to the Al-Bukhary Foundation,Malaysia; the award for the mostoutstanding corporation went toInternational Humanitarian City, Dubai;and the award for the individual with themost outstanding achievement in givingwas presented to Tan Sri Syed Mokhtar Al-Bokhary.




I do not think Bahrain has lost itsposition. Bahrain is still a hub for Islamicfinance in the region and it has more of anestablished infrastructure in Islamic fi-nance than its neighbouring countries.There are 26 Islamic banks and 19 Islamicinsurance companies operating in theKingdom. Bahrain is home to AAOIFI,LMC, IIFM and the IIRA, Islamic financialbodies that are sustaining and promulgat-ing the industry. The industry in Bahrainhas remained resilient with its direct con-tribution to gross domestic product stand-ing at 26%. The Islamic finance industry isstrongly supported by the Central Bank,

and regulations have been passed whichare conducive to the growth and develop-ment of Islamic finance.

A central advantage of Bahrain is itslocation. It is close to Saudi Arabia, whichis the Gulf’s largest economy. Saudi Arabiais also experiencing a significant boomright now, though this can also be saidabout Qatar, which is less than an hour’sflight way. In fact, I believe the Gulf regionis going through a very exciting period.With Bahrain, the unrest had caused uncer-tainty in the financial markets but this ap-pears to be subsiding. Anxiety remains butI think over the next few years there will bemore stability, which will help propelBahrain forward.

Given the impressive growth of Is-

lamic finance, it is easy to forget that the in-dustry is still in its infancy and will taketime to reach critical mass. The problem isthat we are trying to compete and replicateeverything conventional. We flatter theirsystem by imitation. There needs to be atransition from “Shari’a Compliant” to“Shari’a Based”. This is changing but thereremains a fair level of scepticism. It makesit di!cult in terms of marketing to con-vince potential customers about the valueproposition of Islamic finance. A lack ofunderstanding about the products con-tributes further to this scepticism withmany people making presuppositions be-fore actually investigating the nuances ofIslamic finance. However, I think the in-dustry shoulders the burden of responsi-bility to change people’s perceptions. Atthe heart of Islamic finance is a genuinephilanthropic spirit which pervades all itsbusiness practices. Till the Islamic financeindustry is able to meaningfully contributetowards its greater objectives of wealth cre-ation, scepticism will remain. Islamic fi-nance should focus on the dual purposes


of personal social responsibility and corpo-rate social responsibility.

Islamic banks need to ensure thatnot only are contracts for financing halal,but every facet of its business followsShari’a principles and spirit. Unfortunately,we have seen several Islamic banks in theMiddle East that have not lead by example.Practices in western conventional banks areoften much better. It is not enough for anIslamic bank to claim Shari’a compliancemerely because it has a fatwa from ascholar on a product or service. To date,most institutions have placed additionallayers of documentation without looking atmaqasid al- Shari’a focusing on the “Form”mostly and ignoring “Substance”. I believeall areas of an Islamic bank should beShari’a based; from its HR policies to reme-dial management. An Islamic bank should“manage by Islam”, following this conceptin its entirety. More research is needed inthis area linking modern management withShari’a. We have much to learn about lead-ership and management practises of theHoly Prophet (PBUH) and his Sahaba.

It is important to educate currentcustomers and potential customers on Is-lamic finance. The next step is for Islamicbanks to understand the needs of its cus-tomers; proper customer segmentation ex-ercise is needed for each jurisdiction itoperates in. A “one size fits all” approachis no longer usefull. Islamic banks have todeliver products and solutions which arecost effective, creative and adhere strictlyto Shari’a principles. Islamic banks are re-alising that by just pushing products andwaiting for a deluge of new customers, it isnot going to generate the numbers that willensure that the industry flourishes. Wehave to provide solutions, not just simplypush and promote products.

Other issues in the market includea lack of trained manpower. There are anumber of qualifications and trainingcourses out there that, in the long run, willcreate a talent pool from which the indus-try can benefit. It will take time but it is notan insuperable obstacle, and certainly notone that we should be too worried aboutgiven the growing interest and desire forIslamic finance. One issue that I do believeneeds to be resolved urgently is the lack ofuniformity of Shari’a standards. Differ-ences can breed uncertainty and confusion.In the modern world, we pride ourselvesin mitigating these factors and having clar-ity. A lack of uniformity perpetuates ambi-guity.

In order to reach the next level, wehave to attract non-Muslims. For this tooccur, making inroads into the US marketis imperative. Islamic finance has enteredthe US market but unfortunately it is toosmall and there are far too many negativeconnotations associated with Islam and Is-

have to concede that Islamic banks are stillplaying catch up to large sophisticated con-ventional institutions. Furthermore, withinlarge conventional banks, generally, Is-lamic businesses contribute very little tothe bottom line compared to the conven-tional business; hence it becomes a chal-lenge at times to make its presence felt.

King Abdullah bin Abdulaziz, Ma-hathir Mohamad and Recep Tayyip Erdo-gan are extraordinary Muslim leaders, whohave done much to for their respectivecountries and the Muslim ummah at large.One cannot underestimate the importanceof a leader in making a country great. Platospoke of the philosopher king as the de-sired ruler, one who understands the real-ity of his people but goes beyond thephysical realm and ponders upon pro-found questions of life. I think these leadershave the right balance of profundity andpracticality, making them such excellentleaders. We need these kinds of people forMuslim countries to shake off the negativeviewpoints arising due to authoritarianismand poverty that prevails in most Muslimcountries. In many respects, these leadershave paved a worthy path for Muslimsleaders to follow.

Bahrain is very different to placeswhere I have lived in the past. Bahrain is adesert island, surrounded by a shallow,warm sea. Barring some recent unrest, lifeis very peaceful and serene. It is a close knitcommunity and a melting pot of differentcultures. Bahrain is an open, tolerant andwelcoming society; a place without preju-dice. It is the most politically liberal coun-try in the Gulf with long-standing socialopenness and tolerance and a lot of respectfor diversity. Expats and Bahraini nationalsare well integrated in both professional andsocial circles. Bahrain has a very strong,rich heritage and culture in the GCC. Un-like some of its neighbours, Bahrain has re-tained its authenticity. Bahrain offers verygood value for money with its low livingcosts.

lamic finance in the States. However, thereis potential and Islamic financial institu-tions need to do more to change percep-tions.

I gave up a career in conventionaltreasury because I did not want to “wagewar against Allah and his Prophet(PBUH)”. Since then, I have never lookedback. Yes, there have been lucrative oppor-tunities offered to me in the conventionalspace that I declined. For me, a career inbanking has to be only Islamic, InshaAllah.A competent Islamic banker will alwayshave job offers.

I am passionate about Islamic fi-nance and promoting it. Islamic finance hasbrought a lot of “barakah” (blessings) inmy life. When the source of one’s incomeis halal, supplications are answered. I havegained recognition in this industry, Alham-dulillah, from a very young age, I wasgiven opportunities to share my perspec-tive and convey the little that I know glob-ally at various international forums andevents. I have been invited to conductworkshops and have had opportunities toteach at universities. From a career per-spective, Allah has blessed me with growthwithin the organisations I served and mademy ventures successful. It all begins withhaving the right “niyah” (intentions) andhard work.

Both Islamic banks and conven-tional windows have their particular rolesto play. There is still so much to learn fromthe conventional banking industry. WhileIslamic finance is diametrically opposed tothe conventional system, we cannot ignoretheir best practices. Not everything in theconventional banking industry is haramand they have had many more years of ex-perience to ensure best practices and goodgovernance. Windows at conventionalbanks can leverage off the establishedbrand and working practices and so addvalue to the Islamic finance industry. We



creation of a legal and governanceframework.

However, a constant concern forIslamic finance is the differences of opinionon product structures. There is a pressingneed for harmonisation in the long runespecially in today’s interlinked globalmarket. If one country prohibits oneproduct, while another permits, then thiscould have an effect on cross-bordertransactions, and on the e!ciency ande!cacy of the industry.

Zaki Badawi, former principal ofthe Muslim College in London, empha-sised the importance of the use of maqasidoriented ijtihad for the development of anIslamic financial system. He stated that lit-tle attention was paid by most fuqaha tothe basic objectives of the Shari’a. Hepointed out that Al-Shatibi as well as Al-Ghazali, Ibn Taymiyyah, and Ibn Qayyimadvised the fuqaha to take into considera-tion the purposes of the Shari’a to address

the individual and society’s needs when is-suing a fatwa. Badawi added that the taskof identifying the real needs of society,along with their relevance to the purposeof the Shari’a is not easy. It pushes thescholar to consider the literal text on onehand and the abstract purposes of the Shar-i’a on the other. He concludes that a newijtihad must begin by adopting the post Al-Shatibi approach to usul al-fiqh.

Hashim Kamali argues that usul al-fiqh has become a theoretical disciplinestudied as a part of the legal heritage ratherthan a tool to regulate and encourageijtihad. He added that usul al-fiqh is notwithout weaknesses and some of theweaknesses are not new, but existed foralmost as long as the usul al-fiqh itself. Alegitimate use of human intellect in dealingwith emerging circumstances is guidedonly by the general principles of Shari’abased on justice and benevolence (al-adlwa ihsan).

Al-Shatibi has emphasised the im-portance of maqasid for ijtihad. He advo-cated a sound knowledge of the goals and

slamic banking is slowly emerging as animportant area of applied Islamic lawand jurisprudence. The relationship be-

tween classical Islamic law and Islamic fi-nance has created a new system oflaw-making under the Shari’a, one that hasevolved remarkably over the last 40 years.The syncretic process of mining the classi-cal texts, considering modern sensibilitiesand accommodating state-law prescrip-tions has undoubtedly made Islamic fi-nance a thoroughfare of progression in theIslamic legal derivation process.

Original interpretation and ijtihadis most essential today for the developmentof Islamic law generally and of Islamiccommercial law in particular. Despite theexisting weaknesses concerning ijtihad, ifthere is a success story to be associatedwith the revival of Islamic jurisprudence inmodern times, that story will certainlyinclude Islamic finance. From little morethan a concept and an ideal, modernIslamic finance grew rapidly, with the lasttwo decades seeing the establishment of avariety of financial institutions and the


the objectives of the Shari’a as a pre-requi-site to reach the rank of a mujtahid. SanoKoutoub argued that the protection andpreservation of wealth is one of the essen-tial elements of maqasid al-Shari’a. There-fore, the continuity and growth of wealthin society should be encouraged and main-tained. The continuous distribution ofwealth in the society should also be en-hanced to bring happiness and financialstability. To achieve these objectives, a sup-portive Islamic jurisprudential frameworkis required based on the concept ofmaslaha and the broader objectives of theShari’a.

There is no doubt Islamic bankingand finance has gained greater importanceover the last two decades but thesoundness and stability of its infrastructurecan be secured through the robustness ofits regulatory framework supported by thesophistication of its products and services.While it was initially developed to fulfil theneeds of the Muslims, Islamic banking andfinance has gained universal acceptance asthere has always been a demand amongstMuslims for financial products andservices that conform to the Shari’a. Withthe development of workable Islamicalternatives to conventional finance,Muslims are beginning to find Shari’acompliant solutions for their financialneeds.

Although Islamic banking hasmade significant headway in a short periodof time, juristic disagreements still exist.Debt financing is one of the core areas ofconcern, where disagreements exist overproducts such as murabaha, bay bithamanajil, bay al-dayn and bay al-ina. Generallyspeaking, the Middle Eastern scholarsprohibit debt trading while the Malaysianscholars in o!cial rulings permit it.

Apart from this, there are manyissues that have to be addressed by Islamicbanks both in terms of documentation andtransactional structure. The general legalframework in many countries will need tobe modified to promote Islamic banking.The current governor of Bank Negara, ZetiAkhtar Aziz argued that at present Islamicbanking and financial institutions have, toa large extent, been governed by theconventional regulatory framework,supplemented and reinforced by theShari’a framework and Islamic accountingstandards. However, Islamic banking isdistinct from conventional finance in termsof its philosophy of prohibiting interest,

which in turn shapes the nature of itsfinancial transactions and its risk attributes.Therefore, she suggested the developmentof a separate regulatory framework in viewof the unique risks associated with Islamicfinancial transactions to provide for theireffective assessment and management. Thefocal point that needs to be analysed is thepresiding regulatory framework: does itaffect the process of fatwa and ijtihad ornot?

Sudin Haroon stated that there is nouniformity of laws and procedures in thepractice of Islamic banks around the world.Islamic banks have to conform basically to

two types of laws: the Shari’a and positivelaws. While Shari’a law is based onreligious foundations, positive laws arepromulgated by sovereign bodies tosafeguard public interest. The positivelaws, in most cases, are under thesupervision of the Central Banks. InMalaysia, for example, the establishment ofan Islamic bank is governed by theCompanies Act 1965, and its operations aresubjected to the Islamic Banking Act 1983and, to some extent, the Banking andFinancial Institutions Act 1989. Islamicbanks must conform to all requirements asstipulated in the above stated Acts.


Similarly, other governments have passedspecial laws that govern the operations ofIslamic banks in their countries. Islamicbanks in Malaysia are subject to theMalaysian’s Companies Act 1965; theIslamic banks of Bahrain are subject to theBahrain Commercial Companies Law 1975and the Kuwait Finance House (KFH) issubject to the Kuwait CommercialCompanies Laws 1960. Whilst Malaysiaand Kuwait have recently legislated onIslamic Banks, Bahrain has no special lawson the subject.

The social changes in modern timeshave introduced complexities in theapplication of Islamic law. The prevailingdiversity in the contemporary applicationof Islamic law as a response to socialchange on one hand is perhaps a welcomedevelopment; but on the other hand, itcreates new challenges too. The Islamicbanking industry is the most prominentexample, where the emerging challengesare significant and need to be addressedurgently.

While the diversity in fiqh opinionis presently contributing to global growth,it may soon become a constraining factor ifthe challenges arising out of it are notproperly addressed. The two distinctmechanisms that operate side by side tocarry out business according to the divinerevelation are equity financing and debtfinancing. Equity financing is affectedthrough profit sharing contracts, whiledebt financing is affected through deferredcontracts of exchange. The Quran furtherelaborates debt financing with thecontracts of deferred exchange allowedand interest based lending forbidden. Themain disagreement which prevailsbetween the two regions under review,Malaysia and the Gulf, is over debt basedfinancial products such as murabaha, bayal-bithaman ajil, bay al-dayn and bay al-ina.

Murabaha in fiqh literature isconsidered as a type of sale. The onlyfeature in murabaha distinguishing it fromother kinds of sale is that the sellerexpressly informs the purchaser of his costand the profit he intends to make. Themain objections to murabaha are that thereis a chance for partaking in bay al-ina aspractised by some Islamic financialinstitutions and that it combines two sales

in one. There are also differences of viewsamongst the scholars regarding thebinding nature of a promise to purchase.

The imposition of a compensationrate (ta’widh) is contentious. A consensushas been reached in this regard ascontemporary jurists have allowed banksto stipulate late fees on those clients whowere able to pay but were nonethelessdelinquent. However, this amount shallnot become a part of the income of thebank. This opinion is being followed in theGulf. On the other hand, the Shari’aAdvisory Council of Bank NegaraMalaysia has permitted the imposition ofone percent compensation rate on latepayment and unlike the opinion from theGulf, this money can form part of theincome of the bank. This is regarded asta’widh (compensation) for the bank andcannot be compounded.

Another important area is therebate. The majority of the jurists agree thatrebate can neither be stipulated in amurabaha transaction affected by anIslamic bank nor can the client claim it as aright. However, the bank can give thecustomer a rebate on its own as gratuity.Nonetheless, the Shari’a Advisory Council(SAC) of the Securities Commission inMalaysia has issued a fatwa declaring thata rebate clause and formula to calculate theamount for an early settlement can bestipulated in the primary legal documentof Islamic bonds based on the contract ofexchange.

There are controversies amongstMuslim scholars as to whether the pricecharged by the seller under bay al-bithaman ajil can be higher than the spotprice. Even the scholars, who are of theview that charging a higher price than thespot price is permissible under Shari’a, donot recommend a heavy reliance on it.Although, the validity of bay al-bithamanajil is proven from the Quran and Sunna,certain practices are not acceptedinternationally, specifically in the MiddleEast, Pakistan and Europe because of thedanger attached to it of opening a backdoor to riba. The act of deferring thepayment of price in a sale is also acceptedin the rest of the world and the contract ofmurabaha is being used predominantly.The main issue in certain types of bay al-bithama ajil as practiced in Malaysia by

some Islamic financial institutions is thatthey use bay al-ina under the guise of bayal-bithaman ajil. In this case, the contract ofbay al-bithaman ajil is preceded by apurchase of asset by the bank from thesame customer.

Bay al-dayn has always been anissue amongst the past and present Muslimjurists. The jurists who do not allow bay al-dayn have premised their objectionsmainly on the prohibition of riba, and theincreased risk to the buyer in the event of adefault. There were differences amongstthe classical Muslim jurists regarding thesale of debt from the creditor to the debtorand the sale of debt from the creditor to thethird party.

The majority of the classical Muslimjurists were of the opinion that it was notpermissible because it was a legal excuse tolegitimise riba. This opinion is beingfollowed by the jurists of Islamic finance ofthe Middle East. The Shari’a advisors fromthe Middle East and Gulf region considerit as a ‘back door’ to riba. However, bay al-ina is being practiced by Islamic financialinstitutions in Malaysia. It is consideredvalid by the Shari’a Advisory Council ofBank Negara Malaysia and the Shari’aAdvisory Council of the SecuritiesCommission of Malaysia.

To sum up, the central issue per-taining to existing disagreements betweenthe scholars of Malaysia and those of theMiddle East is the interpretation of Shari’ainjunctions. Disagreements exist in juristicviews and rulings particularly betweenMalaysia and the Middle East. The issue ofdisagreement is very important and has afar reaching impact on the Islamic bankingand financial industry worldwide. It can besaid that disagreement is inevitable, but atthe same time, there subsists a reconcilia-tory mechanism in Islamic law to har-monise different interpretations fromeither jurisprudential or administrativeperspective or both. Nevertheless, harmon-isation of the different views amongst thescholars from the different schools ofthought is necessary to enhance the globaldevelopment of Islamic banking and fi-nance. It is recommended that any furthermove in this direction be made under thepurview of siyasah Shari’a. This will createa much more robust system.


able. NASDAQ OMX is undoubtedly acompany with its finger on the financialpulse; and so with the emergence of Is-lamic finance, NASDAQ OMX sees poten-tial. For Jacobs, Islamic finance is a rapidlygrowing and increasingly important sectorof the global economy but he fears that de-spite the tremendous growth, it remainsunderserved and still in need of greaterglobal exposure. However, for Jacobs, thecompany he has served so loyally isuniquely qualified to further develop theIslamic financial sector. It is a bold ambi-tion but very few could doubt Jacobs’ ac-complished eye.

On February 8th 1971, 12 years be-fore John L. Jacobs began his fateful day,the National Association of Securities Deal-ers Automated Quotations (NASDAQ)commenced trading of over 2500 securitiesas part of the NASDAQ composite index.It was set up by the National Association ofSecurity Dealers (NASD), a regulatory au-

thority that had primary responsibility foroversight of brokers and brokerage firms.The NASDAQ exchange granted house-hold names the platform from which toraise capital: Intel, Microsoft and Apple areindebted to the exchange. Recently, Face-book has joined this heady list of illustriousnames for its IPO. Over the years, NAS-DAQ has accomplished many milestones.In 1997, NASDAQ was the first stock mar-ket to offer its listed companies a propri-etary online service with company, peerand industry trading data called NASDAQOnline. Three years later NASDAQ’s mem-bership voted to restructure and turn theexchange from a public company, ownedby NASD, into a shareholder-owned, for-profit company. In 2006, NASDAQ com-pleted its separation from the NASD andbegan to operate as a national securities ex-change.

In 2008, the NASDAQ OMX Group,Inc. was formed. It is a holding companycreated by the business combination of TheNASDAQ Stock Market, Inc. and OMX AB.The NASDAQ Stock Market is the holdingcompany’s U.S. equities stock exchange.

n 1983, an ambitious young manstepped into the o!ces of NASDAQ.His ambivalent emotions belied the en-

thusiastic smile he wore on his face. Inside,he was nervous but excited, worried buthopeful, inexperienced but committed tolearn. He had just joined the world’s firstelectronic stock market in an age wherecomputers had yet to be as ubiquitous andessential as it is in contemporary society.NASDAQ was to be a trailblazer and JohnL. Jacobs had become its newest recruit.

Now approaching two decades, Ja-cobs sits as the Executive Vice-Presidentand Chief Marketing O!cer. He couldnever have imagined the growth of NAS-DAQ (now NASDAQ OMX) and the suc-cess of his own career were synonymous.He has seen significant changes occur inthe company that has been an integral partof his life and has presided over many ofthe expansive steps that NASDAQ hasmade. NASDAQ OMX has had to adapt tothe constant evolutions of the market andthe altering environment. Players enter themarket, players leave. To remain in market,a company has to be relevant and adapt-


OMX licensees reported issuing at least8,500 structured products linked to NAS-DAQ OMX indexes with the notional valueexceeding $1.4 trillion in 24 countries.NASDAQ OMX indexes are widely usedas benchmarks by plan sponsors, financialinstitutions and individual investors. Theyalso license their indexes to asset managersand financial entities that distribute a vari-ety of financial instruments that closelytrack their indexes with the purpose ofachieving investment results that generallycorrespond to the performance of their in-dexes, such as exchange-traded funds(ETFs), mutual funds, UITs, annuities andother portfolio-based products. Index op-tions, futures, and other derivatives basedon NASDAQ OMX indexes are available toinstitutional and individual investors to beused for risk management.

It has only been recently that Jacobsgained acquaintance with Islamic financethough he must have looked with interestthe creation of the Dow Jones Islamic Indexin 1999. The launch was significant for theprogress of Islamic finance in the westernworld, announcing quite boldly that Is-lamic principles have a place in the westernbased financial system. The creation of theindex followed the USA O!ce of Comp-troller of the Currency (OCC) 1997 issuanceof directives which permitted murabahaand ijara structures in the USA. HSBC hadalso entered the USA market to offer theirretail products. The horizon was bright forIslamic finance but following 9/11 there has

The transformational combination of thetwo entities resulted in the expansion ofNASDAQ business from a U.S.-based ex-change operator to a global exchange com-pany offering technology that powers morethan 70 exchanges, clearing organisationsand central securities depositories in morethan 50 countries.

Jacobs is proud of the growth ofNASDAQ since he joined. The NASDAQOMX Group is the world’s largest ex-change company and owner and operatorof 24 markets in the U.S. and Europe. NAS-DAQ OMX is the parent company of theNASDAQ Stock Market, the world’s firstelectronic exchange and the largest ex-change in the U.S. NASDAQ OMX is alsohome to NASDAQ OMX Global Indexes —a premier full-service global indexprovider. NASDAQ OMX Global Indexesdevelops NASDAQ OMX branded indexesand licenses associated derivatives and fi-nancial products.

Indices are a barometer of markethealth, be it reflective of the broader econ-omy or a specific sector – such as technolo-gies. Indexes allow institutional andindividual investors to track day-to-daychanges as well as long-term trends in theeconomy and the financial markets. Theyare used as benchmarks, a standard bywhich economic sectors and investmentportfolios are measured. They bring clarityto market participants and help them withinvestment decision-making.

NASDAQ OMX’s index creationprocess is driven by demand and develop-ments in the global economy. Jacobs be-lieves objectivity is crucial to the creationof a robust index. The perspective of the in-vestor remains cornerstone to the formula-tion and an investor has to be positive thatthe index is truly reflective of the generaleconomy or segment. NASDAQ OMXadopts a methodology that looks at waysto measure segments or sectors of eco-nomic models in a fashion that is transpar-ent and based on rules with an emphasison investing, trading and philosophy.

Due to great demand, NASDAQOMX Global Indexes is one of the fastestgrowing indexers in the world. This yearalone, they have created 450 new indexesand now have more than 3,000 diverse in-dexes covering equities, bonds and com-modities. Their client base spans the entirespectrum of the financial services industryincluding big investment banks, portfoliomanagers pursuing passive investmentstrategies, commercial banks, and insur-ance companies located in the Americas,Europe and Asia. During 2011, NASDAQ


bility that NASDAQ OMX offers by beinga global exchange and a global brand is aperfect medium for Islamic finance. Lever-aging off the NASDAQ OMX brand, aswell as their innovative indexes will enableShari’a sensitive investors to expand thetrading and investment landscape withnew opportunities in ETFs, structuredproducts, investments and Shari’a compli-ant derivative securities.

Nevertheless, Jacobs is aware that itis not only awareness that needs to be tack-led; competition remains a key considera-tion in structuring and promoting theShari’a indexes. Maybe counter-intuitively,competition is not limited to dedicatedindex providers. NASDAQ OMX facescompetition from investment banks, ex-changes and developers who create finan-cial products designed to meet investorneeds. But such are perennial considera-tions of a financial market player. The in-terplay of micro and macro economicfactors in the market requires constantmonitoring and evaluation. The dynamismof the markets is what Jacobs thrives on.Being the Chief Marketing O!cer, he is al-ways looking for those opportunities tocreate the right profile, build profits and re-duce opportunities for loss. The role ischallenging but one that Jacobs finds excit-ing and fulfilling. Entering a new marketsuch as Islamic finance brings its own setof complications and concerns, and em-bracing a fledgling market requires flushesof optimism.

The Edbiz NASDAQ-100 Shari’aIndex contains securities of the NASDAQ-100 Index which are considered Shari’a-compliant. The NASDAQ-100 Indexincludes 100 of the largest domestic and in-ternational non-financial securities listedon the NASDAQ Stock Market based onmarket capitalization. Because the EdbizNASDAQ-100 Shari’a Index is also a mar-ket cap-weighted index, the index securi-ties generally enjoy large capital growth.Like the NASDAQ-100 Index, it reflectscompanies across major industry groupsincluding computer hardware and soft-ware, telecommunications, retail/wholesaletrade and biotechnology.

The indexes are used by those whoare interested in tracking Islamic economicsectors and maintaining Islamic investmentportfolios. Institutional and individual in-vestors are interested, as are plan sponsors,asset managers and financial entities thatdistribute financial products such as ex-

change-traded funds (ETFs), options andother derivatives.

Target audience is those who are in-terested in tracking Shari’a-compliant non-financial large-cap growth stocks. Potentialclients include professional and individualinvestors, plan sponsors, asset managersand financial entities that distribute finan-cial products such as exchange-tradedfunds (ETFs), options and other deriva-tives.

The Dow Jones Islamic Market USIndex measures the US universe of in-vestable equities that pass Dow Jones’ pro-prietary screens for Shari’a compliance.The selection universe for the DJIM USIndex includes the components of the USbenchmark index, which covers approxi-mately 95% of the float-adjusted marketcapitalization of the underlying market.

The correlation between the Edbiz-NASDAQ-100 Shari’a TR Index and theDow Jones Islamic Market US TR Index is95.5%. As one would expect with a highcorrelation, both indexes have moved verymuch in tandem with one another over thepast two years. Returns have been almostidentical at 33.65% and 33.62% with NAS-DAQ edging out Dow Jones.

Jacobs is optimistic about theShari’a index. He is proud that NASDAQOMX Global Indexes continuously seeksnew opportunities to license indexes toasset managers and financial institutionsworldwide. With a range of financial in-struments such as ETFs, index mutualfunds as well as options and futures con-tracts, market participants can develop avariety of strategies that help them meettheir investment objectives. Jacobs asserts,rightfully, that the NASDAQ-100 Index isone of the most widely watched indexes inthe world with almost $400 billion in globalassets linked to it. With the Edbiz-NAS-DAQ-100 Shari’a Index, they are workingdiligently to replicate the success they havehad in making the NASDAQ-100 Indexone of the world’s most widely watched in-dexes. Jacobs is confident that this is anachievable aim. After nearly 20 years ofsuccess, it would be di!cult to argueagainst him.

been caution with launching Islamic fi-nance initiatives. 10 years on, Jacobs opinesthat there are potentially favourable invest-ment opportunities in Islamic financeamong US-based investors. However,given his position as a senior representa-tive of a global exchange company, he de-clines to predict future economicperformance: a testament to ensuring NAS-DAQ OMX remains both objective andtransparent. In part, the uncertainty result-ing from the global credit crisis precludesany definitive predictions to be made.

Nevertheless, Jacobs feels that thereis more demand for tools to accuratelymeasure the performance of the Islamic fi-nancial sector. He wants to ensure thatNASDAQ continues its position as a pre-mier global index provide by delivering ontheir commitment to design and license in-novative and relevant indexes that meet theevolving needs of investors and other mar-ket participants. The introduction of theEdbiz NASDAQ-100 Shari’a Index and theother indexes in NASDAQ OMX’s familyof Shari’a indexes are examples of their ef-forts to facilitate investment opportunitiesin Islamic finance. The Edbiz NASDAQOMX Shari’a Index family brings a new setof tools to those interested in measuring Is-lamic economic sectors and maintaining Is-lamic investment portfolios. They offerShari’a-compliant solutions beyond themost basic Islamic equity funds. This indexfamily is comprised of securities that meetthe Shari’a requirements as prescribed bythe Accounting and Auditing Organisationfor Islamic Financial Institutions (AAOIFI)and adopted by NASDAQ OMX with theguidance of the Shari’a advisor, Edbiz Con-sulting Limited.

Jacobs feels that NASDAQ OMXwill be able to benefit Islamic finance by itspromotion of the Edbiz NASADQ OMXShari’a indices. He is quite confident thatNASDAQ OMX has the tools to create aShari’a compliant index which is attractivefor its investors. He points out once againthat unlike other index providers, the NAS-DAQ OMX index creation process andmethodology is completely objective,transparent and rules-based. This uniqueapproach offers market participants an un-biased perspective of the Islamic financialsector. Additionally, as a global exchangecompany, Jacobs avers that NASDAQOMX offers unparalleled market visibilityand perspective, key values that most otherindexers cannot provide.

The problem for Islamic finance, Ja-cobs argues, is a lack of awareness. Despiteits rapid growth, many market participantsare still learning about Islamic finance andShari’a compliant indexes. This can be mit-igated by NASDAQ OMX. The global visi-






he global Islamic finance industryhas witnessed considerable growthover the last four decades. At present,

the Islamic financial industry operates inmore than 75 countries across the worldand boasts of an asset base of over US$ 1.3trillion. It is pertinent to note that demandfor Islamic finance is not just confined toMuslim states but also exists in nonMuslim countries.

Pakistan is one of the few countriesto have undertaken the ambitious aim ofIslamising the banking system. The processbegan in the 1960s but made considerableheadway in the 1980s (for details of keyhistorical developments of the Islamicfinance industry in Pakistan see Table 1). Itis important to note that this attemptachieved only limited success. The abruptconversion of the whole banking systemfrom riba based to Shari’a based withoutdeveloping an adequate infrastructuralframework and improving the human

resources capacity weakened long terme!cacy and sustainability.

In 2001, policymakers adopted amore phased approach in converting thebanking system to interest free. This timethe process of conversion was adequatelyplanned providing a comprehensive legal,regulatory and Shari’a compliance frame-work. The new paradigm was based on amodel that allowed four types of Islamicbanking institutions:

i) Fully fledged Islamic banks;ii) Islamic banking subsidiaries of

conventional banks;iii) Islamic banking branches (IBBs)

of conventional banks;iv) Conventional banks having Is-

lamic banking branches were also allowed

to have Islamic banking windows in theirconventional branches.

It is important to note that in thissecond phase of transformation, SBP hasbeen spearheading initiatives for thedevelopment of the industry. SBP has beenplaying a dual role of both regulator aswell as a facilitator. Some of the initiativestaken by SBP are as follows:

1. SBP issued policies for the for-malisation of Islamic banking practices in2003. These included stipulating eligibilitycriteria, licensing requirements, and pro-ducing guidelines on the physical set upalong of the bank, Shari’a compliance pro-cedures and other operational matters ofthe banks.

2. a comprehensive Shari’a compli-ance framework was introduced by SBP forIslamic banking institutions that required:

a) Shari’a board at the SBP; b) a designated Shari’a advisor at


(IBIs). However, SBP has allowed IBIs todevelop their own products with theapproval of their Shari’a advisor whileensuring adherence to the essentials. SBPhas also adopted five Shari’a standards ofAccounting and Auditing Organization forIslamic Financial Institutions (AAOIFI)after customisation in accordance with thelocal conditions in order to bring harmonyand to make local industry at par with theglobal Islamic finance industry.

5.Risk management guidelines forIBIs based on Islamic Financial ServicesBoard (IFSB) standards were issued. Theseguidelines cover all major risk categorieswhile providing best practices for estab-lishing and implementing risk manage-ment in IBIs.

6.SBP is actively engaged in capac-ity building through various promotionand training programs. These initiativesare undertaken in collaboration with re-

individual banks; c) mandatory internal Shari’a audit; d) Shari’a inspections by the SBP.

It is important to note that SBP isone of the very few central banks thatinitiated Shari’a inspections. Before theo!cial endorsement of Shari’a inspections,a comprehensive Shari’a inspection manualwas developed and training was impartedto the Shari’a inspectors.

3.For encouraging Islamic microfi-nance in the country, SBP has allowed theestablishment of full-fledged Islamic mi-crofinance banks, Islamic microfinanceservices by full-fledged Islamic banks andIslamic microfinance divisions in conven-tional microfinance banks.

4.SBP communicated essentials ofmajor Islamic finance products andinstruments along with their modelagreements to Islamic Banking Institutions

puted multilateral institutions such asIFSB, AAOIFI and International Islamic Fi-nancial Market (IIFM). These initiatives arehelping in enhancing awareness and im-proving the depth of the talent pool in Pak-istan.

7.SBP is currently working on thedevelopment of a liquidity managementframework for the Islamic banking indus-try. In collaboration with the local industry,efforts are being made to develop a frame-work aimed at encouraging Islamic banksto offer participatory mode based financ-ing. It will help to create more musharakabased models.

Since 2001, the Islamic bankingindustry has shown strong momentum


registering a high annual growth rate. Inthe last few years, the growth rate has been30 percent. Currently Islamic bankingassets constitute around a 7.8 percentmarket share of the overall bankingindustry reaching Rs. 641 billion inDecember 2011 compared to Rs. 477 billiona year earlier. Growth in assets is mainlymade up by financing and investment thattogether grew by 40.4 percent on Year onYear (YoY) basis (Rs. 475 billion inDecember 2011 compared to Rs. 338 billionin December 2010). Similarly total depositsin the Islamic banking industry in Pakistanhave registered substantial growth over theyears and reached Rs. 521 billion inDecember 2011 thereby constituting amarket share of 8.4 percent of the overallindustry.

As of December 2011, 5 full fledgedIslamic banks and 12 conventional bankswith Islamic banking branches areoperational in the country. There are 886Islamic branches in more than 70 districtsacross the country. Growth is likely togather further momentum with increasingawareness and expansion of Islamicbanking network in second and third tiercities.

In terms of profitability, the profitof the Islamic banking industry crossed Rs.10 billion mark for the first time inDecember 2011. Despite the successes,there are still some areas in the Islamicbanking industry that need to beaddressed. For example, concentration offinancing in only a few sectors, and therising non-performing finances (NPFs) tofinancing ratio, though less than overallbanking industry, are some of the keyissues faced by the industry.

The domestic sukuk market hasshown substantial growth over the years.As of March 2011, sukuk worth more thanRs. 436 billion have been issued in the do-mestic market. A large portion of this is-suance (nearly 76 percent) has come fromthe Government of Pakistan (GoP) ijarasukuk programme. Since auction of thefirst GoP ijara sukuk in 2008, a total of 10ijara sukuk have been issued, amounting toRs. 333 billion. The issuance of sovereignsukuk has witnessed an upsurge since No-vember 2010 as 6 GoP ijara sukuk havebeen issued since then amounting to aboveRs. 290 billion. The issuance of sovereignsukuk has helped in not only providing amuch needed benchmark but also en-hanced liquidity management and im-proved asset quality for IFIs. These highyielding sukuk have provided a good andstable source of funds to governments and

have also encouraged Islamic banks tochange their asset structure by shiftingtheir investment from interbank place-ments (low return investment avenues) tothese Islamic bonds particularly since No-vember 2010. There are now regular auc-tions of GoP sukuk.

Despite showing strong growthmomentum, the Islamic banking industryis still confronted with several key chal-lenges that need to be overcome in order tosustain the high growth trajectory. Some ofthese issues are:

1.Despite making a significant con-tribution to GDP, small and medium enter-prises (SME) and agriculture are stillunderserved sectors in terms of access to fi-nance. By targeting these underserved sec-tors, Islamic banks can not only increasetheir depth and breadth but also fosterhigher financial inclusion levels in thecountry. SBP has already issued a salam-based product for an agricultural firm andis working with the industry to developmore products. Moreover, Islamic micro-finance is another potential area that can beexplored for serving the underserved anddeprived population of the country.

2.IBIs in Pakistan, like their interna-tional counterparts, need to address thelimited availability of instruments to man-age their liquidity requirements.

3.A large number of unbankedcitizens prevails in the country, either due

to low penetration of the banking systemor due to voluntary exclusion. Suchpotential clientele of the banking systemcan be tapped by the Islamic bankingindustry specifically in the rural areas. Inthis context, SBP has recently provided arevised definition of rural areas to help theIslamic banking industry increase itsoutreach.

4.The limited capacity, particularlythe scarcity of trained Islamic bankers, isanother important challenge that can stag-ger growth and hinder development of theindustry.

Since its re-launch in 2001, the Is-lamic banking industry in Pakistan hasmade significant strides forward with bothassets and deposits recording a significantincrease. A large part of this success hasbeen due to the facilitative role played bythe SBP in terms of providing a compre-hensive legal, regulatory and Shari’a com-pliance framework. By adopting a dynamicexpansion policy that is inclusive in nature,the Islamic banking and finance industryin the country can significantly increase itsoutreach while fulfilling the social ethicaland moral values embedded in the Islamiceconomic system. Against this backdrop, itis likely that the Islamic banking industryin Pakistan is going to sustain its growthmomentum in the near future. However, alot will depend upon political will and pru-dence to fully effectuate a beneficial out-come for Islamic finance.


he Islamic banking and finance indus-try is at present valued at USD1.357trillion according to Global Islamic Fi-

nance Report 2012 (GIFR 2012) published byEdbiz Consulting. In GIFR 2011, Edbiz Con-sulting introduced the Islamic FinanceCountry Index (IFCI), which ranks countriesaccording to their prominence and involve-ment in Islamic finance. The index is basedon a multivariate analysis of a number ofvariables that contribute to the growth anddevelopment of the Islamic banking indus-try in the country. This means that the rank-ings are not based on any individualvariable. The latest information available onthese 8 variables was collected and weightswere ascribed for these variables using amultivariate analysis. The data was testedto see if it contained any meaningful infor-mation to draw conclusion from and inmaking sure it is presented in an objectivemanner.

The variables introduced in the Is-lamic Finance Country index are shown tothe right. These variables remain the samefor IFCI 2012.

According to the rankings of IFCI2011, Iran ranked number one. This is thesame for IFCI 2012. Although Iran is notone of the major global players in Islamicbanking and finance industry, the localIranian banking industry follows the pre-cept of Islamic law. The banks in Iran arethus considered Shari’a compliant by de-fault. Iran currently has $330bn assetsunder management (AUM) increasingfrom $160bn in 2006 with an annualizedgrowth of 25 percent. Iran is one of the twocountries that converted their economy toconform to the Shari’a. It is also currentlyhome to the world’s largest Islamic bank,


Bank Melli, which has over $60bn AUM.The Iranian government is keen to encour-age the Sukuk issuance for infrastructuredevelopment in the country. Previously,Iran issued musharaka sukuk but they arekeen to diversify.

The country ranked second accord-ing to IFCI 2012 is Malaysia with over$100bn AUM, approximately 22 percent oftotal assets of the country. Malaysia is astalwart for the Islamic banking and fi-nance industry: an innovator, pioneer andpromoter. It has been at the forefront ofproduct development, sukuk issuances,regulatory change, building a comprehen-sive financial infrastructure, and adoptingbest legal practices. Malaysia has donemuch in terms of the development ofhuman talent, which is key to capacitybuilding in the industry. The foundationto Malaysia’s success has been governmentsupport and investment. The governmenthas been proactive in pushing Islamic fi-nance forward. Malaysia is also home to Is-lamic Financial Services Board (IFSB), oneof the two regulators in the global Islamicbanking and finance industry. During2011, Malaysia accounted for 60% of thetotal sukuk issuance of the world and it ap-pears that this trend is continuing in thefirst quarter of 2012.

Saudi Arabia was ranked 3rd ac-cording to the IFCI. Its Islamic banking andfinance assets accounted for approximately$140bn in AUM. Figures from the bankingand finance industry show that there is in-creasing demand for Shari’a compliantproducts in the Kingdom with 57% of theassets being Shari’a compliant (as reportedby Saudi Arabian Monetary Authority(SAMA)). The takaful industry is the fastestgrowing Islamic financial segment in SaudiArabia with assets expected to reach $7bnin 2012. The remainder of the top ten in-cludes Kuwait, UAE, Bahrain, Indonesia,Pakistan, Qatar and Sudan.

The IFCI gives a comparativeoverview of the state of Islamic banking In-dustry. The ranking is a composite statisticwhich accounts for the variables listedabove. These rankings will change on anannual basis based on the latest informa-tion available about the country and the de-velopments in the country for that period.Comparing the ranking of the IFCI 2011and IFCI 2012, we have seen changes in theranking. Countries like Kuwait which wasranked as number six has moved numberto number four this year while other coun-tries, such as Indonesia, has moved threeplaces down the ranking from number fourto number seven. In the last year, Bahrainhas experienced much social and politicalturmoil, but according to the IFCI this hasnot had an effect on the Islamic banking

and finance industry. The overall rankinghas improved from number eight to six.Other countries such as Qatar, UnitedKingdom, Brunei Darussalam, Jordan, andKenya have also improved in their rankingcompared to IFCI 2011. However, countrieslike Pakistan, Bangladesh have moveddown the rankings.

The uniqueness of the IFCI is that itdoes not rank countries according to oneparticular variable. It is based on differentvariables that are assigned weights accord-ing to a multivariate analysis. Such infor-mation is vital to the growth of the globalIslamic banking and finance industry.Through the IFCI, stakeholders and poten-

tial investors will be provided an instantsummary as to the state of the industry invarious countries. However, the IFCI is inits gestation period. For more robust analy-sis, variables will need to be increasedalong with a more e!cient gathering ofdata. The IFCI is dependent on the avail-able information and relies upon availabil-ity and authenticity of data. If this ismissing, there is an effect on the IFCI.

Currently, the IFCI does not reflecthow big or small the industry is when com-pared to conventional finance. However,going forward, IFCI will adopt a morecomparative approach.


Western world, Islamic banking and fi-nance is being looked into as a possible so-lution to the volatility in the marketplace.In a nutshell, Islamic banking and financehas become a modality for the renaissanceof Islam and an alternative market mecha-nism. Without doubt, the unparalleledgrowth in Islamic finance has played a sig-nificant role in the revival of the Islamiccivilisation that we see today.

At the zenith of its glory, Islamiccivilisation was characterised by unrivalledintellectual achievement across all disci-plines of knowledge. During this golden

age of Islam, the Islamic world was a caul-dron of cultures which collected, synthe-sized and significantly advanced theknowledge gained from other civilisations.Places of worship and educational institu-tions such as mosque, madrasa, librariessupported this advancement. Cities likeBaghdad, Cordoba and Toledo wereknown as centres of civilisation and knowl-edge where scholars, both Muslim andnon-Muslim, gathered, discussed and in-vestigated. A large number of educationalinstitutions, research centres and great li-braries were established in these citieswhere scientific books were kept with reli-gious ones. In the Western part of the Is-lamic world, extensive efforts were madeto translate many of the Muslim works

slamic finance for an increasing numberof Muslims is part of a new life style. Forothers, it is an extension of their Islamic

identity. Although it seems like a commer-cial phenomenon, Islamic finance haswider social implications. Indeed, it can beused for not only reformation of Islamic ju-ristic thinking but also bring about socialreformation of Muslim communitiesaround the world. In some countries, likeMalaysia, Islamic banking and finance hascertainly contributed in terms of wideningemployment opportunities for the bumipu-tra, especially those who come from a reli-gious educational background. In othercountries, such as certain Middle Easterncountries, it is being used as a tool for en-hancing financial management. In the


from Arabic into other languages, espe-cially in the fields of astronomy, mathemat-ics, medicine, chemistry, botany andphilosophy. This golden age of Islam wasalso the golden age of knowledge and ed-ucation.

The growing international interestin Islamic finance has fuelled a similargrowing interest in Islamic studies in theWest. The recent two decades have wit-nessed the explosion of scholarly worksand writings related to various aspects ofIslamic economics, banking and finance.The development of knowledge in thesedisciplines has been so impressive that ithas become di!cult to keep pace with thegrowing literature produced by an interna-tional assortment of scholars and re-searchers. The global interest in Islamiceconomics and finance transcends nations,languages and cultures. Many Westernscholars have studied and written on Is-lamic economics, banking and finance. Is-lamic finance education has also gainedsignificant momentum. Islamic economicsand finance courses are now taught as anacademic discipline in academic institu-tions in the Islamic and Western countries.We have also seen top business schools inthe West incorporating elements of Islamicfinance into their MBA programs. Theglobal growth of Islamic finance has en-couraged professional bodies and privateentities to offer certificates, diplomas, un-dergraduate, masters and post-graduatedegrees in Islamic finance and economics.The growing interest and advancement ofknowledge in Islamic finance attests to therevival of Islamic civilisation.

The second characteristic of Islamiccivilisation is its geographical spread. Theknowledge gained in science, geography,algebra, medicine, arts, economics and lit-erature in the Islamic world spreadthrough the Middle East and North Africainto Europe and across Asia to the borderof China. Trade, commerce, technology,music, arts, philosophy, architecture, lawand education flourished and developedacross the vast cultural highway created bythe Islamic world. San Simon, a Frenchphilosopher, wrote in his book The Anthro-pology: “the one who studies the variousstructures of human civilisation, he can’tdeny the big cultural role of Muslims andArab in building the scientific renaissanceof modern Europe.” Similarly, growth inIslamic finance has not been confined to theMuslim world, but spans across the Westand the Asia Pacific region where thegrowth is driven by commercial consider-ations. There are now more than 300 Is-

lamic financial institutions operatingworldwide across 75 countries. The broad-ening geographical base for Islamic finan-cial services has seen Islamic financemoving beyond its historic boundaries intonew territories. An increasing number of fi-nancial centres in the West, eager to profitfrom the lucrative Islamic financial busi-nesses, are looking to make appropriateregulatory and legal reforms that would fa-cilitate provision of Islamic financial prod-ucts. Financial centres such as London,Hong Kong and Singapore have alreadymade Islamic finance as part of their finan-cial and business activities. Following thelead set by these centres, other majoreconomies like Japan and France have alsojumped on the wagon of the globallybooming Islamic finance industry.

At the apex of the great Islamiccivilisation, trade was among the most im-portant activity in wealth creation. The Is-lamic world dominated global tradethrough its control of land and naval chan-nels from the East to the West. In order tosupport their trading activities, Muslimtraders started the early development of Is-lamic finance when they engaged in activ-ities such as interest-free deposit taking,

money changing, remittance services andthe use of cheques. The usage of chequesfor trade purposes was a norm in the cityof Baghdad. The city of Basra flourishedwith the activities of money changers.Here, trading and business activities car-ried out in each market were conductedusing cheques issued by money changerswhich were then used to purchase goods.Hence, Islamic civilisation which was char-acterised by innovation in financial andbusiness transactions was also the catalystwhich unified the different nations and cul-tures.

Today, Islamic finance involving fi-nancial flows between Muslim and non-Muslim world has revived and revitalisedeconomic ties, a trend that will generatemutually reinforcing growth prospects.The emergence of Islamic financial centresin the East and West and their increased fi-nancial integration has paved the way forthe revival of a vibrant Islamic civilisationin the twenty first century. The phenome-nal growth in Islamic finance has led to in-novative Shari’a-compliant financialproducts and services. One of the moststriking features of the recent growth in Is-lamic finance has been the development ofsukuk as an investment vehicle and thishas been considered as the peak of innova-tion in Islamic finance. Over the years, thesukuk market has become more diversifiedwith new categories of issuer and morecomplex structures being used. The Islamic


financial product range has now expandedinto a broad array of innovative instru-ments. A number of innovative productshave been introduced which include resi-dential backed securities, commoditybased financing as well as investment andequity linked products. More recently, theinternational dimension of Islamic financehas gained prominence as it transitionsfrom being domestic to becoming increas-ingly more internationalised. This is evi-dent by the increasing internationalparticipation in Islamic financial markets inthe different jurisdictions and the growingnumber of Islamic financial institutionsthat have presence or strategic interests inforeign jurisdictions. This trend has re-sulted in increased cross border financialflows.

Islamic civilisation had many greatachievements and accomplishments thathave contributed to world culture. Today,Islamic finance as a new financial culturehas emerged in many parts of the worldnow that Muslims have regained their po-litical and economic independence. Islamicbanking came as a market response to theneeds of Muslims who were looking for Is-lamic financial solutions and services thatnot only fulfil their financial needs but alsotheir religious obligation. However, itwould be wrong to pigeonhole Islamic fi-nance as Muslim-only. The industry beganto fulfil the needs of only Muslims but itcan be safely said that Islamic finance is nolonger just an all-Muslim affair.

The industry’s appeal has grown toattract the non-Muslim markets. We findthat this new Islamic financial culture tran-scends religions and nations. Consumer in-terest is not merely driven by religiousbeliefs, but stems from transparency of theterms and conditions, the ethical nature ofsocially responsible investing, fairness tothe consumer and competitive pricing. Inmany respects, Islamic banking and fi-nance has also emerged as an elitist phe-nomenon, especially in the Gulf region.The finance offered by Islamic banks is fora new and modern life style. Luxury itemslike yachts, personal jets, expensive carsand high-end living are being financed byIslamic banks. Other financial products likeIslamic credit cards, Shari’a compliantmortgages, takaful and similar services aregiving rise to a new financial brand - an Is-lamic brand to which an increasing num-ber of young Muslims are subscribing. In

the past, an Islamic life style was primarilyassociated with rituals – ‘ibadat – but thisnew brand associates Islam with other as-pects of social interaction – mu’amalaat - aswell.

This new Islamic financial life styleis developing a new identity for contempo-rary Muslims. A 21st century Muslimwishes to be identified with the new trendsin all aspects of life, including banking andfinance. This trend as an individual choiceoffers an opportunity for the Islamic statesas well. Given that economic power playsan important role in determining the con-tribution of a particular country or nationin world affairs, the global movement of Is-lamic banking and finance provides an op-portunity to the OIC countries to developa new financial civilisation based on an Is-lamic heritage in business and trade.

Malaysia has indeed found an op-portunity in Islamic banking and financeto play a role in the peaceful restorationof Islamic ideals and its once vibrant cul-ture. A pioneer in Islamic finance formore than 30 years, Malaysia has pavedthe way and designed the building blocksfor the development of the global Islamicfinance industry. Today, Malaysia’s con-tribution to Islamic finance has receivedglobal recognition. The key to their suc-cess lies in the development of the regu-latory infrastructure encompassingliberalisation and incentivisation to pro-mote the Islamic financial industry. Reg-ulation has been passed on key structuralcomponents namely the Islamic bankingsector, Islamic capital market, takaful andmany other peripheral Islamic institu-tions. Malaysia is also at the forefront ofdisseminating Islamic finance education..Malaysia, as a multicultural nation, un-derstood the pervasive influence of cul-tural and religious paradigms on modernlife and proactively sought to enact a vi-sion. This transformed the nation into amodel for the revival of Islamic civilisa-tion in the modern world.

The glory of Islamic civilisationemerged as a consequence of the enormousflow of ideas from Muslim thinkers. Fromthese streams of ideas emerged Islamic phi-losophy which later became the hand-maiden that developed Islamic sciencesthat included mathematics, physics, geol-ogy, chemistry, astronomy and sociology.This new knowledge continued to flowand enrich not only the Islamic world butalso the entire human civilisation at thattime. More importantly, every discoveryadded a newer, deeper and richer dimen-sion to the Islamic world. It is dishearten-ing to note that such a glorious era ofknowledge promotion and advancement isvery much lacking in the Muslim worldtoday. I believe the singular reason for thisstate of affairs is the transformation of apeople from processors of ideas to recy-clers of ideas. On the moral and spiritualfront we are trying to recycle the ideas ofour forefathers and on the material frontwe are just consumers of western ideas.

As we progress in this millennium,Islamic civilisation will be able to emulatesome of its past successes highlighted ear-lier. We are already witnessing a gradualincrease in the share of Islamic financial ac-tivities as a proportion of the global finan-cial system. Increased wealth and assetsplaced and managed by Muslims financialprofessionals can be utilised through refi-nancing to reduce the debt burden of Is-lamic countries and enhance the prosperityof the ummah. Indeed Islamic finance hascome a long way as a new financial cultureand global civilisation. But the road aheadremains long. The Muslim world mustlearn to cooperate better and strive to un-leash its potential by focusing on economicdevelopment and building stronger tradelinks. The promotion of economic integra-tion through enhancing the breadth anddepth of Islamic finance should remain theagenda of the day for Muslim nations.




ISFIRE | Volume 2 | Issue 2 | May 2012

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