The Big Question by MM (Issue 1)

the changing landscapeD.Vicary & R.Thomas

INSIDE05

strengthening Islamic FinanceAbdelilah Belatik 13

Shariah-compliant systemsRosie Kmeid

17 POWER OF THE CROWDIbn Salam

22

Islamic Micro-FinanceHameed Azhar

25 the Big question Muath Mubarak31

Broadbasing the Industry...

Islamic Finance Today is a monthly magazine exclusively dedicated to Islamic Finance & Banking published by Pioneer Publications (Pvt) Ltd. It contains a variety of interesting articles including exclusive interviews, news and views on various aspects of the industry.

No part of this publication may be reproduced in any form without the prior written permission of the publisher. Views expressed in this publication are not necessarily those of the publisher.

Editor in Chief - Asiff Hussen

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EDITORIAL

Asiff HusseinEditor-in-ChiefIslamic Finance Today

In our new multi-media feature MIT Talks, Ikram Thowfeek, addressing the issue of whether Islamic Banks and Financial Institutions should drop the tagline Islamic to broadbase their reach, makes a point why it should not be so, arguing that it is not branding that counts, but creating awareness to expand the reach. Why, because as much as 80 percent of the market remains untapped due to poor awareness of the industry.

Yes, it is only broadbasing the industry that can take it to new horizons. But how do we set about it? Creating greater awareness is obviously one solution. But there's more that can be done.

In this issue we feature two papers bearing on the topic. The first by Ibn Salam makes a convincing case for Crowdfunding to lead the industry to phenomenal growth. This was seen in Barack Obama's election campaign that asked a lot of people for a little money to do things. He takes the logic further, arguing that Islamic Financial Service Providers can make a pitch on the Internet to reach hundreds, thousands or even millions of people across the world to raise monies on whatever mutually agreeable basis for funding new ventures with Shariah –compliant financing. Such a move, he argues, could revolutionise the industry. After all, Crowdfunding is growing fast and according to Forbes, is set to become a $1 Trillion marketplace in another five years.

The other by Hameed Azhar makes a strong case for taking Islamic Finance to all levels of society by adopting the co-operative model for growing Islamic micro-finance. Such a scheme shows great promise to take the industry to the very grassroots since as he argues any industry that has been successful on a larger scale can by this means be replicated on a smaller scale in keeping with Schumacher's ideal of small is beautiful . By taking Islamic Finance to the masses, it promises to nurture a generation cultured in Islamic finance at all strata of society, besides improving public perception of the industry as a whole and drawing not only Muslims but also those of other faiths to its fold.

The question is, are we ready for it?

IFT31 Islamic Finance Today - March 2015

Muath Mubarak (MM) is an Islamic Banker, Trainer and Writer in the field of Islamic Banking & Finance industry. MM aims to bring different viewpoints of core issues of the expanding Islamic Finance industry under this special segment The Big Question

"Why does the Islamic Financial Services Industry lack initiative in entering new happening areas such as venture capital?"

The Islamic Banking & Finance industry has witnessed growth amidst challenging climates but many stakeholders still wonder whether this industry has been moving in the right direction to tap into new markets such as venture capital, crowd funding, carbon trading to provide solutions for the capital market requirements including margin trading, hedging to liquidity management.

As per Pew Research Muslims will make up 26.4% of the total projected population of the world in 2030 which is 2.2 billion in numbers, reported in 2011. Also, the Shariah compliant industry has diversified from food, finance, fashion, health care to media. The Global Islamic Economy is offering some irresistible offers to the marketplace with unparalleled growth rates. But still many believe that there is something missing in terms of moving into new arenas exponentially.

IFT 32Islamic Finance Today - March 2015

The underlying philosophy of banks is risk minimization, and in an Islamic Bank, this philosophy often overshadows the objectives of the Shari'a. The end result is that Islamic Banks are as much interested in protecting their investments and making a return as their conventional counterparts and do not venture into new areas. He says:

Today, the use of instruments such as Mudaraba and Musharaka which meet the objectives of the Shari'ah in their true sense have been highly underutilized. Islamic Banks are unwilling to engage in participative contracts as they involve high risk levels. Mudaraba and Musharaka contracts are theoretically right and on paper, the Islamic Bank might secure a profitable venture. However, the practical answer to a bank engaging in equity positions is quite contrary. I personally do not blame the Islamic Banks.

Several factors explain the under-utilization of Mudaraba and Musharaka contracts. Certain jurisdictions do not allow banks to engage in equity investments or the regulations in place do not encourage Mudaraba and Musharaka contracts. In addition, Murabaha is preferred due to its ease of use for Islamic Banks wishing to keep the same business model as in conventional banking in jurisdictions with high levels of competition. Islamic Banks may consider participative contracts only in cases where the client in question is an 'established customer' with a strong track record. However, the practicality of Mudaraba and Musharaka will depend upon the jurisdiction. In Mauritius, there are several cases where clients (Corporates and big companies) do not backup their companies in trouble and remain silent onlookers of the liquidation process. The Mauritian law perceives a company as a separate legal entity from its owners and even if the owners are wealthy, they cannot be forced to inject capital into a dying company. In such cases, the Islamic Bank is in a risky position if it engages itself in participative contracts although, there are means to mitigate risks in Mudaraba and Musharaka contracts. From an Islamic banker perspective, I am of the opinion that clients may profit from the Banks in the sense that they are in a relatively higher position and an abuse of trust can be seen. Another example from Mauritius is syndicated financing, another method of Shari'ah Compliant financing that has been so far unexplored.

Dr. Muniruddeen Lallmahamood is Acting CEO of Century Banking Corporation and a well known consultant in the industry.

Dr. Muniruddeen believes Islamic Banks are first and foremost institutions that operate based on the principles of Islamic law.


The Islamic Finance industry is now an important component of the global financial architecture. The success of this industry lies in the development of the various segments that make it - like Sukuk, Takaful and Fund Management. The reason why Islamic banking and Finance is lacking initiative to step into new arenas are many.

Development is needed in Islamic financial markets, the financial infrastructure, and research to further the cause of innovation, and improving the legal, regulatory and supervisory framework. Post financial crisis the conventional banks bounced back and the big banks have grown bigger whereas the Islamic banks remain diminutive compared to them on account of their weak asset quality.

For the industry to step into unchartered territory, there is a compelling need to reach the critical mass by coming on par with the conventional banks. This could be done by spreading its reach to untapped markets and clients and bringing together existing platforms to create an entity which can influence multiple areas of the market.

The industry lacks a large scale IFI with substantial leverage to generate change, which could generate the product profile relevant to penetrating new markets and at the same time influence global market/investor awareness. There is a need to develop alternative forms of financing like private equity and venture capital to penetrate untapped markets like SME's.

Nida Khan is a Master's Student in Information and Computer Sciences in the University of L u x e m b o u r g a n d i s t h e Developer of the first Islamic Finance Education iOS App, CIFE, CTP.

She says in response to our question:


Further IFI's still face the challenge of lack of instruments to manage liquidity. There is a dearth of skilled staff to meet the demands of innovative products and services and there is little or no effort towards recruiting foreign talent from the existing International financial hubs. The huge potential of micro finance still remains largely untouched in this industry.

Presently the Islamic Finance industry is in need of greater international integration to get that initial push needed for its further growth. To achieve this there is a need that regulators and Islamic Finance Institutions work together to achieve a higher level of global cooperation. There is a lack of proper corporate governance processes which are relevant and particular to Islamic principles.

There is also a driving need for a prudent capital adequacy framework necessary to recognise risks inherent in transactions compliant with the Shariah. Further there is a demand for a strong Shariah framework in order to facilitate greater consumer confidence and flexibility for the IFI to be innovative within the realm of Shariah principles.

For the Islamic Finance industry to reach the next level of growth and expand, the above mentioned areas need to be taken care of in terms of more standards being developed apart from the existing ones to provide greater flexibility and region specific solutions to the consumers and niche markets, as well as be resilient and stable globally to create the much needed International image to attract new market segments and audiences.


Moreover, effective risk management in Islamic finance deserves priority attention. However, it entails many complex issues that need to be better understood to be successfully addressed. The nature of risk in Islamic finance raises a host of issues in risk measurement. The challenges associated with Basel III compliance and concerns about liquidity risk management are to be addressed with the appropriate adaptation of a mature risk management framework.

Rapidly expanding Islamic finance suffers from a dearth of skilled human resources with Shariah knowledge. There's a lack of public awareness and experts to provide the skills to explore the principles and practices involved in the industry, as they commonly lack the understanding, the training and the expertise. Efforts to strengthen the pool of qualified professionals come as educational programmes for Islamic banking practitioners. Islamic finance currently faces a dilemma, which is sustaining its impressive growth rate while staying aligned with Shariah principles. Greater harmonization of practices among various market players would help the consolidation and further expansion of this industry.

However, innovation in Islamic banking and finance Industry is moving slow. The reason for it from my humble point of view is due to shortage of qualified experts with strong knowledge and awareness of the aspects of Shariah law and principles of fiqh al muamalat.

Sameera Al Bulushi is a Shariah Analysis & Support Manager of Islamic Finance at Thomson Reuters.

In response to our question, this is what she has to say:

Islamic Finance has matured very quickly during the last four decades to become a solid, comprehensive and competitive alternative to the conventional banking system. This would have never happened without


Muhammed Ikram Thowfeek, Group CFO & Acting CEO , QAF Holdings & Founder, First Global Group

Today, many Islamic financial institutions (IFIs) are being criticized for not venturing into 'Musharaka' and 'Mudaraba' (partnerships, equity participations, venture capital style products) that will bring the much needed benefits to the community at large, by enabling entrepreneurs to start their own self-employment projects, supporting micro, small & medium enterprises etc., But the Big Question to ask again is:

Who will ensure 'profitability' and 'protection' of the depositors and investors funds deployed for these new entrepreneurial initiatives?

Lack of solutions to these 'profitability' and 'protection' issues, prompts Islamic finance institutions to shy away from Musharaka and Mudaraba. These are the purest forms of Islamic finance products that need to be offered to the masses, if we are to make a wider impact on the community and also the governments at large, whilst at the same time making reasonable profits for the IFIs concerned.

Finally, let's ask ourselves, what's needed to take up these new initiatives? It's the framework that needs to be formulated and the processes that need to be established to offer these pure forms of Islamic finance products in practice - not just theory. To do this, IFIs must engage in serious and focused R & D to introduce such products on a larger scale.


Rosie Kmeid is Vice President - Corporate Communications & Marketing, Path Solutions which is a leading software provider for the financial services industry with special focus on Islamic banking. She believes that despite growth rates at least twice as high as those recorded in conventional finance, the Islamic finance industry struggles with a number of challenges that are hindering its growth potential. Addressing these factors can help reduce the barriers between both segments and could further facilitate product development and innovation. Increasing awareness, improving regulatory framework, rebalancing tax treatment, promoting standardization, ensuring adequate liquidity and establishing sound risk management practices can play an important role in underpinning the segment.

To quote her:

Sound regulation is essential for a well-functioning Islamic financial sector; while taxation has to catch up with the many innovations of this rapidly expanding market. In many countries, leveling the playing field with respect to the tax treatment of Islamic financial instruments is an urgent need.

Lack of standardization and compliance hinders the growth potential of Islamic finance and prevents the industry from attaining competitive advantage. The lack of standardization increases the risk of non-compliance with Shariah, which creates the hazard that a contract will not be recognized as valid under Islamic law by all Islamic scholars. Standardization could eventually eliminate the need for a Shariah board at every single Islamic financial institution. The benefits of a standardized Islamic financial system include time and cost savings, financial stability, greater transparency and consistency in financial reporting, as well as improved public confidence.


To quote him:

Within this framework, Islamic Finance, based upon Islamic Economic Theory, tries to create financial assets that are in line with Shariah. Assuming that justice and equity are the core values of Shariah, centuries of interpretation have offered us various ways to apply those Shariah objectives into finance. For these reasons, financial products, such as venture capital, which are allowed by some institutions or countries, may not be allowed in other countries. This is what makes standardisation difficult.

By essence, Islamic Finance has been developed in a safe and risk averse way. In this connection, areas such as venture capital have been less developed. With the Islamic finance backed-asset requirement, Islamic Finance would have hardly sponsored high tech (like Google or Skype start-ups) or third sector services. It also means investing massively on financial structure giving them the opportunity to raise high and short-term return on financial operations.

Venture capital operations are an alternative to classical bank funding but mainly focused on hi-tech sector. It needs to be diversified to attract a bigger interest in the Shariah compliant market. On a pure structuring mode, Istisna'a and Musharaka offer perfectly compatible financial structures for venture capital operations

NEXT - The Question:Big

“Why Islamic Finance Graduates are

not getting hired for the right positions?"

Would you like to contribute your say to this big question, then email your point of view to [email protected]

on or before 15 April 2015

A.Ridouan is a PhD Researcher at Louvain School of Management (LSM) and ISFIN Senior Consultant. He feels that Islamic Finance is entering an era where a lot of standardizing processes are taking place. Institutional actors and state are trying to provide standards and guidelines to Islamic Finance operations. AAOFI, IIFSB, IIFM, IIRA are some of the actors that are trying to streamline:


The Big Question by MM (Issue 1)

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