Monday, June 12, 2006

Islamic Goods Fair in Malaysia features 'Islamic' toothpastes to 'Islamic' Holidays to...

It pleases to see Muslim entrepreneurship blooming at a global level but something is evidently lacking.

The impetus behind this event is that "Muslims have the responsibility to help improve the world with whatever they can deliver," says the fair's organizing director, Sabariah Abdullah of Malaysia's Saba Islamic Media, a distribution and promotions group. But if all they can deliver is a neatly canvassed 'Islamic' package of virtually any item imaginable under the sun, then one begs to differ as to how exactly that will improve the world.

Although 'Halal' alternatives to food products are mainly on the agenda, what constitues 'Halal' has been subject to vague interpretations. One supplier of Islamic confectionary recently argued to a prospect client, a friend of mine, that what makes his products significantly 'Halaler' than others' is that he uses 'Halal' glue to seal the packaging. Amazing!

It can be imagined that as consumers become more aware of their religion, the demand for religiously certified products will increase. This is increasingly being viewed as a profiteering opportunity by sanctimonious entrepreneurs. Remember the recent 'al-Quds Jeans' issue. Now we can have 'Islamic' vitamin supplements, holiday packages to Turkey, Egypt & Morocco, pop bands etc.

However, genuine Islamic services - effeciently priced, of course - that focus on our real needs as Muslims need praise and our total support. On the other hand, we should be trying to organise a conference of Muslim entrepreneurs who have provided for the genuine necessities of wider society instead of exploiting the faith of their co-religionists. That will be more helpful in improving the world.

Sunday, June 11, 2006

Enron Scandal: Differentiating between letter & spirit of law

An enlightening report in the Business Week on the Enron affair: how Skiller and Co. skillfully abided by the letter of the law with total disregard towards its spirit. An eye-opener for some of the current Islamic Finance Advisors who are indulged in a similar practice, albeit with a higher law than man-made.

Mahmoud el-Gamal wrote in his analysis of this piece, 'In the area of Islamic jurisprudence of financial transactions, Abdul-Wahhab Khallaf said it best: the law is there to serve certain ends, and the ends are more important than the mechanics of the law.'

Saturday, June 10, 2006

Islamic Financial Services: a comprehensive guide to current Islamic Finance

This comprehensive book by Dr. Mohammad Obaidullah provides a basic-level introduction to current concepts and practices of the Islamic Finance market.

An ideal first-read for anyone interested in IF as it assumes no prior expertise in this field. The unique feature about it is that it illustrates the concept further by providing case studies of how that concept was implemented.

The author has a doctorate in Economics and is associate Professor in the Islamic Economics Research Center at King Abdul Aziz University, Jeddah.

Download the entire book in zipped format here, or read the book online in PDF format here

IBB launches house-financing product

Islamic Bank of Britain launched its 'own' home-financing product yesterday.

It was expected from them as the leading Islamic retail bank that this product would be signifanctly unique or at least an in-house facility. However, the financiers for this product are al-Buraq (subsidiary of ABC International Bank plc) and Bristol & West plc. Virtually the same package as offered by Lloyds TSB.

Not much of an 'own' product then. And sadly, not another real option for home-buyers.

Friday, June 09, 2006

Fatwa regarding the Ansar Housing Ltd. scheme - by Shaykh Haitham al-Haddad

All praise and thanks are due to Allah, the Lord of the worlds. Peace and blessings be upon our Prophet, Muhammad, his family and all his Companions.

Since the publication of the fatwa regarding the impermissibility of the Islamic mortgages offered by some interest-based banks in May 2004, I have received several questions relating to the various facets of Islamic home finance in the UK. Some of these questions are enquiring about the availability of a true Islamic model to purchase homes in the UK, while others are concerned with the permissibility of some other schemes proffered by conventional banks further to those mentioned in the original fatwa.

In this short fatwa, I would like to identify a scheme that I am confident provides a good model for true Islamic Finance. This scheme is provided by Ansar Housing Ltd. in Manchester (www.ansarfinance.com) and it is, so far, the best scheme that I have encountered. Given that Islamic guidelines concerning finance are fulfilled as far as is possible under present UK regulations, we can say confidently that it is an ideal scheme for Islamic home financing.

The scheme adopts a unique system of joint ownership that fulfils the aims and objectives of Islamic finance. I urge both Muslims and non-Muslims to study it objectively and thoroughly in order to realise how true Islamic finance deals fairly with all parties to a transaction, both the weaker and the stronger. It is also important to notice how such a scheme ensures that the customer does not bear financial burdens beyond his ability, which is a major factor encouraging the over-indebtedness of so many individuals today. Moreover, this scheme does not link together several contracts nor does it impose obligations upon the customer in such a way that the end result is indistinguishable from an interest-based loan secured on the customer’s home.

In conclusion, I would like to encourage Muslims and non-Muslims who dream of building a fair society, free from oppression by debt and its detrimental consequences, to try their best to ensure that schemes such as this are successful.

And with Allaah lies all success and may Allaah send prayers and salutations upon our Prophet (sall-Allaahu ‘alayhe wa sallam) and his family and his companions

Haitham Al-Haddad

12 Jamda al-Thani 1427

8th June 2006.

Thursday, June 08, 2006

FT: Islamic transactions have much in common with west

The central religious precept driving the Islamic finance industry is the idea that riba (a word that can be translated either as “interest” or “usury”) is haram (“forbidden” or “sinful”).

At first glance, this appears to rule out most aspects of modern finance. But although the Koran bans the creation of money, by money, it does allow money to be used for trading tangible assets and businesses – that can then generate a profit.

Consequently, what most Islamic financial products do is create “trading” or “business” arrangements that pay profits to investors (or lenders) from business transactions backed by tangible assets, ideally sharing risk and rewards.

Gillian Tett of FT draws on the similarities. The reality is that the difference between the two is not so much in the substance than in the concept and, importantly, purpose.

(The article is slightly old and was published on June,1.)

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I just realized FT requires subscription to view the article, so I have pasted it below :

The central religious precept driving the Islamic finance industry is the idea that riba (a word that can be translated either as “interest” or “usury”) is haram (“forbidden” or “sinful”).

At first glance, this appears to rule out most aspects of modern finance. But although the Koran bans the creation of money, by money, it does allow money to be used for trading tangible assets and businesses – that can then generate a profit.

Consequently, what most Islamic financial products do is create “trading” or “business” arrangements that pay profits to investors (or lenders) from business transactions backed by tangible assets, ideally sharing risk and rewards.

Some of these financial schemes, such as those known as mudaraba and musharaka, look similar to western-style venture capital projects. In the murabaha scheme – which is widely used in Islamic banking – an exchange of tangible goods is used to provide profits. Another popular scheme is ijara, which is similar to western-style lease financing.

The details of these schemes are often complex, since they involve special-purpose vehicles. However, in practical terms, they produce products that can be similar to western banking products – aside from the fact that the margins charged by banks are often much higher.

Take sukuks (Islamic bonds). These have maturity dates, coupons and yields. However, what differentiates sukuks is that they are backed by cash flows from tangible assets. Last year, for example, the government of Pakistan issued a $600m (€468m, £321m), five-year sovereign bond, using the tolls from a motorway to provide payments.

Ironically, some of these structures and techniques echo those that flourished in Christendom in Europe between the 12th and 15th centuries. The Christian Council of Nicea (in 325) banned the practice of usury among the clergy and in 1140 this principle was extended to church members.

However, when trade expanded in Europe from the 12th century onwards, merchants at trade fairs became adept at constructing financial transactions that avoided religious censure. Loans were sometimes considered to be “rent charges”, or interest payments were classified as “damnum emergens” (opportunity loss) or “lucrum cessens” (forgone income), which were permitted by the church. Another popular scheme was the “contractus trinius”, a three-way “partnership scheme”.

Periodically, the church sought to tighten the rules. However, the merchants proved adept at developing schemes in response to this.

Meanwhile, Jews were permitted to continue money-lending since it was presumed that they were already excommunicated.

These practices eventually died out in the 16th century, when the church loosened its ban on usury payments.

The issue of Sukuk: Islamic 'debt finance'

The latest boom in the IF industry is that of 'Sukuk Issuance' - the 'Islamic' alternative to debt finance. Obviously, we can't neglect this important area that is at the very foundations of the modern financial system, since we are hopelessly trying to imitate every product that comes onto the conventional markets.

The issuance of Sukuk, in itself, is not a problem. It encourages entrepreneurship from the grass-roots level. But the structuring of the increasing multitude of Islamically-questionable Sukuks emerging on the market scene is what is lamentable.

An established principle is the Islamic Economic ethics is that a debt (dayn) cannot be sold. It can only be re-assigned at face value. We have, on the market, Sukuks on Bai' bi thaman 'Ajil (deferred payment sale), on Salam (wherein payment is made in cash at the point of contract but the delivery of the asset purchased is deferred to a pre-determined date), on Murabahah (cost plus mark-up agreement) etc. that are securitized receivables and cannot be traded in secondary markets.

However, issuance of Sukuks on tangible asset-backed portfolios is indeed permissible, with elaborate rulings, and are tradeable at variable rates.

The absence of secondary markets in the region necessiatates that these Sukuks are held until maturity. They have hitherto only appeared as a tool to mitigate excess liquidity at the subscriber level in favour of a fixed return at maturity. Its full implications have not yet been measured. Maybe these debt-based Sukuks will automatically be phased out with the emergence of secondary markets as their fixed value redemption becomes evident as less profitable than the variable asset-backed Sukuks.