Islamic Finance

 

Islamic Finance - Opportunities and Challenges
(Published by Islamic Finance Today - Dubai)

 
 
By: Mufti Ismail Ebrahim Desai
 
The Islamic Financial system has witnessed considerable developments in the past four decades and is now regarded as one of the fastest growing segment of the global financial system. Islamic finance assets grew at double-digit rates during the past decade, from about US$200 billion in 2003 to an estimated US$1.8 trillion at the end of 2013 (Ernst & Young 2014; IFSB 2014; and Oliver Wyman 2009). The existing Islamic Finance market stands at an estimated $1.81 trillion in assets based on 2014 disclosed assets by all Islamic Finance institutions (full Shariah-compliant as well as those with Shariah 'windows') covering commercial banking, funds, Sukuk, Takaful, and other segments.34 The breakdown by category is as follows: $1,346 billion for commercial banking, $33.4 billion for Takaful (insurance), $295 billion for Sukuk (bonds) outstanding, $56 billion in funds, and $84 billion for other financial activities. 
 
The Islamic Finance Industry has experienced robust and phenomenal growth over the past few years and recorded a compounded annual growth rate of 17.3% between 2009 and 2014. (IFSB Stability Report, 2015) The total Islamic finance assets are projected to reach $3.25 trillion by 2020. Islamic commercial banking assets are projected to reach $2,610 billion by 2020. 
 
The key Islamic Finance Jurisdictions such as Malaysia and the GCC have gained much growth and traction over the past few years. However other jurisdictions in Africa such as South Africa, Nigeria and Kenya have made considerable progress in the growth of Islamic Finance. Bangladesh and Indonesia in the Asian region have shown key potential for growth in the industry. European countries such as UK and Germany have also shown heightened activities in the industry. 
 
Islamic Finance has made considerable progress in the African region, spurred by demand from Muslims and non-Muslims. The Nigerian Central Bank issued a license to Jaiz Bank Plc, to operate as a fully-fledged non-interest financial institution (NIFI). There are other Islamic Banking windows operational in Nigeria, which serve the Muslim population of 173.6 Million. There remains huge opportunity for Islamic Banks to setup in Nigeria given the huge Muslim population and growing demand. Nigeria has facilitated the issuance of sukuk (Islamic Bonds) by amending the regulations by the Securities and Exchange Commission of Nigeria (SECN). The State of Osun sold $61 Million of sukuk in 2013 becoming the first state in Nigeria to sell sukuk.
 
South Africa's National Treasury wants to make the country the hub for Islamic finance in Africa. The South African banking regulators have taken various measures to develop and promote the Industry including amending tax laws to create an equitable and level playing field for Islamic finance. The country currently has one full-fledged Islamic bank; Al Baraka Bank was registered in South Africa in 1989. Other banks such as First National Bank (FNB), Absa Bank and HBZ Bank house Islamic finance windows alongside their conventional banking services. The South African Government issued their debut sukuk in the third quarter of 2014. The $500 Million 5.75-year was oversubscribed more than four times and attracted Middle Eastern and Asian investors.
 
In West Africa, Senegal successfully launched a four-year XOF100 billion (US$171.96 million) Sukuk in June 2014. This Sukuk represents a new era in the use of Islamic financing instruments in the country's public finances. Senegal may consider additional Sukuk issuance to support the country's infrastructure needs and Dakar is aiming to position itself as the continent's hub for Islamic finance.
Cote d'Ivoire launched its debut five year 150 billion CFA issuance sukuk priced at a profit rate of 5.75% in the last quarter of 2015. Cote d'Ivoire mandated the ICD as the lead manager for its inaugural local currency Sukuk program worth XOF300 billion (US$515.87 million), which will be issued over the 2015-20 period in two equal phases.
 
In East Africa, the government of Uganda has approved the Financial Institutions (Amendment) Bill 2015, paving the way for Islamic banking and finance in the country. Kenya has set its sights on becoming the Islamic finance hub of the East Africa region. With two fully fledged shariah-compliant banks in operation, licensed takaful and retakaful businesses and a number of financial institutions offering products that comply with Islamic law. 
 
There have been several key growth points for Islamic Finance in the Asian region. Bangladesh is the third largest Muslim country in the Word. With a predominantly Muslim population of 160 million, the industry has doubled in size in the past four years. The Islamic Bank of Bangladesh Limited (IBBL) was launched in 1983. 
 
The country had seven standalone Islamic Banks and 16 conventional banks with Islamic Banking windows by 2014. (IFSB, 2014) The market share of Islamic Banks in Bangladesh is sizeable and accounts for 18.9% of the total banking deposits and 21.1% of total financing. (Annual Report, Bangladesh Bank, 2013)There is also a sizeable Takafol market in Bangladesh with 8 Takafol operators. The central bank has a small short-term sukuk (Islamic bond) programme which issues six-month tenors to help Islamic banks manage their liquidity requirements. The central bank auctioned three-month and six-month sukuk on Jan. 1. 2015, selling 855 million taka ($11 million) and 936 million taka respectively, it said in a statement.
 
Indonesia has the World's largest Muslim population with 12.7% of the World's Muslims. Indonesia's capital market regulator has published a five-year strategy for the Islamic finance industry. Indonesian Authorities want Indonesia's Islamic banks to hold at least 15 percent of the market by 2023. Islamic Banks in Indonesia comprise of 12 fully fledged Islamic banks and 22 conventional banks have Islamic Banking windows. There are 45 Islamic Insurance institutions in the country.
 
Furthermore, there are 316 Shariah-compliant stocks which have been classified and listed under Shariah Listed stocks comprising of 60% of the total stocks in Indonesia. Indonesia's Islamic bond market is the second largest in East Asia. The Government issued its first retail sukuk in Feb 2009 for $144.4 million. The government issued its first sovereign sukuk based on the ijarah principle in August 2008 with the sale of 7-year (IFR0001) and 10-year (IFR0002) Islamic bonds. The Government has allocated IDR 6.94 trillion for infrastructure projects via Government Sukuk issuance.
 
There has been key growth in several European Countries. The United Kingdon issued the first sovereign sukuk by a European Government. The Government raised $339.5 Million with a profit rate of 2.036% and a five year tenure. The order book was oversubscribed by nearly 10 times the issuance size. The government-backed export credit guarantee agency has provided cover for a $913m (£617m) Islamic bond issued by Dubai's Emirates Airline to purchase aircraft including the giant Airbus A380. More than 20 banks currently offer Islamic financial products and services in the UK. The value of Sukuk already listed on the London market exceeds $34bn (£21bn) over the past five years with more than 50 bonds quoted by the London Stock Exchange.
 
With a population of 4 million Muslims in Germany, holding an estimated wealth of 25 billion €, Germany potentially is a big market for Islamic Finance. According to a 2010 survey, 72 % of Muslims living in Germany are interested in Islamic Finance products. Germany launched its first fully-functional Islamic bank in Frankfurt under the name KT Bank AG. FWU Group, a Munich-based financial services company, issued a $20 million five-year Islamic bond backed by insurance policies in October 2013 and issued a $55 million seven-year sukuk through a private placement that was backed by intellectual property rights in December 2012.
Luxembourg issued a sukuk for $253 Million with a five year tenure in October 2014. The sukuk was twice oversubscribed.
 
 
 
 
Challenges
 
Despite the huge growth of the Islamic Finance and Banking Industry over the past few years, the industry currently faces considerable challenges and in particular:
 
 
1. Lack of Human Capital
Qualified human resources play a pivotal role in the development and success of any industry. There is a dearth of qualified bankers and professionals who are well versed in Islamic laws as well as contemporary economics and finance. Currently, various universities and training institutes are offering courses in Islamic finance but they also face lack of competent human resources to conduct these courses. There also remains a huge lack of human resources on the expert level. There remains a significant shortage of Shariah Scholars who are well versed in Islamic Finance. Business schools and religious schools should offer Islamic Finance qualifications in co-operation and conjunction with industry experts to create the next generation of Shariah experts and professionals. Academic Institutions should also be encouraged to establish centres of excellence for the Islamic Finance Industry. 
 
2. Shariah Standardization and Harmonization
Islamic Law accommodates for differences of opinion and interpretations of classical Islamic texts. This leads to different practices and policies adopted across different jurisdictions. This may impact on the growth and internationalization of the Islamic Finance Industry. Islamic Finance Laws, policies and practices should be standardized and harmonized in order to create more unification and consolidation within the industry. This would strengthen the industry from a Shariah perspective and root out weak and rejected views. Furthermore Shariah scholars should adopt these policies and procedures to prevent and mitigate Shariah non-compliance risk. 
 
3. Lack of Public Awareness
There remains a low penetration rate and lack of critical mass in the Islamic Finance Industry. This is due to mainly a lack of public awareness and knowledge of Islamic Finance. Islamic Banks, regulators and Governments should undertake mass awareness programmes to drive the growth of Islamic Finance and create critical mass for the industry. 
 
4. Shariah Law and Legal Framework
There remains a great need to harmonize Shariah Law with the existing legal framework. This creates huge difficulties and challenges in the event of disputes and legal matters as Islamic Financial concepts are not recognized by certain legal frameworks. There should also be a drive to create more innovative products and gradual shift from products that closely resemble conventional financial products such as commodity Murabaha and Tawarruq.
 
4. Regulation and Supervision
Islamic Banks are exposed to various risks such as displaced commercial risk (DCR). This forces Islamic Banks to lose profits in order to pay comparable returns to investment account holders (IAH) and depositors. This create huge challenges for Islamic Banks in creating excess reserves to cover losses and how this is viewed from a regulatory perspective.
 
Islamic Banks also face equity investment risk, rate of return risk, Shariah non-compliance risk in the event of perceived non-compliance and liquidity risk due to the shortage of liquidity products. Other challenges include the divergent interests of Investment account holders and the Islamic Bank's shareholders. One of the major issues is that IAHs share profits and bear losses, but do not have shareholder rights (López-Mejía and others 2014). This leads to a lack of transparency in the reporting of profits and losses to the IAH.Various standards have been issued by the IFSB and AAIOFI. However many jurisdictions have failed to implement these standards.
There also remains a huge challenge in the adoption of Shariah Compliance. Various jurisdictions do not regulate and supervise the way Shariah Compliance is adopted. There should be a proper selection criteria for Shariah Scholars. Many jurisdictions have begun adopting central shariah boards in order to ensure harmonization of Shariah compliance within the industry.
 
5. Access to Finance
Muslim countries have shown a lower level of financial inclusion than other countries in the World. This can be resolved by creating a better business model, reforms to increase competition within the banking sector, consumer protection, better credit information and education.
 
 
6. Monetary Policy and Liquidity Management
Money and interbank markets for Shari'ah-compliant instruments have not yet developed in most countries, in part because of a lack of available instruments. There remains a huge shortage of Shariah central banking facilities. Moreover many Islamic Banks operate under a dual system of conventional and Islamic Banking policy framework and are heavily influenced as a result by conventional banking instruments and conditions. Central Banks should adopt more effective instruments and policies for Islamic Banks. Many jurisdictions do not have a lender of last resort for Islamic Banks. Only 6 out of 24 Jurisdictions for Islamic Banking have a lender of last resort for Islamic Banking.
 
7. Tax Policy
Regulatory/tax reforms play a pivotal role for the growth of any industry. There remains various tax issues which need to be resolved in order to level playing field between Islamic Banks and conventional banks. Some of these issues include the treatment of Islamic finance under income taxes, sales taxes (for example, value added taxes), specific transaction taxes, and bilateral tax treaties. International standards can encourage governments and jurisdictions to facilitate tax reforms.
 
8. Benchmark
The usage of the conventional interest based benchmark (Libor) creates a negative perception among investors who tend to associate the Islamic Financial system with the conventional financial system due to the usage of the interest based benchmark. Furthermore Islamic Banks are placed at the mercy of the movements in the conventional money markets by using the conventional interest based benchmark.

 

Question:

Is Fractional Reserve Banking halal? is it halal to have your money in a checking account where the bank takes most of that money and uses it to make loans to other people?  It is well known that banks lend out more than cash they have on hand.

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

 

This question was already answered one month ago, but due to technical difficulties it was not successfully posted on the Askimam website. We apologize for any inconvenience.

 

 

We have reproduced the original answer below:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

 

Fractional-reserve banking is the practice whereby a bank holds reserves (to satisfy demands for withdrawals) that are less than the amount of its customers' deposits. Reserves are held at the bank as currency, or as deposits in the bank's accounts at the central bank. Because bank deposits are usually considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.

Although the funds are used to give interest bearing loans to others, it is the current form of banking practised in all countries worldwide. Therefore, if there is no adequate alternative to fulfil one’s financial needs, it is permissible to utilize the fractional-reserve banking system.[1][2][3]

 

And Allah Ta’āla Knows Best

Saleem Khan

Student Darul Iftaa
Bradford, UK

Checked and Approved by,
Mufti Ebrahim Desai.

 

And Allah Ta’āla Knows Best

Bilal Mohammad

Student Darul Iftaa
New Jersey, USA

Checked and Approved by,
Mufti Ebrahim Desai.

www.daruliftaa.net



[1] To mitigate the risks of bank runs (when a large proportion of depositors seek withdrawal of their deposits at the same time) or, when problems are extreme and widespread, systemic crises, the governments of most countries regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks. In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals. Rather than directly limiting the money supply, central banks may pursue an interest rate target to control bank issuance of credit.

Fractional-reserve banking is the current form of banking practised in all countries worldwide

 

http://en.wikipedia.org/wiki/Fractional_reserve_banking

 

 

 

[2] Checking Account

A transactional deposit account held at a financial institution that allows for withdrawals and deposits. Money held in a checking account is very liquid, and can be withdrawn using checks, automated cash machines and electronic debits, among other methods.

 

A checking account differs from other bank accounts in that it often allows for numerous withdrawals and unlimited deposits, whereas savings accounts sometimes limit both. Checking accounts can include business accounts, student accounts and joint accounts along with many other types of accounts which offer similar features.

 

In exchange for the liquidity, checking accounts typically do not offer a high interest rate, but if held at a chartered banking institution will be FDIC guaranteed up to $100,000 per individual depositor.

 

A checking account may also be called a "demand account" or "transactional account"

 

 

 

 

 

[3]  [فتاوي محموديه ج ١٦ ص ٣١٢ فاروقيه]

 

[كفاية المفتي ج ٧ ص ١٠٢ دار الاشاعة]

Question:

I have applied for a position as a financial manager. Two of the job description concern me namely

1.To maintain and manage the company treasury function including local and foreign funds.

2.To manage the company long term debt facilities in accordance with the debt agreements.

So to expand this will entail moving funds from the current account to the fixed deposit accounts and administer the process as well as administer the forward exchange contracts.

I will not be signing any documents or agreements.

Over and above this I would be performing interest calculation an reviewing the accounts.

 


 

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

We have taken note of your query and assume that aside from housing prior experience working in a bank, as an `Ālim you are highly concerned about dealing with ribā and other unislamic financials. Based on this, we provide the following advice:

The job description provided above highlights factors that potentially may contravene specific injunctions of Sharī`ah such as managing long-term debt facilities and forward exchange contracts. Even though you may not be signing off any documents, you will still be in charge of managing and administering funds related to these transactions.[1] Allāh Ta`ālā says in the Holy Qur’ān:

 

وَلَا تَعَاوَنُوا عَلَى الْإِثْمِ وَالْعُدْوَانِ وَاتَّقُوا اللَّهَ إِنَّ اللَّهَ شَدِيدُ الْعِقَابِ

And do not assist one another in sin and aggression. And fear Allah; indeed, Allah is severe in penalty. [Al-Qur’ān; 5:2]

 

The general principle laid out in the verse above demands that we protect ourselves from providing assistance in any sinful acts by steering clear of any areas where we might become potential agents in carrying out harām acts. As such, taqwā and diyānah calls for a more cautious approach when pursuing employment for such positions.

The information you have provided in your query may generally outline your job description, but it remains ambiguous and unclear in providing a more comprehensive definition of this position. It may be more useful if you present to us your specific doubts regarding this job so we may be able to assist you on those particular issues.

 

And Allah Ta’āla Knows Best

 

Bilal Mohammad

Student Darul Iftaa
New Jersey, USA

Checked and Approved by,
Mufti Ebrahim Desai.

www.daruliftaa.net

 



[1] Islam Aur Jadeed Ma`āshī Masāil, v. 4 p. 135, Idāratul Islāmiyyāt;

Fatāwā Dārul `Uloom Zakariyyā, v. 5 p. 675, Zam Zam Publishers

Question:

Please provide the Islamic reasoning why home insurance is haram and if it applies to car insurance which is mandatory?

 

Answer:     

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

Home insurance is impermissible to use because it results in contractual uncertainty. The policy holder will only be rightful for a return in the case that an unpredictable event occurred, such as fire or theft. This amounts to gambling. Also, the amount of damage is impossible to quantify beforehand. This leads to a second problematic aspect, namely interest.

 

The return that the insurance policy holder may get will rarely equal to the premiums he paid. This discrepancy between payment and return constitutes ribā-e-faḍl e.g. interest.

 

In the case of basic necessities of life where insurance is compulsory, it is permitted to opt for such an insurance. However, this is only to the extent of necessity. Thus, one is required to select the least expensive insurance available. This in spite of the clear lack of utility of the cheapest alternative. In the event of an accident, one may only make a claim to the extent one has paid. For instance, Zaid paid two years worth of insurance premiums, amounting to a total of 3,000.

 

If Zaid were to get into an accident that caused 2,500 worth of damage, then he can claim the full amount. In case that the damage caused was worth 3,500, then he may only claim 3,000. Anything claimed in excess has to be dispensed of in charity to the poor.

 

And Allah Ta’āla Knows Best

Khalil Johnson

Student Darul Iftaa
Canada

 

Checked and Approved by,
Mufti Ebrahim Desai

Question:

If a person purchases goods on credit with the stipulation that payments will be in instalments, any fine due to delayed payment thereafter is clearly usury and interest. What can Muslim shop owners and businessmen do to be able to give goods on credit, ensure their payment is received on time and also abstain from usury? 

 

Answer:

In the Name of Allah, the Most Gracious, the Most Merciful.

As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.

It is permissible to purchase a commodity on cash or on credit on the stipulation that the deferred price is predetermined and agreed upon at the time of contracting the sale. However, according to Sharia, if the customer defaults in payment at the due date, the predetermined price cannot be increased and no further cost or fine can be imposed upon the defaulter[1].

 

Nevertheless, Muslim owners and businessmen may feel restricted since this can be potentially exploited by dishonest purchasers who intentionally fail to pay at its due date knowing that they will not be summoned to any additional amount on account of default. Therefore, the Islamic jurists have devised mechanisms to overcome this issue:

 

1. The businessmen and shop-owners could develop a system where such defaulters are duly penalised by depriving them from enjoying any facility from that company in future. However, this will be most effective where the businesses and companies are working in collaboration with each other and thus the defaulters are deprived from enjoying any facility from all the corporates within the umbrella. Prophet Muhammad (peace be upon him) said:

المسلمون على شروطهم إلا شرطا أحل حراما أو حرّم حلالا

Translation: All the conditions agreed upon by the Muslims are upheld, except a condition which allows what is prohibited or prohibits what is lawful.

2. The seller and purchaser may conclude a transaction whereby the price is agreed to be paid by a stipulated time; and if the purchaser defaults in payment within that certain period, the transaction would be void. This option in the terminology of Islamic jurists is called Khiyar an-Naqd (an option as to payment)[2].

3. Alternatively, the seller may further inflate the overall deferred price of the commodity at the time of transaction and then promise to provide a discount equivalent to the amount inflated on receiving regular payment on instalments.

 

For example: A wants to sell a commodity for a total of R3 000 under an instalment plan. A wants to ensure regular payment and thus inflates the price of the commodity and sells it to B for a deferred payment of additional R500 constituting R3 500 in total. A promises an incentive and discount of R500 only if B does not default in his regular payment. In this way, A will efficiently retrieve the R3 000 price for the commodity and B will ensure he does not default in regular payment in order to save R500.

 

It is important to note that, however, if the default is due to a genuine reason, such as poverty, it will be a gesture of goodwill from the businessman to give respite to the customer and lengthen the time by which the payment is due. Allah Ta`ala says:

وإن كان ذو عسرة فنظرة إلى ميسرة

Translation: And if he (the debtor) is short of funds, then he must be given respite until he is well off[3].

 

According to Hadhrat Mufti Muhammad Taqi Usmani (may his shadow remain upon us), the company may compel the customer, when entering into a transaction, to a self-undertaken vow and promise that in defaulting in payment at the due date, a specified amount would be paid as a deterrent, importantly not to serve the interests of the company but, to a specific charitable fund[4].

 

From a practical and theoretical point of view, point three seems to be more favourable; as in the case of a penalty, it does not solve the creditor’s problem. In the alternate situation, even if the debtor falters in the timeous payment, the creditor will be entitled to the excess R500 which may be more than the penalty amount and which does not compensate the creditor.

 

And Allah Ta’āla Knows Best

Hanif Yusuf Patel

Student Darul Iftaa
UK

Checked and Approved by,
Mufti Ebrahim Desai.

 



[1]   See: [An introduction to Islamic Finance, p.133-137, Maktaba Ma`arif al-Qur`an]

[2] Durar al-Hukkam fi Sharh Majallat al-Ahkam, Rule. 313

[3] [Al-Qur`an, 2: 280]

عن أبي هريرة قال قال رسول الله صلي الله عليه وسلم: من يسر على معسر يسر الله عليه في الدنيا والآخرة

[Ibn Majah, 2412]

قال رسول الله صلي الله عليه وسلم: من أحب أن يظله الله في ظله فلينظر معسرا أو ليضع له

[Ibid, 2414]

[4] See: [An introduction to Islamic Finance, p.137-140, Maktaba Ma`arif al-Qur`an]

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