CW: Does Ethical Investment Pay?

Does Ethical Investment Pay?
Ross Havemann, Peter Webster
September 1999

CW: Does Ethical Investment Pay?

Shariah Compliant Call Option: Mechanism 1

Call Option using Set-Off


Calls through debt set-off (muqaddasah). AAIOFI shariah standard number 3 states that setoffs are possible as long as they involve the same counterparties (e.g., I owe you and you owe me) and the notional is the same and the maturity is the same. These can even be made contractual. There is also some leeway if notionals are different and maturities are different. Here we stick with the basic set-off.

In the diagram above we see the cashflows for a call-option. This structure was used for Principal Protected Commodity Notes (just adding on a separate SPV with murabaha to synthesize the zero-coupon bond) by some large commercial Saudi banks and super-large continental European banks.

• Investors puts up $C (call premium) at t=0, which is supplemented with the Murabaha (effectively borrowing $(K-C) strike price less call premium-worth of a commodity at time t=0).
  
• The commodity is sold on the open market to raise $(K-C).
  
• The premium and proceeds of commodity sale with total value of $K are invested in a Bay-al-Salaam contract.
• This Salaam contract is used as collateral (through a "pledge") for the Murabaha and recourse to the SPV is limited to this Salaam contract.
• At maturity, the commodity is delivered and will be sold (on the open market) under a separate wakala arrangement.
  

Now there are two possible scenarios at maturity t=T

1. Commodity price P>K the strike. Commodity is delivered into salaam, sold, proceeds used to cover the monies owed in murabaha, and remainder $(P-K) is paid to investor.
2. Commodity price P the strike. In this case, the commodity is delivered and sold, but proceeds cannot cover the murabaha and the bank will exercise its recourse to receive the value from the proceeds of the salaam sale. SPV is wound down with no further recourse.
   

Effectively, investor receives max(P-K,0) at time t=T, the payoff of a call option.

IMHO, I see no loopholes in this. Debt set-off is allowed and it can be contractual. Here, the salaam and the murabaha have the same maturity and same notional, so what is owed on one can be used to offset the other by contract with no further recourse or implications. The SPV and pledge allow is to take place from an English Legal perspective.

Comments please!

Shariah Compliant Call Option: Mechanism 1

Islamic Finance Networking & Events

Here are some introductory Islamic Finance events (either free or require a registration fee to cover expenses) which are right around the corner (in Singapore and Hong Kong). Will be loooking out for other cities and will keep updating the list - as always appreciate any comments/feedback.

RIBA: WHY, WHY, NOT?
February 28 2009, Hong Kong
Islamic Banking & Finance Network - Hong Kong (IBFN)
Fee & Registration required

IFN Roadshow
Global locations and year-round
Islamic Finance News (IFN)
Free - Registration required

Islamic Finance Networking & Events

Shariah-Compliant Short-Selling: Mechanism 1

Short Sale via Wa'ad.
General description: Short seller sells security to exchange. Exchange promises to repurchase security. Exchange faces short-term long buyer who buys security from exchange and promises to resell to exchange at a later date.

Like a conventional (covered) short, the security which is shorted is identified by the short-seller (identified as "supplier" below). The long, ("user" below) is long a conventional security with one catch--he must sell (at market price) at some point in the future. The fact that this his purchase has a condition means he must be compensated for it, much as in the conventional framework.

Is this two transactions in one? Can we actually sell with a condition that we can repurchase the same back again? Wouldn't there be shariah-specific objections to this? Or is it a viable approach? The Shariah scholars at the SC and BNM believe so (see link). Note the necessity of the intermediary to make this work. (This would be VERY good in western finance--to track the shorts). What do you think?

SC's Islamic Capital Markets Quarterly Nov 2008, pp 2-4

Shariah-Compliant Short-Selling: Mechanism 1

Shariah Compliant Derivatives: Yes or No?

FT Alphaville highlights ongoing debate on Islamic Derivatives. While some would question how halal they truly are, it is clear they do exist and are traded. (see the Alphaville blog for some examples).

In fact there are so many ways for structuring certain (but not necessarily all) types of derivatives, that we will spend some time discussing these, together with different means for short-sales, different means for leverage, etc?

Aslo, checkout the Linkedin discussion on "Why Islamic Finance Prohibits Short Selling"

Shariah Compliant Derivatives: Yes or No?

Islamic Finance - Third Party Reports

Have come across several third party papers as well, these three reports in particular might provide a useful overview and past statistics on Islamic banking and finance.

It is also interesting to compare figures as they refer to various sources of information and are authored from rather different perspectives:


Ernst & Young - Islamic Funds & Investment Report

Moody's - Islamic Finance 2007 Review and 2008 Outlook

S&P - Islamic Finance Outlook 2008

Islamic Finance - Third Party Reports

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA
ISRA Research Paper (No. 5/2009)

"One of the most popular instruments used today in the Islamic Capital Market is sukuk. Various sukuk structures based on ijarah, musharakah, mudharabah and hybrid forms have evolved. However, these innovations have raised many Shari‘ah issues and controversies. This paper argues that some innovations which try to achieve the same economic outcome as conventional instruments distort the vision of Islamic economics based on justice and equitability. This vision is deeply inscribed in the objectives of the Shari‘ah (Maqasid al-Shari‘ah). The distortion stems from a restricted understanding of the Shari‘ah that focuses on the legal forms of contracts rather than their substance, especially when structuring financial products. The overemphasis on form over substance may lead to abuse of Shari‘ah principles in justifying certain contracts that are, in fact, contradictory to one or more Shari‘ah texts and that ultimately undermine the higher objectives of the Shari‘ah. The paper concludes that the substance of a contract, which has greater implications for the realisation of Maqasid al-Shari‘ah should be equally looked into."

Challenges of Realizing Maqasid Al-Shari'ah (Objectives of Shari'ah) in the Islamic Capital Market: Special Focus on Equity-Based Sukuk Structures

Dubai Shariah Hedge Fund Index Up 1.53% In January

Thursday, Feb 05, 2009 LONDON (Dow Jones) -- The Dubai Shariah Hedge Fund Index, which shows the performance of the DSAM Kauthar Commodity Funds, was up 1.53% since its start on Jan. 1, the hedge funds' first public performance numbers showed Thursday. The index is comprised exclusively of shariah-compliant hedge funds and was launched by The Dubai Multi Commodities Center Authority, or DMCCA, and Shariah Capital, Inc.

The DKCF is an equally weighted fund-of-funds comprised initially of four single-strategy, commodity-focused funds that invest exclusively in shariah compliant long/short equity hedge funds on the Al Safi Trust platform. The best performing fund in the group during January was the DSAM Kauthar Gold Fund, up 4.42% followed by the DSAM Kauthar Energy Fund, up 1.61%. The DSAM Kauthar Natural Resources Fund was up 0.21% and the DSAM Kauthar Global Resources & Mining Fund was down 0.14%. The DSAM Kauthar Commodities Fund, an equally weighted basket of the four funds, was up 1.53%.

By publishing the figures, the group hopes to set a transparent precedence, Eric Meyer, chief executive of Shariah Capital, told Dow Jones Newswires, and to attract both Islamic investors and conventional investors. "We let the investor have a transparent choice so the investor can see every month how the funds are doing and choose how they want to invest on a monthly basis," Meyer said. It will post performance figures monthly, calculated and reported by Thomson Reuters. The funds were each given $50 million from the DMCC. The individual fund portfolios are run by BlackRock Inc.'s Global Resources & Mining Fund, Tocqueville Asset Management, Zweig-DiMenna International Managers and Lucas Capital Management.
-- By Devon Maylie, Dow Jones Newswires

Dubai Shariah Hedge Fund Index Up 1.53% In January

The End of Wall Streets Boom--Michael Lewis Article

The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong. (Conde Nast Portfolio)

This is now two months old but absolutely relevant. A long article but definitely worth the read.

A few points of relevance for Islamic Finance: in general, leverage is more limited, and there is none of this endless creation of synthetic products--real assets back transactions.

Nowadays, synthetics are larger than real CDOs. This is now a repeated story, much like what happened at the end of LTCM when they owned more options than stocks outstanding (or in 1987 when rehedging portfolio insurance could make the equity market gap) and pricing models like Black-Scholes are guaranteed to not work.

Can it happen to Shariah-compliant finance? Not like this...no

The End of Wall Streets Boom--Michael Lewis Article

Islamic Finance Training Programs & Certifications

Here is a summary list (in pdf format) of Islamic finance study programs which we have compiled, hope it might be helpful to those seeking professional advancement and wishing to gain better understanding of the industry. At the same time appreciate anyone contributing to this list to make it more comprehensive, pretty sure there are a few missing. The full list (so far):




AAOIFI: Certified Islamic Professional Accountant (CIPA)
http://www.aaoifi.com/cipa2.html

Academy UK: MBA Islamic Banking and Finance
http://www.academyuk.org/courses/course.aspx?id=11

AIMS: MBA in Islamic Banking and Finance
http://www.learnislamicfinance.com/MBA-Islamic-Banking-and-Finance.htm

Al Jamia Al Islamiya: Post Graduate Diploma in Islamic Economics and Finance
http://www.aljamia.net/english/pgdief2.html

BIBF: Masters of Science-Islamic Finance (MSIF)
http://www.bibf.com/cfif/islamicfinance-msifprogram.htm

CASS: Executive MBA - Islamic Finance stream
http://www.cass.city.ac.uk/mba/dubai/course/electives/islamic-finance/index.html

CIFA: Certified Islamic Financial Analyst Program (CIPA)
http://www.shapefinancial.com/cifa/index.asp

CIMA: Certificate in Islamic Finance
http://www.cimaglobal.com/Study-with-us/Certificate-in-Islamic-Finance/

Durham Islamic Finance Program (DIFP); Islamic Finance Summer School
http://www.dur.ac.uk/sgia/difp/

Ecole de Management Strasbourg – University Degree in Islamic Finance
http://www.em-strasbourg.eu/docs/confdufi.pdf

ESA & CISI (formerly SII): Islamic Finance Qualification (IFQ)
http://www.esa.edu.lb/en/IFQ_Qualification.shtml

GARP - Certificate in Risk Management for Islamic Financial Institutions
http://www.garp.com/certifications/Islamic_finance/about.aspx?ekmensel=c580fa7b_42_48_78_1

IBFIM: i-Series Programme, CCP Islamic (CCP-i), Islamic Financial Planner (IFP)

http://www.ibfim.com/index.php?option=com_content&task=view&id=1386&Itemid=201

ICMA: MSc Investment Banking and Islamic Finance
http://www.icmacentre.ac.uk/study_and_research/msc_investment_banking_and_islamic_finance

IIBF: Post Graduate Diploma in Islamic banking and Insurance
http://www.islamic-banking.com/diploma/index.php

IIIBF: Certified Islamic Banker and Others
http://www.iiibf.org/

IIUM: MBA with concentrations in Islamic Banking & Finance
http://managementcentre.com.my/page.php?34

INCEIF: Chartered Islamic Finance Professional (CIFP)
http://www.inceif.org/

IslamicAdvisory.com: Online Courses
http://www.islamicadvisory.com/

Islamic Finance Training: Various Courses
http://www.islamicfinancetraining.com/

Islamic Online University: Various Islamic Courses
http://www.islamiconlineuniversity.com/
http://www.islaamicstudiesacademy.com/

Markfield - Certificate in Islamic Finance
http://www.mihe.org.uk/mihe/detail.php?page=104&s=13

Straightway Ethical: Islamic Financial Ethics
http://www.straightwayethical.com/courses.php

Sunni Path Online Islamic Academy: Modern Finanical Transactions
http://www.sunnipath.com/Academy/OnlineCourses/Law/Modern-Financial-Transactions.aspx

Tazkia - Islamic Undergraduate degree in Indonesia
http://tazkia.ac.id/

Trisakti University - Islamic Economics and Finance degree in Indonesia
http://ief-trisakti.ac.id/

Universitas Indonesia - Islamic Economics and Finance degree in Indonesia
http://www.psktti-ui.com/

University College of Bahrain: MBA in Islamic Finance
http://www.ucb.edu.bh/gande/Islamic.html

Islamic Finance Training Programs & Certifications

Key Trends in Islamic Funds

Most recent report from Eurekahedge on the growth and distribution of Shariah-Compliant Funds. Very comprehensive state of the industry (with nice charts).

Please use the link to their site to view/download the report (requires a one-time free registration).

Key Trends in Islamic Funds

Can there be an Islamic Hedge Fund?

First we have to define what a Hedge Fund truly is.

This interesting article from Fortune Magazine speaks of the demise of the HF in... 1969. Warren Buffet was planning on winding his down, the SEC was thinking of regulating further, leverage was disappearing and returns were dismal.

The article is exceptionally well documented, interview managers, investors, etc. Fascinating reading and worth the length.

And defines what makes a HF different:

1. Leverage
2. Short-selling
3. Compensation Scheme

We will explore each of these aspects and shariah-compliant means of achieving them (or not!).

As one of my friends put it, HFs are described as an asset class. They're not an asset class--they're a compensation scheme.

Can there be an Islamic Hedge Fund?

Experimenting with New Feeds

We are experimenting with new feeds (as you might see at the bottom of the page). Please be patient as we try to increase the coverage of our news feeds, group feeds, etc. Comments and suggestions are always welcome.

Experimenting with New Feeds