CW: Socially Responsible Investments: Methodology, Risk Exposure and Performance

Socially Responsible Investments: Methodology, Risk Exposure and Performance
Jenke Ter Horst, Chendi Zhang, Luc Renneboog
June 2007

CW: Socially Responsible Investments: Methodology, Risk Exposure and Performance

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA
ISRA Research Paper (No. 10/2010)

"In 2009, Bursa Malaysia launched a new trading platform called Suq al-Sila’ or Commodity Murabahah House. It was introduced to facilitate certain Islamic financial transactions, particularly commodity murabahah based on tawarruq. This platform is claimed to provide genuine commodity transactions where possession and delivery of the commodity can take place without any hindrance, as opposed to the controversial widespread form of tawarruq that uses platforms like the London Metal Exchange (LME). This paper discusses the practice of tawarruq using Bursa Malaysia’s Commodity Murabahah House. In particular the paper comprehensively examines the debates over tawarruq which eventually lead to the OIC Fiqh Academy’s declaration that organized tawarruq is impermissible. This paper concludes that despite the criticisms and some unresolved Shari‘ah matters entangling the practice of tawarruq, the effort made by Bursa Malaysia to introduce a platform such as Commodity Murabahah House is commendable. Furthermore, since the nature of modern organized tawarruq may not strictly comply with Shari‘ah principles, the reasons behind using this facility should be carefully taken into consideration, especially situations of real urgency and cases of need."

Can Bursa Malaysia’s Suq al-Sila’ (Commodity Murabahah House) Resolve the Controversy over Tawarruq?

Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

Ewa Karwowski

University of London - Levy Economics Institute Working Paper

January 2009

Abstract: "This paper explores the significance of Islamic banking in Malaysia for stability in the country's economy as a whole. Neither conventional theory nor Islamic economics puts forward a systematic explanation of financial intermediation; consequently, neither is capable of identifying destabilizing elements in the system. Instead, a flow-of-funds approach similar to Minsky's own is applied to the (post-) modern consumption-led) business cycle and financial (and asset) market.

Malaysia's structural current account surplus contributes to the overcapitalization of domestic firms. This in turn finances a financial (as opposed to an industrial), consumption-led (instead of investment-led) business cycle, where banking favors destabilizing asset price inflation. Islamic banks operating interdependently with conventional ones contribute to economic destabilization channeling surplus funds from the corporate to the household sector."

Financial Stability: The Significance and Distinctiveness of Islamic Banking in Malaysia

The New Mainstream: Islamic Private Equity and Competitiveness

Is Islamic private equity under-rated or over-sold? Untapped or ill-deployed? There is very little data available on the viability, success (or for that matter failure) of current and previous efforts in this space. While advertorial in nature, this piece suggests a variety of opportunities are available due to three key factors: Demand, Means and Support. However it suggests that in order to activate this there are four challenges faced by the industry: Standardization, Engineering, Education and Human Capital.

The New Mainstream: Islamic Private Equity and Competitiveness
Seera Investment Bank
November 2008

The New Mainstream: Islamic Private Equity and Competitiveness

CW: Socially Responsible Investments in Germany, Switzerland and the United States : An Analysis of Investment Funds and Indices

Socially Responsible Investments in Germany, Switzerland and the United States : An Analysis of Investment Funds and Indices
Michael Schroder
September 2003

CW: Socially Responsible Investments in Germany, Switzerland and the United States : An Analysis of Investment Funds and Indices

Adopting and Measuring Customer Service Quality in Islamic Banks

Adopting and Measuring Customer Service Quality in Islamic Banks: A Case Study of Bank Islam Malaysia Berhad

by Shahril Shafie, Dr Wan Nursofiza Wan Azmi and Professor Sudin Haron

KLBS - Working Paper Series 001

2004

Adopting and Measuring Customer Service Quality in Islamic Banks

3rd IFSB Public Lecture on Financial Policy and Stability

3rd IFSB Public Lecture on Financial Policy and Stability

In conjunction with the 15th Meeting of its Council, the Islamic Financial Services Board (IFSB) is organising its 3rd Public Lecture on Financial Policy and Stability on 23 November 2009 in Kuala Lumpur, Malaysia. Bank Negara Malayia (BNM) is kindly hosting both the Meeting of the Council and the Public Lecture.

Mr. Paul Koster, Chief Executive of Dubai Financial Services Authority, and Mr. Jean Pierre Sabourin, Chief Executive Officer, Malaysia Deposit Insurance Corporation will speak in the Public Lecture, which is scheduled to be held at 1:30pm – 5.15pm.

You can view the downloadable programme at the IFSB website. Should you wish to attend the both the Public Lecture and the High Level Conference, or either one of these events, please fill up the online registration form, or email/fax in your details to the IFSB Secretariat.

For more information contact:
Ms. Puteri Bahrun
Email: puteri@ifsb.org
Tel: + 603 2698 4248 ext: 114

3rd IFSB Public Lecture on Financial Policy and Stability

Islamic Finance - Podcasts & Webcasts

Here we feature a collection of educational multimedia materials (both video webcasts as well as audio podcasts) offered by the CFA Institute. This provides an opportunity to learn about various concepts of Islamic finance, topics include structuring sukuk, corporate governance, and the role of standard setting bodies in Islamic finance (this is also complemented by various introductory pieces as well). The list of experts includes Professor Rodney Wilson, Shaykh Yusuf Talal DeLorenzo, Rushdi Siddiqui, Professor Simon Archer, Professor Rifaat Karim, Richard de Belder, and Mohammed Amin (among others).

This list will expand in the near future as they plan to add new webcasts periodically. Similarly we plan to highlight much more multimedia content in the near future.

These webcasts are available for free but a registration is required for non-members of CFA Institute (creating an account to login will be created instantly).

With thanks to Usman Hayat for his assistance with the materials.

Islamic Finance - Podcasts & Webcasts

DFSA - Enhancing Clarity and Accessibility of Islamic Finance Rules

Consultation Paper No. 66 Enhancing Clarity and Accessibility of Islamic Finance Rules

The DFSA is proposing to restructure the rules relating to Islamic finance to better promote the visibility and accessibility of the DFSA's regulatory regime (as it applies to Islamic financial activities conducted within the DIFC).

Comments and feedback can be sent to (note deadline is December 4th):
Dhammika Amukotuwa
Associate Director, Policy and Legal Services, DFSA
Email: DAmukotuwa@dfsa.ae

The relevant files are as follows:
Consultation Paper in PDF Format
Appendix 1 — Proposed New IFR Module
Appendix 2 — Sample of a Virtual Handbook

DFSA - Enhancing Clarity and Accessibility of Islamic Finance Rules

The Future of Takaful: Potholes in the Streets of Gold?

The Future of Takaful: Potholes in the Streets of Gold

by Peter Hodgins and Caroline Jaffer

Clyde & Co

August 2009

The Future of Takaful: Potholes in the Streets of Gold?

CW: Socially Responsible Investment Screening: Strong Evidence of No Significant Cost for Actively Managed Portfolios

Socially Responsible Investment Screening: Strong Evidence of No Significant Cost for Actively Managed Portfolios
Bernell K. Stone, John B. Guerard, Jr., Mustafa N. Gultekin, Greg Adams
June 2001

CW: Socially Responsible Investment Screening: Strong Evidence of No Significant Cost for Actively Managed Portfolios

Islamic Banks and Wealth Creation

Islamic Banks and Wealth Creation
Prof. Dr. Abdul Ghafar Ismail
ISRA Research Paper (No. 9/2010)

"This paper aims to examine how Islamic banks create wealth: how customers as depositors invest their money through the banks; how the banks invest the funds at their disposal; and how economic agents such as individuals, firms and government use these funds. It also examines how this money generates profit, which is then distributed to Islamic banks and depositors, and hence preserves and develops the wealth (mal) of economic agents. It also raises the larger question of whether Islamic banks contribute to the well-being of society by focusing on return to depositors and to shareholders."

Islamic Banks and Wealth Creation

CW: Socially Responsible Investing in the Global Market: The Performance of US and European Funds

Socially Responsible Investing in the Global Market: The Performance of US and European Funds
Maria Ceu Cortez, Florinda Silva, Nelson Areal
February 2009

CW: Socially Responsible Investing in the Global Market: The Performance of US and European Funds

Opalesque Islamic Finance Intelligence - Fourth Issue

We are back after a month filled with journey (the OIFI team has been travelling of late: Malaysia, Jordan, UK, UAE and more to come) and correspondingly our fourth installment incorporates content from all corners of the globe. We begin by exploring the potential synergies available across the industry (and whether it is in need of a catalyst to spur further growth and collaboration) in our editorial piece.

Complementing this is our Featured Resource section which outlines a variety of country and regulatory perspectives on Islamic finance, exhibiting how approaches can differ widely from one country to another. While some of it is positioning, they are testament to the importance being placed on Islamic banking and how regulators are hard at work trying to address and incorporate it into their existing financial architecture.

Nevertheless this is not just a case of mere talk--what is transpiring beyond the boardrooms of IFIs is in fact very energetic discourse that is gradually developing into a tangible initiative. There is great expectation that this can take the shape of an industry-wide effort (resilient to commercial interests) and one which we look forward to reporting in the near future. Indeed we explore the roots of this initiative in our Discussion Board as we borrow the topic from our online forum: 'Does Islamic Finance Need a Voice'.

In this edition OIFI dives deep into multiple asset classes: The Featured Structure section tackles Islamic REITs and the apparent underutilization of liquid real estate products. Khalil Khoury of KIPCO Asset Management Co. provides his perspective on the investable universe of Shariah compliant products in the Allocator Interview section. We further investigate what might be in store for indexation products in our Fund Manager Interview, as we converse with Saeid Hamedanchi of Florentez Investment Management. To round it out, our Industry Snapshot profiles the latest research undertaken on Islamic equity funds, as we hear from the team of Andreas Hoepner, Hussain Rammal and Michael Rezec.

Further expanding on his Lex Islamicus column, Khalil tackles arbitration and enforcement in Islamic contracts - with particular relevance on the revitalized sukuk market. On the other hand, Nikan surveys the various currents of thought on existentialism in Islamic finance under the Opinion Column - with a compendium of views that are not only contrary to the mainstream but possibly test the resolve of Islamic Bankers. But what doesn't kill us makes us stronger.

As always, we welcome your comments & suggestions (you can also feedback directly to the authors), and we remind our registered readers that you have free access to the entire archive of Opalesque Islamic Finance Intelligence (including back issues) and Opalesque Islamic Finance Briefing (our daily news summary), an ever-growing historical data bank of industry news and articles.

Download Opalesque Islamic Finance Intelligence here

Opalesque Islamic Finance Intelligence - Fourth Issue

CW: Socially Responsible Investing and Management Style of Mutual Funds in the Euronext Stock Markets

Socially Responsible Investing and Management Style of Mutual Funds in the Euronext Stock Markets
Auke Plantinga, Bert Scholtens
May 2001

CW: Socially Responsible Investing and Management Style of Mutual Funds in the Euronext Stock Markets

New LinkedIn Subgroups

As our Linkedin group has continuously expanded (well over 2,700 members and more than 200 relevant discussions) we have launched smaller subgroups to allow for more focused interaction between like-minded members (we recognize Linkedin requires registration but it is free and very useful in many other respects). We now have four subgroups that cater to the following themes:

• Islamic Finance - Accounting & Auditing
• Islamic Finance - Careers & Education
• Islamic Finance - Funds & Asset Management
• Islamic Finance - Takaful & Pensions
• Islamic Finance - Research & Reports

New LinkedIn Subgroups

Takaful: Concepts & Practise

Takaful: Concepts & Practise

Thursday 29 October, 2009

Islamic Banking & Finance Network - Hong Kong

Fee & Registration required

(RSVP by 23rd October)

Featured Speaker: Hussain Ahmad, Consulting Actuary, Towers Perrin

Hussain Ahmad, a qualified actuary in the insurance consulting business of Towers Perrin, covers conventional insurance, Takaful, and financial risks for firms across Asia and the U.S. His extensive experience includes conducting M&A due diligence for the general and life insurance sectors, analyses of market entry strategies and start-ups, as well as advising institutional clients on Takaful concepts and their implications on valuation. Prior to Towers Perrin, he worked with Pakistan’s Securities and Exchange Commission on Takaful Rules and other regulations. Hussain is a Fellow of the Casualty Actuarial Society (FCAS) and earned a Master of Finance from Hong Kong University and a B.Sc. from Drake University in the US. He is a regular contributor to industry publications and a noted speaker at leading industry events (and a member of our Linkedin forum).

Takaful: Concepts & Practise

Islamic finance: a recent history with France, a longstanding history with its banks

This paper from the Reims Management School provides a wide overview of the "breakthroughs, challenges and opportunities" faced by the Islamic finance industry in France. It delves into a historical review and an overview of French institutions already involved in Islamic financial transactions. Most importantly it delves into various current issues such as the Fiscal & Legal adjustments being sought. With thanks to the author for providing the paper.

Islamic finance: a recent history with France, a longstanding history with its banks
Ghassen Bouslama, PhD.
Professor of Finance, Reims Management School
July 2009

For our francophone readers: La finance Islamique: une recente histoire avec la France, une longue histoire aves ses banques

Islamic finance: a recent history with France, a longstanding history with its banks

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market
Assoc. Prof. Dr. Asyraf Wajdi Dusuki, Head of Research Affairs Department, ISRA & Shabnam Mokhtar, Researcher, ISRA
ISRA Research Paper (No. 8/2010)

"Sukuk comprise one of the fastest-growing segments of the Islamic debt capital market. This paper aims to shed light on Shari‘ah issues that arise in asset-based sukuk structures and operations. It first discusses the concept of sukuk and delineates the difference between asset-based and asset-backed sukuk. It then discusses Shari‘ah issues with regards to ownership (qabd). From the analysis of case studies conducted, three major issues were identified in the operation of asset-based sukuk. They are sukuk-holders’ interest in the underlying assets, restrictions on asset disposal, and due diligence regarding sukuk assets. The paper concludes that restriction of the right of disposal poses a serious doubt whether asset-based sukuk structures truly comply with Shari‘ah principles. Furthermore, the coupling of this restriction of disposal with the purchase undertaking at par effectively turns sukuk into a debt instrument. Hence the paper suggests that there is a need to move towards asset-backed sukuk that clearly fulfils the Shari‘ah requirement. Nonetheless the paper recognizes that the current legal framework impedes the issuance of asset-backed sukuk. Instead of making overnight changes to the sukuk market, the paper highlights the need for all stakeholders to come together and thoroughly discuss measures needed for a transition to an improved market."

Critical Appraisal of Shari'ah Issues on Ownership in Asset-based Sukuk as Implemented in The Islamic Debt Market

Islamic Mutual Funds' Financial Performance and Investment Style

This particular study scrutinizes the performance of Islamic funds with much more comprehensive data of the existing universe of investment products and at the same time delving deeper into the implications of the data. While some of the conclusions would have been voiced within the industry, this study provides much more solid evidence to support/substantiate them.

Islamic Mutual Funds' Financial Performance and Investment Style: Evidence from 20 Countries
Andreas G. F. Hoepner (1), Hussain G. Rammal (2) & Michael Rezec (1)
(1) School of Management, University of St. Andrews, UK
(2) International Graduate School of Business, University of South Australia, Australia

September 2009

Abstract: "We contribute to the investment literature by pursuing the first sophisticated, large scale analysis of a strongly growing mutual fund type: Islamic funds. Despite hundreds of Islamic funds exist the few previous studies investigate the financial performance of less than 60 and the investment style of 6 funds. Based on unique data access, we analyse the financial performance and investment style of 262 Islamic equity funds from twenty countries. We develop a (conditional) three level Carhart model to simultaneously control for their exposure to different national, regional and global equity markets and investment styles. Our findings are fourfold. First, Islamic funds from eight (mainly western) nations significantly underperform their international equity market benchmarks, while funds from only three nations do the opposite. Second, Islamic funds generally prefer small stocks but have no preference for other investment styles. Third, Islamic funds from the Gulf Cooperation Council (GCC) or Malaysia neither significantly underperform nor clearly prefer small stocks. These three findings have some theoretical appeal, as Islamic funds’ investment universe is limited to Shari’ah law compliant companies, which are more likely small and present in economies with a higher density of Muslims. Fourth, we find some evidence that Islamic equity funds exhibit a hedging function, as their investment universe is limited to low debt/equity ratio stocks."

With thanks to Andreas Hoepner for providing the paper.

Islamic Mutual Funds' Financial Performance and Investment Style

CW: Measuring The Performance Of Ethical Mutual Funds: A DEA Approach

Measuring The Performance Of Ethical Mutual Funds: A DEA Approach
Antonella Basso, Stefania Funari
January 2002

CW: Measuring The Performance Of Ethical Mutual Funds: A DEA Approach

Islamic Finance: What leaders do differently

This piece is far more concerned with branding and positioning of Islamic banks in the context of competing side by side with conventional institutions. Not surprisingly items such as product innovation and 'quick' Shariah approval process are prime considerations, among other things. The question remains - does the need to compete vis-a-vis conventional players makes IFIs drift away from their original business model, instruments, and practices??

Islamic Finance: What leaders do differently
Lessons learned from Islamic financial institutions in the GCC

Dr. Helmut Schulte-Croonenberg and Alexander von Pock

A. T. Kearney

Islamic Finance: What leaders do differently

The Question of an Islamic Futures Market

This short piece is a followup on our previous posting on Islamic futures contracts, in this case we have an argument comparing/contrasting salam with istisna. The author goes on to highlight in the discussion whether there is a "need for a more up-to-date ijtihad to develop an Islamic futures market capable of capturing the merits of modern future markets and avoiding their demerits."

The Question of an Islamic Futures Market
(Apologies, original link is broken!)
Seif I. Tag El-Din
Markfield Institute of Higher Education, Leicester
IIUM Journal of Economics and Management 12, no.1

The Question of an Islamic Futures Market

Does Islamic Finance Need a Voice?

We have been developing this discussion within our Linkedin forum, and would like to seek feedback and suggestions from everyone in this regard (not just from members of Linkedin but from the industry at large).

Does Islamic Finance Need a Voice?
An industry association?
A lobby group?
A vehicle to aggregate efforts and derive change?
A repository of frustration that nobody listens to?
A pat-in-the-back flag-waving exercise?

Clearly much to discuss - in particular a base agenda - but certainly there is a need for some sort of communication channel with the industry as a whole. Your ideas and comments are welcome.

Does Islamic Finance Need a Voice?

Do Islamic Banks Have Greater Market Power?

Time and again we hear about how Islamic banking has proven to be on par with conventional banking (whether that is good is another discussion!), here we profile a recent paper that provides a similar conclusion although it uses a far more technical (and substantiated) approach.

Do Islamic Banks Have Greater Market Power?

Laurent Weill

Laboratoire de Recherche en Gestion (LARGE) (Management Research Laboratory)

Université de Strasbourg

February 2009

Abstract: "The aim of this paper is to investigate whether Islamic banks have greater market power than conventional banks. Indeed Islamic banks may benefit from a captive clientele, owing to religious principles, which would be charged greater prices. To measure market power, we compute Lerner indices on a sample of banks from 17 countries in which Islamic and conventional banks coexist over the period 2000-2007. Comparison of Lerner indices shows no significant difference between Islamic banks and conventional banks. When including control variables, regression of Lerner indices even suggests that Islamic banks have a lower market power than conventional banks. A robustness check with the Rosse-Panzar model confirms that Islamic banks are not less competitive than conventional banks. The lower market power of Islamic banks can be explained by their different norms and their different incentives."

Do Islamic Banks Have Greater Market Power?

Marketing Strategy of Islamic Banks

The following paper from KLBS was presented in May 2005 at the International Seminar on Enhancing Competitive Advantage on Islamic Financial Institutions in Jakarta. The study highlights how the new Islamic banks in the Malaysian market (and the new Islamic windows of conventional banks) have exhibited a much more aggressive marketing strategy than their established counterparts. It goes on to specify key elements such as product placement, pricing & promotion, distribution channeles, etc.

Marketing Strategy of Islamic Banks: A Lesson from Malaysia

by Professor Sudin Haron and Dr Wan Nursofiza Wan Azmi

KLBS - Working Paper Series 006

May 2005

Marketing Strategy of Islamic Banks

Islamic Capital Markets: Products, Regulation and Development

Islamic Capital Markets: Products, Regulation and Development

IRTI Seminar Proceedings

Salman Syed Ali

2008

Abstract: "Islamic capital markets are among the important and growing segments of Islamic finance. These markets are experiencing inflow of innovative financial products and receiving increased investor attention. At the same time various countries and regions competing to position themselves as financial centres are gradually amending and strengthening their regulatory framework. These developments are opening new avenues for Islamic financial markets and posing new challenges."

Islamic Capital Markets: Products, Regulation and Development

Islamic Capital Market Products - Developments & Challenges

Islamic Capital Market Products - Developments & Challenges

IRTI Occasional Papers

Salman Syed Ali

2005

Abstract: "The development of Islamic capital markets is integral part of development of capital markets in general. Such markets are essential for efficient resource mobilization and allocation. It is more so in an Islamic economy because prohibition of interest implies greater reliance on equities and asset based financing.

The paper focuses on the state of equity and stable income products (sukuk) in Islamic capital markets. Taking Bahrain, Malaysia, Pakistan, and Sudan as sample it surveys the size of the markets for stocks and ijarah sukuk and highlights the issues in their development. [Excluded from the analysis are the other products, the regulatory issues, and the aspects of market micro-structure]. This is done with the purpose to understand how to enhance the proportion of Islamic products in the capital markets of the IDB-member countries. Availability of appropriate products will induce the firms to use the markets in the member countries for raising the funds and investing them there."

Islamic Capital Market Products - Developments & Challenges

CW: Is there a Difference? The Performance Characteristics of SRI Equity Indexes

Is there a Difference? The Performance Characteristics of SRI Equity Indexes
Michael Schroder
July 2005

CW: Is there a Difference? The Performance Characteristics of SRI Equity Indexes

Eid Greetings

Hari Raya Eidul Fitri, Maaf Zaher dan Batin!

From the Islamic Finance Resources Team


Courtesy CommentsGuru.com - Forward This Image

Eid Greetings

A Note on Islamic Economics

A Note on Islamic Economics

IRTI (IDB Prize Winners)

Abbas Mirakhor

Executive Director, IMF

2007

A Note on Islamic Economics

KPMG: Growth and Diversification in Islamic Finance

A broad overview by KPMG on Islamic finance, worth noting Section 3 which outlines a variety of barriers to entry - amongst them the ever increasing gap in Human Capital and (very current in recent headlines) the need for regulatory and legal frameworks. Also page 13 talks about Women in Islamic Finance, highlighting various industry voices on the challenges faced. While this particular piece dates back t0 2007, it seems that many of the key challenges are still present to this day and some remain unaddressed.

Growth and Diversification in Islamic Finance

KPMG International

2007

KPMG: Growth and Diversification in Islamic Finance

Sukuk and their Contemporary Applications

This particular piece sparked an industry-wide debate on the day-to-day practice of various sukuk structures (mainly murabaha and musharaka versions). For a short review of the paper and its market implications also check this short brief from Norton Rose. Among other things Taqi Usmani goes on to discuss 'The Higher Purposes of Islamic Economics', but mainly he focuses his attention on these three key points:

1. Bond Holders' Ownership of Enterprise Assets
2. Regular Distributions to Sukuk Holders
3. Guaranteeing the Return of Principal

Sukuk and their Contemporary Applications
Muhammad Taqi Usmani
President of the AAOIFI Shariah Council
2007

Sukuk and their Contemporary Applications

CW: Investing in Socially Responsible Mutual Funds

Investing in Socially Responsible Mutual Funds
Christopher Geczy, Robert F. Stambaugh, David Levin
October 2005

CW: Investing in Socially Responsible Mutual Funds

Case Study: Islamic Microfinance in Australia

The perspective from downunder is rather different than other periphery markets, but noticeably Islamic finance has been developing through community organizations and grassroots initiatives for quite some time now, MCCA being an example. This paper gives some color to the viability of microfinance and other financing schemes in Australia, particularly interesting as local demand might be small but it proves crucial to the viability of Islamic finance.

Islamic Microfinance: A Case Study of Australia
Abu Umar Faruq Ahmad
Professor A. B. Rafique Ahmad
Journal of Islamic Economics, Banking and Finance
August 2008

Abstract: "Microfinance services are commonly viewed for those traditionally considered non bankable. Microfinance tool can be adapted in every environment, based on the local needs and
economic situation. In Australia, Islamic microfinance enterprises that mostly rely on their shareholders’ savings proved to be very successful in providing microfinance to their clientele."

Case Study: Islamic Microfinance in Australia

Islamic Marketing Ethics

Ethics, governance, corporate behaviour, branding - all in all, how does one combine marketing and Islamic finance? On the other hand, what is the level of recognition and validity given by Muslim customers to Shariah compliant investments? How does one determine the level of preference for a compliant solution versus a conventional one? Is there such a preference or is it perceived as a penalty on financial performance? Is there a way to quantify all this? Can this methodology be applied to other services beyond banking products (from insurance & car financing to food, clothing, etc?). A vast topic indeed!

This specific piece from KAU provides a good starting point for discussion. Note the original link to the paper is broken, shown here is a mirror link.

Islamic Marketing Ethics and Its Impact on
Customer Satisfaction in the Islamic Banking Industry
Abul Hassan, Abdelkader Chachi, Researcher, Islamic Economics Research Centre, King Abdulaziz University, Jeddah, Saudi Arabia, and
Salma Abdul Latiff, Director of Centre for Islamic Banking, Finance and Management, University Brunei Darussalam.

With thanks to Joy Abdullah for suggesting the topic.

Islamic Marketing Ethics

Basel II and Regulatory Framework for Islamic Banks

Basel II and Regulatory Framework for Islamic Banks
M. Kabir Hassan, University of New Orleans
Mehmet F. Dicle, University of New Orleans

"Even though Islamic banks offer profit and loss sharing accounts and therefore expose limited risk of insolvency, systemic risks still exist and deserve much attention."

"Basel II introduces a new approach to evaluating credit risk. Although the scope of Basel II does not include Islamic banks, the new models of credit risk rating introduce compatibility for Islamic banks."

Basel II and Regulatory Framework for Islamic Banks

Opalesque Islamic Finance Intelligence - Third Issue

First of all we would like to extend to all a blessed Ramadan Mubarak. As Muslims around the globe observe the holy month we take this opportunity to pause and reflect on where Islamic finance stands today and what’s in store for the industry’s future. As millions of Muslims reflect, so does the industry ponder on its very own direction, principles and ultimate purpose.

This is barely our third edition, but the feedback can be summarized by one of our readers (a director of an Asian-based investment bank) who put it plainly: “there is some really good stuff in this thing”. We push forward and for this edition of OIFI we begin by addressing what we term the 'Two Schools of Islamic Finance' as we delve into a rather unassuming - although significant - division in opinion on how the practice of Shariah compliance should be approached. Interpretation can have far reaching implications, take for instance the Majallah (the civil code of the Ottoman caliphate) which is regarded as the first attempt to codify Islamic law and remains an important source of reference to the present day.

We follow with one of our most requested items – and a good indicator of industry renaissance – a compilation of Islamic finance training programs and certifications. Thereafter, Nikan tackles a more specific discussion on Wa’d in our Featured Structure section, whereas Khalil delves into a forward looking analysis of Islamic financial instruments and arbitration channels in his Lex Islamicus column. Their perspectives are complemented by additional opinions on the role of the Islamic finance framework in our Discussion Board.

This month’s edition includes a Manager Interview with Dieter Küffer, of Sustainable Asset Management, regarding their Islamic water strategy. Their SRI background is by no means accidental, as our Opinion Column further profiles views on social responsibility and corporate governance from Sayd Farook and Usama DeLorenzo respectively. To round it all out, the spirit of transparency is alive and well in our final piece which explores the rather unusual: products from the graveyard (liquidated, obsolete, dare we say unsuccessful).

Once again we welcome your comments & suggestions, and a reminder that you can check the free online archive of Opalesque Islamic Finance Briefing (our daily news summary) which provides a historical data bank of industry news and articles, as well as the back issues of OIFI. It’s all there, it’s all free.

New subscribers can set up their Opalesque subscriptions here.

Download Opalesque Islamic Finance Intelligence here

Opalesque Islamic Finance Intelligence - Third Issue

Shariah Compliant Structured Product: Consecutive or Rolled Murabaha

Structured Product, by its nature is something that can deliver diverse risky cashflows to investors. Delivering this to a conventional investor involves hedging, sometimes statically, sometimes dynamically with vanilla options, swaps and swaptions, basis and asset swaps, correlation product and a whole host of other, 'slightly less exotic' product. That being said, structured product is a huge business, one that generates large returns for banks (less so recently) and makes structurers on the Islamic Structuring side look for ways to deliver the same cashflows to Islamic Investors?

Can it be done? Yes, well, maybe, or depending on our viewpoint, definitely not. There are two standard methods for delivering structured product cashflows to investors that are in common use today. Both are exceptionally simple and banks seem to believe they are applicable in a wide variety of cases. As we have already spoken at some length on the Wa'd Swap (see here, here, and here), we will focus on the Rolled Murabaha.

Sample Structured Product
We take as a case in point a principal protected commodity-linked range-accrual. The example structure will be as follows with initial price of $100.

Final Payoff in year 5: $100 + (LIBOR(t)+Spread)x Num x $100
where Num = (1/252) number of days over the 5Y of the product that
Commodity(t) is between LB (Lower Bound) and UB (Upper Bound). (1/252 would usually be some other more conventional daycount convention, but we don't want to go into that here.)


Conventional Structure
To structure this conventionally we need the following:

1. We purchase a zero-coupon bond. With prevailing rates at 5% and the structure maturing in 5Y, the cost is around $75.
2. With the remaining $25, we enter into the risky trade, effectively purchasing a warrant/option linked to this range accrual cashflow. If we simplify the structure to say that it pays (HighFixedInterestRate)xNum x $100, we note that this is merely a set of daily digital options on the commodity, struck at LB and UB. The payoff of each daily digital is exactly HighFixedInterestRate x $100 x 1/252. Each payoff is tiny, so the premium for each daily digital is also tiny. Combined it will be $25 worth.
   
3. In reality, nobody would hedge using daily digitals. The trader uses a model to determine greeks (deltas, gammas, vegas) with respect to the commodity and commodity vol, etc. The structure is a bit tricky since the gamma switches signs at the boundaries, effectively leading to more erratic hedging behaviour. Nonetheless, it is a very standard product.
   

We should fully expect that Spread is relatively large to make this attractive, and that in a backtest the structure will appears to have some amazing return over the last 10 years (as though someone actually offered us the structure for the last 10 years? NOT!).


Rolling Murabaha: Shariah Compliant Alternatives
This would be a standard commodity-linked range-accrual product. Unfortunately, we cannot deliver it exactly as is, but with some very minor modifications.

1. First we enter into a 5Y murabaha which matures at value $100 (the principal protection). The markup will be prevailing 5Y swap rates (since there is no 5Y LIBOR). If rates are close to 5%, then we effectively use $75 for this.
   
2. The bank offers the investor a unilateral undertaking to enter into a subsequent murabaha starting in 5Y for the duration of 1M. This second murabaha will have a markup of (LIBOR+Spread)xNum x $100 where this markup is determined from today to year 5 at which point it is fixed.
3. If the markup is less than or equal to 0 (it will not be negative in this specific example but we can devise cases where it easily could be), the client receives $100 in year 5 and chooses not to roll into the second murabaha.
   
4. If the markup is in fact positive , the client will choose excercise the wa'd and roll into the second murabaha, receiving $100 + (LIBOR+Spread)xNum x $100 in 5Y and 1M.
   

This is not exactly fair as stated. The $100 from the first murabaha should at least get 1M libor over the final month. But except for some minor pricing and minor timing related differences, we have managed to replicate the conventional range-accrual structure.

The deconstructionalist approach
Now, principal protected product can easily be decomposed into a risk-free principal protection piece (well, not exactly risk-free since it is usually financial paper!), and a risky option/warrant. Oftentimes this warrant can and will be traded separately, depending on the risk-profiles of the end-user. In Europe, most retail want principal protection, while in Asia, warrants are quite common.

In this specific case, we can split off the first murabaha as an ordinary murabaha (i.e., a zero-coupon bond). In the above example we invested $75 in the first murabaha. Where did the remaining $25 go?

It was spent on the warrant. Effectively, we spent $25 to purchase a wa'd (promise) to enter a murabaha starting in 5Y time, maturing in 5Y1M, with a markup linked to a particularly off-market rate of (LIBOR+Spread)xNum x $100.

We have effectively purchased a promise. And this undertaking allows us to enter into a murabaha not at the prevailing rate of 1M LIBOR at that time, but instead some odd range-accrual-linked cashflow.

Note that unlike the conventional structure which can be sold to a third party or resold to the bank, this rolled murabaha is not transferrable. Otherwise it would be bay' al dayn (sale of debt). The wa'd swap structure is fully transferrable.

The Criticism: Short but Sweet
We state the criticism of this structure succinctly.

1. The structure involves entering a murabaha with a markup linked to a possibly non-shariah-compliant underlying/cashflow. The muslim investor, by buying this product, enables, enjoins or effectly invests in non-compliant products. (that extra $25 that was set aside to buy daily digitals in the conventional case? Well, here it 'buys a promise to enter a murabaha'. Effectively, it allows/compels the hedging bank to hedge using options and futures, etc, all haram assets. Consequently, Sh Yusuf Talal DeLorenzo's objection to the Shariah-Conversion Technology applies here (see here). NB: If the second murabaha had a markup linked only to halal underlyings then Sh Yusuf's objection does not apply.
   
2. The structure involves a purchase of a promise (to enter a second murabaha). Can promises be purchased? Wa'd is a unilateral promise with no consideration under virtually all definitions. Can it be purchased? I believe most shaykhs would say no. A promise is an intangible which cannot be owned and cannot be the subject matter of sale in Islam. One cannot even buy usufruct, let alone intangibles such as promises. Instead the nomenclature is that the offering bank asks to charge an 'upfront fee' to offset expenses for offering this wa'd/undertaking. But a 'fee' is consideration. The wa'd has suddenly been turned into a unilateral promise for consideration.
   

This sort of structure allows a whole range of otherwise haram activities to be made 'legitimized' merely through the linking process. Is this right?

Note that this method for packaging structured product is in fact very common. Many if not most structured product are delivered this way. The wa'd swap is playing catchup.

Note as well that all the interesting and more intricate structures we have talked about in this blog are rarely used for structured product cashflows. Why? Because they are more costly and not nearly as general!

The wa'd swap and the rolled murabaha are so simple we can even devise platforms for their issuance and standardized legal matter for each new product. It has revolutionized Islamic Structuring. No need to think of how to adapt this or that Islamic Contract and combine them to deliver interesting end-results. Instead we can just jam it all into Murabahas or Wa'd swaps.

Mass production on the way!

Shariah Compliant Structured Product: Consecutive or Rolled Murabaha

Role of Microfinance in Poverty Alleviation

Abstract: "This case study discusses how microfinance contributes to poverty alleviation. It talks about programs that have poverty reduction effects such as developing livelihood enterprises and developing growth enterprises."

Role of Microfinance in Poverty Alleviation

IRTI Research Papers

Mohammed Obaidullah

2008

Role of Microfinance in Poverty Alleviation