Regulating Islamic Financial Institutions: The Nature of the Regulated

Regulating Islamic Financial Institutions: The Nature of the Regulated
Dahlia El-Hawary, George Washington University
Wafik Grais, World Bank
Zamir Iqbal, World Bank
February 2004
World Bank Policy Research Working Paper No. 3227

Abstract: "More than 200 Islamic financial institutions (IFIs) operate in 48 countries. Their combined assets exceed $200 billion, with an annual growth rate between 12 percent and 15 percent. The regulatory regime governing IFIs varies significantly across countries. A number of international organizations have been established with the mandate to set standards that would strengthen and harmonize prudential regulations as they apply to IFIs. El-Hawary, Grais, and Iqbal contribute to the discussion on the nature of prudential standards to be developed. They clarify the risks that IFIs are exposed to and the type of regulations that are needed to systematically manage them. They consider that the industry is still in a development process whose eventual outcome is the convergence of the practice of Islamic financial intermediation with its conceptual foundations. The authors contrast the risks and regulations needed in the case of Islamic financial intermediation operating according to core principles and current practice. They outline implications for approaches to capital adequacy, licensing requirements, and reliance on market discipline. They then propose an organization of the industry that would allow it to develop in compliance with its principles and prudent risk management, and facilitate its regulation."

Regulating Islamic Financial Institutions: The Nature of the Regulated

Value Through Diversity: Microfinance and Islamic Finance and Global Banking

Value Through Diversity: Microfinance and Islamic Finance and Global Banking
Nicoletta Ferro
Fondazione Eni Enrico Mattei (FEEM)
June 2005

Abstract: Internet resources, extended media coverage and international organizations' reports recently witness the increasing interest of western banks in new models of finance, particularly Islamic finance and microfinance. This new trend is not only channeled through the frame of corporate social responsibilities programs and policies or limited to ad hoc financial institutions (like microcredit banks or Islamic banks) as it is entering the financial offer of mainstream banks. The paper primarily outlines that many elements of microfinance could be considered consistent with the broader goals of Islamic banking. Apart from pure economic considerations which are not the aim of this analysis, the paper supports the thesis that by addressing new markets and embracing unconventional financial proposals, the global banking sector can contribute to the quest for diversity-oriented policies posed by an increasingly globalised scenario. The consequences this new trend is likely to have on inner banking structures are still unknown and are likely to interest the issue of wealth distribution. Moreover, from a more general point of view, by showing that even different moral ethos deep rooted in different cultural paradigms can be as profitable and available as western capitalistic ones, the banking sector can play a potential role in disseminating awareness on specific cultural and religious issues, resulting in increased integration of Muslim communities and low income investors in the long run and supporting commercial banks the close relation between economy and culture.

Value Through Diversity: Microfinance and Islamic Finance and Global Banking

Sign posts to Islamic finance 2.0

Sign posts to Islamic finance 2.0
By Rushdi Siddiqui
October 25, 2010

"Is the AIR (authenticity, innovation and reach) out of Islamic finance? It has been operating in a viral vacuum of “Islamic on Islamic” as an over the counter fragmented industry without global connectivity."

Sign posts to Islamic finance 2.0

Shariah Opinions (Fatwa) On Murabaha

Shariah Opinions (Fatwa) On Murabaha
Compiled & classified by: Dr. Ahmed Mohieddin Ahmed
Reviewed by: Dr.Abdul Sattar Abu Ghuddah
Al Baraka Center for Islamic Economics

Shariah Opinions (Fatwa) On Murabaha

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia
H. Nur Kholis, S.Ag, M.Sh.Ec
Head of Islamic Economic Department, Faculty of Islamic Studies
Islamic University of Indonesia, Yogyakarta, Indonesia
November 2009

The Contribution Of Islamic Microfinance Institution In Increasing Social Welfare In Indonesia

Islamic Banking and Finance: Between Ideals and Realities

Islamic Banking and Finance: Between Ideals and Realities
Abdul Rahim Abdul Rahman
Associate Professor, Kulliyyah of Economics and Management Sciences,
International Islamic University Malaysia, and formerly Director of IIUM
Institute of Islamic Banking and Finance
2007

Islamic Banking and Finance: Between Ideals and Realities

Islamic Finance Transparency Standard - a Consultation

Islamic Finance Transparency Standard - a Consultation
The Business & Economics Committee (BEC) of the MCB
The Muslim Council of Britain
October 2008

This consultation document, prepared by the BEC and its partners, intends to:
(a) Identify the problems created by the lack of Shariah governance standards
(b) Discuss the scope for industry self-regulation
(c) Examine the position internationally
(d) Examine the legal position in the UK
(e) Propose the creation of an Islamic Finance Transparency Standard

Islamic Finance Transparency Standard - a Consultation

Analytical Reflections on Murabaḥah Contracts and Islamic Debt Securities

Beyond the Theoretical Dichotomy in Islamic Finance:

Analytical Reflections on Murabahah Contracts and Islamic Debt Securities

Nagaoka Shinsuke

Graduate School of Asian and African Area Studies, Kyoto University, Japan;
Research Fellow of the Japan Society for the Promotion of Science
2007

Analytical Reflections on Murabaḥah Contracts and Islamic Debt Securities

Riba and Recognition: Religion, Finance and Multiculturalism

Riba and Recognition: Religion, Finance and Multiculturalism
Ibrahim Abraham
Monash University

Abstract: "This article utilises the contemporary political theory of Nancy Fraser to explore the seemingly disparate issues of religious diversity and financial regulation in multicultural late capitalism, focusing on Islamic finance. In recent decades, Islamic finance has expanded into an almost trillion dollar global industry based around the rejection of riba, an Arabic word meaning usury. Whilst the growth of Islamic finance has been staggering, there has been little political or sociological analysis undertaken. This paper argues that Islamic finance challenges not only conventional financial wisdom and regulations, but raises numerous issues about religious identity and relationship between religion, politics and the economy. Analysing the development, principles and practices of Islamic finance, this paper argues that the seemingly staid field of financial regulation is actually a field wherein the politics of religious identity is very strong and wherein complex issues of cultural recognition, economic redistribution and political representation have emerged."

Riba and Recognition: Religion, Finance and Multiculturalism

Opalesque Islamic Finance Intelligence - Twelfth Issue

Welcome to the twelfth edition of OIFI (download PDF version), where we dig deep to uncover the hidden gems of Islamic finance. Sometimes it seems we might not be able to see the forest for the trees, and our editorial section takes a different angle with respects to Shariah supervision and its overall role within the corporate walls. Our Featured Resource compiles a large selection of research papers from the International Shari'ah Research Academy for Islamic Finance (ISRA), which might not be widely disseminated but prove to be excellent reading.

Istijrar is a financial instrument that is seldom talked about in Islamic finance but which contains some intriguing characteristics, Nikan dissects it in the Featured Structure segment. For our Allocator Interview we hear from Chaaban Omran of Crescent Investments Australasia, as we discuss the investment rationale for Australia (which could be regraded as a frontier market for Islamic finance).

Furthermore, Abdulkhaliq Elshayyal takes on Lex Islamicus where he delves into how Islamic financial institutions manage the risk of non-compliance with Shariah, with some very interesting insights. The Industry Snapshot section sees Mobasher Zein tackle the topic of an Islamic currency, both revisiting the historical background as well as analyzing the various pieces of the puzzle that needs to be put together to support an Islamic economy. In addition, Mohammed Amin shares with us his review of the book "Islamic Banking and Finance: What It Is and What It Could Be" and we hope to bring more book reviews in the future.

As always, we are keen to hear your comments & suggestions and remember that you can visit our online archive (see reference link) for access to our ever-growing databank of Opalesque Islamic Finance Briefing as well as all of the back issues of Opalesque Islamic Finance Intelligence.

Download the complete issue of Opalesque Islamic Finance Intelligence here.

Alternatively you can read each article separately in the OIFI Archive:
Editor’s Note: The Shariah Compliance of Teldar Paper
Featured Resource: ISRA Research Papers
Featured Structure: Istijrar - How does it really work?
Lex Islamicus: A Brief Look at Ikhtilaf - Diversity of Ijtihad in Islamic Finance
Allocator Interview: Crescent Investments Australasia
Industry Snapshot: Islamic Dinar Reloaded
Book Review: Islamic Banking and Finance: What It Is and What It Could Be

Opalesque Islamic Finance Intelligence - Twelfth Issue

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment
Aaron Z. Pitluck
Illinois State University - Sociology
March 2008

Abstract: "This paper addresses the puzzle of why the inclusion of non-financial social justice or religious criteria by professional fund managers has been so popular in Malaysia and yet has had to date relatively little influence in the United States stock market. Drawing from over 125 ethnographic interviews with financial workers in Malaysia, this paper argues that moral investment behavior in stock markets is shaped primarily by 'market structure' rather than by 'mandates.' In both countries mandates are a weak form of social control of fund manager's behavior. This is because mandates are not principal-agent contracts but are primarily marketing exercises and cultural tools. Social investing in the United States is weak because it relies solely on mandates to communicate clients' ethical desires to their fund managers. Islamic and Ethical finance in Malaysia is strong because Islamic social movements have reformed the Malaysian stock market's structure. Specifically, a uniform interpretation of Islamic investing was institutionalized with the creation of a nearly-unique quasi-governmental body. As a consequence, Islamic principles systematically influence the behavior of corporations listed in Malaysia, at present narrowly, but with the potential for wider influence in future. The paper closes with implications for social investment in the United States."

Moral Behavior in Stock Markets: Islamic Finance and Socially Responsible Investment

Future of Islamic Finance

Future of Islamic Finance
Dr. Mohammad Nejatullah Siddiqi
Presented at the conference on: Leadership in Global Finance-the Emerging Islamic Horizon, organized by INCEIF
August, 2007

"Before I proceed to talk about Islamic finance in some detail, I must caution against a possible misunderstanding. The shift from individualistic amoral capitalism towards a morally oriented, socially conscious and consulting approach to economic activity that I am envisaging would not and should not come at the cost of freedom. It is not to be imposed from above by the Social Authority. I am not for dirigisme. I envisage internalization of moral values leading to a quest for balance. I also believe the ground for such internalization is prepared by spirituality."

Future of Islamic Finance

Islamic Finance in Europe

Islamic Finance in Europe
Robert Schuman Center for Advanced Studies
RSCAS Policy Papers
Prof. Rodney Wilson
February 2007

Islamic Finance in Europe

Case Study: Islamic Banking in Bangladesh

Islamic Banking in Bangladesh: Achievements & Challenges
Abdul Awwal Sarker
IBTRA
2005

Abstract: "For a continued expansion of the Islamic Banking system, however, a number of issues that pose serious problems for Islamic banks will need to be carefully addressed. This paper discusses and makes recommendations on the more pertinent of these issues, viz., the development of an Inter-Bank Islamic Money Market, activation of Shariah Supervisory Boards, enactment of a full-fledged Islamic Banking Act, development of New Financial Products in line with the Islamic Shariah, and extension of investment in line with PLS framework, especially by constituting consortium or syndication by the Islamic banks. The paper suggests that micro, small, and medium enterprises (MSMEs) should get priority in the investment decisions of the Islamic banks."

Case Study: Islamic Banking in Bangladesh

Islamic Insurance and Reinsurance: Theory and Practice

Islamic Insurance and Reinsurance: Theory and Practice
Dr. Ahmed Salem Mulhim, PhD in Comparative Jurisprudence, Jordan University
Ahmed Mohammed Sabbagh, General Manager, The Islamic Insurance Company, Jordan
Al Baraka Center for Islamic Economics

Islamic Insurance and Reinsurance: Theory and Practice

ICM Quarterly Bulletin - June 2010

Malaysian ICM Quarterly Bulletin
Securities Commission Malaysia
June 2010 Vol. 5 No. 2

The latest issue of the Malaysian ICM quarterly bulletin is here, published by the Securities Commission Malaysia (SC).  Among the featured content you will find an interesting article on the Social Dimension of Islamic Finance as well as a piece on Sukuk best practices. This and previous issues of the bulletin are available on their online archive here.

ICM Quarterly Bulletin - June 2010

Islamic Banking and Its Potential Impact

Risk Management : Islamic Financial Policies

Islamic Banking and Its Potential Impact
Thomas A. Timberg
Nathan Associates, Inc.

"Indonesia, with the world’s largest population of Muslims, has come to Islamic or shariah banking fairly late. Many of Indonesia’s Muslim leaders do not believe that commercial interest in its modern form is prohibited, although others do. After some false starts, Islamic financial institutions are developing rapidly and have the enthusiastic support of many young people and intellectuals. The work of the Shariah Bureau of Bank Indonesia demonstrates that Indonesia, especially in particular parts of the country, has considerable unmet demand for Islamic banking."

Islamic Banking and Its Potential Impact

The Compatibility of Islamic Financial Services and Microfinance

The Compatibility of Islamic Financial Services and Microfinance: A Little-Explored Avenue for Expanding Outreach
By Dahlia El Hawary, Consultant, Financial Sector Operations and Policy Department, and
Wafik Grais, Senior Advisor, Financial Sector Vice Presidency
World Bank

The Compatibility of Islamic Financial Services and Microfinance

Islamic Finance: Overview and Policy Concerns

Islamic Finance: Overview and Policy Concerns
Congressional Research Service
Shayerah Ilias
February 2009

Islamic Finance: Overview and Policy Concerns

Islamic Finance News Needs to Catch Up

Islamic Finance News Needs to Catch Up
By Rushdi Siddiqui
September 12, 2010

"The act of turning a press release into an article, and keeping to the soft questioning of executives, does not benefit the industry."

Islamic Finance News Needs to Catch Up

Corporate Governance in Institutions Offering Islamic Financial Services

Corporate Governance in Institutions Offering Islamic Financial Services - Issues and Options
Wafik Grais and Matteo Pellegrini
World Bank

Abstract: "This paper reviews Institutions Offering Islamic Financial Services (IIFS) corporate governance (CG) challenges and suggests options to address them. It first points out the importance of CG for IIFS, where it would require a distinct treatment from convention CG and highlights three cases of distress of IIFS. It then dwells on prevailing CG arrangements addressing IIFS’ needs to ensure the consistency of their operations with Islamic finance principles and the protection of the financial interests of a stakeholders’ category, namely depositors holding unrestricted investment accounts. It raises the issues of independence, confidentiality, competence, consistency and disclosure that may bear on pronouncements of consistency with Islamic finance principles. It also discusses the agency problem of depositors holding unrestricted investment accounts. The paper argues for a governance framework that combines internal and external arrangements and relies significantly on transparency and disclosure of market relevant information."

Corporate Governance in Institutions Offering Islamic Financial Services

A Primer on Islamic Finance: Definitions, Sources, Principles and Methods

A Primer on Islamic Finance: Definitions, Sources, Principles and Methods
A. Gait and A. C. Worthington
University of Wollongong
Year 2007

"Islamic finance is one of the most rapidly growing segments of the global financial system. However, despite the increasing importance of Islamic finance, particularly in developing economies in the Middle East and South-East Asia, religious and social complexity has acted against a fuller understanding by regulators, policymakers, researchers and practitioners. This paper provides a succinct and accessible analysis of the definition, sources, principles and methods of Islamic finance. This serves as a suitable starting point for further work into Islamic finance and many of the pressing regulatory, supervisory and competitive issues that remain as yet unaddressed."

A Primer on Islamic Finance: Definitions, Sources, Principles and Methods

Opalesque Islamic Finance Intelligence - Eleventh Issue

Welcome to the eleventh issue of Opalesque Islamic Finance Intelligence (download PDF version), we bring together a wide range of content that we hope you will find both timely and relevant. This month's edition explores a recurring theme, that of crossovers and frictions that are generated between the worlds of Islamic finance and traditional finance. Recent events have only reminded us of this delicate balance. We might be tempted to think that Islamic finance operates on a standalone basis, alien to the mechanics of mainstream finance (and media) and immune to the ebbs and flows of capital markets (and public perception). However, the reality is that every bank, product and service in the former exists (and co-exists) in the realm of the latter. We explore the implications across this issue.

Our editorial note discusses the interactions between Muslims and non-Muslims in the Islamic finance industry, an often taboo subject but a blatantly obvious one. We also showcase the various published standards from the Islamic Financial Services Board (IFSB) in the Featured Resource segment, arguably the most transparent and comprehensive set of prudential documentation available for the industry.

The Featured Structure section sees Nikan scrutinizing structured products as they make the journey from the turbulent waters of traditional finance to the shores of Islamic finance, with a specific focus on rolled Murabaha contracts. Lex Islamicus profiles the study by Mohammed Khnifer on the bankruptcy proceedings relating to the East Cameron Gas sukuk and the sukuk-holders priority claim on the underlying assets post-default. In addition, Toby Birch and Shahzad Siddiqui share their analysis of integrating Islamic private equity with a physical commodity component in our Allocator Interview.

The Opinion Column welcomes Rushdi Siddiqui as he shares his point of view on the proposed Muslim community center in lower Manhattan. Furthermore, the Industry Snapshot section hears from Mobasher Zein as he has explores Islamic mutual funds and recent trends as the industry awakens from the aftermath of the global financial crisis.

As always, we are keen to hear your comments & suggestions and remember that you can visit our online archive (see reference link) for access to our ever-growing databank of Opalesque Islamic Finance Briefing as well as all of the back issues of Opalesque Islamic Finance Intelligence.

Download the complete issue of Opalesque Islamic Finance Intelligence here.

Alternatively you can read each article separately in the OIFI Archive:
Editor’s Note: The Conquest of Kafiristan
Featured Resource: IFSB - Published Standards
Featured Structure: Shariah Compliant Structured Product: Consecutive or Rolled Murabaha
Lex Islamicus: When Sukuk Default - Asset Priority of Certificate-holders vis a vis Creditors
Allocator Interview: Gold Bullion and Islamic Private Equity: Protection and Production
Opinion Column: From a Mosque to a Museum
Industry Snapshot: A Study of Islamic Mutual Funds

Opalesque Islamic Finance Intelligence - Eleventh Issue

Meeting fatigue in Islamic finance

Meeting fatigue in Islamic finance
By Rushdi Siddiqui
August 29, 2010

"One of the silver linings from the dark cloud of the credit crisis is, thankfully, fewer Islamic finance conferences..."

Meeting fatigue in Islamic finance

Towards a Theory of Islamic Financial Reporting

Towards a Theory of Islamic Financial Reporting
Anaf Masood, The Boston Consulting Group and
Mohammad Iqbal Tahir, GIFT Business School
January 2008

"This paper has two major streams. It seeks to devise an entity that will allow Muslims to raise the necessary finance to conduct large-scale commerce. Simultaneously, it presents ideas for a reporting scheme that suits this new structure. The need for a connection between the business form and its disclosure scheme is illustrated by reviewing the results of the attempts by the Accounting and Auditing Organization for Islamic Financials Institutions (AAOIFI) at setting accounting standards for a Mudaraba, a uniquely Islamic enterprise. The position of the Western corporation in Islamic law is then examined. It is found that Islam can only accept a separate legal entity that has unlimited liability. To overcome this constraint, a corporate structure that primarily channels investment through Islamic financial institutions is proposed.

The paper also identifies the quality and type of disclosures that any Islamic entity will need to make and then applies these criteria to create a reporting system for the proposed Islamic company. Among the central requirements, apart from financial information, are Zakat and Shariah compliance. It is pointed out in the paper that the proposed Islamic structure promotes a scheme of shareholder-regulated disclosure that can be used to achieve the necessary reporting standards. Even Shariah compliance can be handled for the most part internally through the Islamic bank's Shariah Supervisory Boards. It is, however, felt that Zakat is best policed by an independent agency, which would selectively audit returns submitted by the company. This method also has the advantage of accommodating the as yet unresolved difference about whether Zakat is a personal obligation or one owed by the corporate entity. Through the ideas contained in this paper, Muslims should be able to share in the benefits of modern, large-scale commerce without having to compromise their religious teachings."

Towards a Theory of Islamic Financial Reporting

Islamic Banking: How Has it Diffused?

Islamic Banking: How Has it Diffused?
IMF Working Paper - African Department
Imam, Patrick A. and Kpodar, Kangni
August 2010

Summary: "This paper investigates the determinants of the pattern of Islamic bank diffusion around the world using country-level data for 1992 - 2006. The analysis illustrates that income per capita, share of Muslims in the population and status as an oil producer are linked to the development of Islamic banking, as are economic integration with Middle Eastern countries and proximity to Islamic financial centers. Interest rates have a negative impact on Islamic banking, reflecting the implicit benchmark for Islamic banks. The quality of institutions does not matter, probably because the often higher hurdle set by Shariah law trumps the quality of local institutions in most countries. The 9/11 attacks were not important to the diffusion of Islamic banking; but they coincided with rising oil prices, which are a significant factor in the diffusion of Islamic banking. Islamic banks also appear to be complements to, rather than substitutes for, conventional banks."

Islamic Banking: How Has it Diffused?

London – the European hub for Islamic finance

London – the European hub for Islamic finance
by Gillian Walmsley
London Stock Exchange

"As the profile of Islamic finance continues to grow and with current market conditions highlighting the resilience of some features of the Islamic market model, several financial centres are becoming alive to the possibilities for fostering Islamic finance and attracting new investors to their markets".

London – the European hub for Islamic finance

Analysis of Stock Screening Principles in Islamic Mutual Funds Industry

Analysis of Stock Screening Principles in Islamic Mutual Funds Industry
Salman Ahmed Shaikh MS
Lecturer, University of East, Pakistan
January 2010

"There are certain principles that need to be followed to become shariah compliant. This paper will discuss how a company can become a shariah compliant KMI-30 company by using economic models and established deductive knowledge in Economic, Finance and Portfolio theory".

Analysis of Stock Screening Principles in Islamic Mutual Funds Industry

Islamic Banking and Finance: Fundamentals and Contemporary Issues

Islamic Banking and Finance: Fundamentals and Contemporary Issues
IRTI Seminar Proceedings
Salman Syed Ali, Ausaf Ahmad
2007

The paper "deals with the fundamentals of and the issues faced by Islamic finance at the theoretical level. It addresses various contemporary issues empirically and discusses some legal issues in the practice of Islamic banking and finance."

Islamic Banking and Finance: Fundamentals and Contemporary Issues

Islamic Finance: Growth and Prospects in Singapore

Islamic Finance: Growth and Prospects in Singapore
Habibullah Khan & Omar K. M. R. Bashar
U21Global
June 2008

Abstract: "Islamic finance has been growing rapidly since its launch in the 1970s. The major market for this industry is typically the Middle East and it is gaining popularity in the UK, USA and Southeast Asia. Malaysia is the leading Islamic finance industry in Southeast Asia while its neighbor Singapore is relatively a new market player. Singapore revised its regulatory framework and tax structure and gradually introduced various Shariah-compliant financial products in the last couple of years. This paper argues that despite having small domestic market and competition from Malaysia, Singapore can still position itself in a niche market in the region. Through its strategy of integrated financial and economic development, Singapore can create new opportunities for Islamic finance and related financial products in the region."

Islamic Finance: Growth and Prospects in Singapore

Case Study: Pilgrims Management & Fund Board

Towards Islamic Banking: A Case Study of Pilgrims Management & Fund Board, Malaysia
Khalid Rahman
Director Institute of Policy Studies
Islamabad, Pakistan

"Experiments have been undertaken all over the world and may prove helpful in overcoming our inhibition after removing unjustified apprehensions. The task has become all the more important particularly in the context of recent Supreme Court Shariat Appellate Bench Judgment since this will help make a whole hearted beginning. This, however, requires studying in detail the institutions claiming to be operating on interest-free basis, focusing particularly on the level of success they have achieved, compatibility with Shari’ah in their working and impact on society."

Case Study: Pilgrims Management & Fund Board

The Changing Face of Islamic Banking

The Changing Face of Islamic Banking
by Professor Sudin Haron
KLBS - Working Paper Series 011
November 2007

Abstract: "more and more parties have joined the bandwagon including non-Muslim institutions. This development has created a new dimension in Islamic banking system. Initially, Islamic banks were seen as institutions that operate based on religious doctrine. Today, many proponents believed that this doctrine is no longer applied by Islamic financial institutions. Majority appears to regard Islamic bank as a normal business entity with a profit maximization principle."

The Changing Face of Islamic Banking

Can Banks Survive without Interest?

Can Banks Survive without Interest?
By Muhammad Ayub
Senior Joint Director, Islamic Banking Department
State Bank of Pakistan, Karachi

Can Banks Survive without Interest?

Derivatives in Islamic Finance

Derivatives in Islamic Finance
Andreas A. Jobst
International Monetary Fund (IMF) - Monetary and Capital Markets Department (MCM)
Islamic Economic Studies, Vol. 15, No. 1
August 2007

Abstract: Despite their importance for financial sector development, derivatives are few and far between in countries where the compatibility of capital market transactions with Islamic law requires the development of shariah-compliant structures. Islamic finance is governed by the shariah, which bans speculation, but stipulates that income must be derived as profits from shared business risk rather than interest or guaranteed return. This paper explains the fundamental legal principles of Islamic finance, which includes the presentation of a valuation model that helps illustrate the shariah-compliant synthetication of conventional finance through an implicit derivative arrangement. Based on the current use of accepted risk transfer mechanisms in Islamic structured finance, the paper explore the validity of derivatives from an Islamic legal point of view and summarizes the key objections of shariah scholars that challenge the permissibility of derivatives under Islamic law. In conclusion, the paper delivers suggestions for shariah compliance of derivatives.

Derivatives in Islamic Finance

Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari'ah

Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari'ah
Eddy Yusof, Ezry Fahmy, Kashoogie, Jhordy and Anwar Kamal, Asim

International Islamic University Malaysia (IIUM)
April 2009

Abstract: "A hot topic among Islamic economists is the debt versus equity debate. Which of the two are more in line with justice and equality? Which of them is more productive in fulfilling the greater objectives of the Shariah? This paper is divided into sections. After the introduction, it is followed by problem statement as well as objective of the study. After that, section 4 briefs the research questions for answering the analysis in this paper. Section 5 deals with discussion obtained from literature review whichhighlights important issues regarding Maqasid Al-Shari’ah in term of justice and equality vis-àvis the current practice as well as ideal model of Islamic banking and finance. Finally, this paper ends up with conclusion."

Islamic Finance: Debt versus Equity Financing in the Light of Maqasid al-Shari'ah

Commodity murabaha: does it violate Islamic norms? Note

Commodity murabaha: does it violate Islamic norms? Note
Hasan, Zubair (November 2008)
INCEIF

Abstract: "Recently commodity murabaha has run into disrepute due to court decisions going against the use of this instrument in Islamic banks. This brief note argues that at fault has been the structure of contracts and the excessive use of the instrument. In principle, commodity murabaha is doubtless rooted deep in the Islamic Shari’ah."

Commodity murabaha: does it violate Islamic norms? Note

Opalesque Islamic Finance Intelligence - Tenth Issue

Islamic finance is riddled with dichotomies, it is almost natural to approach it in terms of good and bad, right and wrong, halal and haram. The reality however is sometimes not as clear cut, and we explore many of these dichotomies (and some of the ensuing gray areas) in this the tenth issue of Opalesque Islamic Finance Intelligence (download the PDF version). To start off our editorial note surveys a variety of research taken from the conventional finance world and how this relates to Islamic finance. This is promptly followed by our Featured Resource, which lists several of these academic studies.

We welcome Mohammed Amin in our Featured Structure section as he shares a descriptive analysis of takaful and how it differs with conventional insurance. Similarly, Lex Islamicus hears from Marjan Muhammad and Hakimah Yaacob, from the International Shari’ah Research Academy (ISRA), as they scrutinize the application of Ibra' and whether it should remain discretionary or mandatory in contractual agreements.

The Kulliyyah Korner profiles the work from Mobasher Zein as he has explored various areas of Islamic finance (from sukuk to hedge funds), whereas Joy Abdullah provides food for thought in the Islamic Window segment by looking into how Islamic values can be brought into the branding of Islamic banks and their products.

Blake Goud takes on our Opinion Column with his analysis of the recent publication by Zaid Ibrahim & Co entitled "Demystifying Islamic Finance" and the various issues that this publications tackles. Last but not least, our Industry Snapshot section has Omar Clark Fisher delving into corporate governance issues faced by the takaful industry.

As always, we are keen to hear your comments & suggestions and remember that you can visit our online archive (see reference link) for access to our ever-growing databank of Opalesque Islamic Finance Briefing as well as all of the back issues of Opalesque Islamic Finance Intelligence.

Download the complete issue of Opalesque Islamic Finance Intelligence here.

Alternatively you can read each article separately in the OIFI Archive:
Editor’s Note: Conventional Wisdom
Featured Resource: Conventional Wisdom - ESG/SRI Research
Featured Structure: How Conventional Insurance and Takaful Differ Numerically
Lex Islamicus: Ibra’: Should it be Discreationary?
Kulliyyah Korner: A Study of Islamic Finance: Searching for a New Path
The Islamic Window: Young but Disconnected
Industry Snapshot: Alignment of Corporate Governance and Company Performance: A Focus on Takaful
Opinion Column: Zaid Ibrahim Report on Islamic Finance

Opalesque Islamic Finance Intelligence - Tenth Issue

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers
Dr. Rusni & Reasearch team
ISRA Research Paper (No. 18/2010)

Abstract: "IFSB’s Guiding Principles on Shari'ah Governance Systems for Institutions Offering Islamic Financial Services defines “Shari'ah governance system” as the set of institutional and organisational arrangements through which an institution offering Islamic financial services oversees Shari'ah compliance, i.e., that Islamic banking products and operations are in accord with Shari'ah principles. This requires the establishment of a Shari'ah advisory board. The Shari'ah governance of Islamic financial institutions (IFIs) in Malaysia consists of two components: the Shari'ah apex body, which is the Shari'ah Advisory Council (SAC) established by the Commission, and the Shari'ah advisors appointed by the respective institutions (Shari'ah Committees). Their roles are directing, reviewing, supervising and approving or rejecting the activities of IFIs in order to ensure compliance with Shari'ah rules and principles. The extent to which Islamic banks comply with Shari'ah principles is, to a great extent, determined by the role of such boards. Consequently, this body needs sufficient authority to enable its members to perform their functions effectively. However, many issues have arisen about the role and competency of Shari'ah advisors. This research aims to examine the current practice of Shari'ah advisory in Malaysia from the perspectives of advisors, bankers and regulators. The research focuses on the roles and functions practically played by the Shari'ah advisors and the IFIs’ expectations of them. Problems faced by the Shari'ah advisors, bankers and regulators need to be specifically identified so that measures to bridge the gaps between them may be proposed. This will ensure a harmonious relationship between all stakeholders as well as ensuring that the dayto-day running of IFIs will be compliant with Islamic law."

An Analysis of the Role and Competency of the Shari'ah Committees (SCs) of Islamic Banks and Financial Service Providers

Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions

Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions (BNM GPS1)

Bank Negara Malaysia
December 2004

These Guidelines aim at achieving the following:
(a) to set out the rules, regulations and procedures in the establishment of a Shariah Committee;
(b) to define the role, scope of duties and responsibilities of a Shariah Committee; and
(c) to define relationship and working arrangement between a Shariah Committee and the SAC of Bank Negara Malaysia.

Guidelines on the Governance of Shariah Committee for the Islamic Financial Institutions

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context
Gianfranco Forte, Bocconi University
Federica Miglietta, Bocconi University
August 2007

Abstract: "Defining social investing and its boundaries is a challenging task. Since the religious beginning of ethical investments, many overlapping investment styles have been grouped into the bucket of socially responsible investments, or SRI. This includes, for instance, faith-based investments. In this paper we study the underlying principles of SRI and Islamic funds as investment classes, and try to determine whether Islamic mutual funds, as faith-based investments, can be included into the category of socially responsible mutual funds, or if they exhibit distinguishing characteristics that indicate that they would be more fittingly grouped in a separate investment family. We address the question from both a qualitative and quantitative point of view. Comparing ideas, ratios and investment styles underlying SRI and comparing them to Islamic portfolios, we identify the potential inconsistencies related to some of the investment decisions. Together with a qualitative assessment of the differences and similarities, we discuss, in the quantitative section of our study, the different sector and country composition of two generic portfolios, SRI and Islamic (proxied by relevant European indices), derived from the application of the investment screens. In addition, through a cointegration analysis on FTSE indices, we show that FTSE Islamic, exhibits peculiar and interesting portfolios' differences in terms of econometric profile, compared to conventional and SRI indices. This paper attempts to unify the studies regarding SRI, with the available studies on Islamic investments. To the best of authors' knowledge, this is the first time that SRI and Islamic indices are analysed and compared."

Islamic Mutual Funds as Faith-Based Funds in a Socially Responsible Context