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A few of the resources that you can find in this site:
- Funds@Work: Network Analysis Among Sharia Scholars v 4.0
- ISRA: Islamic Finance Knowledge Repository
- IFSB-IRTI-IDB Islamic Finance and Global Stability Report
- Sukuk Reports: I, II, III, and IV
Much more available under 'Industry Reports' and 'Academic Papers' (right hand side menus)

Islamic Finance in the News

Islamic Markets on Twitter


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!



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."

IRTI Research Papers
Mohammed Obaidullah



Present Scenario and Future Potentials of Takaful

A few inquiries from our Linkedin Takaful subgroup have highlighted the need for more specific metrics on Takaful (as well as more background information such as country specific data and substantiated growth projections).

This is a brief overview and we will endeavour to followup with the various Takaful models that are currently used in the market.

Present Scenario and Future Potentials of Takaful
Kazi Md. Mortuza Ali
Prime Islami Life Insurance Limited, Bangladesh

Abstract: "The idea of having a Shariah based insurance system (Takaful) stems from the desire of the followers of Islam to conduct their affairs in day to day life according to the teachings of Islam and within the framework of Islamic law. Takaful is based on the concept of cooperation, brotherhood and solidarity of the members of the society who voluntarily agree to contribute money to support a common goal of providing mutual financial aid to the members of the group under certain terms and conditions. Takaful has emerged as a complementary and supportive system of Islamic Banking movement throughout the world."


Case Study: Islamic Banking in Jordan

This is one of what we hope will be many country-specific papers that we will be featuring going forward. An array of global reports and statistics are available on Islamic finance but it seems equally sensible to tackle specific markets as well, not just to learn about their idiosyncracies but also to refine the understanding of some Islamic finance markets that tend to be over shadowed by other larger markets.

Islamic Banking Performance in the Middle East: A Case Study of Jordan
A. S. Saleh and R. Zeitun
Faculty of Commerce - Economics
University of Wollongong
October 2006

"The aim of this paper is to examine and analyse the Jordanian experience with Islamic banking, and in particular the experience for the first and second Islamic bank in the country, Jordan Islamic Bank for Finance and Investment (JIBFI), and Islamic International Arab Bank (IIAB) in order to evaluate the Islamic banks’ performance in the county. The paper goes further to shed some light on the domestic as well as global challenges, which are facing this sector."


Islamic Finance - Opportunity for Long Term Growth

Here is a recent paper from State Street which gives a brief introduction of Islamic finance but - most importantly - gives an overview of various key areas of development (funds, sukuk, takaful, new products, etc). It is also evidence of increased awareness from the part of conventional financial institutions from across the globe.

State Street - Vision Series
February 2009

Nice quote: "What makes Islamic finance uniquely different — and uniquely global — is the common bond that its Muslim customers share: their religion, whose moral lessons are shared through the teachings of the Koran, but whose legal principles and codes are governed by Shariah, or Islamic law ... While Shariah’s faith-based principles continue to hold strong appeal for Muslims, the pragmatic benefits arising from its application are becoming increasingly attractive to non-Muslims as well, particularly during the current economic crisis and the intense focus on risk management we are witnessing."



Binding Wa'd - Is it Permissible?

Here is some background information on wa'd as part of our Linkedin discussion, the reason we are highlighting this item is the fact that a variety of products/solutions are based on wa'd and we are bound to see more products coming into the market using this type of contract. The issue is mainly whether or not you can pay for a promise (or more broadly whether you can provide some type of consideration for a promise), since the wa'd in its simple form is no more than a unilateral promise.

The Binding Unilateral Promise (wa’d) in Islamic Banking Operations: Is it Permissible for a Unilateral Promise (wa’d) to be Binding as an Alternative to a Proscribed Contract?
Rafic Yunus Al-Masri
Assistant Professor, Islamic Economics Research Centre
Faculty of Economics, King Abdulaziz University
Jeddah – Saudi Arabia

Islamic Banks' Profitability in an Interest Rate Cycle

A couple of recent discussions in our Linkedin forum delved into the various risks faced by Islamic financial institutions and whether any of these would be specific and/or more concentrated due to the nature of their business model. Here is a short piece that - although outdated - provides a good starting point for exploring the issue further.

Islamic Banks' Profitability in an Interest Rate Cycle
Anouar Hassoune
International Journal of Islamic Financial Services (now IBF Review)
July - Sept 2002

Excerpts: "All in all, not only does Islamic banks’ profitability seem less volatile than that of conventional peers, but it is also higher on average, at least in the GCC region. These two elements are essential for assessing the soundness of Islamic banks’ financial profile and creditworthiness. Islamic banks thus seem less vulnerable to the cyclical nature of returns on assets and costs of liabilities."

"On the other hand, Islamic banks lose on the grounds of liquidity, assets and liabilities concentrations and operational efficiency what they tend to win in the field of profitability."



The Development of Islamic Finance in the GCC

A recent piece surveying the development of Islamic finance in the GCC, examining the extent to which government policy (i.e. legislation and regulation), has facilitated the development of the industry in the region. Governance systems are also looked at, especially the preferred self-governance approach that has been developed by Islamic financial institutions in the region.

The development of Islamic finance in the GCC
The Kuwait Programme on Development, Governance and Globalisation
Rodney Wilson, Durham University
May 2009


The view from Riyadh: Fictitious Murabaha

A short editorial piece (in Arabic) courtesy of Al-Eqtisadiah that collects a range of points of view regarding Murabaha structures. In particular, they explore the what they term factious/fictitious murabaha activities undertaken by brokers. It is followed by an interview with Aznan Hasan on the same issue.


Introducing Islamic Banks into Conventional Banking Systems

Here is an interesting piece from the IMF that outlines the different approaches by which Islamic banking can develop in a country - this being relevant to markets which are not yet active. A few things to highlight, such as the discussion on Islamic windows and check pages 10-11 for a brief review of using tawarruq to transition from a conventional balance sheet to a Shariah compliant one. Most importantly, the role of regulators and/or supervisory agencies is discussed in later sections of the paper.

Introducing Islamic Banks into Conventional Banking Systems
Juan Solé
IMF Working Paper
Monetary and Capital Markets Department
July 2007

Abstract: "Over the last decade, Islamic banking has experienced global growth rates of 10-15 percent per annum, and has been moving into an increasing number of conventional financial systems at such a rapid pace that Islamic financial institutions are present today in over 51 countries. Despite this consistent growth, many supervisory authorities and finance practitioners remain unfamiliar with the process by which Islamic banks are introduced into a conventional system. This paper attempts to shed some light in this area by describing the main phases in the process, and by flagging some of the main challenges that countries will face as Islamic banking develops alongside conventional institutions."



Paper: A Shariah Compliant Proposal for Equity Risk Management

Value Preservation through Risk Management
Bacha, Obiyathulla/I
Management Center
Kulliyyah of Economics & Management Sciences
International Islamic University Malaysia

With thanks to Charles Stromeyer for highlighting the paper.


Paper: Shariah Compatible Futures

Sharia Compatible Futures

Abdul Rahim Al-Saati
Associate Professor
Economics Department
King Abdulaziz University
Jeddah – Saudi Arabia

With thanks to Charles Stromeyer for highlighting the paper.



Opalesque Islamic Finance Intelligence - Second Issue

Dear All,

First of all we would like to extend our sincere gratitude for the warm reception and the extensive feedback received following the first edition of Opalesque Islamic Finance Intelligence (OIFI).

Our maiden issue (available here) saw OIFI building a readership of well over 2,000 and this only solidifies our commitment to explore industry-specific content, encourage critical discussions and lively interaction. All of which we resume in this our second installment, where we explore the specifics of Shariah scholars and Shariah boards.

It is the most essential question for practitioners and non-practitioners alike: how do you achieve Shariah compliance? While there is no clear cut answer we run through a Shariah Compliance Toolkit that delves into the mechanics of engaging Shariah advisors, the existing business models, procedures & timelines, agency & monetary costs, as well as some recent developments.

Our Featured Resource section sheds further light on various Fatwa databases and search engines that are useful in specific areas of research.

In this issue, we explore how the manufacturing process has fared in this regard in the Featured Structure section, highlighting some of the recent entries into the landscape of Islamic products (such as CPPI vehicles and other structured notes).

We further focus the attention on the perspective of the boutique (or more specifically the perspective of a non-Islamic financial institution) as it pertains to creating and developing solutions. Our Allocator Interview examines the experience of Amiri Capital in putting together a Shariah compliant platform and the challenges faced in bringing products to market.

While we have dissected exotics, even the most vanilla of contracts isn’t exempt from scrutiny, as we look at the intricacies of modern murabaha contracts in the Lexicus Islamicus column. Moreover, differing opinions on this and other instruments have reignited the debate of whether Shariah boards (and their approval process) should rest within financial institutions or at the country level, with the Discussion Board opening the floor to industry voices.

Finally, from these various inputs we probe the outputs as well - surveying the bad habits of Islamic fund managers in our Industry Snapshot section.

Once again we welcome your comments & suggestions, and please check the archive of Opalesque Islamic Finance Briefing which is now available online here providing a free historical data bank of industry news (over 3,300 articles) as well as back issues of OIFI. It's all there, it's all free.

New subscribers can set up their Opalesque subscriptions here.