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

Internationalization of Islamic Financial Institutions: Challenges and Paths to Solution

Internationalization of Islamic Financial Institutions: Challenges and Paths to Solution
Samy Nathan Garas
Al Baraka Center for Islamic Economics

Abstract: "The Islamic Financial Institutions (IFIs) have witnessed a significant growth recently and become a new player in banking industry. As IFIs move towards the international markets, they confront several challenges on internal and external levels. Internally, IFIs still have limited recognition by investors, marginal contribution to the macro economy and limited customer service. Externally, IFIs have lack of communication with other players in the financial markets. Their products are not totally promoted to the international investors and their system is not completely regulated and recognized by central banks. This paper will address these challenges and provide a conceptual framework of solutions."

Internationalization of Islamic Financial Institutions: Challenges and Paths to Solution

The Nature of Infaq and its Effects on Distribution of Wealth

The Nature of Infaq and its Effects on Distribution of Wealth
Aziz, Farooq, Mahmud, Muhammad and Karim, Emadul (December 2008)
Federal Urdu University of Arts, Science and Technology,
Karachi Campus, Karachi, Pakistan, Khadam Ali Shah
Bukhari Institute of Technology (KASBIT)

Abstract: "Infaq is one of the basic terms of Quran, which is used in Quran, at almost sixty places. It is basically pious spending in the way of Allah. It has a significant importance in Islamic economic principles, with reference to redistribution of wealth and elimination of poverty. At different places Quran has described its different aspects, e.g. its need, conditions, ways and monetary and non monetary results. It is used by holy prophet, Peace be upon him (P.B.U.H) at different occasions to fulfill the needs of individuals and society as well. In order to ensure the better distribution of wealth which is the need of time, it is necessary to follow the orders of Infaq as given in Quran, and also the guidelines provided by holy prophet P.B.U.H., therefore, the basic objective of this paper is to analyze the role of these spending particularly infaq as a tool of equitable income distribution in an Islamic society."

The Nature of Infaq and its Effects on Distribution of Wealth

Case Study: Farmers Commercial Bank

Risk Management: Islamic Financial Policies
Case Study of Farmers’ Commercial Bank

Ahmed Gaber

Farmer’s Commercial Bank

Case Study: Farmers Commercial Bank

Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead

Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead
IMF - Monetary and Exchange Affairs Department
V. Sundararajan and Luca Errico
2002

Summary: "The provision and use of financial services and products that conform to Islamic religious principles pose special challenges for the identification, measurement, monitoring, and control of underlying risks. Effective and efficient risk management in Islamic financial institutions has assumed particular importance as they endeavor to cope with the challenges of globalization. This requires the development of not only a more suitable regulatory framework, but also new financial instruments and institutional arrangements to provide an enabling operational environment for Islamic finance. The recent establishment of the Islamic Financial Services Board, facilitated by the IMF, addresses these needs."

Islamic Financial Institutions and Products in the Global Financial System: Key Issues in Risk Management and Challenges Ahead

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

by Professor Sudin Haron and Dr Wan Nusofiza Wan Azmi

KLBS - Working Paper Series 007

June 2005

Determinants of Islamic and Conventional Deposits in the Malaysian Banking System

Interest, Mark up and Time Value of Money

Interest, Mark up and Time Value of Money
By Muhammad Ayub
Senior Joint Director, Islamic Banking Department
State Bank of Pakistan, Karachi

Interest, Mark up and Time Value of Money

A Capital Adequacy Framework for Islamic Banks

A Capital Adequacy Framework for Islamic Banks: The Need to Reconcile Depositors’ Risk Aversion With Managers’ Risk Taking
Dadang Muljawan, Research Economist, Bank Indonesia
Humayon A. Dar, Lecturer, Department of Economics, Loughborough University, Loughborough, UK
Maximilian J.B. Hall, Professor, Department of Economics, Loughborough University, Loughborough, UK

Abstract: "This paper combines modern banking theory and principal-agent analysis to develop a framework for an optimal capital structure for Islamic banks. The proposed capital regulation includes a minimum risk-based equity capital cushion [as required under the Basel Accord], a prudent assets-liabilities [capital] structure [i.e. appropriate proportions of PLS- and non-PLS-based assets and liabilities] and a minimum ‘financial participation’ requirement."

A Capital Adequacy Framework for Islamic Banks

A Note on Sukuk and their role in Islamic Finance

A Note on Sukuk and their role in Islamic Finance
Dr. Mohammad Nejatullah Siddiqi
LSE/HIFP Seminar
February 2008

"This note argues that distancing sukuk from debt is necessary to make them free of riba and elements of maysir (gambling). This can be done by making sukuk based on real assets to the exclusion of murabaha receivables. It also requires doing away with the commitment to redeeming sukuk at their original price on expiry of their term. These steps may save Islamic finance from contributing to the trend towards inequity and instability germane to conventional debt based financial system. Oil rich Muslim countries issuing sukuk should especially avoid financial products likely to further worsen the distribution of income and add to popular discontent."

A Note on Sukuk and their role in Islamic Finance

Islamic Finance - Luxembourg

New Arendt & Medernach publication on Islamic finance

Islamic finance has been one of the driving forces of the development of Luxembourg for a long time. Indeed, as early as in 1983, Luxembourg became the domicile of the first Shari'ah-compliant insurance company in Europe. The Luxembourg Stock Exchange played a leading role as the first European Stock exchange to enter the sukuk market in 2002. Luxembourg has a long experience in the Islamic finance field and there is a clear and strong willingness from market participants and authorities to further support the development of this activity.

Islamic Finance - Luxembourg

Review on Sukuk Researches: Where are We Now?

Review on Sukuk Researches: Where are We Now?
Dodik Siswantoro
Faculty of Economics
University of Indonesia

Abstract: "The development sukuk has been growing so fast for the last couple years since the first issuance in Malaysia in the early 1990s, known as Islamic Private Debt Securities (IPDS). However, in Indonesia, sukuk just issued in 2001 by PT Indosat Tbk, a telecommunication company based on mudharabah basis. Then, it followed by others which are dominantly in the form of ijarah (leasing) basis. But, the government Islamic bond or sukuk offered lately in 2008, this may be caused by unavailability of supporting regulations such as the difference of common and civil laws. This paper tries to identify some researches in sukuk. It identifies some approaches and methodologies in each research, such as qualitative and quantitative method, and then grouped into specific topics. However, researches are in qualitative and quantitative approaches in almost equal. Constraints found are due to lack of available data, existing unresolved discussions in conceptual background and unsystematic recording researches such as lack of refereed and regular journals."

Review on Sukuk Researches: Where are We Now?