Islamic Finance: Instruments and Markets PDF
Preview Islamic Finance: Instruments and Markets
ISLAMIC FINANCE INSTRUMENTS AND MARKETS This page intentionally left blank ISLAMIC FINANCE INSTRUMENTS AND MARKETS Copyright © Bloomsbury Information Ltd, 2010 First published in 2010 by Bloomsbury Information Ltd 36 Soho Square London W1D 3QY United Kingdom All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted by any means, electronic, mechanical, photocopying, or otherwise, without the prior written permission of the publisher. The information contained in this book is for general information purposes only. It does not constitute investment, fnancial, legal, or other advice, and should not be relied upon as such. No representation or warranty, express or implied, is made as to the accuracy or completeness of the contents. The publisher and the authors disclaim any warranty or liability for actions taken (or not taken) on the basis of information contained herein. The views and opinions of the publisher may not necessarily coincide with some of the views and opinions expressed in this book, which are entirely those of the authors. No endorsement of them by the publisher should be inferred. Every reasonable effort has been made to trace copyright holders of material reproduced in this book, but if any have been inadvertently overlooked then the publisher would be glad to hear from them. A CIP record for this book is available from the British Library. Standard edition Middle East edition ISBN-10: 1-84930-017-8 ISBN-10: -84930-018-6 ISBN-13: 978-1-84930-017-9 ISBN-13: 978-1-84930-018-6 This book is produced using paper that is made from wood grown in managed, sustainable forests. It is natural, renewable and recyclable. The logging and manufacturing processes conform to the environmental regulations of the country of origin. Project Director: Conrad Gardner Project Manager: Ben Hickling Assistant Project Manager: Sarah Latham Cover design by Suna Cristall Page design by Fiona Pike, Pike Design, Winchester, UK Typeset by Special Edition Prepress Services, London Printed in the UK by CPI William Clowes, Beccles, NR34 7TL Contents Contributors vii Best Practice—Instruments 1 Viewpoint: Shariah Law—Bringing a New Ethical Dimension to Banking Amjid Ali 3 Islamic Modes of Finance and the Role of Sukuk Abdel-Rahman Yousri Ahmad 7 Introduction to Islamic Financial Risk Management Products Qudeer Latif and Susi Crawford 11 Islamic Insurance Markets and the Structure of Takaful Suzanne White 17 Identifying the Main Regulatory Challenges for Islamic Finance Bilal Rasul 21 Islamic Microfnance: Fulflling Social and Developmental Expectations Mehmet Asutay 25 Risk Management of Islamic Finance Instruments Andreas Jobst 31 Sukuk Issuance and Issues in Purchase Undertakings Barry Cosgrave 39 Auditing Islamic Financial Institutions Roszaini Haniffa 45 Islamic Finance Litigation Kilian Bälz 49 Best Practice—Markets 55 Islamic Capital Markets: The Role of Sukuk Rodney Wilson 57 Capital Adequacy Requirements for Islamic Financial Institutions: Key Issues Edib Smolo and M. Kabir Hassan 61 The International Role of Islamic Finance Andreas Jobst 67 Investment Risk in Islamic Finance Kamal Abdelkarim Hassan and Hassan Ahmed Yusuf 73 Middle East and North Africa Region: Financial Sector and Integration Samy Ben Naceur and Chiraz Labidi 79 Managing Shariah-Compliant Portfolios: The Challenges, the Process, and the Opportunities John A. Sandwick 85 Small and Medium-Sized Enterprises and Risk in the Gulf Cooperation Council Countries: Managing Risk and Boosting Proft Omar Fisher 95 Bankruptcy Resolution and Investor Protection in Sukuk Markets Kamal Abdelkarim Hassan and Muhamad Kholid 101 Procedures for Reporting Financial Risk in Islamic Finance Daud Vicary Abdullah and Ramesh Pillai 109 The Emergence and Development of Islamic Banking Umar Oseni and M. Kabir Hassan 113 Islamic Finance and the Global Financial Crisis Bilal Rasul 119 Checklists—Instruments 123 Alternatives to Riba in Islamic Finance 125 Key Islamic Banking Instruments and How They Work 127 Key Principles of Islamic Finance 129 Murabahah Sale Instruments and Their Applications 131 An Overview of Shariah-Compliant Funds 133 Possibilities for Shariah-Compliant Derivatives 135 The Role of the Shariah Advisory Board in Islamic Finance 137 Sukuk: Islamic Bonds 139 Takaful Insurance 141 Checklists—Markets 143 Business Ethics in Islamic Finance 145 Islamic Commercial Law 147 Islamic Equity Funds 149 Islamic Joint Ventures 151 v Contents QFinance Islamic Finance: Instruments and Markets Islamic Law of Contracts 153 Islamic Microfnance 155 Managing Risk in Islamic Finance 157 Regulatory and Capital Issues under Shariah Law 159 Country Profles 161 Shariah Law: An International Perspective 163 Algeria 167 Bahrain 169 Bangladesh 171 Brunei 173 Egypt 175 Indonesia 177 Iran 179 Iraq 181 Israel and the Palestinian Territories 183 Jordan 185 Kuwait 187 Lebanon 189 Libya 191 Malaysia 193 Morocco 195 Pakistan 197 Qatar 199 Saudi Arabia 201 Syria 203 United Arab Emirates 205 Information Sources 207 Books 209 Magazines 216 Journals 218 Internet 219 Organizations 221 Index 225 vi QFinance Contents Contributors Amjid Ali, senior manager at HSBC Amanah main areas of academic research cover account- Global is recognized as one of the most infu- ing, fnancial structure, corporate valuation, and ential Muslims in the United Kingdom by the economics, with particular emphasis on Middle Muslim Power 100 awards, and has 22 years of Eastern and North African fnancial markets. branch banking experience with Midland Bank and HSBC in the United Kingdom. He joined Barry Cosgrave is an associate in the fnance HSBC Amanah UK in 2003 as senior business practice of Vinson & Elkins LLP. His principal development manager, and took over as UK head area of practice is Islamic fnance. He has expe- in January 2005 with responsibility for strategy, rience of the structuring and documentation of distribution, and sales. He was appointed as sen- sukuk offerings and Islamic bilateral facilities. ior manager, HSBC Amanah Global, in August Cosgrave also has experience in the structur- 2008, where he works as part of the HSBC ing and documentation of shariah-compliant Amanah central team headquartered in Dubai. derivatives products for clients in the Middle East and South East Asia, and has spent time on Mehmet Asutay is senior lecturer in Middle secondment assisting the Islamic fnance team East and Islamic political economy and fnance at a large international fnancial institution that at the School of Government and International has offces in the Middle East. Affairs, Durham University. He teaches and supervises masters and doctoral research on Susi Crawford is a senior associate in C lifford various aspects of Islamic economics, banking, Chance’s fnance practice. She has worked on and fnance; economies of the Middle East and a number of projects, project fnancings, and Muslim countries; and political economy and fnancings in Europe and the Middle East and economic development related subjects. He is specializes in Islamic fnance. She advised on a co-director of the Durham Islamic Finance the frst ever shariah-compliant swap to use P rogramme and course director of the MA/MSc the wa’ad structure and continues to advise a in Islamic fnance at the Durham Islamic fnance number of fnancial institutions on this struc- summer school. He is managing editor of the ture. In addition to her structured fnance prac- Review of Islamic Economics, and a ssociate tice, she has been the lead associate on a number e ditor of the American Journal of Islamic Social of signifcant Islamic fnance transactions and Sciences. He has published articles and books continues to work on Islamic fnance transac- on Islamic moral economy and fnance, and on tions that use new and innovative structures. issues in Turkish and Middle Eastern political economy. Omar Fisher is managing director of Khidr Solutions, an advisory service concentrating on Kilian Bälz is a partner of Amereller Legal takaful (Islamic insurance), Islamic fnance, and Consultants, a specialist law frm focusing on the risk management. He was a founding member MENA region, with offces in Cairo, D amascus, and managing director of Unicorn Investment Dubai, Baghdad, and Erbil, in addition to Bank of Bahrain from 2004 until 2008 and pre- Munich and Berlin. Based in the frm’s Cairo viously deputy head of Takaful Taawuni at Bank offce, he advises international and regional Al Jazira, where he launched the frst family fnancial institutions and corporations on M&A (life) takaful business in Saudi Arabia. He also and fnancing transactions in the region, also established the frst commercial/general taka- including shariah-compliant transactions. A ful business in the United States. He is author former partner in Gleiss Lutz, he was involved of numerous books and articles on cross-border in some of the frst Islamic transactions in con- fnancing, hedging political risks, Islamic leas- tinental Europe. ing, and takaful. Dr Fisher was awarded a PhD jointly by the International Islamic University Samy Ben Naceur is associate professor of of Malaysia and Camden University of Delaware fnance at ESSEC Tunis. He is a consultant (USA) for research on operational and fnancial in fnance and economics and has previously performance characteristics of takaful compa- worked with the Economic Research Forum, nies in the GCC states. He is an advisor to the the European Union, and the World Bank. He International Council of Mutual/Cooperative was previously associate professor of fnance at Insurers (UK) and a board member of Family Bouabdelli University, Tunisia. Ben Naceur’s Bank, an Islamic microfnance bank licensed vii Contributors QFinance Islamic Finance: Instruments and Markets in Bahrain. The Hult International Business many private organizations and universities around School’s Dubai campus awarded Dr Fisher the world. Dr Hassan received a BA in econom- its frst Global Alumni Achievement award in ics and mathematics from G ustavus Adolphus August 2010. College, Minnesota, US, and a MA in economics and a PhD in fnance from the University of Roszaini Haniffa is professor of accounting Nebraska-Lincoln, US. He is now a professor in at the Bradford University School of Manage- the Department of Economics and Finance at ment, where she is also head of the accounting the University of New Orleans, Louisiana, USA. and fnance group. Prior to joining Bradford she He has more than 100 papers published in refe- taught at Exeter University, where she received reed academic journals to his credit. He is editor her PhD. She has also taught professional and of the Global Journal of Finance and Economics academic courses in accounting and fnance at and the Journal of Islamic Economics, Banking several higher education institutions in M alaysia. and Finance, and co-editor of the Journal of Her research interests focus on corporate gov- Economic Cooperation and Development. Dr ernance, voluntary disclosure, corporate social Hassan has edited and published many books and environmental reporting, auditing, business along with articles in refereed academic journals. ethics, international accounting, and the Islamic A frequent traveler, Dr Hassan gives lectures perspective on accounting. Professor Haniffa and workshops in the United States and abroad, is moderator and examiner for the Association and has presented more than 150 research of International Accountants and the Bahrain papers at professional conferences. Institute of Banking and Finance. She is also the joint editor of a newly launched specialist Andreas Jobst is an economist at the M onetary journal, the Journal of Islamic Accounting and and Capital Markets Department of the IMF in Business Research (JIABR) and is a member of Washington, DC. His work focuses on s tructured several other editorial boards. She was included fnance, risk management, sovereign debt in the Muslim Women Power List 2009 of the m anagement, fnancial regulation, and Islamic UK Equality and Human Rights Commission. fnance. As part of IMF missions, he has been responsible for the fnancial sector coverage of Kamal Abdelkarim Hassan is involved in Costa Rica, the Dominican Republic, G ermany, structured products as part of the Treasury, Honduras, India, Panama, Switzerland, and Financial Institutions and Debt Capital M arkets the United States. He previously worked at at Kuwait Finance House (Bahrain). He is the the F ederal Deposit Insurance Corporation, former director of technical development at D eutsche Bundesbank, the Center for Financial the Accounting and Auditing Organization for Studies in Frankfurt am Main, the European Islamic Financial Institutions (AAOIFI), the Central Bank, the Bank of England, the Comisión international self-regulatory organization for Económica para América Latina y el Caribe of the the Islamic fnance industry. Hassan has over 10 United Nations, Deutsche Bank, and the Boston years’ experience working in the Islamic fnance Consulting Group. Jobst holds a PhD in fnance industry. He holds a MBA in Islamic bank- from the London School of Economics. He has ing and fnance from the International Islamic published more than 20 articles in peer-reviewed University Malaysia and a BSc in economics journals and 10 book chapters. He is associate from the London School of Economics. He is a editor of the International Journal of Emerging sought-after speaker on Islamic fnance, having Markets and the Journal of Islamic and M iddle delivered presentations and lectures at various Eastern Finance. He is also one of the main international conferences. authors of the Global Financial Stability Report published by the Monetary and Capital Markets M. Kabir Hassan is a fnancial economist with Department of the IMF. consulting, research, and teaching experience in development fnance, money and capital mar- Muhamad Kholid is AVP product develop- kets, Islamic fnance, corporate fnance, invest- ment at PermataBank Syariah, a leading Indo- ment, monetary economics, macroeconomics, nesian Islamic banking arm of PT Permata Bank and international trade and fnance. He has pro- Tbk and Standard Chartered Saadiq. Having vided consulting services to the World Bank, graduated from the University of Indonesia, the International Monetary Fund, the Islamic majoring in industrial engineering, he continued Development Bank, the African Development his postgraduate study program at the Interna- Bank, USAID, the Government of Bangladesh, tional Islamic University Malaysia with a MBA the Organisation of the Islamic Conference, and specializing in Islamic banking and fnance. viii QFinance Contributors Contributors He also holds the professional qualifcation of He holds a bachelor degree in economics with Chartered Islamic Finance Professional (CIFP) accountancy from Loughborough University. A from INCEIF Malaysia. His past works, mainly member of the Institute of Chartered Account- on waqf, capital markets, and risk manage- ants in England and Wales and the Malaysian ment, have been presented at international con- Institute of Accountants, as well as a Certifed ferences on Islamic fnance. His work on waqf Risk Professional, Pillai was also a regional development and sukuk has been published in director for the Global Association of Risk Pro- the Awqaf Journal. fessionals and is one of the founding members of the Malaysian chapter of the P rofessional Risk Chiraz Labidi is assistant professor of fnance Managers International Association. at the College of Business and Economics, United Arab Emirates University in Al Ain. She Bilal Rasul is the registrar of modaraba was previously assistant professor of fnance at c ompanies and of the Modarabas, Securities IHEC Carthage. Her areas of academic research and Exchange Commission of Pakistan (SECP). cover international fnancial markets, emerging A British Council (Chevening) scholar, Rasul markets, and dependence structures. gained his master’s degrees in public admin- istration and in economics and fnance in the Qudeer Latif is head of Islamic fnance at United Kingdom. He has 15 years of varied C lifford Chance. He has worked with Chance experience in capital market regulation, includ- in London, Dubai, and Riyadh, and his practice ing the securities market and nonbanking and covers structuring and implementing Islamic fnance companies, as well as the nonfnancial instruments across a number of asset classes sector. As registrar, he is responsible for head- including those in the capital markets, project ing the Islamic fnance initiative for the capital fnance, acquisition fnance, structured fnance, market in Pakistan. He is also the focal person and asset fnance felds. of the Islamic Financial Services Board (IFSB) at SECP, responsible for the implementation and Umar Oseni is a solicitor and advocate of the adoption of IFSB standards and principles. Supreme Court of Nigeria. He completed the Bachelor of Laws program in 2005 and proceeded John A. Sandwick moved to Geneva in 1993, to the Nigerian Law School. He successfully com- frst working at Deutsche Bank (Suisse), and pleted the Bar Part II program in 2007 and was then at Banque Leu, a unit of Credit Suisse called to the Nigerian Bar later that year. He is a P rivate Banking. In 1999 he started his own member of the Peace and Collaborative Develop- conventional wealth management company, ment Network, the Young International Arbitra- but in 2009 he converted his practice to entirely tion Group, the London Court of International s hariah-compliant asset management. S andwick Arbitration, the Nigerian Bar Association, and has been called a pioneer of Islamic banking by the Association of Professional Negotiators and Schweizer Bank magazine and has appeared Mediators. Oseni has written 15 academic papers, in numerous venues worldwide, including the 10 of which have been published in academic World Islamic Economic Forum and many journals and books. He has also presented papers International Islamic Finance Forum events. He at international conferences on Islamic banking has a master’s degree in development banking and fnance. He won the Best Student Award for from the American University in Washington, Masters of Comparative Laws during the 25th DC, and is author of numerous works on Islamic Convocation Ceremony of the International Uni- banking in the Western and Arabic press. versity Malaysia (IIUM) in 2009. He is currently a PhD research scholar and part-time lecturer at Edib Smolo is a researcher and coordinator of the Faculty of Law, IIUM. His areas of research the Islamic Banking Unit at the International include Islamic banking and fnance, alternative Shari’ah Research Academy (ISRA) for Islamic dispute resolution, contemporary application of Finance. He received a double bachelor’s degree Islamic law, and international trade law. in economics and Islamic revealed knowledge and heritage, as well as a master’s degree in eco- Ramesh Pillai is CEO and group managing nomics, from the International Islamic U niversity director of Friday Concepts (Asia). He is also the Malaysia. He also holds a C ertifcate for Profes- risk management advisor to AmanahRaya/KWB sional Specialization in Political M anagement and a nominee director for Bank Negara Malaysia from the Bulgarian School of Politics, jointly (Central Bank of Malaysia). Previously he was organized by the New Bulgarian University and the risk management advisor to Tabung Haji. the Council of Europe. Prior to joining ISRA, ix Contributors QFinance
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