The New Mainstream Alternative
by the InvestorsOffshore Editorial Team,
IMPORTANT WARNING: The
contents of this report have been compiled in good faith by Investorsoffshore.com
to provide assistance to investors, but do not constitute investment
advice or recommendations. Investors should not rely upon the information
given in order to choose types or routes of investment but should make
their own independent enquiries before making choices. Investorsoffshore.com
has taken reasonable care in researching and presenting the information
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Although the Islamic finance sector suffered along with other investment
sectors during the credit crunch of 2008 and 2009, its long-term future
seems assured. Rushdi Siddiqui, Global Head of Islamic Finance at Thomson
Reuters, told participants at the Middle East, North Africa and South
Asia (MENESA) Forum on ‘The Challenges Ahead for Islamic Finance’
in May that Islamic Finance is on a firm footing to become a USD2 trillion
industry in the next half decade. “It took the Islamic Finance
industry 40 years to become a USD1 trillion industry. It will take another
two to five years to become a USD2 trillion industry,” he said.
Speakers concluded however that the sector's problems include lack
of standardization in the industry, the lack of consensus among Shari’ah
scholars, poor “connectivity” between Islamic Finance institutions
across the world, and the global shortage of experienced Islamic Finance
The Islamic finance industry's total assets scaled new heights in
2009 according to Moody's Investors Service, rising to just under USD1
trillion despite the gloomy economic landscape, although the ratings
agency has urged the industry to continue to innovate, particularly
in the area of risk hedging, if Islamic finance is to really thrive.
In a new Special Comment, Moody's estimates that the market's potential
is worth at least USD5 trillion and the industry is continuing to expand
globally. But the Moody's report suggests that the combined use of securitization
and derivatives "offers considerable scope for reducing the risk
exposures of Islamic financial institutions (IFIs) and thus improving
their overall creditworthiness."
"In this context, IFIs are continuing to deliver Shari'ah-compliant
returns whilst, at the same time, focusing on efficiently mitigating
the associated risks through a new risk management approach, including
the use of derivatives," says Anouar Hassoune, a Moody's Vice President
and author of the report.
"If employed with care, derivatives can enhance efficiency in
IFIs through risk mitigation, thereby making them more competitive as
well as appealing to customers. However, their application in Islamic
finance is highly controversial for reasons of speculation and uncertainty,
two practices forbidden under Shari'ah," explains Hassoune.
Harris Irfan, the head of Islamic finance products at Barclays Capital
and Barclays Wealth in Dubai told Bloomerg in May that Islamic banking
is in fact in the "stone ages" and has a lot more evolving
to do if the full potential of the industry is to be realized. “A
Shariah-compliant customer only gets a fraction of what a conventional
customer has access to,” Irfan told Bloomberg. “We’re
almost at that stone age phase of sticking your money under the mattress.”
However Moody's estimates that the market's potential is worth at least
USD5 trillion and the industry is continuing to expand globally. But
a lack of sophistication in the industry so far, such as in the development
of hedging products and mechanisms, may hold back future growth.
Islamic fund management has not seen much growth lately. The 4th annual
Ernst & Young Islamic Funds & Investment Report released at
the World Islamic Funds and Capital Markets Conference in June states
that global Islamic fund assets stagnated at US$52.3bn in 2009, remaining
at almost the same level as the US$51.4bn posted in 2008.
According to Sameer Abdi, Middle East Head of Ernst & Young's Islamic
Financial Services Group, "This trend is reflective of a distinct
shift in investors' preferences, and requires Islamic fund managers
to adapt their strategies and operating models accordingly to meet the
new levels of expectations."
Ernst & Young says that the silver lining for the industry is the
continued strong growth in the overall Shari'a sensitive investable
assets. Ashar Nazim, Director at Ernst & Young's Islamic Financial
Services team in Bahrain says: "Shari'a compliant investable wealth
pool grew by 20% to reach US$ 480 Bn in 2009. In 2008, this was US$
400 Bn. The GCC remains the single biggest contributor to this growing
wealth pool. It clearly represents substantial untapped opportunities
for local and international players who can understand and respond to
their investors' evolving needs."
A paper from the International Monetary
Fund says that more and more countries are climbing aboard the sukuk
issuance band-waggon in order to tap the massive pools of money in the
hands of Muslim individuals and their companies. The UK, Japan, Thailand
and France are among the countries which have recently begun to establish
sukuk issuance programmes. This often requires significant changes to
monetary and fiscal legislation, though, as does the opening up of domestic
financial markets to Islamic finance. Dozens of countries have either
already made these changes, or have indicated that they are about to
The most prominent national issuers
of Islamic debt instruments so far have been Malaysia, Qatar, Bahrain,
and Pakistan, along with some of the multilateral institutions, including
the Islamic Development Bank and the World Bank, although the market
has been dominated by corporates, which have accounted for more than
three-quarters of issuance to date.
Geographically, Asia, and especially
Malaysia, have dominated the market, although issuance in the GCC (Gulf
Cooperation Council) is rapidly catching up.
If 2006 was the year in which Islamic
finance, a concept virtually unheard of outside banking circles a decade
ago, finally crossed the border-line between slightly exotic alternative
territory and the mainstream, 2007 saw an explosion of demand for alternatives
to western banking products structured along ethically-aware Islamic
principles. In early 2007 Islamic finance received the financial equivalent
of the accolade when UK Chancellor Gordon Brown announced that the Islamic
finance industry would be given the same tax treatment in the UK as
other investments. The move was applauded by tax and finance experts,
who say it put the City of London at the forefront of the nascent but
rapidly growing global industry.
Although the size of the Islamic sector
remains just a fraction of global assets, given a world Muslim population
of around 1.5 billion people, the industry has enormous potential, and
this is a fact that is starting to be recognised in boardrooms of some
of the world’s largest western-based banking, fund management
and insurance groups, many of which have now launched banking facilities
compliant with Shariah law.
One of the attractions of the Islamic financial
sector and the institutions which populate it
is that they have remained largely untainted
by the global credit crisis."Islamic finance
does demonstrate good banking behavior that
has been perhaps lost over the last 10 years
or so," said Neil Miller, head of Islamic
finance at Norton Rose and an adviser to the
British government, to Associated Press. "Islamic
banking is saying we are close to our clients
and we're only going to do genuine transactions
where we can see the asset, we understand the
asset, we can make an assessment of that asset:
whether it's financing a ship or an aircraft
they will go and have a look at the business.
It's giving guidance as to what banking should
What Is Islamic Finance?
It's almost no longer necessary to ask
that question, but for the record, under the guiding principle of Shariah
law, the goal of trade and enterprise within an Islamic-based society
is the sharing of wealth and prosperity within the community through
morally acceptable business activities. Likewise, Shariah law dictates
that risk in trade and business should also be shared. This means that
the accumulation of wealth through the receipt of interest, or riba,
is prohibited, as interest income is deemed effortless profit. It also
means that investment in certain business activities is forbidden on
ethical and moral grounds, such as those involving alcohol, tobacco,
pornography, armaments and gambling.
Whilst trade along Islamic lines is
as old as the religion itself, modern Shariah banking didn’t really
take off until the 1960s with the launch of the Social Bank in Egypt,
a project later replicated in other areas. In the intervening years,
some countries, such as Pakistan and Sudan, have made attempts to completely
‘Islamicise’ their financial systems, although the Islamic
banking and investment industry has been, until recently, confined largely
to the Middle East.
The concept of a bank making a profit
without charging interest can be a difficult one to grasp for those
of us brought up in a western-style capitalistic environment. However,
numerous financial products and contracts have been developed and are
appearing on the market place all the time, based on a number of structures
which seek to eliminate the need for interest, and share both profit
Possibly the most popular of these is
the contract known as Murabaha. Described as a cost-plus-financing contract,
a Murabaha contract can be used to finance a variety of purchases. For
example, in order to buy a house using this contract, the prospective
buyer agrees a sale price with the seller and approaches a bank, which
will buy the property and sell it back to the customer at a higher price.
The house will be registered in the buyer’s name and he will agree
to pay back the amount in instalments. This technique is also applied
to the financing of other purchases, such as cars or household appliances.
Murabaha contracts are also used to issue letters of credit and to provide
financing for trade.
A similar method, known as Ijara, works
in much the same way, except that the bank will buy an asset and then
effectively lease it to the customer for an agreed period. During the
term of the lease, the buyer is required to pay a form of rent, which
is deemed by the bank to be reflective of the risk that it is taking
as part of the transaction. This rent can be either fixed or variable,
depending on the specific contract terms offered by the institution.
Another popular method of financing
under Islamic law is Musharaka, which can be loosely translated to mean
a partnership. This is widely recognised as perhaps the purest form
of Islamic contract available within the modern banking framework because
it has more of a basis in the profit and risk sharing principle. Within
a personal banking context, a Musharaka arrangement may see the bank
providing the funds to enable the customer to buy an asset, with the
bank and customer agreeing a profit or equity sharing ratio for that
asset. Losses are shared on a similar basis.
There are also variations on the above
themes, such as Ijara-wa-iktana. This is similar to Ijara, the difference
being that included in the contract is a promise from the customer to
buy the asset or goods at the end of the lease period at a pre-determined
price. Rentals paid during the period of the lease constitute part of
the purchase price and often under these arrangements the final sale
will be for a token sum.
Ijara with diminishing Musharaka means
that an institution’s equity in an asset may be reduced as the
buyer makes capital payments over and above the agreed rental payments
or lease payments. This means that the bank’s ownership decreases
and the customer’s equity increases over time, until ownership
is eventually transferred entirely to the buyer.
Another important tool within the Islamic
finance framework is the Mudharabah contract, which is used in the financing
of new business ventures. In short, under this arrangement, one party
known as the rabal-maal provides the funding, while the other party
- the entrepreneur or mudarib - provides the effort and labour. Profit
is shared at an agreed ratio at the start of the contract; however,
in the event that the venture fails, any losses are borne completely
by the owner of the capital, whilst the entrepreneur derives nothing
for their efforts.
Instruments have also been developed to serve
part of the investment industry that were previously
off limits to the Islamic investor, such as
the international bond markets, in which sukuks
are fast becoming a visible feature. These certificates
bear a resemblance to conventional bonds, but
unlike their western counterparts, they are
backed by an asset, such as pools of ijara contracts.
The asset will be leased to the client to yield
the return on the sukuk and backing by real
assets ensures that a sukuk is also tradable
in a Shariah-compliant secondary market.
Location Of The Islamic Finance Sector
Key locations for the rapidly developing
Islamic finance sector are Dubai and Labuan, because they are sophisticated
low-tax centres in Islamic regions with concentrations of wealthy investors,
while London and the Cayman Islands, as existing banking and investment
fund centres, are home to the highly skilled legal and financial professional
communities needed to bring Islamic products to market.
Although starting late, Hong Kong may
also become a major player. Chief Executive Donald Tsang noted in late
2007: "At present, assets worth more than US$300 billion are being held
by some 300 Islamic financial institutions in 75 countries. A further
US$400 billion is managed by the Islamic business units of international
In August, 2008, the Hong Kong government
said it hoped to be able to iron out tax issues that could complicate
the issuing by local insititutions of Islamic bonds, or sukuk, by October.
In the case of Hong Kong sukuks, it was feared that the intruments would
be liable for stamp duty twice.
Stock exchanges around the world are
queuing up to make markets in Islamic instruments, of course. In March
2008 the Luxembourg Stock Exchange announced that it had cemented its
position as a key European listing centre for Islamic bonds, with the
listing of its 14th Sukuk, issued by Salam Bounian Development Company
Sukuk Limited. The face value of the issue, with a maturity of March
2018, was USD137.5mn. The Luxembourg Stock Exchange has been listing
Sukuk instruments since 2002.
In July, 2008, the Johannesburg Stock
Exchange, in partnership with FTSE Group launched the FTSE/JSE Shariah
Top 40 Index, is a selection of Shariah compliant companies from the
FTSE/JSE Shariah All-Share Index. The calculation of the index and the
treatment of corporate actions are similar to the FTSE/JSE Top 40.
The FTSE/JSE Shariah Top 40 Index is
suitable for the creation of financial products, such as index funds,
warrants, certificates and Exchange Traded Funds.
“Internationally the market for
Islamic investment products is growing exponentially, at an estimated
15-20% per annum,” explained Ana Forssman, Senior General Manager:
Information Products Sales at the JSE, who went on to state:
“This index gives Muslim investors
access to the top performing listed companies in South Africa without
compromising religious beliefs."
Imogen Dillon Hatcher, Managing Director,
EMEA - FTSE Group, added: “With approximately 1.5 billion Muslims
worldwide, there is huge growth potential for investment vehicles with
a faith-based mandate.
The constituents of the FTSE/JSE Shariah
Top 40 Index are screened by Yasaar Research Inc, a well-respected authority
on Shariah law.
To qualify as a constituent of the index,
companies undergo a detailed screening process, which filters out any
organisations considered unacceptable or non-compliant according to
Shariah-law, including businesses involved in conventional finance,
alcohol, pork-related and non-halaal food, entertainment, tobacco and
The remaining companies are then further
screened according to Shariah compliant financial criteria.
In order to remain in the index, the companies
are reassessed by Yasaar quarterly.
London's Growing Role
Already in 2005, the UK's RICS (the
Royal Institution of Chartered Surveyors) was able to publish a report
saying that London had become a major centre for Islamic banking and
Britain has already licensed 5 Islamic
banks, with Gatehouse Bank being the most recent; while other key European
financial centers continue to develop opportunities for Islamic finance,
including exciting initiatives in Germany, France, Italy and Belgium.
According to Angus McIntosh, Partner
& Head of Research at King Sturge international property consultants:
‘UK business is now familiar with ethical funds but there is a real
need to find out more about the growing opportunities for Shari'ah compliant
real estate investment and the nature of the market as this area represents
a crucial opportunity for many UK businesses.’
The most important factor considered
by Shari'ah compliant funds when buying and selling property was tax
status (cited by 65% of respondents), followed by the availability of
specialist expertise (61%), the regulation of investment and risk assessment
regulation (both 47%) and the transparency of transactions (41%).
UK-based HSBC has launched a number
of Shariah-compliant products through its Amanah Finance division. The
bank is also seeking to establish a firm foothold in the US market,
offering Islamic banking services through 300 branches in the New York
area. Other institutions, such as the UK’s Lloyds TSB and the
US-based bank Citigroup, have also stepped into the market.
Gordon Brown's 2007 budget introduced
two key measures to encourage growth in Islamic finance, namely a new
regime for sukuk (Islamic securitisations) giving comparable tax treatment
to conventional securitisations, and guidance clarifying the treatment
of diminishing musharaka (partnership share) and takaful (insurance)
Commenting on the move, Darshan Bijur,
Director, KPMG Islamic Finance Advisory, said this new legislation has
created the framework for London to emerge as undisputed global leader
in the Islamic finance industry.
“Sukuk will be the equivalent of Eurobonds,
and the likely exponential growth in UK Sukuk issuance will ensure that
Islamic finance moves from niche to the mainstream," he observed. “It
will cost the UK next to nothing, and opens up the way for UK companies
to access Islamic finance, and the Middle East wealth that has been
generated by oil."
Peter Muir, tax partner at Deloitte,
said: "The UK is the only country which is changing legislation to create
a level playing field for both individuals and companies investing in
Islamic finance products," he noted. "Reform of sukuk (Islamic bonds)
is the latest addition to the suite of specific legislation that gives
certainty to the taxation of Islamic financial products. Before this
reform was introduced, there was ambiguity around how capital gains
tax, income tax and capital allowances would apply to these products."
Muir added: “Gordon Brown seems to have
taken a personal interest in ensuring Islamic products are brought into
a level playing field. This is intended to meet the financial needs
of the Muslim community as well as, increasingly, non-Muslim investors
in these products."
"From a capital markets perspective,
the reforms are a boost to the City of London, improving its global
competitiveness in the Islamic finance market. Notably, the measures
reach out to a potentially much wider group of international exchanges
who can be given tax recognition in the UK in relation to ‘sukuk’ bonds.”
Mohammed Amin, tax partner, PricewaterhouseCoopers,
said that Sukuk have become increasingly important in the Muslim world,
as companies prefer to obtain finance directly from international investors.
"While London-based lawyers and bankers
regularly structure and market sukuk for companies from Muslim countries,
until today tax uncertainties have precluded them being issued from
the UK," he stated. “The changes announced should enable the City of
London to become the global centre for international sukuk issuance
and trading, in the same way as it dominates the eurobond market. There
should also be scope for mainstream UK companies to issue sukuk to both
Islamic and conventional investors.”
In December, 2008, a joint Treasury–Financial
Services Authority (FSA) consultation on proposals for the legislative
framework for the regulation of alternative finance investment bonds,
which include sukuk, was launched by Ian Pearson, Economic Secretary
to the Treasury. Commenting on the launch of the consultation, Pearson
said: “This consultation is an important part of the work government
is doing to support the growth of Islamic finance in the UK and to increase
our position as a leading global centre in this market."
“The government wants to ensure
no one in the UK is denied access to good financial services on account
of their religious beliefs. We value the contribution Islamic finance
makes to London’s position as an international financial centre
and we want to see this sector continue to grow and prosper in this
Following the consultation, the government included measures in its
December, 2009, pre-budget report that will equalize the tax treatment
of property refinancing transactions.
Commenting on the changes, Mohammed Amin, UK Islamic finance leader,
PricewaterhouseCoopers LLP, said that Britain's position as a leader
in the Islamic finance industry has been strengthened further: "Over
several years, the UK has become the leading Western country in Islamic
finance by taking a series of measures to ensure that Islamic finance
is taxed no worse, and no better, than conventional finance. The pre-Budget
report continues this progress by including measures to equalize the
tax treatment of property refinancing transactions," he observed,
"After extended consultations with the industry, the Government
has announced that, subject to appropriate safeguards, a sale for the
purposes of refinancing in accordance with the tax rules governing Islamic
finance will not give rise to a taxable disposal for capital gains tax
"While the relevant legislation exists to facilitate Islamic finance,
it is neutral regarding religion. It applies to transactions by all
citizens which fall within the tax rules, regardless of the religion
of the taxpayer or whether the bank is an Islamic bank or is a conventional
The proposals will make it possible for Muslims who own property (normally
investment property or real estate used for a business) which has appreciated
in value to obtain additional bank finance in a Shariah compliant way,
using the property as collateral. Prior to the change, such refinancing
often faced prohibitive tax costs.
Conventional refinancing typically involves taking on extra borrowing
when a property has increased in value since its original purchase.
Such extra borrowing does not give rise to any capital gains tax issues,
since for tax purposes the property continues to be held by the owner,
even if it is mortgaged to the lending bank.
Islamic refinancing cannot be done in the above manner. Instead, it
typically involves the property being sold to the "lending"
bank and then rented back. The bank’s customer will also be obliged
to buy the property back eventually, to repay the financing. However,
under current tax law the sale to the bank is a disposal for capital
gains tax purposes, giving rise to capital gains tax if the property
is worth more than the owner paid for it. (Principal private residences
are an exception as gains on them are exempt.)
Then in January, 2010, the UK
Treasury introduced measures in Parliament to support Islamic finance
and the issuance of corporate sukuk.
The Financial Services and Markets Act 2000 Order 2010 will help to
provide a level playing field for corporate sukuk within the UK. The
Order provides clarity on the regulatory treatment of corporate sukuk,
reducing the legal costs for these types of investments and removing
unnecessary obstacles to their issuance.
Exchequer Secretary to the Treasury Sarah McCarthy-Fry said: “The
government’s objectives on Islamic finance are to enhance the
UK’s competitiveness in financial services by maintaining the
UK’s position as a Western leader for international Islamic finance;
and to ensure that everybody, irrespective of their religious beliefs,
has access to competitively priced financial products.”
“This measure is another important step
in the development of the Islamic finance sector
in the UK and will help to provide a level playing
field for Islamic financial products in this
country. It is good news for the UK economy
and for our Islamic finance industry.”
The Role Of Offshore Jurisdictions
Offshore jurisdictions have played a major
role in the development of Islamic finance markets,
particularly Labuan and Dubai, although Hong
Kong and Bahrain are beginning to assume a higher
Malaysia and Labuan
Kuwait Finance House, a leading Islamic
banking group, announced in December, 2005, its intention to break into
the South East Asian market through a new base in Labuan, which it hopes
will come on stream in 2006.
Jamelah Jamaluddin, deputy chief executive
of Kuwait Finance House in Malaysia, said that the group sees potentially
lucrative investment opportunities in real estate, infrastructure assets
and power plants within the region.
"We want to position Malaysia as a regional
hub for KFH in this part of the world which includes Thailand, Singapore,
the Philippines, to a certain extent China and India, and maybe Australia
and New Zealand," Jamelah stated, adding that KFH is also attempting
to make inroads into the Indonesian market.
KFH's Malaysian operation will initially
focus on investment banking, and will later branch out into commercial
and retail banking, providing consumer credit products such as mortgages,
car financing, credit cards and insurance.
In September, 2008, Malaysia's Prime
Minister, Abdullah Ahmad Badawi, unveiled plans to implement a series
of economy-boosting measures in the country's 2008/2009 budget, which
include hefty tax breaks for Islamic bonds, or Sukuk. The Prime Minister
announced that in a bid to encourage fiscal growth, the government will
award fees and profits gained from non-ringgit Islamic bond deals distributed
outside of the country a three-year tax exemption.
Coming into effect from 2009, the exemption
applies to the fees and profits on arranging, underwriting, distributing
and trading non-ringgit sukuks. Making sukuks tax-free will further
enhance Malaysia's current position as the world's largest sukuk market.
In June 2008, Malaysia accounted for 62.6% of global outstanding sukuk
In addition to this, the Prime Minister
also announced the introduction of a double tax deduction for Islamic
finance courses on offer at one of the Malaysian universities to compensate
for the shortage of industry experts.
In February, 2009, a report
by Cerulli Associates revealed that Malaysia is now the closest rival
to Saudi Arabia in terms of Shariah-compliant mutual fund assets, and
has overtaken Saudi when it comes to the number of locally domiciled
The report - entitled 'Shariah Investing: Market Sizing and Analysis
- stated that in November 2008, Shariah funds domiciled and managed
in Malaysia totaled 145, compared to just 131 in Saudi Arabia. These
range from investments in money markets and sukuk (bonds) to regional
and global equities.
Determined to make an impact on the global Shariah industry, Malaysia
has, over the past few years, worked to establish itself as a center
for Shariah fund manufacturing.
Today, Malaysia possesses the most highly developed regulatory structure
for Islamic finance in the world, and has attracted more than eight
international Shariah managers by offering a host of tax and other incentives.
However, Malaysian-domiciled Shariah funds are still unable to compete
with Saudi funds in terms of asset size; the AlAhli Saudi Riyal Trade
Fund is the world’s largest with USD3.6bn in assets under management
as of October 2008. This is nine times the size of Malaysia’s
biggest fund, the Public Ittikal Fund.
In total, Malaysian-domciled Shariah funds manage USD4.6bn of assets,
compared to USD13.9bn held in Saudi funds.
In August, 2009, Petronas issued
a landmark dual-tranche USD4.5bn bond/sukuk, domiciled in Labuan and
managed by Bank Negara Malaysia. The Malaysian national oil company’s
issue consisted of a USD3bn 10-year fixed-interest USD bond and USD1.5bn
five-year sukuk. Foreign-currency issues out of the Labuan International
Business and Financial Centre (LIBFC) have now been named “Emas”,
in an attempt to provide added exposure for the LIBFC and Malaysia as
a means of attracting funds.
It was hoped that the issue’s success would show that Malaysia
could be utilized not only for the origination of domestic ringgit bonds
and sukuk, but also for foreign-currency denominated bonds and sukuk.
In January, 2010, the Malaysian
stock exchange, Bursa Malaysia Berhad (BMB), and the Bahrain Financial
Exchange (BFX) announced the signing of a memorandum of understanding
(MOU) to develop a joint commercial agreement between the two exchanges
to provide financial products to the Islamic market.
The MOU will involve a feasibility study to identify shariah-compliant
products, including a commodity murabaha trading platform to satisfy
short-term financing needs. It will lay the foundation for both exchanges
to work jointly on increasing the awareness of investment and liquidity
management opportunities in their respective Islamic markets using acceptable
In a press release, BMB's Chief Executive Officer, Dato' Yusli Mohamed
Yusoff, who signed the MOU on behalf of the Malaysian exchange, which
also owns the Labuan International Financial Exchange, said that "the
collaboration with BFX is aimed at facilitating cross border development
in the Islamic financial markets, widening market reach, exchanging
technological expertise and building a sustainable business model for
"This is a major step towards consolidation in the Islamic finance
world,” he added. “As both Exchanges come together on a
single platform, this will add to the strength of this industry. This
initiative will go a long way in addressing the issues of standardization,
innovation and transparency, thus providing a new dimension to the Islamic
In addition, BFX board director, Arshad Khan, said: "This initiative
is a major development for the Islamic finance market where the collaboration
will seek to offer a wider risk management portfolio to global Islamic
practitioners. By partnering with Bursa Malaysia we can ensure that
the products offered are well defined, robust and fully shariah compliant.”
The signing ceremony was witnessed by Razif
Abdul Kadir, Deputy Governor of the Bank Negara
Malaysia; Nik Ramlah Nik Mahmud, Managing Director
of Malaysia’s Securities Commission; and
Abdul Rahman Al Baker, Executive Director, Financial
Institutions Supervision, of the Central Bank
Dubai and the UAE
International law firm, Walkers announced
in January, 2006, that it had opened the first fully transactional office
for an offshore law firm in the Dubai International Finance Centre (DIFC).
The office is staffed jointly with a combination of regional lawyers
and leading attorneys from London who specialize in Islamic finance
and Middle Eastern issues.
"As the formation of investment funds,
private equity funds, and Sukuks – a type of Islamic bond – continues
to soar, the need to provide global counsel has grown too," the firm
explained in a statement.
"Walkers recognizes that having counsel
in Dubai doing the transactional work in the same time zone and same
culture is vitally important to getting the job done. Walkers’ expertise
in investment funds, structured finance, and international insolvency
matters coupled with a presence in the Cayman Islands, London, the British
Virgin Islands, Hong Kong and now Dubai, means that the firm can offer
worldwide clients an even broader range of products and services," Walkers
According to a survey by McKinsey &
Company, more than 75 percent of the top 30 global asset managers are
now active in Dubai. The MAN Group plc, a leading hedge fund group that
has operated in the Gulf Cooperation Council region (GCC) for more than
20 years and was part of the McKinsey survey, reported an upswing of
institutional investments in hedge funds.
"Also driving the need for greater offshore
legal expertise in Dubai are the international entities who invest in
the GCC region through British Virgin Islands companies and regional
investment in United Kingdom commercial real estate,” observed Mr Palmer.
“With Walkers’ strong presence and experience
in those jurisdictions, we can now provide a complete suite of offshore
legal service to our clients in Dubai," he added.
Companies in Dubai recognize multiple
benefits from the jurisdiction, including zero tax on income and profits,
100 percent foreign ownership, no restrictions on foreign exchange or
capital/profit repatriation, operational support, and business continuity
In March, 2007, Dubai Islamic Bank listed
a $750 million Sukuk on the Dubai International Financial Exchange (DIFX)
after selling the Islamic securities to investors in the Europe, Asia
and Middle East, cementing the DIFX's position as the leading exchange
for the listing of these Islamic instruments.
The Sukuk was the first ever issued
by the bank, which specialises exclusively in Islamic financial services.
Forty-five per cent of the Sukuk issue was placed with investors in
the Middle East, 30% in Europe and the balance was placed in Asia.
The Sukuk was issued by DIB Sukuk Company
Limited, a company incorporated in accordance with the laws of, and
formed and registered in, the Cayman Islands. The Sukuk issue is rated
A1 by Moody's and A by Standard and Poor's. The lead managers and bookrunners
for the issue were Barclays Capital, Citigroup and Standard Chartered
Hamed Ali, Executive Officer of the
DIFX, noted: “The DIFX intends to strengthen its focus on Sukuk. The
total value of Sukuk issued globally in 2006 was $27.1 billion, more
than twice as much as in 2005, as issuers turn increasingly to this
Islamic asset class as an effective way to raise capital.”
Also in March, the Dubai Financial Services
Authority (DFSA) entered into a mutual recognition agreement to facilitate
cross border distribution of Islamic investment products with the Securities
Commission of Malaysia (SC).
The agreement was signed by Dato’ Zarinah
Anwar, Chairman of the SC, and David Knott, Chief Executive of the DFSA
at a ceremony in Kuala Lumpur, witnessed by the Second Finance Minister
of Malaysia, Yang Berhormat Tan Sri Nor Mohamed Yakcop.
This is the first mutual recognition
agreement entered into by both regulators, and is a significant milestone
for both the SC and the DFSA in the area of cross-border regulation
of Islamic investment funds, and the development of deeper and broader
investment markets. Under the mutual recognition framework, Islamic
funds that have been approved by the SC may be marketed and distributed
in the DIFC with minimal regulatory intervention, following the inclusion
of Malaysia on the DFSA’s list of Recognised Jurisdictions. Similarly,
Islamic funds which have been registered or notified with the DFSA will
be able to access Malaysian investors. Supported by a bilateral memorandum
of understanding, both regulators will work closely in the areas of
supervision and enforcement of securities laws to ensure adequate protection
In November, 2007, the Dubai Financial
Services Authority (DFSA) received the accolade of 'Best Regulator for
Islamic Funds', which was awarded during the recent 5th Annual Islamic
Funds World Conference.
The award was co-presented to the DFSA
and the Malaysian Securities Commission (SC), at the Master of Islamic
Funds Awards luncheon in Dubai, which took place on 13th November 2007.
The award was co-sponsored by Dow Jones and Standard & Poor's, and recognises
the DFSA’s efforts to facilitate cross-border marketing of Islamic investment
In November, 2008,
the Dubai International Financial Centre (DIFC) announced that it had
enacted new regulations that enable companies within the financial district
to quickly form Special Purpose Company (SPC) structures. The
new regulations allow companies to create SPCs for facilitating both
Islamic and conventional transactions as well as vessel registrations.
Transactions that can be facilitated by the new law include acquisitions
Under the law, Special Purpose Companies
can be easily structured and incorporated, while enjoying exemptions
from some filing and disclosure rules relating to conventional companies
in DIFC. For example, they are not required to hold annual shareholder
meetings, can be administered by a corporate service provider and are
not required to file annual returns.
Dr. Omar Bin Sulaiman, Governor of the
DIFC said: "The SPC Regulations form part of DIFC's constantly
evolving legal framework that aims to provide a supportive environment
for financial services companies. DIFC is committed to providing a world-class
regulatory framework that offers companies the flexibility necessary
to structure a range of financing transactions. At the same time, our
regulations ensure that we retain our strong focus on integrity, transparency
and efficiency. The enactment of the SPC Regulations will provide a
great boost for conventional and Islamic acquisitions and financings
in the region."
In another late-2008 move, the DIFC,
in association with the International Islamic Finance Market, organised
a project briefing session to re-affirm support for the Master Agreements
for Treasury Placement (MATP), a major initiative that facilitates the
unification and growth of the Islamic financial services industry.
Key representatives of the Islamic Finance
industry hailed the MATP as a landmark initiative for standardising
the Commodity Murabaha, a tool customarily used by Islamic institutions
for Shari’ah compliant liquidity management. Officials who spoke
at the briefing session included Mr. Nasser Al Shaali, Chief Executive
Officer of the DIFC Authority and Mr. Ijlal Ahmed Alvi, Chief Executive
Officer of the International Islamic Finance Market (IIFM).
The MATP is a benchmark document and
a global first for the Islamic finance industry. Its adoption will enhance
cost, time and operational efficiencies of Shari'ah compliant deposit
arrangements. The initiative caters to the Shari’ah compliant
commodities market, which represents, in some cases, 90% of commodity
Murabaha transactions. The agreements cover principal to principal as
well as agency arrangements. The global Commodity Murabaha market is
currently worth over USD100bn.
Nasser Al Shaali said: "The MATP
represents a significant milestone in the development of the global
Islamic Finance industry. As part of DIFC's mission to catalyse the
growth of the regional capital market, we will be seeking to raise awareness
and understanding of the MATP not just within the financial district
but across the region. The agreement will facilitate more harmonious
practices, lower costs and greater clarity for institutions involved
in commodity Murabaha transactions. It will give a significant boost
to the growth of the Islamic financial services industry and the development
of Islamic capital markets across the world."
The agreement is the culmination of
a consultation with over 40 regional and international market participants.
The project was driven by IIFM's Shari'ah panel consisting of several
leading scholars while the DIFC and the Central Bank of Bahrain played
key roles in facilitating the complex agreement. DIFC hosted the final
review of the MATP by the scholars of the IIFM Shari'ah Panel on August
The agreement was finalised when a pronouncement
approving the MATP, was signed by the IIFM Shari'ah Panel at a meeting
in Jeddah on September 7, 2008.
In parallel with Dubai's distribution
role, the Cayman Islands have emerged as the jurisdiction of choice
for the listing of Islamic financial products.
The introduction of a new Arabic language
facility by the General Registry in Cayman in March 2007 will trigger
more valuable business from the Islamic region, according to international
law firm, Ogier.
Ogier partner Gray Smith, who practices
Cayman law from London, observed that the move demonstrated Cayman’s
recognition of the Middle East as an important area for new business.
“We can now use both Arabic and English
names on all documents when setting up a company and can also open bank
accounts in both names. Previously we had to use only an English translation.
The same ethos was applied to Chinese characters a few years ago and
that was of huge benefit in Hong Kong, where both English and Chinese
are used widely,” he explained .
Mr Smith went on to add that Cayman
law particularly lent itself to Islamic finance structures because of
its flexibility. It has become a centre for “sukuks” – bond issues that
are Shari’ah compliant, prohibit interest payments and require tangible
assets or equity as collateral.
“It’s straightforward, the processes
are relatively easy and it’s very flexible, allowing for the drafting
of articles and agreements that comply with the restrictions of Islamic
law. Cayman is also a lighter regulation jurisdiction and a widely recognised
international finance centre which suits Middle East companies looking
for investments,” he revealed.
The Ogier partner also predicted further
inflows of money into the Middle East as clients are increasingly marketing
their funds outside the region.
“The inflow to Middle East funds is
a new growth area. Furthermore, the establishment of the Dubai Finance
Centre will enable the listing of Cayman funds on the Dubai Stock Exchange
and dual listing, in Cayman and the Middle East or the Middle East and
the UK,” he stated.
In December, 2009, DIFC has announced
the release of its "DIFC Sukuk Guide," a comprehensive introduction
to various sukuk structures, which also provides legal and regulatory
information on issuing sukuk from the DIFC, and listing sukuk on NASDAQ
The guide provides detailed descriptions of more than 10 sukuk structures,
information on the history and current status of sukuk globally, an
overview regarding the issuing and listing of sukuk in or from DIFC,
and information on regulatory licensing in the district.
It is hoped that the guide will further reinforce the DIFC’s
leading role in global Islamic finance, hosting the largest exchange
for sukuk by listed value, with value of more than USD16bn.
“The changing global economic landscape and shift eastward of
the economic center of gravity means DIFC is ideally situated to capture
an even larger share of the global sukuk market,” commented Farhan
Al Bastaki, Executive Director of Islamic Finance for the DIFC.
“With this guide, we are providing market participants with a
clear understanding of this important sector and the supportive environment
for sukuk at DIFC.”
According to the report, the United Arab Emirates
is the leader in terms of sukuk issuance by
value, accounting for USD26.8bn in issuances
between 2000 and 2008, in a market that is estimated,
by Standard and Poor’s, to be worth around
USD50bn and growing.
As part of its role as an international financial center and a gateway
to China, Hong Kong is preparing tax changes to level the playing field
for Islamic bonds with conventional bonds.
Speaking at the Islamic Finance Symposium 2009 in Tokyo, the Secretary
for Financial Services & the Treasury, KC Chan, disclosed that Hong
Kong is “best positioned to serve as a gateway to China to capitalize
on China's growth. Hong Kong is a major asset management center in Asia.
Our combined fund management business amounted to HKD5.8 trillion (USD750bn)
in 2008, about 70% of which was sourced overseas.”
“Hong Kong is striving to develop into a global capital formation
center, asset management center and offshore RMB business center, with
regard to China,” he said. “Hong Kong is best placed to
serve as an effective channel for orderly capital outflows from the
Mainland, and Mainland financial institutions can manage their overseas
investments through Hong Kong.”
"Indeed, Hong Kong serves as a unique portal for overseas funds
and fund managers seeking business opportunities from the burgeoning
Mainland economy,” Chan continued. “Overseas fund houses
in Hong Kong also have the edge of gaining first hand information regarding
Mainland assets and investments.”
Furthermore, he added: “Hong Kong is best placed to serve as
a testing ground for the development of RMB business outside the Mainland.
We have been working with the relevant Mainland authorities, our financial
regulators and the trade to attract more RMB liquidity and to build
a market offering a broad range of RMB products and services.”
It is against that overall background, he said, that the government
will implement a platform in Hong Kong for the development of Islamic
finance, the huge market potential of which has driven Islamic financers
to look beyond historical boundaries to explore new territories, both
within and outside the Muslim world.
"We believe Hong Kong is well placed to become a center for Islamic
finance in Asia,” Chan stated. “Our sound financial services
infrastructure and well-established legal system make Hong Kong an attractive
location for such investments."
The city's unique advantage, he concluded, is its above-mentioned role
in bridging the Mainland of China to the international market. By bridging
the investment needs of the Middle East with the capital needs of the
Mainland, Chan believes Hong Kong can be the trusted platform to link
In February, 2010, the director
of the Hong Kong Economic and Trade Office in Singapore, Subrina Chow,
disclosed that Hong Kong would like to develop closer financial links
with Brunei, particularly in the field of Islamic finance products.
Hong Kong’s government believes that there is an excellent opportunity
to develop closer financial and other economic ties between Hong Kong
and Brunei. John Tsang Chun-Wah, Hong Kong’s Financial Secretary,
visited Brunei in March to discuss these issues.
Subrina Chow, in Brunei as a precursor to the visit, noted that, despite
the issue of Islamic bonds from Hong Kong over the past few years, it
is still a relative novice in Islamic finance. It therefore feels the
need to diversify and increase the volume of the Islamic products and
services it is currently able to provide.
The assistance that Hong Kong could offer to Brunei would lie, primarily,
in the use that Brunei could make of Hong Kong’s well-developed
capital markets, while Hong Kong would thereby develop a capability
in Islamic finance and insurance. Subrina Chow added overseas businesses
were welcome to list on the Hong Kong stock exchange and raise capital.
While, in the past, Hong Kong has developed
ties with its closest trading partners –
Singapore, Malaysia and Thailand – it
is now looking further afield in the Asian region,
to Indonesia and Vietnam, and now also Brunei.
Islamic Hedge Funds And Derivatives
In June, 2008, Barclays Capital, the
investment banking division of Barclays Bank plc, and the Dubai Multi
Commodities Centre Authority (DMCC), an agency of the Dubai government,
announced the first Shariah compliant hedge funds to be launched on
the Al Safi Trust alternative investment platform.
DMCC has committed to seed five commodity
hedge fund managers on Al Safi with USD50 million each, a total of USD250
million, for a Shariah compliant fund of funds product to be offered
under the Dubai Shariah Asset Management (DSAM) brand.
The commodity strategies and hedge fund
managers approved by DMCC are Tocqueville Asset Management Gold, Lucas
Capital Management LLC Energy/Oil & Gas, Zweig-DiMenna Intl. Managers
Natural Resources, Ospraie Management Agriculture and BlackRock, Inc.
Global Resources and Mining.
Al Safi is a comprehensive Shariah compliant
platform comprised initially of single strategy alternative investment
managers with Shariah Capital as the Shariah advisor and Barclays Capital
as the prime broker and structured product distributor.
Al Safi is described as a “plug
and play” solution offering an established process of due diligence
which accepts only those hedge fund strategies and managers that meet
the exacting criteria of its Shariah Supervisory Board. It claims to
offer Islamic investors the same high-quality managers and strategies
available to conventional investors including comparable returns, competitive
fee levels, diversification across asset classes and access to customised
structured products which can provide full capital protection, all within
a pre-established Cayman trust framework.
Al Safi has been created in response
to market demand for Shariah compliant alternative investments and the
considerable impediments fund managers have faced meeting that demand.
In addition to the above commodity fund
managers, other long/short equity hedge fund managers available on the
Al Safi platform will be announced shortly. The Al Safi platform expects
to include a range of alternative investment strategies as well as specialised
Richard Ho, Head of Fund-linked Derivatives
at Barclays Capital commented: “The DMCC’s provision of
seed capital for five fund managers on Al Safi is a strong affirmation
of the robustness of the platform’s Shariah framework and an exciting
development in the alternative investments available to Islamic investors."
Ahmed Bin Sulayem, Executive Chairman,
DMCC stated: “DMCC is pleased to work with globally renowned organisations
Barclays Capital and Shariah Capital to offer the first Shariah compliant
hedge funds on the Al Safi Trust alternative investment platform. We
have worked closely with our international partners to engage world-class
fund managers with excellent track records in order to offer investors
premium Shariah-compliant investment solutions."
Eric Meyer, Chairman and CEO of Shariah
Capital added: “With the capital support of a sovereign government
and the prime broker and structuring expertise of Barclays Capital,
the Al Safi Trust platform is a historic development that unites modern
investment strategies with Shariah. The initial commodity hedge fund
managers who will be available through Dubai Shariah Asset Management
are truly world-class. They represent the best and most successful commodity
strategists in the world, and they have agreed to accommodate Shariah
within the strict guidelines established by our Shariah Supervisory
Russell Lucas, Co-Founder and Co-Portfolio
Manager of Lucas Capital Management said: “Al Safi is built from
the ground up upon compliant assets and is controlled within a credible
Shariah framework. Barclays Capital Prime Brokerage is the first to
provide the needed Shariah equivalent solutions for hedge funds. We
are very pleased to be one of the first to be working with the DMCC
in providing hedge fund access to Islamic investors."
Dr. David Rutledge, Chief Executive
of DMCC commented: “The Al Safi platform is ideal for the Shariah
compliant asset management capability we are developing in commodities.
It enables us to access exceptional managers with strong track records
in order to achieve our goal of delivering diversified exposure across
a range of commodity sectors to both institutional and individual investors
interested in Shariah compliant investment products and solutions. We
are privileged to seed these initial managers and support Barclays Capital
with our commitment to the platform’s success."
January, 2010, witnessed a breakthrough in Islamic finance with the
launch of the 'Tahawwut' (Hedging) Master Agreement, following an agreement
between the Bahrain-based International Islamic Financial Market (IIFM)
and the International Swaps and Derivatives Association, Inc. (ISDA).
This marked the introduction of the first globally standardized documentation
for privately negotiated Islamic hedging products.
“Given the growing nature of the Islamic finance industry, the
institutions operating on Shari’ah principles can no longer afford
to leave their positions un-hedged,” said Khalid Hamad, Chairman
of IIFM and Executive Director of Banking Supervision at Central Bank
of Bahrain. “Hence, some key hedging products are now becoming
common across jurisdictions to mitigate risk. The ISDA/IIFM Tahawwut
Master Agreement gives the industry access to a truly global framework
document which is neutral in terms of treatment to both the transacting
parties and at the same time strictly conforms to Shari’ah principles."
The DIFC has hosted a meeting of the Shari’ah Advisory Panel
of the International Islamic Financial Market (IIFM), with the purpose
of presenting guidance and explaining the benefits of its Tahawwut (Hedging)
The Agreement provides a framework and mechanism on hedging or risk
management transactions that can be undertaken by the Islamic finance
industry. It has been developed by the IIFM jointly with the International
Swaps and Derivatives Association (ISDA).
The DIFC meeting focused on the key features and mechanics of the Tahawwut
documentation, which the IIFM and ISDA have developed in consultation
with market participants and under the guidance of the IIFM Shari’ah
Panel. The meeting was attended by scholars on the panel, legal counsel,
officials from IIFM and ISDA, in addition to market participants including
Standard Chartered Saadiq.
Farhan Al Bastaki, Executive Director of Islamic Finance at the DIFC
Authority, stated that: "While the world has been searching for
an alternative to the conventional banking system deeply impacted by
the global financial crisis, few have realised that a more stable, asset-backed
and efficient system already exists. Islamic Finance has withstood the
negative impact of the global financial crisis, proving its resilience,
effectiveness and relevance to the global financial industry.”
He continued: "The system is there, but its wider acceptability
has to be created by spreading awareness as well as by providing depth
to the market. The IIFM has been making significant efforts to provide
depth to the Islamic finance industry such as through its latest framework
for risk management.
Although the structure of the master agreement is similar to the conventional
ISDA master agreement, the key mechanisms and provisioning such as early
termination events, closeout and netting are developed based on the
Islamic shari’ah principles.
“Given the growing nature of the Islamic finance industry, the
institutions operating on shari’ah principles can no longer afford
to leave their positions un-hedged,” said Khalid Hamad, Chairman
of IIFM and Executive Director of Banking Supervision at Central Bank
of Bahrain. “Hence, some key hedging products are now becoming
common across jurisdictions to mitigate risk. The ISDA/IIFM tahawwut
master agreement gives the industry access to a truly global framework
document which is neutral in terms of treatment to both the transacting
parties and at the same time strictly conforms to shari’ah principles.”
“Standardization is a key element in the progress of Islamic
finance though it is not a simple process as evident from the efforts
put in to the development of this master agreement,” continued
Ijlal Ahmed Alvi, Chief Executive Officer, IIFM. “A record number
of drafts - 24 drafts – were developed during the industry consultation
and shari’ah guidance process before ultimately reaching the final
version, which is comprehensive as well as practical in terms of usage
with no compromise to shari’ah principles."
“Demand for customized, privately negotiated hedging tools that
conform to the principles of Islamic finance has increased in momentum,”
added Eraj Shirvani, Chairman of ISDA and Managing Director, Head of
Fixed Income for the EMEA Region, Credit Suisse. “The tahawwut
master agreement provides the critical framework for the growth and
evolution of shari’ah-compliant hedging instruments.”
In addition to developing documentation for
Islamic transactions, ISDA in coordination with
IIFM is in contact with various regulators in
a number of Islamic jurisdictions, such as the
Gulf Cooperation Council region, namely UAE,
Bahrain and Qatar, plus Pakistan to improve
the local legal framework for hedging products
and close-out netting provisioning.
The world of insurance, which by its
very nature runs counter to Shari'ah principles because its profits
are derived through effectively gambling on uncertain outcomes, was
an area that until recently Islamic investors either had to tolerate
or abstain from altogether. However, this problem has been overcome
with the development of the takaful insurance industry. Using the Islamic
principle of Ta'awun, or mutual responsibility, the takaful industry
rests on the same foundations of profit and risk sharing as other areas
of Islamic finance. On a basic level, it provides mutual protection
of assets and property in the event of loss or damage based upon joint
Takaful Re Limited, an Islamic insurance
company, was licensed by Dubai Financial Services Authority (DFSA) in
January, 2006, to operate from the Dubai International Financial Centre
Takaful Re is dedicated to offer Shari’ah
compliant reinsurance and related services to the growing Takaful &
Islamic insurance markets. Takaful Re will offer reinsurance capacity
in all major lines of property, marine and family Retakaful business.
Because profits in the conventional
insurance industry are effectively derived through gambling on uncertain
outcomes the world of insurance has been largely off limits to those
wishing to invest along Shari'ah principles. However, this problem has
been overcome with the development of the takaful insurance industry.
Using the Islamic principle of Ta'awun,
or mutual responsibility, the takaful industry rests on the same ideal
of profit and risk sharing as other areas of Islamic finance. On a basic
level, it provides mutual protection of assets and property in the event
of loss or damage based upon joint risk sharing.
With an authorised capital of US$500
million and paid-up capital of US$125 million, Takaful Re has plans
to focus on retakaful business in the Middle East, North Africa and
other Islamic countries.
“This is a significant announcement
for DIFC, especially when we already have some major international insurance
companies located here," commented Dr. Omar Bin Sulaiman, Director General
of the DIFC Authority.
”The DIFC is committed to actively promoting
the growth and development of the Islamic insurance industry in accordance
with Shari'ah principles. The Takaful market is one of the fastest growing
in the world. It is expected to grow at nearly 20 per cent per annum
to reach US$7.4 billion in global annual premiums in 15 years. Firms
domiciled in the DIFC will complement the regional market and help it
grow. By providing the ideal environment, both in terms of regulations
and infrastructure, the DIFC aims to maximise this potential," Dr. Omar
Bin Sulaiman added.
Meanwhile, Mr. Khalid Ali Al Bustani,
Takaful Re Chairman, commented that: “We are pleased to associate ourselves
with the DIFC which is renowned internationally. For Takaful Re, to
be in the DIFC is a commitment for integrity, transparency and efficiency."
In December, the DIFC welcomed Tokio
Marine Group to its growing portfolio of financial and management service
providers. A leading Takaful insurance
services provider with operations in the UAE and Saudi Arabia, Tokio
Marine Group will expand across the Middle East North Africa (MENA)
region through its new company, Tokio Marine Middle East Limited (TMME).
Registered with and located within the DIFC, Tokio Marine Middle East
Limited is regulated by the Dubai Financial Services Authority as an
insurance management services provider.
Takaful is a form of insurance that
conforms to the principles of Islamic finance. Using the Shariah principle
of Ta'awun, or mutual responsibility, the takaful industry rests on
the same foundations of profit and risk sharing as other areas of Islamic
finance. At a basic level, it provides mutual protection of assets and
property in the event of loss or damage, based upon joint risk sharing.
Nasser Al Shaali, CEO of the DIFC Authority,
commented: "Takaful services are increasingly sought after in today's
dynamic business environment and are of particular relevance to the
region. DIFC is further consolidating its leading role in Islamic Finance
with the addition of Tokio Marine Group, through its new company. The
inception of a company dedicated to Takaful services also illustrates
the DIFC's increasing focus on socially responsible financial services."
Tokio Marine entered the Takaful industry
in 2001 through its conventional financial operations in Saudi Arabia,
and subsequently became the first foreign company in the Kingdom to
introduce property and casualty Takaful products. Recognising the potential
in opening markets to new licenses, Tokio Marine Group established Tokio
Marine Retakaful company, based in Singapore, in September 2004. In
2006, the Tokio Marine Group took a 35% stake in the new joint venture
with Hong Leong of Malaysia for US$29m, to form Hong Leong Tokio Marine
"We are pleased to establish this company
with the objective of seeking new business opportunities and expanding
the Group's existing business in the Middle East and North African markets,"
announced Hisato Hamada, President and CEO, Tokio Marine Group. He continued:
"We are committed to providing products and services that are fully
aligned with our customers' cultural and social values."
Hamada added: "Tokio Marine with its
long history of a local presence believes that with its diverse portfolio,
backed by conventional and Takaful expertise, is well placed to take
advantage of opportunities that open up in the MENA region. The Group
has set its goals to establish or acquire a number of operations in
the MENA region to better serve the indigenous insurance needs. TMME
will help the Group to achieve these goals."
TMME will be a technical and management
services provider, instituting products, systems and procedures for
the existing and new ventures fully or partially owned by the Group.
"Tokio Marine Group is committed to
finding socially responsible ways of bringing insurance solutions to
its customers. These solutions are in complete harmony with its environment
and culture," continued Ajmal Bhatty, Chief Operating Officer and SEO
of the Company. "Takaful may be a system that has its roots in the Islamic
Shariah, but because of its ethical nature it has proven to be of benefit
for everyone. Not only does a Takaful customer benefit from the surplus
of the business when it does well, but he also gains the satisfaction
of knowing that his contributions and premiums are only channeled towards
ventures that are socially and environmentally responsible."
"The biggest challenge and potential
for the region lies in the development of Family Takaful which is life
insurance in compliance with Shariah principles. The cultural mind-set
against conventional life insurance has been one of the main reasons
why development of life insurance has been slow. With strong professional
approach and innovative takaful solutions, the regional markets should
be able to realize the excellent potential that exists in Family Takaful
with its related savings and pensions products," he concluded.
In July, 2009, the Labuan International
Business and Financial Centre (IBFC) said it was developing guidelines
on shariah-compliant captive insurance. Further Labuan initiatives include
provision for protected cell companies and amendments to the 1996 Insurance
Act to allow for marine and aviation captive insurance companies.
Speaking at an industry briefing in Kuala Lumpur, Labuan IBFC chief
executive officer Martin Crawford said guidelines on Islamic captive
insurance were non-existent so far, as very few jurisdictions had a
legal framework to accommodate Islamic finance with the necessary physical
infrastructure. Crawford considers that Malaysia's shariah traditions
and the comparatively low-cost nature of doing business in Labuan augur
well. The Labuan IBFC already has 32 captive and four rent-a-captive
companies in operation and may be the home of 40 captive insurance companies
by the end of the year. This compares with 50 captives in the captive
insurance market of Singapore.
Labuan has also introduced legislation for protected cell companies.
A PCC is structured with core capital, cellular capital, cellular assets
and liabilities, and core assets and liabilities. The various businesses
within each 'cell' are ring-fenced and insolvency of one cell should
not affect the solvency of the whole entity or the performance of the
other cells. For any contract the PCC discloses which cell is contracting
or whether it is a 'core' contract. 'Cellular' or 'non-cellular' shares
may be issued, depending on whether they represent an equity interest
in a specific business cell or in the core assets. The entity keeps
accounts showing the corresponding patrimonial divisions among the segregated
cells and the core cell.
Under an exemption from subsection 140(1) of
the Insurance Act, any marine and aviation risks,
including goods in international transit, can
now be handled by Labuan-based insurance companies,
whereas before April 1, 2009, the risks had
to be insured through a local onshore insurance
Regulation Of Islamic Finance
Regulation and interpretation of Shari'ah
law are two key issues in the Islamic finance industry. Before an institution
can offer such products to the public, they must first be scrutinised
and approved by a panel of Islamic scholars. However, this is by no
means a clear cut issue, and the opinions of individual scholars can
vary. Indeed, there are many academics in the Muslim world who have
been quite critical of contemporary Islamic finance culture, and who
have taken issue with certain forms of financing, notably Murabha and
Ijara contracts which, it has been argued, are too similar to conventional
forms of financing, and which do nothing to share risk and profit, the
central tenet of Islamic capitalism.
To ensure a degree of quality control
over the Islamic finance industry, regulating institutions, such as
the Malaysian-based Islamic Financial Services Board (IFSB), have been
set up to police the emerging industry. The IFSB serves as an international
standard setting body of regulatory and supervisory agencies and its
core mission is to guard the integrity and stability of the Islamic
financial services industry across the spectrum of banking, capital
markets and insurance. The board also provides guidance for institutions
offering Islamic investment products and liaises with other rule-making
bodies in the industry.
Whilst modern Islamic finance may not
be as pure as some scholars and academics would like, the development
of financial products to cover the whole gamut of the finance and investment
industry, and the creation of the regulating institutions to oversee
them, is evidence that the industry in its current form is likely to
be here to stay. And the fact that the new industry has really only
scratched the surface of potential demand for Shariah compliant and
more ethically aware capitalism means that the Islamic banking and finance
is likely to continue growing apace for some years to come.
In December, 2007, Deloitte appointed
Mufti Hassan Kaleem as Shariah scholar in its Islamic Finance practice.
The appointment makes Deloitte the first Big Four firm to appoint a
Shariah scholar, who will ensure that products and transactions are
fully compliant with the principles of Islamic finance.
There is a great shortage of qualified
experienced Sharia’a scholars, but enormous demand. Deloitte revealed
that Mr Kaleem possesses significant knowledge and experience, gained
through a combined 16 years of education and practical experience. He
holds a variety of consultancy posts in Pakistan with organisations
ranging from Islamic bank and insurance companies to advisory committees
for the State Bank and the Securities and Exchange Commission.
Deloitte believes that London is well
positioned as a gateway for Islamic Finance, especially if the current
Treasury consultation on the UK Sovereign Sukuk (Islamic bond) leads
to an actual issuance. “London represents a key location for Islamic
Finance, as the principal based governance and regulation is more adaptable
to accommodate innovation such as Sharia’a compliant products,” commented
Maghsoud Einollahi, global head of Islamic Finance at Deloitte.
Bankers and other finance professionals are concerned that the validity
of many Islamic finance transactions is open to interpretation, and
financial institutions look to guidelines set by Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI) for guidance.
Nonetheless, there is no definitive and binding set of rules saying
that banks must stick to these rulings.
One Middle Eastern banker told Reuters recently that there was "real
concern" among the conventional banks over the absence of an authoritative
centralized body to frame rules. "Islamic finance was originally
about establishing an Islamic economy but we don't even have synergy
between banks in Malaysia and the GCC (Gulf Cooperation Council),"
he told the news agency.
Afaq Khan, chief executive of Dubai-based Standard Chartered Saadiq,
countered in the same report, however, that of the 6,500 rulings, or
fatwas, already issued by Islamic scholars, there is a consensus on
the overwhelming majority.
"The 5 per cent where the difference lies
gives us hope that there will be more innovation,"
he said. "That 5 per cent is very important
for change and evolution in the industry."
Taxation Of Islamic Finance
While the tax treatment of Islamic financial instruments in the main
issuing jurisdictions has been covered above, many other countries are
seeking to encourage Islamic investment by introducing tax incentives.
For instance, the South Korean government has announced that a tax
exemption will be offered for revenues from Islamic bonds, starting
The tax incentive is aimed at attracting Islamic funds, as it was said
that the Islamic financial market has grown rapidly from only USD0.3bn
in 2000 to some USD31bn in 2007. By tapping that market, the tax change
is expected to improve corporate finances by broadening the sources
of investment, as well as reducing dependence on the US and Europe for
financing, thereby diversifying risk.
As interest is not allowed by Shari’ah law, earnings on Islamic
bonds are taken as profit, which is subject to being taxed in South
Korea. The tax so paid is said to be the equivalent of interest of between
1.3% and 3.4%. The government has therefore introduced a bill to offer
the same tax incentives as are given to normal bonds - income and corporate
tax exemptions for interest received on bonds denominated in foreign
The tax incentives will first be applied to two major Islamic bonds,
Ijara Sukuk and Murabaha Sukuk. Withholding tax will be exempted for
both Ijara Sukuk and Murabaha Sukuk, together with transfer, acquisition
and registration tax exemptions for Ijara Sukuk, and value-added tax
exemption for Murabaha Sukuk.
In May, 2010, Australian Assistant Treasurer, Senator Nick Sherry,
announced the terms of reference for the Board of Taxation's review
of the tax treatment of Islamic finance in Australia.
The review, which was announced on April 26, 2010 by the Assistant
Treasurer and the Minister for Financial Services, Corporate Law and
Superannuation, Chris Bowen, will be a comprehensive analysis of Australia's
tax laws to ensure that, wherever possible, they do not inhibit the
provision of Islamic finance, banking and insurance products.
"Islamic finance is a rapidly growing part of the global financial
system," said the Assistant Treasurer. "The Islamic finance,
banking and insurance market is worth almost AUD1 trillion (USD850bn)
and could reach as much as AUD5 trillion."
"Attracting more of these funds and investment will develop business
and boost jobs in Australia," Sherry continued. "This review
is not about creating special treatment, but about creating a fair and
level playing field for the provision of Islamic financial products
into the Australian market."
"My recent trip to the Middle East illustrated the vibrancy and
dynamism of this sector and there is no reason why we shouldn't address
national tax laws that may be inhibiting local growth," Sherry
noted. "Our funds management sector also has much to offer the
wholesale Islamic finance sector - so the review will address any issue
on that front also."
The Board of Tax has been asked to make recommendations on Commonwealth
laws and findings on State and Territory laws that might be impediments
and to review the progress made by other key jurisdictions in Europe
and Asia in similar efforts.
"Ultimately, a guiding principle here is that the tax treatment
of Islamic financial products should be based on their economic substance
rather than their form wherever possible," said the Assistant Treasurer.
"Several other Western jurisdictions have made progress in achieving
this - as have we - but now we need to move to the next level. The Board
of Taxation review will enable us to do just that," he concluded.
The Board is being asked to provide a final
report to the Assistant Treasurer by June 2011.