Islamic Financial Market Exchange in Dubai

Islamic Financial Market Exchange in Dubai

"Prospects of Islamic finance in Dubai Financial Market", Gulf News special report by Rushdi Siddqui, Global Director of Dow Jones Islamic Indexes, December 30, 2006

This special piece in Gulf News by the Director of Dow Jones Islamic Indexes (DJII), Rushdi Siddiqui raises some issues associated with establishing an Islamic stock exchange, but neglects to even mention many. The primary focus of the article is on how to decide what is Shari'ah-compliant, but even this focuses on the current standards created by DJII and adopted by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). However, Mr. Siddiqui avoids the possibility that Shari'ah-compliant products may be offered that that violate the substance and intent (maqasid) of the Shari'ah. Dr. Mahmoud El-Gamal, a prominent scholar on Islamic finance, has repeatedly warned that the current system of using Special Purpose Entities and ancient contract forms will eventually lead to the approval of products that follow the form and violate the substance of the Shari'ah.

While this is a significant problem for the Islamic financial industry to address, the greater problem, I believe, is overlooking the actions of firms in assessing their Shari'ah-compliance. There are screens in place focusing on weeding out companies who derive substantial income from haram business like alcohol, tobacco, weapons and gambling, but there are not screens in place to screen out companies with unethical business practices. These include companies found to be engaged in corruption, those who violate labor, human rights and environmental regulations and global norms. There are also no positive screens to reward companies that not only avoid haram business, but adhere to the highest ethical business practices. This would encourage companies to engage in behavior that promotes the development of the Islamic (and non-Islamic) ummah. An Islamic Financial Exchange focused on the substance of the Shari'ah, not merely the form, will provide a jumpstart to expanding the Islamic financial industry, especially if it brings in practices worked through by the socially-responsible financial industry.

Shari'ah-compliant mortgages in New Zealand, Islamic finance in Lebanon, Sukuk

Islamic bank expansion

"Islamic banks seek fast track expansion", Khaleej Times, December 26, 2006

Islamic banks centered in the UAE are rapidly expanding their branch network within the Middle East and some plan to expand their branch network to other countries with large Muslim countries like Indonesia, Bangladesh, India and countries in North Africa and Central Asia.

Islamic mortgages enter New Zealand

"Buying a home the Islamic way", TV New Zealand, December 26, 2006

The loans promise to be interest-free (which means the bank charges 'rent' to cover its cost of capital), but whether the product is identical to other products in other countries is unclear. First, there is no mention of a Shari'ah board. The product is structured so that the buyer pays 20% up front and monthly 'deposits'. While this is not elaborated upon, it is likely benchmarked to conventional product amortization tables to provide the bank with a return similar to offering conventional products, but the payments are probably split between 'rent' with the remainder used to increase the buyers' share of ownership. The feature that distinguishes the product from many other Islamic mortgage products is that after 10 years, the buyer can either buy the remaining share of the house from the bank (splitting current market value in excess of initial market value with the bank, keeping 90 percent of the gain) or the buyer can roll the deal over for another 10 years.

Islamic Financial Planning Week in Brunei

"Islamic Finance Week Planning At The Mall", BruneiDirect.com, December 28, 2006

Information is available from fmBrunei

Sukuk issues

"Kuwait: Closing of US$ 200 million Lagoon City Islamic Musharaka Sukuk", MENAreport, December 28, 2006

"Dubai Islamic Bank to sell sukuks of Islamic bonds", Daily Star (Lebanon), December 28, 2006

Islamic finance in Lebanon

"Lebanon offers open field for Islamic financing", Daily Star (Lebanon), December 28, 2006

A brief summary of the Islamic financial industry in Lebanon.

Islamic banking needs to develop new & innovative products

"Islamic Banking Needs To Gear Up To Face Changes In Consumer Demand", Bernama, December 22, 2006

The general manager of Hong Leong Bank Bhd, Aminnurrallah Mustapah, criticized the practice of financially re-engineering conventional products to Islamize them. While he was vague in describing the new products that would replace the re-engineered, he did tell Bernama in an interview that "the appetite is definitely there for ground-breaking Islamic structures". A growing realization from Islamic financial industry professionals that simply re-engineering conventional products does not hold the key to expanding the industry should hopefully lead to new products that are based on the ethical system of Islam and work to achieve the ambitious goals for social equality and development laid out by Islamic economics.

Kuwait Finance House expansion to Malaysia

"KFH eyes RHB Islamic assets", The Star (Malaysia), December 22, 2006

Speculation grows on the details of any tie-up between Kuwait Finance House and Rashid Hussain Bhd (RHB) Islamic Bank.

GDP-linked bonds & Shari'ah-compliance

"GDP-linked bonds fully compliant with Sharia demands", Financial Times, December 22, 2006

While I don't know whether a GDP-linked bonds would be considered Shari'ah-complaint, it is an interesting idea to look into.

Islamic credit cards

"BSN Aims At 50,000 Al Aiman Credit Card Holders Next Year", Bernama, December 22, 2006

"Al Aiman offers a low finance charge of 1.25 percent a month and is also free from riba or interest rate and gharar or hidden costs. The card, however, cannot be used at premises that are not listed under the Syariah Council". The annualized compounded 'finance charge' for 1.25 percent per month is 16.1 percent.

Call to (intellectual) arms for the Muslim world

"Original ideas, anyone!", Khaleej Times, December 22, 2006

An opinion piece from the Assistant Editor Aijaz Zaka Syed. Its not directly connected with Islamic finance, but it presents a good model for Islamic finance to build on and distinguish itself from conventional finance.

AmIslamic sukuk

"AmIslamic to raise RM400 million from bond sale", Business Times (Malaysia), December 22, 2006

Contradictions in current practices in Islamic finance

Contradictions within Islamic finance

One of the most seemingly intractable contradictions I see within the Islamic finance industry (and, like all the material on this blog, the opinions are mine and do not represent those of the IHI) is the presence of unethical practices within an industry based on the ethical system laid down by Islam. There are two examples of this I see as the most illustrative: non-divestment from Sudan and Islamic banks offering lotteries for participants. The former seems apparent: when a government is enabling the wholesale slaughter of a portion of its population, it is unethical to do business with the government of the country or to be seen as receiving favor from the government of the country. However, that is exactly what Al Salam Bank - Sudan has done. In the announcement they will begin operating in Sudan, they write:

The economic and political situation in Sudan is encouraging a fresh wave of investments. The Sudanese economy is booming and is one of the fastest growing in the region buoyed by increasing oil production. Sudan has become a magnet for investors, businesses and financiers since the signing of a peace treaty between the north and south of the country.

They followed up this announcement (made April 11, 2005) on May 26. 2005 with the opening of the bank "in the presence of President Omar Al Basheer". Both occurred after Tom Eric Vraalsen, Secretary-General Kofi Annan’s Special Envoy for Humanitarian Affairs in Sudan compared (on March 19, 2004) the situation in Darfur to that of Rwanda in 1994 (the U.N. timeline starts in 2003). This seems to be in conflict with the ethical underpinnings of Islamic finance.

There is also the contradiction of Islamic financial institutions offering lotteries in exchange for banking with them. For example, the Al Alhi Bank of Kuwait has a lottery giving away cash and expensive cars for those customers who transfer their salary to the bank and take out a loan from the bank. It is peculiar that an Islamic bank would be tying the use of their product to gambling, which is very explicitly prohibited for Muslims.

Upcoming conferences in Islamic finance

Conferences

"Chief Justice To Deliver Keynote At Islamic Finance Seminar", Bernama, December 21, 2006

Chief Justice of Malaysia, Tun Ahmad Fairuz Sheikh Abdul Halim, will give the keynote speech at the IFSB 3rd Seminar on Legal Issues in the Islamic Financial Services Industry.

"BIsB Gold Sponsor of the 6th Conference of Sharia'a Supervisory Boards of Islamic Financial Institutions", AMEinfo, December 21, 2006

As always, the Institute of Halal Investing maintains a calendar of upcoming conferences.

Infrastructure, Indonesia, Indices, Banking & Skill Shortages

Islamic banking in Malaysia

"Malaysia's 3rd Islamic Bank to Open", AP via Yahoo! Business, December 20, 2006

A consortium of three banks (Qatar Islamic Bank, Malaysia-based RUSD Investment Bank and Global Investment House of Kuwait) is opening the Asian Finance Bank, the third foreign-owned Islamic bank in Malaysia. The chief executive Faisal Alshowaikh announced plans to open seven branches across Malaysia before expanding the bank into Indonesia, Brunei and Singapore.

New $2 billion Shari'ah-compliant infrastructure fund

"Abraaj Capital USD2 billion fund targets vast infrastructure investment opportunities", AMEinfo, December 20, 2006

The fund will be run by Abraaj Capital with contributions from Deutsche Bank and Ithmaar Bank. The projects will likely include some project financing. There is no indication that the banks intend to follow the Equator Principles relating to monitoring the social and environmental impacts of project financing.

Acute shortage of qualified employees in Islamic banking industry to worsen

"Booming Islamic banking will need 30,000 jobs in the Gulf in 10 years: A.T. Kearney study", AMEinfo, December 20, 2006

Management consulting firm A.T. Kearney predicts that the Islamic banking industry in the Gulf region will require 30,000 new employees trained in Islamic banking over the next ten years.

Indonesia plans to enter sukuk market

"Indonesia eyes Islamic bonds for retail investors", Reuters via Yahoo! News Asia, December 20, 2006

Indonesia, the most populous Muslim country with one of the least developed Islamic finance industries plans to enter the market by issuing Islamic bonds, pending the passage of legislation proposed recently.

Overview of new S&P Shariah indices

"An Overview of Shariah Compliant Indices", Yahoo! Business, December 20, 2006

A brief overview of the S&P indices and comparison with conventional S&P indices and the Dow Jones Islamic Index.

S&P Shariah Indices, GCC sukuk

S&P to create Shari'ah-compliant indices

"S&P launches shariah indices", Financial Times, December 19, 2006

Standard & Poor's Index Service announced the launch of three new indices based on existing indices, but screened to be Shari'ah-compliant. The indices will be called the S&P 500 Shariah Index, the S&P Europe 350 Shariah Index and the S&P Japan 500 Index. The article quotes Alka Banerjee, vice-president of S&P Index Services: “Potential growth in shariah-related investing around the world is enormous, but has been held back by a lack of globally accepted benchmarks and other tailored investment tools." I don't believe that the lack of a benchmark holds back Shari'ah-compliant investing. The industry has, as the article points out, been "fuelled by the oil-related boom in the Middle East", but that explanation misses much of the reason for Islamic finance. The industry is supposed to follow Qur'anic ideas about social justice, promoting equality by reducing exploitation, protecting the environment and reducing poverty, not engineering medieval contracts to look like conventional products with no concern for the social or environment impacts of how the products are used. Shari'ah scholars are vital for the industry, but not to rubber stamp financial institutions' financially engineered products to see if the form of the contracts fits with financial practices of 800 years ago. The scholars job is to decide whether financial products meet up with the values of Islam. Except for a couple major banks with Islamic windows, no Islamic financial institution has signed up to the Equator Principles, which provides a set of standards relating to the social & environment standards for financial institutions funding project finance.

GCC sukuk share of bond issues rising

"GCC bond sales 'may surge to $40bn'", Trade Arabia, December 19, 2006

GCC bond sales have increased significantly over 2005. Bond sales were $25 billion in 2006 compared to $10 billion in 2005 and only $4 billion in 2004. Islamic bonds (sukuk) make up 40 percent of the total bond sales in 2006 compared to 30 percent in 2005.

Grameen Bank, non-Muslims using Islamic banking, Ethical finance, Malaysian sukuk, Islamic MBA

Grameen Bank

"Nobel prizewinner using micro-credit for macro benefit", International Herald Tribune, December 18, 2006

In an article on Dr. Muhammad Yunus, founder of the Grameen Bank and recently a Nobel Peace Prize winner, they quote him discussing the tension he feels with those who favor strict adherence to Shari'ah Law:

Not everything is rosy in Bangladesh, either, as the tension between secular and Islamic law grows. A question on sharia-compliant finance, which does not permit charging interest, provokes a rare grimace.

“In Islam, interest is banned because it is a tool of exploitation. In our case that doesn’t happen, because this bank is owned by the borrowers. So we can at least argue. But they always say ‘we would be very happy if you would run the bank on Islamic principles’.”

I think Dr. Yunus' complaint is one area where much of the current Islamic financial industry loses its relevance and special appeal by focusing on form rather than substance. The Grameen Bank has been instrumental in poverty reduction and by reducing the need for exploitative conventional finance and the poor's reliance on usurious moneylenders. Incorporating lenders as co-owners gives each borrower an equity stake in the lending portfolio and, I belive, should assuage concerns about the use of interest in the Grameen model of micro-credit.


Ethical & Islamic Finance

"Non-Muslims snap up Islamic accounts", BBC News, December 18, 2006

Islamic current accounts in England are becoming more popular with non-Muslims as concern about what projects deposits are used to finance. The article quotes Emma Dellaway, "I don't have much money [...] but what I do have should not be used unethically. I hate to think of arms going to some African country funded, however indirectly, from my account." The appeal of Islamic finance in this regard is the prohibition on investing in haram projects (e.g. alcohol, pork, tobacco & weapons). However, the current structure of Islamic finance lowers this appeal because there is a cost to holding the account. While Ms. Dellaway's friends "can see how closely ethical finance and the Islamic financial models fit together," they do not hold Islamic deposit accounts, perhaps because of the additional cost. The closer Islamic finance borrows tools from the Socially Responsible Investing (SRI) industry, the lower the costs. When the industry is based upon Shari'ah-based ethical finance more than relying on mimicking the conventional financial industry, the costs will be lower due to both reducing the fees paid to lawyers and consultants and higher demand from the more socially-concerned so-called "Generation We".

Malaysian debt market

"2006 landmark year for Malaysian bond market", Business Times (Malaysia), December 18, 2006

"Aseambankers Malaysia Bhd, one of the top bond advisers in the country, projects some RM40 billion worth of bonds to be sold next year, of which 70 per cent is expected to be Islamic-based."

Islamic MBA

"Oil wealth paves way for Islamic MBA", Financial Times via Zawya, December 18, 2006

The Financial Times article today on the prospects of an Islamic MBA program presents good ideas but neglects a couple of important reasons and features of any Islamic MBA program. First, most professionals in the Islamic finance industry and the regulatory bodies which oversee them, particularly in the Middle East and Asia, could benefit greatly from specialized training in business with a focus on the Islamic financial industry. However, the lack of mention of socially- and ethically-responsible business practices highlights a continuing hole where the Islamic finance industry could broaden its appeal and lower costs by using already well-established practices.

Murabaha is most used financing method

"Murabaha Remains Most-Favored Source of Islamic Financing", MENAfn, December 18, 2006

In an article focused on the $300 million Murabaha commodity facility, a couple of points are noteworthy:
• "Islamic banks in particular have a huge exposure to investment and financing in the real estate market"
• "Bankers agree that the internationally-accepted Murabaha will remain a most-favored source of financing for banks, corporates and even utilities, in tandem with the emerging Sukuk (Islamic bond), which has gained increasing prominence over the last year or so."
This reliance on real estate- and commodity-based products could become the biggest liability for the Islamic financial industry. The former is in its greatest boom period in decades and the latter is highly volatile. While the markets are going well for firms that use real estate- and commodity-based products, a cyclical decline could be magnified in the real estate and commodity markets. This would be a huge (and hugely unnecessary) blow to a potentially large industry. It is unnecessary because using sukuk and murabaha transactions are only necessary to fill the form of Shari'ah-compliance and are a least-common-denominator product because they most resemble conventional banking products (pre-arranged fixed markup vs. interest) and are widely seen as Shari'ah-compliant. A more sustainable model would be to focus on the socially- and ethically-responsible financial industry.

Deutsche Bank predicts 15% p.a. growth in Islamic finance, Islamic socially responsible investing, REITs

Islamic finance market to grow 15 percent--Deutsche Bank

"Islamic finance market 'to grow 15pc'", TradeArabia, December 15, 2006

Deutsche Bank expects the market for Shari'ah-compliant products to grow by 15 percent annually. Discussing the Islamic finance market, Stefan Kirsch, business manager in the bank's international private wealth management arm:

'We consider ourselves market leader for Islam-compliant financing deals, at least regarding the number of products on offer,' he [Mr. Kirsch] said.

He said some Islamic products were also interesting for risk-averse non-Muslims.

'Islam-compliant equity funds, which were launched before the dot.com crisis, performed better than traditional ones -- they didn't buy into highly-indebted telecom firms,' he said

Mr. Kirsch's explanation that risk-averse non-Muslims would be interested in Islamic financial products is peculiar since the restriction on indebtedness and the change in the indebtedness ratio from debt-to-assets to debt-to-market capitalization, as well as the fixed ceiling of 33 percent skewed Islamic equities in favor of tech companies during the bubble years as their debt tended to be low and their market capitalization was quickly rising. Furthermore, since the denominator used to calculate indebtedness was market capitalization, as the bubble collapsed, the funds were forced to divest their holdings near the low point of the share price. The Islamic equity index managers were not allowed to wait for the prices of their tech stocks to rebound, hardly an appealing portfolio profile for a risk-averse investor.

This is not to say that Islamic finance (and in particular, Islamic equity funds) cannot be popular among non-Muslims. The focus of Islamic finance on avoiding the haram industries (e.g., tobacco, alcohol, gambling and interest-based financial firms) makes the stock pool from which investments can be chosen very similar to socially responsible mutual funds. The heavily engineered, higher priced Shari'ah-compliant financial products are likely to have a lower appeal for non-Muslims not concerned with strict Shari'ah-compliance. On the other hand, products build around the ethical foundations of Islamic scholarship would be much more likely to have appeal with non-Muslims. Reducing the exploitative aspects of the borrower-lender relationship (say, by adopting a more mutual approach as credit unions do) would have much more appeal to non-Muslims than products approved by Shari'ah boards that are identical in every other way to conventional financial products.

Indonesian Islamic finance

"Shariah Banking: For richer or poorer", Yemen Times, December 15, 2006

An article by Dr. Terry Lacey (who wrote an editorial a couple of weeks ago in the Middle East Times on the socially responsible focus of Islamic finance).

Islamic REITs

"ARB Expects REIT VAlue To Reach RM1 Bln Within Two Years", Bernama, December 15, 2006

Amanah Raya Bhd, a Malaysian government-owned trustee company plans on launching an Islamic REIT by the second half of 2007, according to an article in Bernama, the Malaysian national news agency. The article quotes the company's managing director Datuk Ahmad Rodzi Pawanteh.

Sukuk, law firms, Nakheel, HSBC Amanah, expanding the Islamic financial industry

King & Spalding to open Dubai office

"King & Spalding plots growth in Islamic world", Atlanta Business Chronicle, December 14, 2006

The Atlanta-based law firm King & Spalding plans to open up a Dubai office in order to capture some of the market for Islamic finance.

Law firms chosen to advise on world's largest sukuk

"NAkheel lists world's largest Sukuk, giving DIFX 44 per cent of global listed value of Sukuk", AMEinfo, December 14, 2006

Clifford Chance & Denton Wilde Sapte, two large international law firm were picked to advise Nakheel on their world's-largest US$3.52 billion sukuk.

HSBC Amanah awarded 'outstanding Islamic private banking'

"HSBC Amanah named Most Outstanding Islamic Private Banking", AMEinfo, December 14, 2006

HSBC Amanah, the Islamic window of the international bank, was presented with the award at the 2006 Kuala Lumpur Islamic Financial Forum (KLIFF).

Islamic financial industry growth is the responsibility of all within the industry

"Future Success of Islamic Finance Rests On Efforts Of Industry Members", Bernama, December 14, 2006

The governor of Malaysia's central bank, Bank Negara Malaysia, Tan Sri Dr. Zeti Akhtar Aziz said that "all parties from the Islamic finance practitioners, educators to researchers, should put in relentless efforts to continuously promote the development of Islamic finance into one which is progressive, dynamic, responsive and sustainable."

I believe this could be accomplished most easily by integrating training in Islamic finance with sustainable, socially-responsible and ethical finance. Not only do both areas of finance have similar restrictions on their actions in order to promote an ethical vision, the practitioners could share knowledge and insights from their respective fields that would benefit both groups.

WIBC, sukuk, Al Rajhi, Shariah Capital on AIM

World Islamic Banking Conference (WIBC)

"Jersey Exhibits At Global Islamic Finance Conference", Investors Offshore, December 13, 2006

A group of financial professionals from the offshore financial center of Jersey participated in the World Islamic Banking Conference 2006.

"Fresh boost for Islamic finance", Gulf Daily News, December 13, 2006

At the World Islamic Banking Conference 2006, the Islamic Finance Qualification was launched. The IFQ announcement was originally described back in October on ihiBlog.

New sukuk

"Aldar will sell up to $3.5b of bonds", Gulf News, December 13, 2006

"UAE developer Aldar Properties will sell up to $3.5 billion worth of Islamic bonds in the first quarter of 2007..."

"MTC USD 1.2 Murabaha Facility successfully syndicated and oversubscribed", Kuwait News Agency, December 13, 2006

"Joint bookrunners ABC Islamic Bank, Arab Bank, Calyon, Gulf International Bank, Kuwait Finance House and National Bank of Abu Dhabi successfully closed syndication of a USD 1.2 billion Murabaha Facility for Kuwait's Mobile Telecommunications Company (MTC) on Wednesday 06 December 2006..."

It is "one of the largest Islamic financings in 2006 [and] proceeds of the Facility will be used to refinance the existing USD 750 million Murabaha Facility for an additional period of 12 Months and for general corporate purposes".

Al Rajhi expanding in Malaysia

"Saudi's Al Rajhi on aggressive expansion", The Star (Malaysia), December 13, 2006

The Saudi Islamic bank Al Rajhi has opened nine new branches in the past two months since its entry to the Malaysian market and has already announced plans to open more branches in the coming year.

Shariah Capital listed on London's Alternative Investment Market exchange

"U.S. firm aims at Islamic finance via London Shari", Reuters, December 12, 2006

The U.S.-based firm Shariah Capital Inc., which helps U.S. firms create Islamic financial products (one of its projects was assisting with the East Cameron Partners sukuk) will be listed on the Alternative Investment Market.

Islamic banking

Islamic banking in Egypt

"Accounts with a Conscience?", Business Today Egypt, December 12, 2006

Although Egypt's population is large and predominately Muslim, it does not have a significant Islamic banking industry. This article describes some of the historical reasons for this. Unfortunately, it does not fully look at what the impact the Al-Azhar fatwa allowing bank deposit interest (which has not been widely accepted) could have on the development of the Islamic banking system in Egypt.

Islamic banking

"Islamic banks see strong growth", Gulf News, December 12, 2006

An article looking at the current trends in Islamic banking and encouraging Islamic banks for focus on service and price, not simply Shari'ah-compliance. When looking at other aspects of Islamic banks, and the article does not address this, it seems imperative to look closely at the ethical implications of the banking activities, particularly the loan portfolio held by the banks.

IsDB loan to Gambia, CIMB Kanoo, EIIB-BIsB cooperation, Badr Al Islami offers new product, Arcapita takes over Viridian, WIBC Banker of the Year

The Gambia receives loan from Islamic Development Bank

"Gambia: Islamic Bank Loans Ratified By National Assembly", The Gambia Journal via AllAfrica.com, December 11, 2006

The Gambian National Assembly ratified two loans from the Islamic Development Bank for two loans denominated in Islamic Dinar (ID, which are linked at par with the IMF Special Drawing Rights (SDR)). The loans are for ID6.3 million and ID1.3 million (US$8.9 million and US$1.8 million, respectively) and will finance an agricultural project "designed to combat and roll back salt intrusion in the Gambia's lowland regions". [Note: the exchange rates used between ID & US$ do not match with the SDR exchange rates]. The Secretary of State for Finance and Economic Affairs, Musa Bala Gaye, is quoted describing the project:

"The Lowland Development Project consists of rural infrastructure including lowland and irrigated land development, field equipment and tools, environmental protection, input and supply, project management unit, familiarization visits, and start of workshops, technical assistance, consultancy services and audit"

If the Islamic Development Bank wanted to increase funding for projects like this, they could securitize the loans and sell them to investors. Many investors looking to invest in development would be willing to accept a lower return on their investments as long as the investment is working to assist with development. This could be a way in which Islamic finance could be expanded to appeal to both Muslims and non-Muslim in a way that focuses on the substantive ethical contribution it would provide in terms of alleviating poverty, environmental protection and promoting food security without relying entirely on the form being Shari'ah-compliant.

CIMB Islamic ventures into Bahrain

"CIMB, Kanoo Group Launch Islamic Finance Joint Venture", Bernama, December 11, 2006

CIMB Group, a large Malaysian bank with a substantial Islamic subsidiary has teamed up with Yusuf Bin Ahmed Kanoo Holdings WLL, a Bahrain-based conglomerate. The joint venture will begin operating on January 1 and will focus on debt & equity capital markets, corporate banking, asset management and treasury services. The head of CIMB's Islamic banking division, Badlisyah Abdul Ghani has elsewhere been quoted saying that the launch marks "the start of a long journey for us in the region and we look forward to growing with our customers here".

European Islamic Investment Bank Plc

"European Islamic Investment Bank Plc and Bahrain Islamic Bank sign agreement for international co-operation on Islamic finance", AMEinfo, December 10, 2006

The European Islamic Investment Bank, the first Shari'ah-compliant investment bank licensed by the Financial Services Authority in the U.K. has signed a strategic co-operation agreement with the Bahrain Islamic Bank, the first Islamic bank in Bahrain.

Financing stock trading

"Badr Al Islami launches a Shariah compliant product to finance trading in listed shares", AMEinfo, December 9, 2006

Recently launched Badr Al Islami has unveiled a Shari'ah-compliant financing for share trading. It is unclear whether this is a Shari'ah-compliant version of margin trading or a different product.

Arcapita and Viridian

"Bahrain's Arcapita completes Viridian takeover", Interactive Investor, December 10, 2006

Bahrain-based Islamic investment firm Arcapita has completed its takeover of Northern Ireland's largest electricity supplier Viridian.

Islamic Banker of the Year

"Islamic banking stalwarts honoured at key seminar", Gulf Daily News, December 11, 2006

Al Salam Bank vice-chairman and managing director Hussein Al Meeza was given the Islamic banker of the year award at the World Islamic Banking Conference which wraps up today.

Islamic finance in Malaysia & GCC

"Malaysia at forefront of Islamic finance", The Star (Malaysia), December 11, 2006

While it reads a little like an advertisement for Malaysian Islamic finance, it presents a variety of figures on the size of the Islamic financial industry in Malaysia as well as the size of the potential petrodollars in the GCC.

Commodity financing & the role of social justice in Islamic finance

Commodity trading in Islamic finance

"Commodities and Islam, the start of something big", Reuters UK, December 8, 2006

One of the ways in which the Islamic financial industry has structured financial deals to avoid violating the scholars' interpretation of what is Shari'ah-compliant is by substituting trade in commodities (e.g. metals, palm oil) as a financing mechanism. Essentially, every transaction is a murabaha (cost-plus) sale between a financial institution and its customer where the bank purchases an item for the customer and sells it to the customer at a fixed markup, often in installations. The areas in which this type of trading has become particularly controversial is by using multiple halal transactions to approximate derivatives, currency swaps or personal loans (through tawarruq, for example, which literally means 'monetization'). In tawarruq, a commodity is described well by Mahmoud El-Gamal in his new book Islamic Finance: Law, Economics & Practice:

"If a customer wishes to borrow $10,000 and pay 5 percent interest, and the bank wishes to lend him the money at that rate, the bank needs only to buy $10,000 worth of platinum from a dealer, sell to the customer on a credit basis for $10,500 to be paid later, and then sell the platinum on behalf of the customer back to the dealer, thus generating the desired result (p. 69)

This article describes how a currency swap is designed to become Shari'ah-compliant:

"Under the swap, if the ringgit falls against the dollar, the bank makes a payment to [...] offset the drop in the dollar value of the group's investment. The bank does this by selling the group some metal at a discount to market value. The group then sells the metal and treats the gain as profit."

These types of transactions meet the literal interpretation of how Islamic finance should be conducted, but where does the Islamic conception of social justice enter into the transactions? That is an area in which I believe Islamic finance should work on improving.

Islamic finance: book review

"Book Report: An Introduction to Islamic Finance", International Herald Tribune, December 8, 2006

A review of a book on Islamic finance written by two professionals, Zamir Iqbal & Abbas Mirakhor, one at the World Bank and one at the International Monetary Fund (IMF). The review is a fairly standard description of Islamic finance, but the beginning describes the authors description of the ideal role of Islamic finance:

"In Islam, such subjects [finance & economics] are not profane, but form part of a sacred totality in which profit-seeking, if it is done right, can also be a holy endeavor. And that rings true: After all, entrepreneurship creates wealth, and under the right conditions, wealth spreads, allowing humans to rise above just trying to make ends meet."

An interesting description of the role Islamic finance plays in the interaction between religion, economics and social justice.

Largest sukuk offering, Crude Palm Oil Murabaha

Largest sukuk offering

"Dubai developer sells world's largest Islamic bond", Yahoo! News India, December 7, 2006

The company building the palm-frond shaped islands off of Dubai and had to increase the sukuk issue to meet demand. The sukuk issue ended up being US$3.52 billion.

"Commodity Murabahah set to draw more interest", Business Times (Malaysia), December 7, 2006

The use of commodity murabaha with the underlying transaction based around crude palm oil (CPO) will ease the problems banks have with the illiquidity and maturity mismatch problems associated with Islamic banking operations, but it appears that there has been a breakdown between the basic ideas on which Islamic banking is based. The description of Islamic banking (whether or not this is supported by everyone) is that it is free of interest. However, the commodity murabaha puts the interest-free nature of Islamic banking in doubt. The following is quoted directly from the Business Times article:

"'The main plus point of Commodity Murabahah is that it gives a pre-agreed net yield rate of return at the point of transaction and is Gulf Cooperation Council-compliant,' RHB Islamic Bank chief executive officer Khalid Bhaimia said." (italics added)

How is a 'pre-agreed net yield rate of return' different from interest? Is this distinction one that undermines the basis for Islamic banking or does it make it clearer that an incorporating an ethical edifice for Islamic banking would make it more widely accepted and used by both Muslims and non-Muslims? This is my view looking at Islamic banking through the eyes of a non-Muslim. (Note: as the disclaimer to the right says, this is my personal opinion and does not represent the opinion of the IHI).

Citigroup in Singapore, Deutsche Bank offers Islamic mutual funds, Gulf Finance House in India & China

Gulf-based Islamic finance moves to India and China

"Gulf Finance House eyes to invest in India and China", Arab Times, December 6, 2006

Gulf Finance House, the Bahrain-based Islamic bank, has announced plans to invest at least US$1 billion in China next year and significantly expand the amount invested in India (currently around US$2 billion). The bank invests primarily in infrastructure projects and has made investments in Jordan and Morocco. .

Citigroup in Singapore

"New Islamic investment products expected to attract more Middle Eastern funds", Channel NewsAsia, December 6, 2006

Citigroup has established Islamic operations in Singapore. The products will be based on commodity transactions and will be 'Islamic equivalents' of interest-rate swaps, cross-currency swaps and foreign exchange forwards, all based on murabaha, the cost-plus sale used in "70 percent of Islamic short- and medium-term money market transactions in the Middle East".

"Foreign Islamic bond issuers eye Singapore-Citigroup", Reuters via Yahoo! NewsAsia, December 6, 2006

Citigroup has announced that they plan to issue sukuk in Singapore where there have been very few Islamic products offered, particularly compared to neighboring Malaysia, where 75 percent of all bond issues are suuk.

Deutsche Bank offers Shari'ah-compliant global mutual funds

"Deutsche Bank launches Shari'a mutual fund capability", AMEinfo, December 6, 2006

Deutsche Bank announced the creation of several global Shari'ah-compliant mutual funds, the DWS Noor Islamic Funds. The first five announced are DWS Noor Precious Metals Securities Fund, DWS Noor Global Select Equity, DWS Noor China Equity Fund, DWS Noor Japan Equity Fund and DWS Noor Asia Pacific Equity Fund. The Shari'ah-compliance was monitored by the Deutsche Bank-financed Dar al Istitmar.

Faith-based funds, WIBC, Dubai Bank, Dubai Islamic Bank

Faith-based finance grows in the U.S.

"Putting faith in your investment plan", Bankrate.com via Yahoo!Business, December 5, 2006

While Islamic finance only gets a small share of the religious-based funds and an even smaller relative share of the total mutual fund market in the U.S., it represents one area of a growing religious-based mutual funds. There now exist funds tailored for Catholics, conservative Christians, Quakers, Mennonites and Jews, in addition to those existing for Muslims.

World Islamic Banking Conference (WIBC) 2006

"More than 700 internatioanl bankers to attend the 13th annual World Islamic Banking Conference", AMEinfo, December 5, 2006

The World Islamic Banking Conference (WIBC) will open December 9th and run until December 11th in Bahrain. The conference will include presentation of the McKinsey Competitiveness Report and seminars on Shari'ah Advisory, Islamic Ratings, Retail Banking, Corporate & Investment Banking, and a discussion of innovation in Islamic finance. In my opinion, the conference is missing an opportunity to discuss the use of socially- and ethically-responsible benchmarks in Islamic finance, like the Equator Principles, as well as the opportunity to discuss the relevance of the credit union model for Islamic banking.

Dubai Bank pushes ijara

"Ahmed El Shall: Ijara is on of the most flexible property finance programs available & National Sukuk will continue to grow", AMEinfo, December 5, 2006

Dubai Bank currently offers an ijara home finance plan and plans to add a murabaha (cost-plus) and istisna'a (construction finance).

Dubai Islamic Bank wins 'Bank of the Year - UAE' award

"Dubai Islamic Bank wins 'Bank of the Year - UAE' award", AMEinfo, December 5, 2006

The award was given by The Banker.

Abu Dhabi Islamic Bank sukuk

"Western investors flock to sukuk", Financial Times, December 4, 2006

The sukuk is the first issued by Abu Dhabi Islamic Bank.

Sukuk & Shari'ah-compliant healthcare REIT

New sukuk

"Lagoon City Musharaka Sukuk Road show launched in Bahrain", AMEinfo, December 4, 2006

The sukuk is being issued to finance residential and commercial real estate development in the Kheiran Pearl City project in Bahrain.

"Securitisation the way forward to raise finance and provide investment opportunities", Channel News Asia, December 4, 2006

The article describes the first Shari'ah-compliant REIT, comprising 17 private hospitals built with conventional interest-bearing loans.

GCC banks make inroads into Malaysia; Singapore playing catch-up in Islamic banking

Singapore jumps onto Islamic banking wagon

"Singapore playing catch-up in Islamic banking", The Edge Daily, December 1, 2006

Despite a late start, Singapore has been trying to attract the large amount of funds flowing into Islamic banking markets over the past five years. Most of the current development of the Singaporean Islamic banking industry has focused on Asia, but recently the focus has been widened to include the Middle East and, in particular, the Gulf Cooperation Council. Singapore only became a member of the Islamic Financial Standards Board (IFSB) and, unlike nearby Malaysia, Indonesia and Brunei, does not have a national Shari'ah regulatory body.

Dubai Islamic Bank picks Malaysia

"Dubai Islamic Bank to Turn M'sia A Hub For Asian Region", Bernama, December 1, 2006

The first surviving Islamic bank, Dubai Islamic Bank, which was established in 1975, has picked Malaysia to become the center of its expansion into Asia. This decision is not too surprising since Malaysia has the best developed Islamic capital markets & regulatory structure among Asian countries.

Kuwait Finance House expanding its Malaysian holdings

"Kuwait KFH eyes stake in Malaysian banks-report", Reuters via Yahoo! Asia News, December 1, 2006

Kuwait Finance House, the first foreign Islamic bank to begin operating in Malaysia has announced plans to expand its holdings in Malaysian banks including RHB Islamic Bank, according to Malaysian news agency Bernama