Lessons of Cyprus and Depositor Liability in Islamic Banks

There is a common explanation that Islamic banking can alleviate the European debt crisis, or could have prevented the financial crisis. Normally, these claims are not thought through enough to provide specific policy recommendations, and they instead just form the normal cheerleading heard at many Islamic finance conferences.

However, with the ‘bail-in’ of depositors in Cyprus, Islamic banking may have a specific recommendation for conventional banks based on the products used by Islamic banks. Rather than just lump creditors together an encourage complacency around the potential losses, make these explicit by dividing them into ‘safekeeping’ deposits and ‘profit-sharing and loss-absorbing’ deposits, and connect them with the specific pools of assets within the bank to provide increased transparency.

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Islamic finance complexity (Part IIb)

After my summary of the ideas behind the deposit accounts of Islamic banks, I went and did a very unscientific survey looking at two Islamic bank's deposit accounts (Dubai Islamic Bank and Meezan Bank) to see how they actually operate in practice.  As I expected, the deposit products are similar to what one would find in conventional banking.  There are a mix of demand deposit and savings products offered by each bank.

In the case of Meezan bank, the deposit accounts offer a mix of demand deposit accounts based on qard, where "the Bank is liable to pay your money back on demand".  One interesting point is that, in contrast to the mudaraba deposit accounts, the qard accounts does not discuss the conditions in which the depositor could lose his or her money, even though there is no one would expect depositors placing their money under qard to be below those placing them under wadiah to be in a lower position in the bank's capital structure.

The Meezan savings accounts were all based on mudaraba, which one would expect from an Islamic banks and all stipulated that the deposits would be invested in Shari'ah-compliant contracts like murabaha, ijara, istisna'a and musharaka to generate a return, although "in case of a loss, as per the rules of Mudarabah, the Rab-ul-Maal shall bear the loss in the ratio of their investment".

When I looked at the Dubai Islamic Bank's products, the descriptions looked much more like conventional bank accounts.  Some accounts had profit-sharing features, while others did not.  The contracts under which the accounts operated were not specified, so one can reasonably assume that the ones providing profit-sharing were based on mudaraba while the ones which did not were based on wadiah or qard.

One troubling feature of the DIB accounts was that in neither case of the mudaraba or wadiah/qard was the prospect of loss presented.  When I searched the DIB website for 'loss' or 'lose', the only page that I found was an FAQ page describing in general terms how Islamic finance works without  presenting any risk statement that one would expect from a bank (especially one of the oldest Islamic banks in the world). 

My survey was not representative in any way, but it did find a troubling lack of disclosure of the risks associated with Islamic deposits from one of the banks I surveyed.  When a consumer looks to place funds with a bank, as I discussed in an earlier post, there are three key things he or she expects: safety of the deposits, a return on deposits to offset the costs of inflation, and access to the money deposited.

Both banks provided good access to funds for their depositors, with the note that some products offer limited access by design (similar to conventional Certificates of Deposit).  In terms of a return in excess of inflation, it is unclear.  Not all of the products offered concrete terms or histories of the accounts in terms of whether the deposits were paid returns in excess of inflation, but this is to be expected in Islamic banking.

However, with regards to the safety of the deposits, one bank offered clear disclosure that the account holders could lose their deposits if the investments made with those funds were money-losing.  The other bank did not make any reference to the potential for losses.  Perhaps this lack of disclosure is due to a leniency of regulations in one country versus another, but if Islamic banking is to use mudaraba as a means for raising deposits, there is a clear moral imperative that the costs and benefits of the product be clearly disclosed.

This is especially the case for a bank like DIB where the financial statements for 2010 report a provision against the depositors, albeit one that is outweighed by a far larger transfer from the profit equalization reserve account.  The fact that a bank pays returns based (somewhat loosely) on the returns from its own assets funded by the deposits and shares the risks from those investments with depositors should be clearly stated.  This should be even more pressing an issue for a bank like DIB which still holds a wakala liability to the UAE Ministry of Finance from the recent bank bailouts in Dubai.

Leaving aside the institutional differences between the banks surveyed above, I see a few lessons.  First, Islamic banks should disclose the full risks of their products, including the position in the capital structure based on the type of deposit.  Second, Islamic banks should provide full disclosure that the profit paid on their deposits are totally based on the return on those investments and that they are liable to bear the loss on those investments unless there are funds available in the profit equalization reserve to cover the losses.

It is commendable for Islamic banks to smooth the returns on mudaraba deposits to essentially store up reserves so that depositors can not worry that they will lose their deposits.  However, it is essential that they be fully aware that the reserves put aside to safeguard their deposits may run out and they could lose their deposits.

See the index of other posts: http://investhalal.blogspot.com/2011/11/islamic-finance-complexity.html

Islamic finance complexity (Part IIa)

The goal of this thought exercise is to understand whether Islamic banks meet the financial needs of their customers and structures products that are both readily understandable to customers and competitive in price to conventional alternatives (where they exist).  The first, and most basic, need among consumers is to have access to a safe place to put their money that can earn a return, as well as a place they can turn to for a loan (whether a consumer or a business).  This is a bank.

On the most basic level, a bank is an institution that collects savers' money and invests these funds into loans that earn a return sufficient both to pay a competitive return for depositors and at the same time keeping the depositors' funds safe.  The function of the bank is to turn short-term deposits into long-term loans--to manage the maturity mismatch between the liquidity needs of depositors and the need for long-term funding for borrowers.  In addition to the depositors' money and the loans provided, the bank holds some degree of equity, that for regulatory purposes is separated by how much it is able to absorb losses so they do not need to be passed onto depositors.

Depositors

For depositors, the underlying need is for a safe place to store money with the requirement that they be able to access their money when they need it, that they can earn a return sufficient to offset the effects of inflation and to provide depositors a way to use their money.

The theoretical idea of an Islamic bank where depositors place their deposits under mudaraba conflicts with the idea of safety of the deposits from loss, which (among many reasons) is probably why a pure mudaraba is not used in Islamic banking today.  However, the alternative--wadiah--does not succeed in generating a return sufficient to offset the costs of inflation of deposits by reducing the purchasing power of the deposits held at banks.  Abstracting from the mechanics of how a debit card works, which may not fully comply with the current standards of Shari'ah-compliance, the issue of accessing the funds is not any different between an Islamic bank and a conventional one. 

The solution to two needs (protecting depositors from losses and still providing a return necessary to offset the costs from inflation) that Islamic banks have adopted is that the mudaraba accounts are made liable for losses of the bank, but the profits accruing to equity (who would in theory be on par with depositors) are voluntarily made subordinate to the return of depositors' principal.  In addition, through reserve accounts, the depositors' profit is 'smoothed' by setting up reserve accounts where excess profits are stored to maintain profit payments when the profits generated fall below the market interest rate on deposit accounts.

The arrangement is not optimal because the equity investors are basically making their investment as a mudaraba (they provide the capital and the bank provides the management expertise to generate a return on that equity).  Therefore they should not have to 'voluntarily' sacrifice their return in order to prevent losses on other mudaraba capital, although when the they can capture additional upside from higher profits than depositors can, where excess profits beyond the deposit rate are stashed away in reserve accounts, there is at least the potential for equity investors' return to be higher than depositors, in compensation for the additional risk they are taking.

The wadiah account holders are essentially sacrificing one goal (protection from returns against inflation) to promote the other goals (safety of principal and ability to use their money when they need it).  Their principal is guaranteed, even if inflation erodes the purchasing power of the deposits, and through checks, debit cards or wire transfer, is able to use their deposits as they see fit. 

On a basic (and grossly oversimplified) analysis of the depositors position, the basic Islamic banking model does make sense, although there are trade-offs, which could arguably be used as evidence that Islamic banking both does not suit the needs of both depositors and equity investors in the banks.  However, there are always trade-offs between risk and return and linking risk and return is often described as a key feature of Islamic finance.  While it is not optimal to have mudaraba depositors implicitly subsidized by (mudaraba) equity holders, the potential higher returns for equity investors should assuage some criticism that they are forced to bear greater risk than depositors than they would in a theoretical mudaraba-based Islamic bank.

This analysis does not necessarily cover the actual products offered by Islamic banks for depositors, but that will have to wait for a later post.

See the index of other posts: http://investhalal.blogspot.com/2011/11/islamic-finance-complexity.html

Commodity murabaha spreads to deposits

The Indonesian subsidiary of CIMB, CIMB Niaga, is planning on launching a commodity murabaha deposit account, according to Bernama.  A commodity murabaha is a product mostly used between banks to manage liquidity where one bank buys a commodity (like palm oil) in the spot market, sells it to the counterparty with deferred repayment, and the counterparty then sells the commodity in the spot market.  It is as close as you can get to a conventional interest-based loan in Islamic finance.  Its use has been controversial (commodity murabaha is the same thing as tawarruq) but deemed necessary to keep the Islamic finance industry running (and I accept its use where there are no or very few suitable alternatives, like in inter-bank money markets).

However, when it is introduced as a deposit account product, it is an unequivocal statement that 1) Islamic banking is not any different from conventional banking; and, 2) Islamic banking cannot offer anything new to consumers that will fulfill the role of deposits (liquid, safe places to store money and earn a return).

On the first point, the ideal structure (at least from early theoretical models) is that Islamic banks operate as financial intermediaries between depositors and borrowers (as in conventional banks), but introduce a profit-sharing mechanism that somewhat insulates the bank from the maturity mismatch in conventional banking because depositors are theoretically required to bear loss from their deposits.  They provide the bank with capital under mudaraba and the bank provides financing under mudaraba.

The mudaraba model of banking on the asset side is not common.  The asset side of banks balance sheets has always been more debt-based using ijara or murabaha (including tawarruq) to create a predictable stream of income and a financial statement that bank analysts can easily identify with (and which fits into regulations designed for conventional banks).  On the liability side of the balance sheet, Islamic banks have mostly left the mudaraba model intact.  Depositors are typically required to accept the possibility of loss, although in practice, they are protected from losses by surplus profit or profit-equalization reserve accounts, which shift the first loss position to equity holders and also hold the profits that would accrue to depositors in excess of conventional banks' interest payments on deposits.

In addition to the reserve accounts that protect depositors, there are other forms of deposit accounts like amanah, where the bank guarantees the principal of the account but does not pay a return.  There are other deposit structures like wadiah and wakala that are also used that also require the depositors to (mostly theoretically accept losses).  In the UK, the Islamic Bank of Britain was allowed to give customers the option to refuse deposit insurance if a loss in their deposits would occur due to bank insolvency (as far as I know this is not allowed in the US, although consumers could theoretically refuse to withdraw any deposits held in bank accounts of failed institutions which offer Islamic banking, if the FDIC got involved).

The striking thing about the use of commodity murabaha is that it acknowledges that any model where there is a possibility of loss (mudaraba, etc.) or where there is guaranteed principal but no return (amanah) is not enough to attract depositors.  Instead, the conventional deposit account with principal protection and a return on deposits has to be (re-)created.

There is one other alternative that I can think of and that this product is being used to create Islamic certificates of deposit for retail consumers where funds are locked up for a certain period of time with principal guarantee and a fixed profit.  If this were the case with this product, it would make some sense, but it still amounts to the bank managing its balance sheet into a form that is familiar to conventional bankers (and consumers!).

I would imagine that this type of deposit account is used by other Islamic banks, so I don't want to single out CIMB Niaga, but the implications of bringing commodity murabaha into the equation with depositors when so many near-equivalents are possible and already in use are not positive.  It adds one area of the balance sheet to the list of "things the industry does to make it as close as possible to conventional finance".  As much as I support using replicated products to offer new services to consumers in Islamic banking, I try to limit my support to areas where Islamic finance has not yet found a different way to do these things.  Besides equity, deposits stand alone as the area of an Islamic bank's balance sheet where other, less cynical products are available and already in use.

Considering the possible IILM liquidity tool structures

The International Islamic Liquidity Management Corporation (IILM) announced that it plans to issue the first short-term liquidity management instruments by the end of 2011. This is disappointing because the products are needed, the sooner the better. However, it is usually better to get it right than just to get it out there quickly. The size of the first issue will likely have a minimum size of $300 million, depending on demand, which is tiny compared to the volume of commodity murabaha contracts used for liquidity management which is estimated at $1.2 trillion.

No structure has been announced yet for the IILM, but it would likely not be commodity murabaha, which is not tradable. An article from Bernama describes (citing Mohd Razif Abudl Kadir, the deputy governor of Bank Negara Malaysia): "the main function of the IILM is to issue high quality papers as the shareholders are the central banks, which recognise it as eligible papers that can be traded among the players". Commodity murabaha (all murabaha) is not tradable on the secondary market outside of Malaysia except at par because it represents a debt receivable, subject to restrictions on trading in debt (bai al-dayn). He added that the maturity can be short-, medium- and long-term and gave the specific example that "it can be an avenue for the Malaysian government to tap global funds for the Mass Rail Transit mega-project". The Mass Rail Transit mega-project is a nearly 10 year project to put in 150km of rail in the Kuala Lumpur area by 2020 that is estimated to cost RM36.6 billion ($12.1 billion).

From this point, it is only speculation what the IILM product will look like, there are a few established and developing liquidity management tools (described well by Simmons & Simmons in a document from 2008 [PDF]; they are the basis of the descriptions I provide of the products):

Wakala/Mudaraba: In a wakala, two Islamic financial institutions (IFIs) enter into an agreement where one places funds with the other, who invests it on their behalf. The party placing funds (the lender) bears responsibility for losses. This could be a viable option for the IILM, but only on a short-term basis (unless a secondary market developed quickly). The IILM could provide an "indicative" rate of return, but is non-binding and is not a guarantee. However, the IILM would face a credibility problem if it did not meet the "indicative" rate of return. Central banks undoubtedly want to avoid losses, even if they are less concerned with generating a profit. Once the funds are placed with the IILM, they would have to be invested in something which generates a return that meets or exceeds the "indicative" return investors expect.

The advantage of this structure is that it could provide perpetual sukuk (or sukuk that were issued in equal amount as they matured), so long as the IILM is able to find things to invest in to generate a return sufficient to meet the "indicative" return (adjusted for changes in interest rates; the indicative return may even be calculated as a spread over a benchmark like LIBOR or KLIBOR). This would define the focus of the IILM. Instead of rotating assets from member banks to use as backing for, say, ijara sukuk, the IILM could focus on generating a return with the funds and on facilitating the secondary market.

However, this strength would also create a weakness. It would force the IILM to compete with the Islamic Development Bank and would also limit the size of the tradable market to the amount of funds the IILM could invest in quality projects to generate a return sufficient enough to make profit payments to the holders of the certificates. This is less of a hurdle than it appears at first. If the figure above were only for overnight liquidity management (i.e. the same amount was created and redeemed each day), it would represent just under $5 billion in certificates (i.e. $1.2 trillion divided by 250, the rough approximation of business days in a year). Assuming that the demand for these certificates increase 20% per year for the next 10 years and only 1/2 of the outstanding certificates trade in a given day, that would allow $60 billion in certificates in ten years to replace the equivalent of $7.5 trillion in commodity murabaha contracts. [Note: my assumptions for this calculation is by no means realistic, but used as an exercise to put the $1.2 trillion of commodity murabaha into context]

While the wakala/mudaraba structure seems like it is viable as a structure (there are many asset managers with more than $60 billion in assets), it would be difficult to create the liquid market for the certificates. Pricing would be relatively easy if the IILM is able to garner a credit rating at least as good as its member states (for comparison, the Islamic Development Bank has a AAA rating).

Wadiah: The two IFIs agree that one will place funds with the other and the one receiving the placement invests the funds like in the wakala. However, the placing institution does not have the right (although the receiving institution can voluntarily make profit-sharing payments) to any profits, but is entitled to a return of capital in the full amount, regardless of the performance of the investments made with the funds placed. This has the benefit that the IILM could use it as a way to get certificates into the market. However, it would be more likely to incur losses in adverse market environments. This is unlikely because although the IILM would be forced to pay out deposits in full (in contrast with the mudaraba/wakala), in both situations it would be expected to incur these costs to keep its credibility.

The benefit of the wadiah for the IFIs would be that even though they give up the legal right to a share of profits, they are entitled to their deposit back in full. Given the way markets and institutions operate, the IILM is likely to pay out profit-sharing payments in the good times and make good on deposits in bad times. However, this introduces a new risk to IILM member central banks. Under wadiah, they are obligated to make full payment of deposits on request even if the investments turn out to be unprofitable. It is definitely a "tail risk", but it is worth considering with the hindsight of the experience in the US with Fannie Mae and Freddie Mac, which operated under implicit government guarantees from the US government that were called upon following the US financial crisis. In wadiah, the guarantee would be explicit, while under mudaraba/wakala it would remain implicit.

Accrued Notes: An accrued note works like the wakala product but allows the IFI to either reinvest the profits or take them out in specified intervals. This would allow the IILM to underake longer-term projects with its capital because instead of paying out profits every period (month or quarter), it would issue new certificates to investors who reinvest the profits. Depending on the percentage of certificates held for a longer term (e.g. cash held by money market funds), this would both require less capital to be held in liquid form (i.e. cash) if new certificates could be issued for the same par value as the outstanding certificates. Longer-term investments have the potential to generate higher yield but are also have more risks, which would introduce a greater likelihood of a 'tail event'.

Capital Protected Products (including multi-currency products): In a capital protected note, there is a combination of a commodity murabaha and a wa'd-based swap of returns from a specified index. This is an unlikely structure for the IILM because trading would be difficult because of the commodity murabaha to create the capital protection. It would also be relatively unnecessary if the IILM were able to get a high rating that I would expect (i.e. similar to the Islamic Development Bank). If the IILM is operating on a global scale, it would be able to issue multi-currency certificates and the wa'd-based multi-currency feature would be better served by the Islamic window at a conventional bank, which could limit its currency risk by using conventional hedging tools.

Tradable Sukuk: Besides the wakala/mudaraba and wadiah, this is the most likely product. In fact, it might be more likely because of the relative familiarity that the market has for sukuk. The biggest problem in sukuk markets besides lack of supply is liquidity. Where the wakala/mudaraba product needs both a new market for the certificates and sufficient liquidity, an IILM sukuk issuance needs only a liquid marketplace. The central bank members of the IILM might not have the assets needed to issue a large volume of sukuk, but the comment in the Bernama article that the IILM would consider short-, medium- and long-term products and could use the funds for domestic projects suggest that other assets that are not directly owned by the central banks could be used to back sukuk.

The risk from IILM sukuk being used to fund national projects (like the Malaysian rail project mentioned in the article) is political. How will the assets be selected to back IILM certificates? Even with an IILM guarantee, the certificates would not be identical. You could buy a sukuk that was backed by the transit system in Malaysia (which has Ringgit exposure) or the one in Luxembourg (which has Euro exposure) and your sukuk might be denominated in dollars. It would be preferable to reduce external factors by having the certificates backed by a large number of diversified assets.

This could be accomplished either by the use of wakala or murabaha contracts or by the IILM issuing sukuk using mudaraba or wakala as the underlying contract. Reflecting on the description of what is created with mudaraba or wakala certificates, I think I was essentially describing sukuk certificates. In my opinion, an IILM wakala or mudaraba sukuk is the most likely structure.

Sukuk repos: This is an unlikely product for the IILM because it would duplicate the efforts of the IIFM (which is on the first stages of a difficult road towards a repo master agreement) and would step on the member central banks' toes because one of the primary uses of repos is for monetary policy. It also requires a larger supply of sukuk than exists today (particularly higher-quality sukuk) for it to become feasible.

I would hope that more details are released as we see the IILM develop and the next opportunity for further announcement is coming up when the IFSB holds a seminar on liquidity management in Islamic finance in Istanbul, Turkey on April 6th and 7th.

ShariaUMEX, more TID and Nakheel, wadiah-based retakaful, Islamic Repo 105?

A new Islamic exchange will be launched in London in May, the Shariah Ummah Information Exchange (UMEX). The exchange will be open to companies with at least GBP 20 million ($31 million) seeking to raise up to 20% of their market value. It will operate as a Multilateral Trading Facility (MTF) according to the chairman of Halal Industries, which will manage the exchange. MTFs are low-cost electronic trading platforms under the Markets in Financial Instruments Directive (MiFID). The ShariaUMEX expects to have 10 enterprises and 100 securities listed when it launches and hopes there will be 100 IPOs within a year. The exchange will launch Islamic equivalents to American and Global Depository Receipts (ADRs and GDRs). The primary question I have about the exchange is whether it can provide exchange listing at a similar cost to larger exchanges like the London Stock Exchange and related AIM. Presumably, the companies listed on the exchange will be subject to the same standards of reporting and transparency as other exchanges. One of the largest challenges will be whether the exchange can attract sufficient liquidity to allow relative efficiency in pricing which is necessary to attract future listings. There is certainly some minimum level of trading and listing that the exchange has to reach in order to get to a 'critical mass' where it will attract further listings.

The analysis of the TID v. Blom Bank case continues. An article in the National which continues their solid coverage of Islamic finance describes several areas where the decision could impact the Islamic finance industry as a whole. One area is the increasing Shari'ah risk in UK courts allow TID to argue that a product was not Shari'iah-compliant and therefore outside of its corporate power to enter into despite a ruling by its own Shari'ah board approving the product at the time. Generally, the ability of secular courts too enforce decisions based on religious rulings is a negative because they do not have the expertise to make a ruling in this area. The decision of a Shari'ah board that a given product is Shari'ah-compliant should be what determines whether the company can enter into it. If this is changes so that ex post, the bank can argue in a secular court that a contract is not Shari'ah-compliant for nearly any contract it has entered into if it is in financial difficulties. This erodes the role of the Shari'ah board as the arbiters of what is or is not Shari'ah-compliant. Shari'ah boards should be given the exclusive authority to judge Shari'ah-compliance of a given contract and be allowed to force an institution to change its implementation of a Shari'ah-compliant contract if it is doing os outside of the bounds of the original fatwa. The secular courts, on the other hand, should be limited to judging whether the specific aspects of the contract have been followed, not whether it is Shari'ah-compliant or not. The claim by the TID that the contract was not Shari'ah-compliant because it stipulated a fixed rate of return is another separate issue that Shari'ah scholars can discuss and highlights the problematic nature of some contracts which mimic conventional products, but that is a whole other area of discussion.

Reuters weighs in with an article on the Nakheel debt problems saying that the crisis and eventually a resolution could strenghten Islamic finance by forcing the industry to deal with issues raised by the near-deafult. It has also forced investors in the Nakheel sukuk as well as others looking on to consider the limitations that a sukuk may provide in terms of creditor protections compared with a conventional bond.

Another very interesting article in The National discusses whether accounting tricks like Lehman's Repo 105 transactions could come out and bite Gulf-based financial institutions that use similarly misleading transactions. The National reports: "The [anonymous] accountant noted the example of companies issuing sukuk, which may not transfer all of the downside risk attached to an underlying asset to the bondholder. Neither does that risk appear on the balance sheet of the issuer." This is most likely referring to an ijara, mudaraba or musharaka sukuk where the asset underlying the sukuk is transferred to the SPV issuing the sukuk certificates. I am not knowledgeable enough about accounting under IFRS to make a judgement on the accounting treatment of these sukuk, but it would not surprise me if the assets underlying these sukuk were not included on the balance sheet of the issuer (with the beneficial interest transferred to the off-balance-sheet SPV). This would make it appear that there is no asset on the balance sheet that could lose value and cause the issuer a loss. There are only the debts payable to the SPV (which would then pass them on to the certificateholders). However, if the asset loses significant value, then under most sukuk structures, the bank would be forced upon maturity to repay the principal through the purchase undertaking and take a possibly depreciated and depreciating asset back onto its balance sheet. When this event occurred, the outcome would be the bank paying the par value to redeem the sukuk and receiving an asset on its balance sheet that it would probably have to immediately write down to a fair value from the purchase price, which would cause a loss. I would be grateful if any reader more skilled in IFRS accounting could enlighten me on the subject so I could provide a more accurate assessment on the potential pitfalls of sukuk structures that are described by the accountant in the National article.

The International Shari'ah Research Academy (ISRA) has developed, although not yet released, a model for wadiah-based retakaful, which would clarify who owns what in the fund better than the mudaraba or wakala model, according to ISRA. The way it would work is that takaful providers would contribute to a fund that is managed by the retakaful provider. The funds would be invested and the retakaful provider would receive an agency fee and also be liable to pay claims from the participants. In the case that there is a profit on the investments after claims were paid, the profits would be retained by the retakaful provider and any surplus amount in the account (of contributed amounts) would be owned by the participating firms. The retakaful company is able to keep the profits from the investments, so long as the claims are paid to the takaful firms contributing capital, but the difference between contributions paid and claims paid remains owned by the participants, which should reduce the incentive for the retakaful provider to invest too aggressively, because it is forced to return to participants the difference between the contributions made and the claims paid. If it recognizes substantial losses on its portfolio and there is a surplus of contributions, it would be forced to return those funds to the participants, even if its investments lost money.

With all deference to Dr. Hussein Hamed's expertise, I have to disagree strongly with his statement at the Dubai Peace Convention that "Currency value has become interest-based and, therefore, when the crash happened, the only monetary system that was not affected was the interest-free Islamic system." The idea that the Islamic financial system, either in its theoretical form or in how it is actually practiced today is somehow insulated from economic cycles is just not true. The system is operated by people, often with noble intentions, but it is just as susceptible to crisis and recession as any other economic or financial system. The degree to which it can be decimated by poor decisions through over-leveraged financial products like credit default swaps and collateralized debt obligations may be avoided. However, the problem of, for example, overbuilding in Dubai, some of which was financed through Islamic financial products (Nakheel's sukuk, for example) cannot be avoided simply by replacing the conventional financial system with an Islamic one. Human nature being what it is will always create excesses one way or another, although the Islamic restrictions may limit some of the more harmful excesses. If anything, the Islamic financial system should be more, not less, dependent upon the economy cycle because it is supposed to be based on real tangible assets and profit and loss sharing. How many sukuk need to default and financial institutions fail or nearly fail to demonstrate that a severe economic recession can take its toll on the Islamic financial system?

Other News

• Malaysia is considering offering long-term sukuk to provide investment opportunities for takaful firms to reduce their reliance on equity and real estate investments.
  
• Hong Kong will change its laws to allow sukuk issuance. Hong Kong's financial secretary John Tsang also said "We're also enhancing market infrastructure and product development and educating market participants and investors in raising the profile of Hong Kong as an Islamic finance platform".
  
• An announcement on the fate of Amlak Finance and Tamweel is expected soon. The likely outcome will be a merger into an Islamic bank that will receive government support. The reports do not describe whether the new bank will be able to restart lending, or whether it will simply wind down the two companies in the least costly way, although there is no indication that this is the likely outcome.
  
• The United Arab Bank launched its Islamic banking unit on March 17th.