Malaysia as a primary legal jurisdiction for Islamic finance, Islamic finance news

Malaysia wants to become a hub as the country where Islamic financial contracts are governed. Currently, most Islamic finance contracts are governed by English laws, because of its predictability. While Malaysia has a unique position having a Shari'ah advisory council at its central bank and could therefore provide governmental legitimacy to the process of litigating whether certain contracts were or were not Shari'ah-compliant, it would likely run into difficulty because the country's Shafi'i interpretation of Shari'ah is viewed as more liberal than the Hanafi and Hambali interpretations used in the GCC. Therefore, it may be unlikely that an Islamic finance institution would submit to the jurisdiction where a different interpretation of Shari'ah is prevalent.

The Shari'ah Advisory Council of Bank Negara Malaysia gave the go-ahead for wa'd (unilateral promise) to be used to hedge against currency fluctuations as long as there is no compensation paid for the wa'd, which would make it a bilateral wa'd. The promise is binding on the promisor.

Rusdhi Siddiqui's latest article tackles the area of Islamic finance news, which I agree does have too little depth behind it. Bloomberg articles (not to pick on them alone) give the bullet points and then re-spout market statistics with too little context. Other news outlets just string together a few quotes with generalities about "Islamic finance is designed to avoid interest, etc". If this blog does anything, I hope it provides a current and critical look at the Islamic finance industry. It certainly has an inherent bias towards the Islamic finance industry, but I have also been critical of the "party line" talking point (for a while at least) that Islamic finance was not harmed by the credit crisis. And thankfully, there are other reporters out there who take stands against things that are either ridiculous Panglossian ideas or products that too cynically avoid the restrictions that are the heart of the Islamic finance industry. However, it is always a good time to remind oneself to think critically.

Other News

• Kiplinger has an interview with Monem Salam and Nicholas Kaiser of the Amana Funds.
  
• Details about the Dubai World restructuring are coming and I expect more to come out as the process of implementing the restructuring proceeds.
  
• Mushtak Parker wrote an article about the growth of Islamic ETFs.
  
• Pakistan's government plans to sell sukuk by the end of the month. The sukuk are expected to carry a maturity of less than on year.
  
• Despite many suggestions that Islamic finance could become viable in Russia, there are few Islamic financial institutions in the country.
  

ISRA Shari'ah scholar certification

The plan by ISRA to set up a global certification for Shari'ah scholars is proceeding and the body expects to pick a board of regulators to develop the qualifications by year-end. The goal of the certification is to ensure that all Shari'ah scholars have requisite training and competence not only in Shari'ah, but also finance. I believe the primary beneficiaries of the qualification will be the less well known scholars who may find more demand for their services with the certification providing some confirmation that they are qualified. However, there will remain significant momentum among particularly the global financial institutions to recruit the highest profile scholars to their Shari'ah boards as a way of enhancing their reputation as being Shari'ah-compliant.

Other News

• Moody's Investor Services and Mashreq Capital DIFC believe that the Nakheel trade creditor sukuk will spur secondary market activity in sukuk because many trade creditors will sell them.
  
• Dana gas and Aldar's convertible sukuk performed well in the first two months of the third quarter, with their yield falling from 13.6% to 10.77% (for Dana Gas). The GCC sukuk market has been slow since the financial crisis and the AAOIFI resolution on sukuk.
  
• Padiberas Nasional Bhd issued sukuk as part of a RM750 million ($240 million) sukuk program. While issuance has rebounded in Malaysia, it has remained sluggish in the GCC following the Dubai debt crisis last fall.
  
• The National Bank of Ethiopia is close to approving a directive to allow Islamic banks and Islamic windows at conventional banks. Stanbic Bank in Tanzania, which launched Islamic financial products earlier this year, submitted an application to the country's central bank to widen its product offering.
  
• An article on an Islamic finance conference in Switzerland provides a good summary of the challenges facing Islamic finance if it wants to become more attractive and attract non-Muslim clients.
  
• An article from Trade Arabia discusses one small part of the Islamic financial industry that is Islamic exchange traded funds (ETFs)>
  
• Sudan delayed its planned $300 million sukuk issuance again citing the financial crisis.
  

Kuveyt Turk's sukuk, other news

Kuveyt Turk Participation Bank's recent wakala sukuk was backed by a combination of murabaha receivables and ijara contracts. This is generally tradable so long as 33% of the contracts are ijara contracts. Most of the issuance of this type of sukuk (e.g. by Cagamas and the Islamic Development Bank) adopt a higher 50% level for ijara sukuk. It appears that sukuk backed by murabaha and ijara contracts is becoming more popular among financial institutions since the structure used for mudaraba and musharaka sukuk prior to a 2008 AAOIFI ruling were ruled impermissible.

Other News

• France passed a tax neutrality law for Islamic financial products recently that could encourage more Islamic finance in the country. An earlier law on Islamic financial products was struck down by the high court largely on procedural grounds.
  
• Zawya reviews sukuk activity during August. Much of the activity occurring in August and expected in September is from Malaysia.
  
• Kuwait Finance House, which has a Malaysian unit, is planning further expansion across Asia, including China and is reportedly in talks with Japanese financial institutions regarding a strategic partnership.
  
• An article describes the potential for growth in Islamic finance but notes--correctly in my opinion--that while Islamic financial institutions were less exposed to the financial crisis in general, they have not reacted as quickly as conventional institutions and have been slower to fully recover (particularly in the GCC).
  
• Sukuk returns trailed emerging market bonds in August for the fourth straight month because of continued restructuring talks around some GCC-based sukuk.
  
• Bloomberg describes briefly the Dubai-based institution, Millenium Private Equity, which subscribed for the entire sukuk from UK-based company IIT.
  
• The International Islamic Ratings Agency and Dinar Standard released a report, called "Pulse of OIC Islamic Capital Markets".
  
• Indonesia's government is planning to issue another 2 trllion rupiah ($222 million) in sukuk to the government's haj fund by private placement. Selling the sukuk to the haj fund may be a response to the several failed auctions previously. The previous auctions saw enough demand, but higher yields than conventional bond sales of comparable maturity because sukuk are less liquid than conventional bonds.
  
• Islamic finance in Indonesia has been growing, albeit from a small base of around 2.8% of total banking assets, compared with nearly 20% in Malaysia.
  

Guest Post: Is foreign-exchange trading halal?

There has been much debate in Islam concerning whether trading in the spot foreign-exchange market is halal or haram. Islamic law is fairly straight forward concerning what is acceptable in regards to economic activity and what is not, but still many Shari’ah scholars have built formidable cases on both sides of this topic. Unfortunately, there is no crystal clear conclusion on this heated topic. In this article, we will break down each side of the debate and discuss where the concerns are on both sides.

First of all, Islamic law forbids a person to sell that which he does not possess. Many scholars believe that trading in the FX Market is not permissible under Islamic law because it involves buying or selling a currency which one does not actually own. In the spot FX Market a trader generally trades on leverage, meaning he may control a $100,000 position in the market with just $1,000 in his account. Thus, he is essentially making transactions with money that is not his, and according to the strict letter of the Islamic law, many scholars believe it is not right.

However, other scholars argue that the scriptural context of this law is referring to physical goods such as livestock. Thus, if a person were to find a lost camel, and he tried to sell it without notifying the owner, this would be haram, or against Islamic law. But these scholars argue that dealing with currencies is not the same. They argue that a trader is not really selling something they do not have as in the case of the lost camel.

Second of all, Islamic law forbids entering into an agreement in which an additional amount is added to a loan, which is called “paying fees for delaying the deal.” Unfortunately, this is exactly what happens when an FX trader holds a trade overnight. He is charged a small fee by the broker, which essentially involves paying fees for delaying the deal. Scholars believe this aspect of spot FX trading makes FX trading haram, but many retail brokers have adapted to Islamic law and instead of charging traders an overnight swap fee, they are simply adding an additional “administration fee” on to each contract a traders trades. Scholars who believe FX trading is halal believe that this move by forex brokers breaks down the haram argument surrounding this specific issue.

Third of all, Islamic law forbids usury and taking advantage of another person in economic dealings. Many scholars are concerned that spot FX trading in a forex account can be labeled as such due to the fact it is a zero-sum game. This means that when a trader closes out for a winning trade, the only way he has profit is by another trader having a loss. In Islamic law this is seen as immoral and not to be done; therefore, many scholars see this point as haram. However, the other side of the argument is that not every trader on the other side of your trade is losing money. For example, if you a trader is in a long position and needs to close it out by executing a short position, the trader that is short may be in a lot of profit as well, but he may just have a longer-term or shorter-term position he is managing. Thus, it is not necessarily true that an FX trader only makes money when another trader is losing money. Thus, many scholars argue that this point is further evidence that FX trading is in fact halal.

As you can see, the debate whether FX trading is halal or haram is very debatable. Very respected scholars in Islam are pitted on both sides of this argument.

This guest post was contributed by Bryan Sayers. He is the editor of Forex Fraud, a site is designed to help protect investors from forex scam, commodity fraud, and other investment scams.

Ed. Note: The views expressed in this post are the author's own and not those of Sharing Risk.

Shari'ah scholar licensing, IIT sukuk, Islamic indices

Bloomberg has a more detailed article about the planned Shari'ah scholar certification body, although the details are not yet fully described. I think this is a positive development because it will provide a way for newer or less recognized scholars to build credibility and become selected to be members of Shari'ah boards. This will increase the number of qualified scholars with experience that could be the biggest development to get around the well publicized lack of scholars that are selected to serve on Shari'ah boards. Currently, most Islamic financial institutions select the most recognizable Shari'ah scholars to gain credibility about the Shari'ah-compliance of their offerings. This has led to the top scholars being on many, many Shari'ah boards, which limits the amount of time they can devote to each. This could lead to less thorough review of each product than if the workload were spread across a larger number of scholars. Hopefully the ISRA proposal will move beyond the planning stage and on to become an organization that carries as much weight and recognition as AAOIFI or the IFSB.

There is an article in The Banker about Islamic indices, which have only been around since 1999 when Dow Jones launched their Islamic Finance World index. The article is interesting and notable because it mentions the absence of ETFs (not total absence; there are a few, but not many and most are very small). The Islamic funds industry has grown significantly in the past 10 years, so it seems that the ETF sector would be a natural area for growth as an alternative to actively-managed mutual funds.

The small sukuk ($10 million) from the International Innovative Technologies, which is the first UK-based company to issue a sukuk, is being heralded as the first of many from the UK and Europe. However, I think it is unlikely that this small sukuk, which was subscribed by one entity, Millenium Private Equity, will have that effect. The sukuk--a sukuk al-musharaka--came obout when an investor in IIT suggested Islamic finance as a way to finance the business. This (along its small size and status as a 'first') reminds me of the East Cameron sukuk, which was issued by the US-based wildcatter oil & gas firm with properties offshore Louisiana. While I am not predicting that the sukuk will end up the same way the East Cameron sukuk did (with the bankruptcy of the issuer), I do think that the idea that a small sukuk from a relatively unknown issuer can spark further issuance is overstated. It will take a larger, more well-known issuer to demonstrate that sukuk are the "real thing" to other potential issuers in the UK and Europe. That may happen in the near-term, but it will not make IIT the one that broke the market open. However, it is a start--albeit a small one--that will generate plenty of media attention that could make a sukuk from a better known issuer less surprising. It will be interesting to see what happens from here.

The secretary-general of AAOIFI, Dr. Mohamad Nedal Alchaar, has an opinion article in The National about the potential for France to develop its Islamic finance industry.

Other News

• The current issue of Opalesque's Islamic Finance Intelligence has several interesting articles. One by Shahzad Siddiqui and Toby Birch discusses gold bullion and Islamic private equity. Mohammed Khnifer discusses what happens when sukuk default.  Nikan Firoozye discusses the structure of the consecutive or rolled murabaha. The full issue can be downloaded by clicking through to any of the articles.
  
• South Korea may revive the bill to put sukuk on par with conventional bonds, after it was scuttled earlier this year.
  
• According to an IMF report, the driving force behind the growth in the industry after 2000 was the rise in oil prices, not 9/11. I hope to post something on the report when I have a chance to read it.
  
• The Thai Securities & Exchange Commission will issue rules for sukuk in October, according to the body's Secretary-General.
  
• Kuwait Finance House-Turkey may issue $100 million more in five-year sukuk, after its first issue in August, which was also the first sukuk issued in Turkey. The government of Turkey may consider issuing sukuk "in the future" according to the Finance Minister Mehmet Simsek.
  
• The Central Bank of Bahrain's Sukuk al-Salam was oversubscribed with BD73.5 million ($195 million) in subscriptions for the BD12 million ($31.5 million) issue. The return on the three month securities will be 0.69%.
  
• DIFC Investments will make a scheduled $2.88 million periodic payment on its $1.25 billion sukuk on time, according to a statement posted on NASDAQ Dubai.
  
• A paper in South Africa discusses the basics of Islamic banking.
  
• Malaysia issued four takaful licenses, primarily to foreign companies as it liberalizes its financial sector in a bid to attract more Islamic finance.
  
• Islamic finance could exceed $2 trillion in the next three-to-five years.