Muhammad Ayub Understanding Islamic Finance phần 9 ppsx

406 Understanding Islamic Finance general assets on the basis of Murabaha to give a quasi-fixed return to the Murabaha Sukuk holders. Arcapita Bank B.S.C (Bahrain) issued five-year multicurrency Murabaha-backed Sukuk in 2005 with a five-year bullet maturity. The proceeds of the Sukuk are used for sale and purchase of assets via a series of commodity Murabaha transactions. As Murabaha may yield a fixed return, the Sukuk holders have been offered a return equivalent to three-month LIBOR + 175 bps. The SPV will have full recourse to Arcapita and, therefore, the Sukuk are a freely transferable instrument on the basis of a mechanism approved by Arcapita’s Shar ¯ ı´ah supervisory board. It is presumed that the SPV will be maintaining a sufficient amount of inventory or fixed assets, making its Sukuk negotiable. Mixed Portfolio Securities/Sukuk Banks may securitize a pool of Musharakah, Ijarah and some Murabaha, Salam, Istisna‘a, and Ju‘alah (a contract for performing a given task against a prescribed fee in a given period) contracts. The return/risk on such securities depends on the chosen mix of the contracts. A prominent example of such mixed portfolio Sukuk are IDB’s Solidarity Trust Sukuk for US$ 400 million issued in 2003. Salient features of IDB Solidarity Trust Sukuk are given below. Solidarity Trust Services (STS) served as trustee to issue the fixed-rate trust certificates that were issued to purchase a portfolio of Sukuk assets comprising Ijarah, Murabaha and Istisna‘a contracts originated by the IDB. Each certificate represented an undivided beneficial ownership in trust assets and ranked pari passu with other trust certificates. Most of the assets (over 50 %) would, at all times during the period, comprise Ijarah assets. If, at any time, the proportion of assets evidenced by Ijarah contracts fell below 25 %, a dissolution event would occur, and IDB, by virtue of its separate undertaking, would be obliged to purchase all of the assets owned by the trustee pursuant to the terms of the “purchase undertaking deed”. Profit on Sukuk assets, net of expenses of the trust, would be used to give a periodic return to the certificate holders. Certificates would be redeemed at 100 % of their principal value. In the case of any early dissolution event, the redemption would be according to adjustment, keeping in mind the return accumulation period. Principal amounts of Sukuk would be reinvested in Ijarah and Musharakah contracts to form a part of Sukuk assets. On the basis of a separate undertaking, IDB has guaranteed payments in respect of assets owed by the trustee by reference to the schedule of payments given by IDB at the time of sale of assets to the trustee. Certificate holders will not have any recourse for payment of any amount in respect of certificates in case the trust assets are exhausted. As such, IDB’s guarantee (for the rate on the certificates) does not comprise a guarantee of payments in respect of the trust certificates, but represents a guarantee, inter alia,ofthe amount scheduled as being payable by the obligors of the underlying transactions in respect of the assets. In the case of any shortfall in return on the Sukuk assets, the IDB has agreed to meet the shortfall. IDB has also agreed to provide an interest-free facility to the STS to ensure timely payment of any periodic distribution amounts on the trust certificates. Thus, the ability of the trust to pay the due on certificates ultimately depends on IDB. On the basis of the “purchase undertaking deed” between IDB and the trust, the IDB will purchase the Sukuk assets on the earlier of the maturity date or the dissolution date. The proceeds will be distributed by the trust among the certificate holders, who will periodically receive a fixed rate of return net of any withholding or any other taxes. Sukuk and Securitization 407 Under Islamic banking principles, IDB has to retain the risk of default on the Sukuk assets sold to the trust. As such, it is an unconditional and irrevocable guarantor to provide liquidity to the trust to cover costs and expenses, periodic distribution payments and the principal amount of investment to Sukuk holders. A flow-chart of IDB Trust Sukuk is given in Figure 15.2. Investors/Subscriber Trust Certificate Solidarity Trust Services SPV/Trustee ICD Buys Trust Assets from IDB and sells to SPV IDB originator of Trust Assets ICD Wakil Appointed by SPV IDB Guarantor Proceeds to IDB from sale of assets Proceeds to ICD from sale of assets Transfer of ownership of Trust assets to SPV Transfer of ownership of Trust assets to ICD Distributions from Trust Assets Proceeds from investors who secure the certificates Figure 15.2 Flow diagram of IDB mixed portfolio Sukuk issue, 2003 The modus operandi of issuing mixed portfolio Sukuk is an effective tool for converting nonmarketable and illiquid assets to negotiable instruments having a secondary market, particularly suitable for investment banks and DFIs. 15.3.6 Tradability of Sukuk Sukuk representing tangible assets or usufruct of such assets can be traded in the secondary market, depending upon the quality, risk and profitability of the securitized assets. Tradability is a highly important feature that has to be kept in mind while issuing Sukuk as well as for making investment. A deciding factor in this regard is whether the Sukuk create any debt obligations or they represent an ownership stake in the underlying assets or project; in the former case, the certificate will not be tradable, while in the latter case, it will be negotiable/tradable. As discussed above in the case of various categories of Sukuk in the light of the AAOIFI Standard, the Shar ¯ ı´ah position of their trading in the secondary market is given in Box 15.3. 408 Understanding Islamic Finance Box 15.3: Tradability of Sukuk in the Secondary Market 19 Mudarabah/Musharakah certificates or Sukuk Tradable at market price after the commencement of the activity for which the funds were raised. Ijarah Sukuk based on freehold existing assets Tradable at market price. Ijarah Sukuk of existing assets subject to head lease Tradable at market price or at a rate agreed upon at the date of redemption. Ijarah Sukuk based on future tangible assets Tradable at market price only after the asset is ascertained and leased. Sukuk based on existing specified services Tradable prior to sub-leasing of such services. Sukuk based on described future services Tradable at market price only after the source of the service is ascertained. Salam Sukuk Not tradable except at the face value. Istisna‘a Sukuk Tradable if funds converted into assets and before sale to the orderer. Sukuk issued on Mudarabah basis for Murabaha sales – Murabaha Sukuk Tradable before sale of the goods to the end-buyer or if receivables (if inventory is maintained) are less than 50 %; after sale of the goods and without inventory of more than 50 %, tradable only at face value with recourse. Box 15.4: Prominent Sukuk Issues in Various Countries 20 Name of Sukuk Type Amount Period Pricing Malaysian Global First Corporate US$ 150M 5 years Floating rate on underlying Ijarah IFC Wawasan Ringgit Sukuk (Bai‘ bil Thamanal Ajil) Corporate US$ 132M 3 years Fixed, 2.82 % Malaysian Global Ijarah Sukuk Sovereign US$ 500M 7 years Floating, LIBOR-related Qatar Global Ijarah Sukuk Sovereign US$ 700M 7 years 0.4 % above LIBOR Tabreed Global Ijarah Sukuk Corporate US$ 100M 5 years Fixed, 6 % Sukuk Al Intifaa Makkah Corporate US$ 390M 24 years Sale of usufruct rights as weekly time shares Ijarah Sukuk Saxony-Anhalt Germany Sovereign Euro 100M 5 years 1 basis point over 6-month EURIBOR Dubai – Civil Aviation (DCA) Ijarah Sukuk Corporate US$ 750M 5 years Floating reference rate on underlying Ijarah 19 AAOIFI, 2004–5a, Standard on Investment Certificates (No. 17), clause 5/2. 20 Web sites of LMC (http://www.lmcbahrain.com) and respective entities. Sukuk and Securitization 409 Sitara Musharakah Term Finance Corporate Pak Rs. 360M 5 years Shirkah-based profit/loss Solidarity Trust Certificates IDB Corporate US$ 400M 5 years Based on performance of mixed portfolio, IDB guar- antee Bahrain Monetary Agency (BMA) Sovereign US$ 100M 5 years Fixed, 4.25 % GoB – BMA Sovereign US$ 70M 3 years Fixed, 4 % BMA Sovereign US$ 80M 5 years Fixed, 4 % BMA Sovereign US$ 50M 3 years Fixed, 3 % BMA Sovereign US$ 80M 3 years Fixed, 3 % BMA Sovereign US$ 100M 5 years Fixed, 3.75 % BMA Sovereign US$ 250M 5 years 0.6 % above LIBOR BMA Sovereign US$ 200M 5 years Floating rate reference BMA Sovereign US$ 106M 10 years Fixed, 5.125 % 1st Islamic Investment Bank, Bahrain Corporate US$ 75M 3 years LIBOR-related Malaysia Global Ijarah Sovereign US$ 600M 5 years 0.95 % above LIBOR Dubai Civil Aviation Sukuk Sovereign US$ 1000M 5 years Fixed Durrat Real Estate Sukuk Sovereign US$ 120M 5 years 1.25 % above LIBOR Sarawak Ijarah Sukuk Sovereign US$ 350M 5 years 1.25 % above LIBOR Nakheel Sukuk Corporate US$ 3.52B 3 years 1.20 % above LIBOR Ijarah Sukuk, Pakistan Sovereign US$ 600M 5 years 2.20 % above LIBOR 15.3.7 Issues in Terms and Structures of Sukuk Notwithstanding the exceptional growth of Sukuk in the last five years, there are some concerns that have to be taken care of for more vigorous and sustained support for the emerging financial system. The first and foremost crucial issue is that of conclusively pre- fixed rates of return in almost all Sukuk, in some cases even without any provision for third party guarantee. Profit rates in deferred-payment Murabaha and rentals in Ijarah are no doubt fixed, but while there could be default in receipt of Murabaha receivables, in leases there is the possibility both of ownership-related expenses and default in receipt of the due rental. The loss of the cost of funds that cannot be recovered under Islamic finance and expenses that could be incurred by the lessor as owner of the leased asset may not make it possible to give a return to Sukuk holders that is fixed and guaranteed in all respects. This concern is particularly genuine in respect of sovereign Sukuk, as a guarantee by the sovereign itself may give rise to doubts about Shar ¯ ı´ah compliance. Payment of rental is guaranteed in the main contract itself in the form of a contractual obligation on sovereigns to pay the rent. In this regard, the general public interested in Islamic finance and practitioners need to be educated about the flexibilities and the limits of each mode/product so that the integrity of the system is not damaged. The Shar ¯ ı´ah scholars are unanimous that any pre-fixed return or guarantee of the investment by any of the partners in contractual Shirkah-based modes is not acceptable. According to the AAOIFI’s Standard on Sukuk, a prospectus to issue any certificates (not only those which are Shirkah-based) must not contain any clause that the issuer is liable to compensate certificate holders up to the nominal value in situations other than torts and negligence, or that he guarantees a fixed percentage of profit. (An independent third party can, however, provide such a guarantee free of charge and subject to relevant 410 Understanding Islamic Finance conditions). 21 But the way in which various Sukuk are structured and marketed tends to assure the subscribers/holders that the issue carries a fixed return rate, like any fixed income security in the conventional interest-based structure. One view is that the financier partner can give a part of its own profit or even out of its own wallet to the client partners, as in the case of deposits kept on the basis of Mudarabah. But even there the banks are not free; they can accommodate the clients up to the limit of a pre-agreed ratio only and any arrangement of payment of an agreed amount of profit out of the banks’ own income may dilute the sanctity of the institution of Shirkah, particularly when adopted as a system. In the case of Sukuk, even this is not possible and the SPVs have to distribute among the Sukuk holders the net proceeds of the business in which the raised funds have been used. Ijarah has flexibility in the sense that the rental rate can be fixed or floating and the lessor may know in advance his future expected receipts. But the lessor is exposed to losing rental collection when the lessee fails in timely payment. He may also lose his property because of both systematic and unsystematic risks. So, how can Sukuk holders be given a guarantee of investment and assured of a fixed income? One possibility is that the owner/lessor of the asset may assure the purchaser of the asset (while selling it to the SPV) about the performance of the lessees, as in the case of IDB Trust Sukuk issued on the basis of a mixed portfolio of assets booked by the IDB. In the case of Murabaha or other receivables, the SPV may have recourse to the institution that has undertaken the underlying transactions. It seems pertinent that the Shar ¯ ı´ah scholars may explain the limits within which such guarantee or assurance can be given, particularly in respect of future assets to be leased by the SPV. If the asset is destroyed without any fault or negligence of the lessee, the risk has to be borne by the lessor – Sukuk holders. They may also like to clarify how the requirement of taking up the ownership-related risks would be fulfilled if Ijarah Sukuk holders were guaranteed a fixed return on their investment, as in the case of conventional securities. Another important issue is that a number of contracts are combined in one arrangement of Sukuk issue in such a way that they are interdependent on one another. The Ijarah Sukuk issue with a sale and lease-back arrangement involves about six agreements. If these are made integral parts of the main contract, Shar ¯ ı´ah compliance is at stake. Sequencing of these agreements, which has a bearing on Shar ¯ ı´ah compliance, also needs to be taken care of. Further, it has been observed that most of the issues lack transparency in respect of documentation and rights and liabilities of various parties to the issue. Proper care of all the aspects and transparency would lend enhanced credibility to the concept of Sukuk and widen the Islamic finance market. According to the AAOIFI’s Standard, a prospectus of any issue must include all contractual conditions, rights and obligations of various parties and the party covering the loss, if any. The Shar ¯ ı´ah boards should not only approve the procedure of the issue but also monitor the implementation of the project throughout its duration. This necessarily includes matters relating to the distribution of profit, trade and redemption of the certificates. 22 A related point of concern is that of reliance on Ijarah Sukuk only; the potential of Shirkah-based or even mixed portfolio Sukuk is not being properly realized. Most of the Sukuk issued for public sector financing are not based on the best possible structures of 21 AAOIFI, 2004–5a, Standard on Investment Certificates, clause 5/1/8/7; see also clause 6/7 of Standard No. 5 on Guarantees. 22 AAOIFI, 2004–5a, Standard on Investment Certificates, clause 5/1/8. Sukuk and Securitization 411 Islamic finance. Salam Sukuk in Bahrain and some Shirkah-related certificates in Sudan are the only exceptions. Experience of Shirkah-based certificates of investment issued by corporate bodies has proved their suitability and profitability. Further, the procedures of Ijarah Sukuk issues need some refinement in consultation with a team of Shar ¯ ı´ah scholars. 15.3.8 Potential of Sukuk in Fund Management and Developing the Islamic Capital Market Sukuk, a by-product of the fast-growing Islamic finance industry, have confirmed their viability in mobilization of resources and their effective use for the benefit of both investors and the fund users. Their growth is attributable to a number of factors, including, among others, their potential for liquidity and fund management. They could also be used as a tool for monetary policy and open market operations. As is the case in Sudan, central banks can issue Sukuk for the purpose of controlling liquidity. 23 Previously, IFIs had to rely on Tawarruq and Murabaha-based dealings in the international metals market and equity markets for the purpose of short-term and medium- to long-term fund and cash management respectively. The modus operandi of the transactions in the metals market was not fully acceptable to the Shar ¯ ı´ah scholars, as the Murabaha conditions were not accomplished in letter and spirit. The emergence of Sukuk in general since 2001, and IjarahSukuk in particular, and that of the market makers and servicers facilitates IFIs in short-term fund placements in a Shar ¯ ı´ah-compliant manner. Due to a shortage in supply of such instruments vis-à-vis their demand, Sukuk were tightly held until the recent past, resulting in the absence of a secondary market. Lately, the position has eased and active trading has started. The average volume of trading in PCFC Sukuk has been $10 million a day since their launch. 24 An active secondary market dealing in Nakheel Sukuk just after their issue in December 2006 also points to a healthy signal in this regard. According to Sameer Abdi of Ernst & Young, about one-third of investors in countries with a Muslim majority are seeking Shar ¯ ı´ah-compliant products; another 50–60 % would use products conforming to Shar ¯ ı´ah tenets if they were commercially competitive. At the company level, a large number of businesses and institutions in the world, where Shar ¯ ı´ah- compliant products are available, particularly in the Middle East, are shifting to public vehicles offering Shar ¯ ı´ah-compliant solutions to financial problems. This confirms the huge potential of Shar ¯ ı´ah-compliant certificates of investment. In a Sukuk issue of $800 million from Abu Dhabi Investment Bank that closed on December 4, 2006, nearly 40 % of the investors came from Europe. In the Nakheel Sukuk issue of $3.52 billion also, 40 % of investors are from Europe. A number of European and Japanese corporations are planning to explore the Sukuk market for raising long-term funds. A huge amount of funds is needed for infrastructure projects in the Muslim world, and if managed properly and carefully without compromising on the Shar ¯ ı´ah principles, this can not only be arranged through the vehicle of Sukuk, but also it could be a stepping stone for broad-based development of these economies. This requires developing Islamic countries to increasingly use the vehicle of Sukuk for financing their infrastructure and other development projects. 23 See Eltejani, 2005, pp. 411–413. 24 The Economist, December 9th–15th, 2006, p. 73. 412 Understanding Islamic Finance The development of Sukuk depends on factors like a proper regulatory framework, Shar ¯ ı´ah compliance and convergence, the development of market professionals, investors’ education and knowledge-sharing. 15.4 SUMMARY AND CONCLUSION Sukuk provide a tremendous potential for growth in the global Islamic capital market that is critical for the sustained development of the Islamic finance industry. Their emergence has attracted a large number of investors across the world. Sukuk create a framework for participation of a large number of people in financing projects in the public and private sectors, including those of infrastructure, such as roads, bridges, ports, airports, etc. A variety of target-specific Sukuk can be issued on the basis of various modes, keeping in mind the relevant Shar ¯ ı´ah rules. The return on the Sukuk depends on the income realized by the underlying assets/projects. Sukuk issue requires appropriate enabling laws to protect the interests of investors and issuers, appropriate accounting standards, study of the targeted market, monitoring of standardized contracts, appropriate flow of financial data to investors and provision of a standard quality service to customers at large. Islamic banks’ credibility is a very fragile issue, especially in countries such as the GCC states and Pakistan. The role of Shar ¯ ı´ah scholars is crucial in this regard; anything to do with the Shar ¯ ı´ah should be the exclusive domain of the Shar ¯ ı´ah scholars, who are careful and responsible enough to find solutions to financial problems without compromising on the tenets of the Shar ¯ ı´ah. The international institutions set up during the last decade to lend the Islamic finance industry a global acceptance, namely the Bahrain-based LMC, IIFM and IIRA, have to do a lot to make Islamic capital markets increasingly active and efficient. They have to lead the industry players to exploit the potential of Shirkah-based Sukuk, as reliance on Ijarah Sukuk alone, as has been witnessed over the last few years, may not be sufficient to realize the secu- ritization potential of the industry as a whole. It may not be able to generate the sustainable support critically needed for realization of the market potential. 25 The creation of Islamic universal Sukuk, structured by IIFM as SPV, fulfilling the Shar ¯ ı´ah essentials of Ijarah could serve as a basis to promote cooperation among Muslim countries and their financial markets. Box 15.5: DP World’s Nakheel Sukuk Initial offering – US$ 2.5 billion Final offering – US$ 3.52 billion (amount raised by US$ 1.02 billion) Financial institutions involved – Barclays Capital and Dubai Islamic Bank as joint lead managers and joint bookrunners for the offering Listed on – Dubai International Financial Exchange Sukuk tenor – 3 years Structure – Sale and lease-back (convertible) Pricing – LIBOR + 120 basis points 25 Adam, 2005, pp. 371–400. Sukuk and Securitization 413 Investors’ Profile Around 100 accounts were allocated notes, of which 38 % were from the Middle East, 40 % from Europe and 22 % from the rest of the world. By type, 55 % of the deal went to banks, 35 % to both fixed-income and convertible funds and the remainder to asset managers and wealthy individuals. The bonds will continue until maturity in 2009. There is an extensive security package featuring a mortgage on land, a pledge on shares in the operating company and a guarantee from Nakheel’s parent company, Dubai World. Box 15.6: Ijarah Sukuk Offering by the Government of Pakistan President of Pakistan for and on behalf of Pakistan The National Highway Authority of Pakistan Investors Pakistan International Sukuk Company Limited Distribution Re de mp tio n Ca sh Certificates Rentals Purchase of Highway Land Lease of Highway Land Purchase Price Exercise Price Sale of Highway Land upon dissolution (1) Pakistan’s first ever Islamic Sukuk, worth USD 600 million, were launched in Jan- uary 2005. Pakistan International Sukuk Company Limited (PIS) bought highway land (M-2 motorway) from the National Highway Authority and issued the trust cer- tificates. The Sukuk issue was assigned a B+ rating by Standard & Poor’s Rating Services. Issue structure An SPV was created – Pakistan International Sukuk Company Limited – wholly owned by the government of Pakistan. The property in collateral is the M-2 motorway. The offer • the offer attracted orders from 82 accounts worth USD 1200 million, of which USD 600 million were accepted; • sold at par to yield 220 basis points above six-month LIBOR. 414 Understanding Islamic Finance Box 15.6: Continued Transaction structure • Pakistan International Sukuk Company Limited bought highway land (M-2 motor- way) from the National Highway Authority and issued the trust certificates; • the land was then leased to the government of Pakistan for a period corresponding to the tenor of the trust certificates; • the government of Pakistan is making periodic payments under lease agreements to PIS to pay off periodic liabilities arising on the trust certificates; • on completion of the term, the government of Pakistan will repurchase the land from PIS at an agreed price, enabling it to redeem the Sukuk. Box 15.7: Ijarah Sukuk Issue by WAPDA, Pakistan The Water and Power Development Authority (WAPDA), is an autonomous body working for the development of water and hydel power in the country. It needed finance to enhance its power-generating capacity, which it did through the issuance of local currency Ijarah Sukuk. An SPV, “WAPDA First Sukuk Co” (WFS) was formed, which purchased from WAPDA ten power generation turbines installed at Mangla Hydel Power Station for lease back to WAPDA for seven years. Rentals are benchmarked against the Karachi Interbank Offer Rate (KIBOR). WAPDA pays semiannual rental to WFS to pay periodic rental to the Sukuk holders. At the end of the lease term, WAPDA will purchase the underlying assets by fulfilling its unilateral undertaking to purchase the turbines. This will enable WFS to pay back the investment amounts to the Sukuk holders. The payment obligation of WAPDA under the WAPDA Sukuk issue is guaranteed by the government of Pakistan, this characteristic has made them eligible for maintaining a statutory liquidity requirement (SLR) by Islamic banks. The transaction structure, in brief, is: Rental rate: 6 months KIBOR + 35 bps Principal amount: PKR 8000 million Underlying asset: WAPDA’s ten Mangla Hydel power generation units Issuance format: privately placed LCY floating-rate notes Specific feature: Sukuk eligible for maintaining SLR. Box 15.8: Case Study of Hanco Fleet Securitization (Saudi Arabia) Issue structure Principal amount: USD 27 200 000 Periodic distribution: 6 % Tenor: 3 years Sukuk and Securitization 415 Issuance format: privately placed LCY fixed-rate notes Issuer: two-tier SPV/SPC Underlying assets: motor fleet. A two-tier special purpose vehicle/special purpose company (SPV/ SPC) structure was established to issue Sukuk certificates, where the SPC was incorporated in a foreign country because of stringent Saudi laws. Transaction structure • the SPC issues Sukuk certificates and proceeds are used by the SPV to fund the purchase of assets from the originator; • the SPV owns the assets and allows an agent to manage the assets. The SPV forwards all cash flows into an off-shore bank account, managed by the SPC; • in the case of lack of cash flow to fulfil the payment flow obligations, this bank account is used to meet the obligations; • the SPC pays the certificate holders and, at maturity, sells the assets to fund the redemption of certificate holders. [...]... Time Value of Money and Islamic Banking Some people who believe in prohibition of interest criticize Islamic banking on charging time value of money through pricing, while some others are of the view that avoiding interest means negation of time value of money; therefore, they argue that either Islamic 2 See Maududi, 198 2– 199 1, 1, pp 382, 383 (4: 92 ) 440 Understanding Islamic Finance banks who charge... a of the Islamic Conference in 1405 AH Unanimous decision by the ulama in the First International Conference for the Islamic Economy held in Makah in 1 396 AH Fatwah issued by the State of Trengganu in 197 4 Fatwah issued by the State of Selangor in 197 0 Fatwah issued by the State of Negri Sembilan in 197 2 Fatwah issued by the State of Kelantan in 197 5 Fatwah issued by the State of Perak in 197 4 Source:... Shaikh Jad al-Haq Ali Jad al-Haq in 199 5 (al-Iqtisadul Islami, July 199 5) Fatwah issued in a judicial conference held in Makkah in Shaban 1 398 AH The unanimous decisions of the Muslim scholars in a seminar held in Morocco on 6th May, 197 2 Verdict of the Supreme Court of Egypt on 27th December, 192 6 Fatwah issued by the National Religious Council (Malaysia) in 197 2 Two Fat¯ wa issued by Shaikh Mohammad... majority and minority countries How can a Riba-based institution ensure Shar¯´ah ı 436 8 9 10 11 Understanding Islamic Finance compliance while working in a Riba-ridden environment? It gives rise to doubts about their Islamicity/credibility Islamic banks take collateral/security like their counterparts in conventional finance They should facilitate people who are not in a position to offer any security... services of insurance companies to safeguard against unfortunate incidents and losses to life and wealth While Islamic banking emerged in the 196 0s and early 197 0s, Islamic insurance started no earlier than 197 9 This reveals that the Takaful system developed in response to demand for risk cover by Islamic financial institutions, due mainly to the fact that banking and insurance go hand-in-hand and complement... the Islamic finance movement in the modern age, is the share of Islamic banking in the financial system 1.5 % in Indonesia, 2.2 % in Pakistan, 12 % in Malaysia and 24 % in Bahrain? Bahrain is the hub of Islamic banking, where a lot of work has been done in finalizing the Shar¯´ah standards for Islamic modes, innovation in ı Shar¯´ah-compliant products, providing a suitable regulatory framework for Islamic. .. Mohammad Abduh (the a ex-Grand Mufti of Egypt) in 190 0– 190 1 A unanimous fatwah issued by the ulama in the Muslim League Conference, held in Cairo in 196 5 Fat¯ wa issued by the Higher Council of Saudi Ulama a in 1 397 AH Fat¯ wa issued by the Fiqh Council of Muslim World a League in 1 398 AH Fat¯ wa issued by Shaikh Mohd Baqit (the ex-Mufti of a Egypt) in 190 6 Against life insurance Against the validity... made from the investments of the funds in Shar¯´ah-compliant avenues (this ı is the “investment profit” – different from the UWS/UWL as discussed above) 7 Muslehuddin, 198 2, p 62; Nyazi, 198 8, p 3 39 422 16.3.1 Understanding Islamic Finance Main Objective of the Takaful System The above discussion reveals that the main objective of the Takaful system from the policyholders’ point of view is mutual help... Interpretations ı Another criticism of Islamic finance is that its products are not standardized because a number of its concepts are subject to different Shar¯´ah interpretations Islamic scholars ı do not resort to Ijtihad and therefore, Islamic finance cannot become a solid basis for a financial system to replace the present conventional system However, as the Islamic banking movement has already passed... a significant amount of confusion Some common objections and misconceptions will be discussed here; however, answering 434 Understanding Islamic Finance all frequently asked questions is not the objective.1 Criticisms related to the philosophy and concepts of Islamic banking and finance are briefly listed below 1 The connotation of the word Riba is not expressly given in the original sources of the . While Islamic banking emerged in the 196 0s and early 197 0s, Islamic insurance started no earlier than 197 9. This reveals that the Takaful system developed in response to demand for risk cover by Islamic. – different from the UWS/UWL as discussed above). 7 Muslehuddin, 198 2, p. 62; Nyazi, 198 8, p. 3 39. 422 Understanding Islamic Finance 16.3.1 Main Objective of the Takaful System The above discussion. scheme. Hence, an Islamic alternative to insurance was urgently required to fill the gap in Islamic finance. In many cases it is a legal requirement that assets underlying Islamic banking contracts