Islamic Economic System Only Way Out

The recent global economic crisis was not caused just by sub-prime loans and credit derivative swaps but the more fundamental drawback of the system was behind the meltdown.

C.H. Abdul Raheem, a senior chartered accountant, prominent scholar in Islamic Economics and general manger Finance and Business Planning with Tasnee Company- Jubail, expressed these views at a lecture on “Global Economic Crisis- an Alternate View”.

The event was recently organized by Thanima- a socio-cultural organization of Indian expatriates in the Kingdom. Raheem, is also the founder of Alternative Investment Credit Limited (AICL) a non – banking financial institution, which is run by Islamic banking concepts, implemented in Kerala state in year 2001 with the approval of the Reserve Bank of India.

“Any economic system has to take care of different behavioral aspects of human beings, and moral part is very important, and systems based on material gains alone will not work in the long run,” Raheem said.

The economist said that Islamic economic system, which advocated a balanced combination of individual freedom and social responsibility backed by a strong moral base, was the only viable alternative.
“Islam has structural and compulsory wealth re-distribution mechanism such as Sadaqa, Zakat, Will, Waqf, law of inheritance etc. There were period in human history when these principles were successfully practiced and prominent economist lived in those time and wrote valuable books on Islamic economics and practice”, he said.

Raheem said that the two important symbol and icons of capitalist system – the interest-based banking and the speculative stock exchange system - had miserably failed.
“Capitalism, especially interest-based economy, has brought in huge disparities between the rich and the poor. The capitalist system is practically dead as the western governments has nationalized most of the banks and other industrial corporations, which is a big anti-thesis of capitalism,” he said, adding that implementing a non-interest banking and investment system, which is divine and an ethical procedure is the only practical solution to solve to cover up the present situation.

From Saudi Gazette

Be Positive in Dealing With Decision To Establish Sukuk Market

No two people can disagree over the importance of the step taken by the [Saudi Arabian] Capital Market Authority [CMA] to launch a secondary Sukuk market which will stimulate the public and private financial sector in the issuance of Sukuk bonds. The establishment of this secondary market will transform Saudi Arabia into a major player in this promising market that studies expect will witness unprecedented growth in the near future. The International Monetary Fund [IMF] expects that that by 2010 Sukuk revenue will amount to US $200 billion. The public and private sector will be able to benefit from this revenue rather than seeking investment opportunities outside of Saudi Arabia. According to the McKinsey Competitive Report [issued by the World Islamic Banking Conference], Saudi Arabia is ranked second behind Iran with regards to assets from the Islamic banking industry.

The existence of a secondary Sukuk market is one of the important steps that will enable Riyadh to become one of the most important financial centres of the Islamic banking industry. This is a status that is long overdue and one that Riyadh fully deserves but has failed to achieve due to the previous lack of conviction in the Islamic banking industry on the part of some involved in the Saudi financial sector. This opened the door to some of the capital cities of the neighbouring countries, and even Western and Asian cities, to take over this role. The competition between Riyadh and these capital cities has become more complex, especially since these capital cities have preceded Riyadh in gaining a foothold in this sector. However despite this, Saudi Arabia's task is not impossible so long as efforts are combined and strategies are developed and plans are implemented to help achieve this objective.

Therefore I believe that the step taken by the CMA to launch a secondary Sukuk market must be supported by all parties interested in putting Riyadh on the map of the Islamic banking industry. If anybody has objections to or observations on this decision – whether these are juristic or technical – they should be brought to the attention of the CMA in a calm and rational manner. There should not be any loss of control or media incitement, as this will only result in the severance of dialogue and the CMA maintaining its decision, something which was proven in previous experiences with governmental bodies. These emotional methods [of objecting to a decision] have not led to any changes, and in fact the opposite has occurred with the governmental upholding its position and refusing to make any of the proposed changes.

For this reason, I urge the religious figures who are concerned with this decision [with regards to a secondary Sukuk market] to sit down with the CMA and discuss the details surrounding this, and whether it would be possible to modify or neutralize this. However only Sharia-compliant Sukuk bonds will be traded in this secondary market, and these Sukuk bonds could not have been issued except without the blessing of God and the CMA efforts that facilitated their issuance. The CMA is also the first Saudi Arabian financial regulatory body that specifically mentions Islamic banking in its charter, specifically in the chapters dealing with Islamic investment.

I believe that the timing of the launch of the secondary Sukuk market will encourage public and private institutes to issue Sukuk bonds which will help push this market forward, especially since trading in this market is limited to initial public offering [IPO], which we well know is within the provision of Islamic Sharia law. We know this because the majority of Saudi Arabian investors refuse to utilize any investment tool that is not compatible with Islamic Sharia law.

My words should not be misunderstood as a call to not distinguish between what is Halal [religiously permissible] and Haram [religiously forbidden] with regards to what is taking place in this market. Rather, I am requesting that the discussions that occur on this issue take place in a calm and rational manner away from slander and rebuke, which is something that has been advocated in the Holy Quran. ‘Invite [all] to the way of thy Lord with wisdom and beautiful preaching; and argue with them in ways that are best and most gracious: for thy Lord knoweth best, who have strayed from His Path, and who receive guidance,’ [Surat an-Nahl: 125]. This was also advocated by the Prophet Mohammed (PBUH) in the Sahih Muslim collection of Hadith [Prophetic traditions]. On the authority of Abu Massoud al-Ansari “A person came to the Messenger of Allah (PBUH) and said ‘I keep away from the morning prayers on account of such and such [a man] because he keeps us so long.’ I never saw the Messenger of God [PBUH] more angry when giving an exhortation than he was that day. He said ‘When any one of you leads the people in prayer, he should be brief for among them are the young and the aged, the weak and the sick.’ It was Prophet Mohammed’s nature to act in this manner [i.e. to speak in a calm, generous, and rational way], and this is something that we should emulate.

From asharq alawsat

Shariah Sensitive Assets In GCC, Asia Top US$700 Billion

Shariah sensitive assets in the Gulf Cooperation Council (GCC) countries and Asia touched US$736 billion in 2008 compared to US$267 billion in 2007, said the third annual Ernst & Young Islamic Funds and Investments Report (IFIR) 2009.

In a statement Tuesday, Ernst & Young said that in computing the total asset size this year, the report included Awqaf and Endowments, Takaful operators in Malaysia, sovereign wealth funds in the Middle East and North Africa (MENA) and Asia, as well as the markets of Pakistan and Southeast Asia.

It said that although the Islamic asset management industry had a potential revenue pool of US$3.86 billion, the size of funds remained small with over 50 percent having assets under management of US$20 million or less.

Ernst & Young also stated that the largest concentration of Islamic funds remained in the Middle East and equity funds led the field of choice of asset type. Saudi Arabia held US$19.28 billion in total assets under management for Islamic funds while Malaysia US$4.579 billion, it said.

"The untapped markets in Asia and MENA are a source of growth for the Islamic funds due to their large Muslim populations. These markets, where Islamic finance is still in its infancy include Indonesia, Pakistan, India, Bangladesh, Turkey, Iran and Nigeria," it said.

Ernst & Young said that the average return from Islamic equity funds fell to minus 39 percent in 2008 compared to a 23 percent return in 2007. In the first quarter of 2009, the average return stood at minus 3.7 percent.

On Islamic fixed income funds, the average return dropped from three percent in 2007 to one percent in 2008 and the first quarter of 2009.

Meanwhile, Sukuk issuance slowed as spreads widened -- Sukuks worth US$15.5 billion were issued in 2008 compared to US$47.1 billion in 2007. The report estimated that US$27.5 billion worth of Sukuks would be issued in 2009.

"Last year, we highlighted the phenomenal rate of growth experienced in the Islamic asset management industry. The landscape has changed significantly now, yet the fundamentals of the Islamic fund industry remain strong.

"With almost US$50 billion in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future.

"This is a time when strategic choices have to be made and market participants have to adapt to survive," said Ernst&Young Islamic Finance Services Group (IFSG) partner and its head of Assurance Services of Malaysia Abdul Rauf Rashid.

IDB To Issue $500m Sukuk

The Islamic Development Bank, or IDB, is to issue a $500 million sukuk, or Islamic bond, in a few weeks, according to its president Dr Ahmed Mohammed Ali.

Ali told a Press conference in the bank's headquarters here on Wednesday that it is the first issue in the $6 billion sukuks planned for a period of five years. The media meeting was also attended by chief economist Dr Izzat Ali.

Ali explained that the objective of the sukuk is to collect funds from the international market place to support member countries affected by the global financial crisis. The crisis not only poses a challenge but also throws up opportunities, which the bank is determined and competent to explore and offer to the member countries.

He said that the bank is well-placed, strong and stable to meet with success, and added that all ratings agencies — Fitch, Standard & Poor's and Moody's — have given an AAA rating to IDB.

The recently concluded 34th annual meeting of the IDB Group Board of Governors in Ashgabat, Turkmenistan had noted that the performance of the IDB Group to assist and mitigate the adverse impact of the global food and economic crisis on member countries has been commendable.

It urged the Group to scale up support to meet evolving requests of member countries for assistance in the development of Islamic financial services industry, which will provide "a critical anchor of stability to our domestic financial sector."

The Board welcomed the IDB-led initiative to establish a "Task Force on Islamic Finance and Global Financial Stability" in January, whose work is aimed at contributing to the reform process of the global financial system with a view to enhancing its resilience and preventing future recurrence. It urged the Central Banks and the national investment authorities to strongly support and participate in the resource mobilisation programmes of the IDB Group.

Ali said that Saudi Arabia, Turkey and Indonesia had played a significant role in setting out a comprehensive reform agenda for the global financial system during the G-20 Summit held on April 2.

He said that the Bank was promoting Islamic banking and finance not as a competitor to conventional banking or as a substitute to it but as a viable alternative in the present world financial turmoil.

According to him, Islamic banking has proved its worth and such countries as France are opening doors to Islamic banking.

He said that Muslim countries should place their funds in such productive and growing sectors as infrastructure, and agriculture.

About the Bank's programme to support poor Muslim countries hit by rising prices of essential commodities, Ali said that an amount of $1.5 billion has already been allocated for the purpose. "Our Bank will also support member countries to increase their agricultural production. We are ready to support any project aimed at development of member countries," he added.

He said that IDB?s deposits and assets had not been affected by the financial crisis. "Our funds are invested in secure Islamic portfolios, which are not affected by speculative business," he said.

According to Izzat, it was difficult to predict when the recovery will take place, but it will most likely be "L-shaped."

From Khaleej Times

Call For Intellectual Works To Boost Islamic Finances

There is an urgent need for intellectual works to boost Islamic financial products, Dr. Ahmad Mohammad Ali, President of the Islamic Development Bank (IDB) said here on Saturday.

Addressing a forum to attract support of institutions for Executive Islamic Financial Management (XIFM) Program at Effat University here on Saturday, Dr. Ali said it was important to make the students aware of Islamic banking tracks, such as, Islamic financial and development challenges, Islamic banking opportunities and the financial crisis and partnership opportunities between universities and Islamic banking.
“Some researchers have estimated the average annual growth of the Islamic finance since the beginning of the new century to about 32 percent with assets worth $700 billion over the end of the year 2007,” said Dr. Ali.

The (XIFM) program is in collaboration with Ecole Supérieure des Affaires (ESA) in Beruit, and the Rotterdam School of Management(RSM) at Erasmus University. The Islamic Development Bank (IDB) is supporting the program in this forum.
A number of businessmen, faculty members of the university and IDB representatives attended the forum aimed at making the XIFM program as a headquarter and home for all researchers and students by mixing between the Islamic financial material and traditional finance and to exchange the experiences with the Effat’s faculty members and students in Islamic financial field.

“There is a lack of qualified managers in the Islamic financial sectors based on Islamic Shariah. The Islamic financial institutions are planning carefully to overcome this and to take advantages of banking opportunities available to our students,” said Dr. Haifa Jamal Al-Laial, Dean of Effat University.

Dr. Ali said money cannot alone solve the global crisis. It can be tackled by supporting the intellectual work to redraw the development strategies, and to double the amount of funding and investment within the limits of financial caution.

Furthermore, Dr. Iman Mohammad, chief of the extension programs department said that XIFM program will provide nine scholarships for male and female students. Two of them will be given as a complete scholarship covering all costs of the program amounting to SR135,000.

Three grants will cover about 50 percent, and other four grants will cover 25 percent.

Resurgence Of Islamic Finance

Islamic finance is experiencing a resurgence in the Arab world as a result of the economic recession, according to Alex MacGillivray, senior partner at AccountAbility, one of the co-authors of a new report entitled Responsible Competitiveness in the Arab World 2009.

There’s a new buzz in the Arab world about Islamic finance, which tended to have a reputation of being “nice” yet offering “lower returns”, he says.

Today, argues MacGillivray, Islamic finance is being viewed as a safer and better bet for investors than the “Western casino style” of financial investment.

“It’s not just steady - it’s outperformed a lot of Western banks and therefore the sort of idea that Arabic versions of financial management were kind of dozy but required for good Muslims - that preconceived notion has been disproved. So the essays in the report from financial houses Abraaj and National Commercial Bank are quite ‘gung ho’ about the role Islamic finance can play, and about the role the Arabic version of corporate governance can play.”

“So where many Western investors would have said a year ago, ‘well governance is a bit lacking and they are a bit risk adverse compared to Western finance’ - you won’t hear that now.”

“And put that together with Saudi Arabia joining the G20 as an active player in global leadership and you see quite a different image coming out of the Arab world. They want to be part of the solution.”

From Insead

Financial Crisis An Opportunity For Islamic Banks

The financial crisis presents an opportunity for Islamic banks based in some of the Gulf States according to a new report from the London School of Economics and Political Science (LSE) released recently.

The report entitled “The development of Islamic finance in the GCC”, by Professor Rodney Wilson (pix left), states that the Islamic banks have been less adversely affected than the major international banks by the 2008-9 crisis, making them more attractive to investors.

Gulf Cooperation Council-based investors in conventional banks have seen the value of their investments plummet. These include Prince Waleed’s Kingdom Holdings in Saudi Arabia, which holds five per cent of Citibank, and the Abu Dhabi and Qatar Investment Authorities, which hold significant stakes in Barclays. In contrast, the value of the Saudi Al-Rajhi Bank and Kuwait Finance House (KFH) investments in retail Islamic banking affiliates in Asia has been much more resilient.

Professor Wilson, who wrote the report for LSE’s Kuwait Program on Development, Governance and Globalization in the Gulf States, said: “There has been much questioning of the values underpinning the conventional financial system, and the search for alternatives means that Islamic banks are likely to receive more attention, especially as their raison d’être is morality in financial transactions, based on religious teachings.”

“The increasing international respect for Islamic finance has been noted in the GCC, and this should encourage local acceptance by both governments and bank customers, not least because no Islamic bank has failed in the crisis and required a substantial government bail-out.”

Islamic banks have been somewhat insulated from the current financial crisis because, in contrast to their conventional counterparts, they do not borrow in interbank markets, their funds coming instead from their own deposits. They also did not hold toxic collateralized debt obligations because they are not allowed to hold interest-bearing securities.

According to the report, the GCC is well positioned at the heart of the Muslim world to serve as an Islamic finance hub linking Europe, Asia and Africa. The spread of subsidiaries of GCC-based Islamic banks illustrates that this is starting to happen. Furthermore a global economic recovery is likely to benefit the GCC as oil and gas prices rebound, resulting in fresh liquidity being pumped into Islamic banks to fuel further expansion.

Despite being a reluctant supporter of Islamic banking to date, the report argues that Saudi Arabia could become the global leader in the Islamic finance industry worldwide if the Saudi Arabian Monetary Agency (SAMA) and the Capital Markets Authority become more proactive in promoting the industry. This would bring significant benefits to its economy including employment creation in the King Abdullah Financial District where, for example, although a grand mosque is included in the plans, there is no mention of Islamic finance in the vision.