Riba Vs Interest!

Riba versus Interest is a thought provoking article of Mr. Mohammed Ashraf. Though you may disagree with his few points but overall this is a good effort to summarize the concept of Riba in today’s society. (IBFN)

RIBA Vs INTEREST by MohadAshraf

Tarek Fatah, an ex-Pakistani; now Canadian, is known for his hard and harsh writings about Islam, formation of an Islamic state, and Pakistan. With the failure of Muslim Banking he has predicted the failure of Shariah Banking in Canada. This is not true, the failure of few over enthusiastic inexperienced individuals could be labelled as the failure of entire Muslim community in Canada. Pl read his article with same spirit.  (IBFN)

Sharia banking in Canada!

The leading promoter of Sharia banking in Canada, UM Financial Inc. has gone into receivership without much fanfare. None of the nation’s newspapers have bothered to report the development, despite the fact it could possibly affect hundreds of homeowners. Had it not been for a tweet by an affected Muslim homeowner looking for a lawyer, the story of UM Financial going broke would have escaped even the scant attention the news received on social media.The troubles at UM Financial did not come overnight. As far back as April 2007, theToronto Star reported on the company’s liquidity problems. The Star wrote that Omar Kalair, the founder of UM Financial, “is working hard to maintain on-going sources of funding.” Kalair disclosed that the Credit Union Central of Ontario had extended an additional $50 million to the Sharia banking promoter, and “that will keep us going until the summer.” Apparently, this month the money ran out and UM folded tent. Read full story at http://www.huffingtonpost.ca/tarek-fatah/sharia-banking_b_1011704.html

Challenges to growth of Islamic banking

Mohammad Al Asoomi

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011. A branch of Dubai Islamic Bank. More than 310 Islamic financial institutions currently operate in more than 75 countries. Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011, accounting for only one per cent of the world’s total. This point was made at a seminar organised last week by the Emirates Centre for Strategic Studies and Research in Abu Dhabi in cooperation with the Paris Institute of Geo-Political Studies.

The seminar also highlighted global interest in Islamic banking, motivated by the growing economic importance of Islamic countries and the increasing number of Muslims in places such as Europe. Even China is entering the market, recently approving a license to set up the first Islamic bank in the country. More than 310 Islamic financial institutions currently operate in more than 75 countries, and in the GCC the sector continues to flourish. The recent announcement that the world’s largest Islamic bank, with a capital of $100 billion, would be headquartered in Bahrain will boost this trend. But despite the global interest and new trends, Islamic banking still faces many challenges. Many of these challenges have complicated Sharia and professional characteristics.

Wide variation – Regarding Sharia, there is a wide variation in fatwas in each Islamic bank. Some of these fatwas contradict each other, thus creating hurdles in the progress of the sector. This disparity reflects conflicts of interest and competition among Islamic banks on the one hand, and among scholars on the other. Some financial instruments adopted by some Islamic banks are prohibited or treated as undesirable in other lenders, which may hinder their adoption and the mission of the banking business in general.

On the professional side, although one of the most basic fundamentals of Islamic banking is based on the profit-and-loss sharing principle, the interest rate in Islamic banks mirrors interest rates in traditional banks, in that it moves up and down in accordance with the interest rate of the London Interbank Offered Rate (Libor) on the London Stock Exchange. This is the average interest rate that leading banks in London charge when lending to other banks. Even though fatwa departments in Islamic banks are currently considering a substitute for this interest rate mechanism, in reality, Islamic banking is part of the global banking system and will remain so due to the integration of the economies of Islamic countries with the global economy. This is because economic globalisation does not allow for such a separation between Islamic banks and traditional banks.

The impact of the global financial crisis on Islamic banking stand as evidence of strong association between Islamic banking and global banking, despite the fact that the effects on Islamic banks were less serious than those suffered by traditional banks. Let us not forget that one reason for this is that Islamic finance prohibits overestimating assets without sound financial foundations, and financial derivatives — two major causes of the crisis.

The efforts of Islamic banking to go global are important, particularly if they want to achieve the stature of French banks, for example, but it also requires finding a solution to the currently existing Sharia and professionalism-related problems. Dealing with global fin-ancial markets is different from dealing with local and regional markets, especially given that there are complicated financial instruments and derivatives that are difficult to deal with in terms of Sharia only. There are also major stock exchanges for commodities, gold and oil that deal with billions of dollars daily, thus putting big burdens on financial institutions because of the size and speed of transactions. But if these issues can be resolved, it would be possible for Islamic banking to constitute an important part of the world banking system.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.  http://gulfnews.com/business/opinion/challenges-to-growth-of-islamic-banking-1.971299 

Raising Knowledge: An Islamic Finance Opportunity

The Islamic banking and finance industry has grown at a tremendous pace, but this growth has also led to certain concerns. Ehab Heyassat considers some of the issues that are being hotly debated in the industry.

Islamic banking has witnessed tremendous developments during the last 10 years. Not only did the number of institutions offering Shari’ah-compliant products and services nearly double between 2005 and 2007, but we’ve also seen more sophistication come into play in the industry. Islamic banks and conventional banks with Islamic windows have constantly innovated to offer products that are of the same, or better, caliber than the traditional products available. In Bahrain and Malaysia, there has been considerable advancement in terms of standardising accounting and fatwa procedures across the Islamic markets, while there is now a whole new securities market in the Dubai Financial Market (DFM) that has converted into an Islamic platform.

In the Arab world, some of the biggest transactions in the recent past have been Islamic. In Saudi Arabia, more than 50 per cent of all transactions taking place today are in the domain of Islamic banking.

The rapid pace of growth – 35 per cent, according to some estimates – has brought about its own problems including a lack of professionally-trained Islamic bankers and Shari’ah scholars. According to Saleh Kamil, one of the pioneers of Islamic banking, 85 per cent of the more than 300,000 employees working with Islamic banks and financial institutions today are not well versed in the knowledge of Shari’ah. This issue needs to be addressed quickly, he adds.

The other big impediment is the extreme shortage of Shari’ah scholars to support the industry. It is very common to see the same set of Shari’ah scholars sitting across the boards of rival banks and institutions. In fact, there is almost an unuttered rule in the industry that banks and institutions that are able to pay the fee will get these scholars on their Shari’ah boards, while competition will not ask questions. The reason they will not ask questions is obvious; if they do, they may not have a Shari’ah board at all. Such is the extent of the industry’s shortage.

Dr. Hussein Hamid Hassan is among the most popular of Shari’ah scholars. Dr. Hassan sits as the chairman of many Shari’ah boards from institutions such as Dubai Islamic Bank (DIB), Emirates Islamic Bank (EIB), National Bonds, Amlak, the Dubai Financial Market (DFM) and Ajman Bank.

Another sought-after scholar is Dr. Abdul Sattar Abu Ghuddeh. He is the chairman of Shari’ah boards at Abu Dhabi Islamic Bank, Al Hilal Bank and HSBC Amanah. He is also a member of the EIB, Noor Islamic Bank and DFM Shari’ah boards.

A spokesperson of Noor Islamic Bank admits that some conflict could arise from having the same set of Islamic scholars across rival banks, but quickly adds that there is some value to it as well.

“It does create some conflict of interest. However, having common names in the board of rival banks will, in fact, bring us to a better set of unified rules and regulations that can be applied to all Islamic banks in the region. In addition, it helps in avoiding past mistakes, while also enhancing the knowledge of these scholars,” the spokesperson justifies.
Scholar revenues

The thin spread of Shari’ah scholars has raised questions about the independence and quality of their work. With the newly-set-up, Bahrain-based Islamic International Rating Agency now beginning to rate the quality of Islamic products and institutions, the pressure on the industry to comply more stringently is increasing.

In fact, it is said that the fast pace of growth in Islamic banking has brought in a bounty for Shari’ah scholars. While there is no information available to the public regarding how much Shari’ah scholars earn sitting on the Shari’ah boards of Islamic institutions, a parallel can be drawn with the earnings of the star preachers in the region.

In March 2008, Forbes Arabia published a list of preachers called Da’awa Stars, or Star Preachers. In that list, Amr Khalid, Tariq Sowaidan and Aaidh Al-Qarni were at the top with annual incomes of US$2.5 million, US$1 million and US$533,000 respectively for 2007. The preachers generated these incomes from TV programmes broadcast on several satellite channels in the Arab world, as well as from religious CDs and books.

Market sources confirm that setting up a typical Shari’ah board can cost anywhere from US$80,000-100,000. A quarterly fee of between US$10,000 and US$25,000 is also charged to provide fatwa and audits for products and services.
The DIB, which is at the forefront of Islamic banking and finance, set up a separate subsidiary last July to offer consultancy for Islamic financing and investment transactions to cater to the industry’s rising opportunities.
Although DIB’s Shari’ah consultancy is one of the pioneers in the field, there are others that are planning to come to the market soon to take advantage of the business prospects in Islamic finance.

A controversy
It is important to note that many muftis and scholars are not sure whether taking a fee for issuing a fatwa is the right approach. The majority of scholars are actually of the view that a mufti should deliver a fatwa without taking any fees. Even among those who allow taking a fee for issuing a fatwa, there are differences of opinion as to the circumstances under which such fees can be charged.

The Hanafi, Shafi and Hanabila Sunni schools of thought are against any fees for issuing fatwas. According to the Hanabila school of thought, however, a mufti is allowed to take a fee, but only if he is in need of it. Among the four Sunni schools of thought, only the Maliki allows for charging a fee for issuing fatwas.

However, scholars and industry experts argue that the Shari’ah boards of the banks and financial institutions do much more than issue fatwas. Additionally, there is a host of administrative, processing and servicing work entailed in the contract. This work involves time and effort, so one argument is that the fees charged are legitimate and do not allow for any controversy.

The future
Kamil points out that the tremendous progress of Islamic banking also carries with it a lot of challenges. “We know that humans, the makers of progress and success, are also behind failures and collapses,” he says, emphasising the urgent need for the industry to focus more on education and training in Islamic finance.

The spokesperson at Noor Islamic Bank agrees that Islamic banking education should be applied in all universities of business and banking in the UAE and the Middle East. Both the government and the private sector should encourage the use of Islamic banks and provide attractive job opportunities to people interested in Islamic banking and Shari’ah advising, he says.

The spokesperson adds that another solution would be to set up research institutions to conduct specialised training in Islamic banking

The consensus in the industry is that the only way forward is to cultivate more knowledgeable people and graduates, especially in Islamic Commercial Law. It is also important to create unified Shari’ah standards – for example, the standards set by the Accounting & Auditing Organisation of the Islamic Financial Institution – so that there is more cohesion and efficiency within the industry.

Once these changes take place, many issues that still remain in the grey area should be automatically sorted out. If and when that happens, the Islamic finance industry will be well on its way to the next level of development and growth.

A selection of Shari’ah boards in the UAE finance sector

DFM DIB EIB National Bonds NIB SIB Tamweel
Dr. Hussein Hamid Hassan (Chairman) Dr. Hussein Hamid Hassan (Chairman) Dr. Hussein Hamid Hassan (Chairman) Dr. Hussein Hamid Hassan (Chairman) Sheikh Dr. Mohamed Ali Elgari (Chairman) Dr. Hussein Hamid Hassan (Chairman) Dr. Hussein Hamid Hassan (Chairman)
Dr. Abdul Sattar Abu Ghuddah Dr. Ojeil Jassim AlNashmi Dr. Ojeil Jassim AlNashmi Dr. Ijail Jasim Al Nashmi Dr. Abdul Sattar Abu Ghuddah Dr. Abdul Sattar Abu Ghuddeh Dr. Mohammad Abdul Razak El Sadeek
Dr. Mohammed Daud Bakar Dr. Ali Al-Qurra Daghi Dr. Ali Al-Qurra Daghi
Dr. Mohammad Qasim Dr. Mohammed Daud Bakar Dr. Ijail Jasim Al Nashmi Dr. Mohammad Abdul Hakeem Zuar
Dr. Ijail Jasim Al Nashmi Dr. Mohammad Abdul Razak El Sadeek
Dr. Mohammad Qasim Dr. Mohammad Abdul Hakeem Zuar
Dr. Muabed Al Jarehi

DFM – Dubai Financial Market
DIB – Dubai Islamic Bank
EIB – Emirates Islamic Bank
NIB – Noor Islamic Bank
SIB – Sharjah Islamic Bank

Source: http://www.moneyworks.ae/news_article.php?news_id=2008