HDC Aims To Penetrate Deeper Into International Markets

Bernama -- The Halal Industry Development Corporation (HDC) aims to penetrate deeper into international markets, especially the United States, Europe and Japan.

Managing director and chief executive officer Datuk Seri Jamil Bidin said HDC had been aggressively focusing on capturing the international markets since it assumed the responsibility for halal certification from the Islamic Development Department (JAKIM) on April 17, 2008.

"To date, we have issued halal certifications for 527 companies in the Malaysian market and 16 companies in international markets," he said at a news conference here today.

About 1,000 applications for halal certification have been received from the Malaysian market, he added.

HDC kicked off the two-day International Halal Certification Dialogue at the Kuala Lumpur Convention Centre today, bringing together some of the world's leading researchers and entrepreneurs in the global halal industry.

In total, 47 Islamic bodies from 23 nations are represented at the event.

HDC chairman Tan Sri Dr Syed Jalaludin Syed Salim, in his opening address, said the desire to ensure that the entire production and manufacturing processes involved in the global economy was halal-compliant had led to an increasing level of awareness among Muslims and non-Muslims.

Among the new developments in the halal industry was in genetically-modified food, he said.

HDC vice president of halal integrity Mariam Abdul Latif said at the news conference that genetically-modified food was acceptable as being halal-compliant as long as it was sourced from halal-based materials.

According to Jamil, the main challenge facing the industry is obtaining halal-based raw materials.

He said the industry could benefit from halal-based certification which provided assurances in quality and safety of products for the mass market, especially with the current outbreak of melamine-contaminated products in the market.

He also said that consumer confidence and integrity were placed in the halal certification.

According to Syed Jalaludin, there is tremendous potential for halal products worldwide.
He said even at its relatively early phase of development, some estimates placed the current size of the global halal market at US$2.1 trillion.

Malaysia courts may get expert help on sharia finance

Reuters - Malaysian courts may need to refer to the central bank's sharia advisers when deciding Islamic finance matters to ensure cases are handled by sharia experts, a newspaper reported on Wednesday.

Islamic banking matters are heard by Malaysian civil courts which are staffed by judges who are not formally trained in the sharia. This has led to criticism that some sharia finance cases may not be decided according to Islamic principles.

'It is learnt that the central bank is reviewing the necessary laws to make this possible,' The Malaysian Reserve said, without citing the source of its information.

There was no immediate comment from the central bank.

The central bank has a board of sharia advisers which gives directions on Islamic finance matters regulated by the central bank such as banking and insurance.

The board consists of sharia scholars, jurists and industry practitioners.

Sharia-compliant finance bans the receipt of interest and investments in companies dealing in alcohol, gambling and pornography.

So many jobs, but so few experts for Islamic finance

Gulf Times:The swift rise of the Islamic finance industry could hit a wall in the coming years as the sector struggles to find enough experts to do the job, an industry official said yesterday.

Shariah banking’s sudden popularity has created a scramble for bankers, scholars and lawyers conversant in both conventional finance and Islamic economics, and produced a shortage that sometimes compromises the quality of products, experts say.
Many Islamic bankers are drawn from the conventional finance sector and have structured products which have drawn criticism that Shariah banking is little more than usury-based financing cloaked in Islamic dress.

The Islamic industry’s rapid growth has outpaced the rate at which the sector is able to churn out workers, said Agil Natt, chief executive of Kuala Lumpur-based INCEIF, which says it is the world’s only dedicated Islamic finance university.
“We want to bring the Islamic finance professionals closer to understanding Shariah principles and we want the Shariah advisers to be able to understand some of the problems of practitioners,” Natt said in an interview.“If you do not train the right kind of human capital, there is a risk that the growth of the industry can be stymied.”

About 30,000 Islamic finance professionals will be needed in the Middle East in the next 10 years, he said, citing figures from consultancy AT Kearney.
In Malaysia, another leading centre of Islamic finance, an estimated 8,600 Shariah bankers would be needed by 2012, almost double the 4,800 available now, according to the central bank.

The Islamic insurance, or takaful, industry would require just over 2,000 professionals by 2012, up from 1,250 now.The industry’s lack is especially glaring in commercial banking and takaful in the Middle East, retail banking in the US and fund management and investment banking in Malaysia, Natt said.

Modern Islamic banking, which has its roots in the 1970s oil boom, has been growing about 20% annually, driven mainly by a surge in Middle East oil revenues.
It aims to be a viable alternative to the conventional industry but with over 300 financial institutions worldwide and the sector valued at about $1tn, the size of the Islamic industry is still just a fraction of conventional banking.
The shortage of talent in the industry is creating a fierce competition for workers. Middle East institutions, in particular, are trying to draw in professionals by offering top dollar.

It has also driven up wages, with it not uncommon for Shariah bankers to draw higher pay than their conventional peers.The Islamic industry’s growth was not expected to stall despite easing energy prices, as the global financial meltdown and US housing crisis have put the spotlight on ethical investing, Natt said.

“There would be no drop in momentum simply because Islamic banking and finance has features which makes it appealing for even non-Muslims,” said Natt, formerly a top official of Malayan Banking, Malaysia’s largest lender.
The industry also faces a shortage of Shariah scholars, he said, estimating that there are about 200 such scholars worldwide.

All financial institutions that offer Islamic products must have a board of Shariah advisers who decide if instruments comply with Islamic law’s standards.
INCEIF, which was set up in 2006, is funded by Malaysia’s central bank and has over 1,800 students from 52 countries.

Islamic finance could play a key role amidst global fears

APP)Key investors and industry figures at their meeting at the second Islamic Finance and Trade Conference considered the best ways forward for Islamic and ethnical finance in the face of the global recession.

At the two-day conference which ended here on Wednesday, British financiers discussed the opportunities Islamic and ethical finance presents in coping with the global financial crisis. Despite the global economic crisis leading financial experts believed that finance governed by Sharia law provides the basis for new income streams that are more stable and offer long-term prospects.

The speakers noted that the City of London has always been at the forefront of many of the developments in Shariah-compliant financial products.

With a global recession imminent, exploring ways of building and strengthening these partnerships and applying the underlying principals of Islamic finance could help contribute to a more stable economy.

A sentiment supported and encouraged by the UK Treasury who hope to encourage further foreign investment as well as creating more British-Islamic institutions in the UK.

In his keynote address, the British Financial Secretary Stephen Timms, said: “There are five dedicated Islamic banks in the UK, one Islamic insurance provider, we see these as great examples, like the MCB (Muslim Council of Britain) itself of something we would like to see a lot more of in the UK, distinctive institutions which are both Muslim and British.

Both at the same time without a hint of a conflict because in that way we will see more and more Muslims contributing to British life and to our aims of a strong economy and society for the benefit of every single person in the UK.”

He went on to explain how the new generation of young British Muslims will be key players in Britainbs future success.

“We want this to be a collaborative effort for everybody involved, with the skills, expertise, and dedication that characterise this industry. I am very optimistic that working together we can ensure that Islamic Finance and Trade are very major elements in London’s success in the decades ahead.”

Timms further said the UK treasury has been working to create the right conditions for Islamic finance to thrive and to benefit both institutions and Muslims living in the UK. He observed that in the current economic climate there is much that can be learnt from finance governed by Shariah law.

Timely Offer Of Stability From Islamic Finance

Bernama -- In creating the awareness and benefits of Islamic financial system, Malaysia is offering itself as the perfect gateway for Middle Eastern financial players to tap in to the Asean region's potential of 600 million population.

Bank Negara Malaysia deputy governor, Datuk Mohd Razif Abdul Kadir today said Islamic finance was no longer a domestic agenda for Malaysia as it was integrating globaly, and that the regulator was even offering various incentives to get the ball rolling for foreign investors and players in the country.

"We have to create awareness of the various opportunities available under the Malaysia International Islamic Financial Centre (MIFC)," he said on the sideline of the MIFC road show to Kuwait and Saudi Arabia, here.

MIFC came into existence in 2006 under a collaborative effort by the country's financial and market regulators including BNM, Securities Commission, Labuan Offshore Financial Services Authority (LOFSA) and Bursa Malaysia - together with industry participation from the banking, takaful and capital market sectors in Malaysia.

"Under MIFC, we can isue new licenses for Islamic banking, takaful and fund managements to conduct international business in Malaysia," he said adding that another incentive for players was a 10-year corporate tax free business.

According to Razif, sukuk or Islamic bonds are now also an important alternative for corporate fundings and Malaysia was a centre for sukuk origination and trading with a record of about 60 percent issuance.

He said despite the globl economic uncertainty since late last year which made it impossible to raise funds via conventional bonds in markets elsewhere, the issuance of sukuk was the opposite with some being oversubscribed.

"The US$4 billion sukuk raised for Maxis buy-out last December was at the peak of the subprime crisis, where it was impossible to tap bond markets elsewhere."

"It was oversubscribed two times, eventhough it was the largest sukuk issuance in the world. This proves that Malaysia's sukuk market is large and very liquid for both local and foreign investors," he said.

Razif said another focus in the Islaimc financial sector was to encourage Middle Eastern players to set up wealth management business in Malaysia to tap high networth investors who want to park their money in Islamic instruments.

"Malaysia has developed a very comprehensive Islamic banking system and robust financial market with various products. The timing cannot be better where the conventional financial instruments have had a depreciation while the Islamic instruments remain steady," he said.

Asset-backed Real Islamic Investments Offer Remedy to Financial Uncertainties, says UK-based cru Investment Management

Zawya:In the backdrop of the global financial contagion, cru Investment Management, the UK-based billion dollar investment company today said that asset-backed real Islamic investments offered a better option to investors to safeguard their investments than the conventional equity mode.

cru, which is targeting the UAE and the regional investors in the GCC to soon offer a shariah-compliant Fund focused on commercial agriculture in Africa, said that the financial turmoil and the resultant steep fall in the value of conventional market instruments will speed up the pace of the growing affinity towards Islamic finance and real assets globally.

Mr. Jon Maguire, Chairman, cru Investment Management, said: "Investors have been burned by public markets in recent times; they are now looking for an asset class uncorrelated with conventional capital markets. We believe that food is the new gold. It is emerging as a popular alternative asset class; especially in light of the global population estimates. Figures show that 80% of the world's population is set to urbanise by 2030 - if we don't grow food, who will feed these people?"

He said that cru has positioned itself as an entity with focus on social investments and is currently in advance stages of offering an alternative investment instrument combining its ethical and transformational investment focus with Islamic finance.

"I have brought on board an Islamic Finance specialist, Naveen Raza, to head up our Islamic offering. We will be promoting a new Islamic Africa Agriculture fund in the UAE, set for launch in March 2009."

Ms Raza, previously of HSBC Amanah, said, "I am delighted to be working on this new initiative. It is closer to the true ethos of Islamic finance than any other product on the market; combining excellent returns on capital with a focus on poverty alleviation and fairer distribution of wealth. This is the future of Islamic finance and should have been its focus right from the start."

The fund, which will invest in commercial agriculture in Sub-Saharan Africa, has dual-purpose - to ensure returns in the range of 15-20 per cent, while the investment helps to create jobs and give rural Africans the chance to help themselves out of poverty. Currently, cru has significant exposure to commercial agriculture in Malawi with over 2,500 hectares of land under its own control and another 4,000 hectares in outgrower schemes.

"Significantly, our fund comes at a time when current market conditions call for investment into real and tangible assets. One of the best places to put your money is into food production - prices are going up, population is increasing and mouths need to be fed. Africa is emerging as a destination of choice, especially for Middle East investors, as is agriculture. Investors are looking to diversify their portfolios by geography and asset type - Africa is the last frontier," Ms Raza said.

"In addition, investing in the fund will also support the various initiatives of the GCC governments to ensure food security at a time of inflation and shortages in the region," she added.

According to the company's estimates, the funds it raised through its existing Africa Invest Fund are financially engaging over 100,000 people in Malawi. It is also supporting 2,000 vulnerables through feeding programmes where orphans, widows, AIDs victims and the elderly receive a nutritious porridge for free every day.
The new open ended fund, set for launch early next year, has an ambitious target to raise over USD 13 billion over a number of years and have interests in many different sub-Saharan African countries.

"We have been marketing this Fund in Europe for the last few months and received a very positive reaction to it, especially from ethical investors. I am now excited to see the response from Islamic investors; particularly those that want to stay true to the spirit of Shariah-based investing," concluded Ms Raza.

QIB eyes global expansion: CEO

Gulf Times: Qatar’s largest Islamic lender QIB’s next phase strategy will focus on retail service expansion and banking investments on a global scale.
QIB chief executive officer Salah Mohamed al-Jaidah said the bank had been working to expand its branches and financial services to better service its clients. “We plan to reach a network of 35 branches soon,” al-Jaidah said.

Currently, QIB has a network of some 20 branches and 91 ATMs across Qatar.
The bank has introduced several innovative products such as Ijara, car finance, salary transfer and ‘Atta’ term deposit. QIB is also looking for potential opportunities to spread its wings to foray into the Mena region, GCC and Southeast Asia.

“We will work continuously to maintain sustainable growth and expansion plans in accordance with our forward-looking strategy and in an effort to boost investments and maintain strategic partnerships. While depending upon our strengths of wise leadership and a dedicated, experienced workforce, we will continue to benefit from the power of our capital and infrastructure,” al-Jaidah said.

By the end of the third-quarter, QIB had entered into investing in and funding major ventures in addition to its numerous contributions to infrastructure projects such as the $150mn finance for the Abu Fontas Desalination plant (Qatar Electricity & Water Company).

QIB also financed Barwa real estate to the tune of QR1.1bn and several high-profile projects such as QR450mn Al Samaria Towers and QR178mn Al Rames Tower.
The bank has posted a robust 45.7% jump in the January-September net profit to QR1.25bn. Depositors share from the profits reached QR269.3mn compared with QR208.5mn in 2007, up 29.2%. Total assets were valued at QR30.1bn, up 55.2% on the same period last year.

The bank’s financing portfolio has risen by 65.7% to QR17.9bn compared with QR10.8bn in the same period last year. The investment portfolio recorded a growth rate of 488% to QR6.1bn from QR4.1bn in 2007.

Al-Jaidah said, “The Q3 financial results reflect the success of the strategy laid by our board of directors. Guided by Sheikh Jassim bin Hamad bin Jassim al-Thani this strategy is responsible for expanding QIB operations and investments and further strengthening our foundation in Islamic finance in Qatar and around the world through astute and judicious planning, hard work and innovative spirit.”

“We are proud of the impressive financial results and we believe the profits we have made despite stiff competition and the current global economic crisis, prove we are capable of seizing opportunities to maintain our leadership and customers’ trust. Thanks to our innovative and distinguished variety of products and services, we can meet and surpass our customers’ needs and exceed their expectations in Qatar and elsewhere,” al-Jaidah added.

Hong Kong hospitals cook up first halal meals

Earthtimes - Halal meals, prepared according to strict Islamic guidelines, are being served to Hong Kong Muslims in some public hospitals for the first time, a media report said Saturday. "Noting their [the Muslims] difference in dietary culture, we decided to introduce a halal meal set," Vivian Wong, co-ordinator for the Hospital Authority in New Territories West, was quoted as saying by the South China Morning Post.

The initiative was launched at four hospitals in Hong Kong's New Territories and the scheme could be launched territory-wide according to the paper.

The recipes, cooking process and kitchen were approved and certified by a governing body of local Islamic affairs.

Halal food is cooked using separate utensils to ensure it is not contaminated by forbidden ingredients, while the meat used comes from animals slaughtered according to religious rules.

Union, an ethnic minority group, welcomed the new policy and urged that it be expanded to other hospitals.

"To take it a step further, they should add menus and food whose appearance are user-friendly for the minorities," said campaign director Fermi Wong, who added that a hospital meal consisting mainly of rice might not suit Pakistani or Indian patients.

Malaysia sharia bank plans funds, sees demand

Reuters - Malaysian Islamic lender Asian Finance Bank will set up aviation and property funds with over 1.5 billion ringgit ($420 million), aiming to capitalise on demand for alternative assets amid the global financial crisis.

As financial markets skid under growing fears of a global recession, some Islamic banks are ploughing on with expansion and fund-raising plans, reflecting a belief that the industry is relatively resilient to the meltdown.

Asian Finance, which is backed by Middle Eastern shareholders, is planning a Gulf aviation fund which could be denominated in the euro or dirham currency, Asian Finance chief executive Mohamed Azahari Kamil said in an interview.It was too early to state the fund's size although it would probably be above 1 billion ringgit, he said, adding that the bank is working on the fund with some Gulf airport operators.

"Aviation has always been the growth sector, particularly in the GCC (Gulf Cooperation Council) because we believe there is a lot of potential in terms of transportation business," Azahari said."Because of the scarcity of liquidity, we need also to look at the possibility of doing a fund which is maybe non-US dollar denominated."Asian sharia banks are aggressively wooing Middle East investors who want their money to be invested according to Islamic principles.

Asian Finance had said on Thursday it would distribute a 1 billion ringgit Islamic fund aimed at allowing Gulf investors to invest in companies in the ASEAN region.
This follows a plan by the Singapore unit of Kuwait Finance House, Kuwait's largest lender by market value, to raise $600 million in Islamic funds next year to buy ships, stakes in private firms and properties in Asia.Azahari said Asian Finance is also working with two companies to create a 500 million ringgit fund to develop properties around Kuala Lumpur.The ringgit-denominated fund is expected to be launched in the first half of 2009, he said.

COMING STORM?

Azahari said he expected demand for Islamic products to hold up as the global financial crisis drives investors into the safe haven of Islamic banking.
"In this very difficult financial meltdown, the conventional system has shown to the public that it has failed," Azahari said."It has failed not only because of corporate governance or transparency but it has failed because of the structure where there is no equitable distribution of wealth between the bank and the customers."

The $1 trillion Islamic finance industry is widely seen as the banking world's conservative alternative, as it forbids speculative activity and excessive risk and demands that partners share the profits and losses of a venture.
But some industry experts have warned that Islamic banks would not escape the fallout hurting conventional markets because property and commodity prices are falling as global economic activity slows down.

Property and commodity underpin many Islamic deals due to the sharia's demand for all transactions to involve a specific asset to avoid purely speculative activity.
Several Islamic bond cancellations and poor earnings by some big Gulf banks have highlighted that the industry is not immune to the troubles in financial markets.
But Azahari was upbeat about prospects for the industry.

"We believe we are quite insulated because our strategy in Islamic banking has always been on the partnership concept, on the win-win situation for both the bank and its partners," he said."Islamic funding has always been about medium to long term so generally this is a cycle which everybody has to go through."

Qatar Islamic Bank and its associates have a 70 percent share in Asian Finance. RUSD Investment Bank Inc of Saudi Arabia has 20 percent and Global Investment House of Kuwait has 10 percent.

Global sukuk market to grow

Business 24-7:Despite the growing list of delays in sukuk issuance, the global sukuk market will grow to $40bn-$45bn (Dh147bn to Dh165bn) this year up at least 10 per cent from $32.65bn in 2007, a top official from Kuwait Finance House (KFH) said.

According to Baljeet Kaur Grewal, Managing Director and group chief economist at KFH, the announced sukuk pipeline to date is already put at $34.5bn, a 5.6 per cent increase from last year's.

And with Islamic bond market becoming more global (thereby attracting non-Muslim issuers), the market can further grow to $45bn-$50bn in 2009, Grewal said.

"The overall market for Islamic banking and finance stood at $700bn in 2007, and growing at 23.5 per cent annually over the past five years," Grewal told an investment conference in Dubai.

"Global sukuk outstanding is expected to reach $200bn by 2010 from current $97.3bn, an annual growth rate of 35 per cent," she said.

She said real estate, financial services and infrastructure (power, oil and gas and roads) sectors are expected to dominate the primary sukuk market in 2008.

The UAE is anticipated to lead at 35.1 per cent, followed by Malaysia at 21.3 per cent and Kuwait at 12.2 per cent. "This year will see sukuk debuts from new markets such as Thailand, Indonesia, Hong Kong and Kazakhstan," she said.

Grewal, however, said new sukuk issues will have to be delayed or priced slightly higher due to rising debt market volatility as well as the slight drop in investors' demand for the sukuk.

The effects of sub-prime has begun to bite the region since last year, Grewal said. Dana Gas was the first victim of the sub-prime turmoil as witnessed from the postponement of its 1 billion issue from July 2007 to October 7. The delays, since then, continue to mount including the pricing of Ithmaar Bank's $300m sukuk and National Bank of Abu Dhabi's $1.7bn bond programme until conditions improve in global debt markets.

Amlak, which is now underway to merging with Tamweel, had also delayed its plan to issue $260m mortgage-backed sukuk scheduled for end-2007. In August 2007, Malaysia's MISC deferred the sale of its planned $750m 10-year dollar-denominated bond issue.

Saudi Basic Industries Corp was forced to lower the senior unsecured bond portion of its financing to buy GE Plastics from around $2.76bn to $1.5bn and raise the bank loan portion from $5.4bn to around $6.6bn.

In May this year, Doha Bank group CEO Raghavan Seetharaman said they are holding the fundraising ($1bn sukuk) for the Middle East's first carbon trading scheme until they get back consumers' confidence.

BNP Paribas wins Islamic Finance House of the Year 2008 Award

Al-Bawaba: BNP Paribas - a European leader in banking and financial services and one of the largest international banking networks - won the 2008 award of the most innovative Islamic Finance House of the Year 2008 at the recently concluded Banker Investment Banking Awards in London.

BNP Paribas’ Islamic Banking Unit, Najmah, since then, was established in Bahrain in 2003, and since then, the team has demonstrated financially innovative ideas and has been first to market with a cross-border equity linked product, an Islamic structured product in South East Asia and a Sharia-compliant exchange traded fund based on global index.

BNP Paribas offers a full complement of Shariah compliant services to corporate and institutional clients covering sukuk, equity derivatives, credit derivatives, interest rate & currency hedging, asset management, asset securitization, real estate, murabaha financing, structured finance, project finance and export credit facilities.

To ensure that BNP Paribas’ products and services comply with Islamic guidelines, the bank works in close consultation with a dedicated Sharia Board comprising eminent highly commended scholars including Sheikh Nizam Yaquby (Bahrain), Dr. Abdul Sattar Abu Ghuddah (Saudi Arabia) and Dr. Mohammed daud Bakar (Malaysia).

Receiving the award on behalf of BNP Paribas, Regional Head of Corporate and Islamic Banking, Jacques Tripon remarked: “It gives me great pleasure to accept this award on behalf of the team, as a true recognition of there excellent work. BNP Paribas has made Islamic products more accessible and this underlines our commitment to fostering the growth of regional economies by playing a leading role in the Islamic finance industry;”

Banker Investment Banking Awards are the most coveted and prestigious awards in the financial industry, and are awarded to institutions that demonstrate unswerving excellence in terms of service to clients, returns to shareholders and pushing the boundaries of what is possible in finance. They are also a appreciation of institutions that display leadership, innovation, and momentum in the markets in which they excel.

Islamic finance panacea for global crisis: Chapra

ArabNews: The Islamic finance system, which introduces greater discipline into the economy and links credit expansion to the growth of the real economy, is capable of minimizing the severity and frequency of financial crises, says Umer Chapra, a well-known Saudi economist and winner of the King Faisal International Prize for Islamic Studies.
“Islamic finance can also reduce the problem of subprime borrowers by providing them loans at affordable terms. This will save billions of dollars that are spent to bail out the rich bankers,” said Chapra, who at present works as adviser at the Islamic Research and Training Institute of the Islamic Development Bank.

Chapra estimated the derivatives market at $600 trillion, more than 10 times the size of the world economy.

“No wonder George Soros described derivatives as hydrogen bombs while Warren Buffett called them financial weapons of mass destruction,” he pointed out. The derivatives include credit default swaps (CDS) worth $54.6 trillion.

The Islamic economist described the present global financial crisis as the worst in four decades. “There is a lurking fear that this might be only the tip of the iceberg. A lot more may come if the crisis spreads further and leads to a failure of credit card institutions, corporations, and derivatives dealers,” he warned.

Chapra urged Muslims to establish a genuine Islamic finance system with proper checks and controls, adding that such a move would encourage others to embrace it.

The Islamic system does not allow the creation of debt through direct lending and borrowing. It rather requires the creation of debt through the sale or lease of real assets by means of its sales- and lease-based modes of financing such as murabaha, ijara, salam, istisna and sukuk.

Spelling out the regulatory regimes in the Islamic system, Chapra said: “The asset which is being sold or leased must be real, and not imaginary or notional; the seller must own and possess the goods being sold or leased; the transaction must be genuine with the full intention of giving and taking delivery; and the debt cannot be sold and thus the risk associated with it cannot be transferred to someone else.”

He said the conditions set by the Islamic system would help eliminate most of speculative transactions. “Financing extended through the Islamic products can expand only in step with the rise of the real economy and thereby help curb excessive credit expansion,” he said.

Chapra emphasized the significance of the condition that prevents a creditor from transferring the risk to someone else by selling the debt. “This will help eliminate a great deal of speculative and derivative transactions where there is no intention of giving or taking delivery. It will also help prevent an unnecessary explosion in the volume and value of transactions and the debt from rising far above the size of the real economy,” he added.

It will also release a greater volume of financial resources for the real economic sectors and, thereby, help expand employment and self-employment opportunities and the production of need-fulfilling goods and services.

The discipline that Islam wishes to introduce in the financial system may not materialize unless the governments reduce their borrowing from the central bank to a level that is in harmony with the goal of price and financial stability, Chapra said.

“In the Islamic system, credit is primarily for the purchase of real goods and services which the seller owns and possesses and the buyer wishes to take delivery. It also requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby ensuring that he evaluates the risk more carefully,” he explained.

He said excessive and imprudent lending by banks was the main cause of the current global crisis.

“There are three factors that make this possible: inadequate market discipline in the financial system resulting from the absence of profit and loss sharing (PLS); the mind-boggling expansion in the size of derivatives, particularly CDSs; and too big to fail concept of banks who believe that the central bank would come for their rescue.”

The false sense of immunity from losses introduces a fault line in the system as banks do not undertake a careful evaluation of their loan projects. This leads to an unhealthy expansion in the overall volume of credit, to excessive leverage, and to an unsustainable rise in asset prices, living beyond means, and speculative investment. Unwinding later on gives rise to a steep decline in asset prices, and to financial frangibility and debt crisis, particularly if there is overindulgence in short sales.

Chapra said the subprime mortgage crisis in the US was also the result of excessive and imprudent lending. “Securitization or the originate-to-distribute model of financing has played a crucial role in this. Mortgage originators collateralized the debt by mixing prime and subprime debt. By selling the collateralized debt obligations (CDOs), they passed the entire risk of default to the ultimate purchaser. They had, therefore, less incentive to undertake careful underwriting.”

Consequently a number of banks have either failed or have had to be bailed out or nationalized by governments in the US, the UK, Europe and a number of other countries.

“This has created uncertainty in the market and led to a credit crunch, which has made it hard for even healthy banks to find financing,” he said.

“When there is excessive and imprudent lending and lenders are not confident of repayment, there is an excessive urge for resorting to derivatives like CDSs to seek protection against default. The buyer of the swap (creditor) pays a premium to the seller (a hedge fund) for the compensation he will receive in case the debtor defaults,” he added.

MIFC Starts Road Show In Kuwait To Promote Malaysia As Islamic Finance Hub

Bernama -- A Malaysian delegation headed by the Raja Muda of Perak, Raja Dr Nazrin Shah on Wednesday kick-started a five-day road show in Kuwait and Riyadh to promote Malaysia as the international hub for Islamic Finance.

The roadshow was spearheaded by the Malaysia International Islamic Financial Centre (MIFC), which came into existence in 2006 under a collaborative effort by the country's financial and market regulators.

They include the Bank Negara Malaysia, Securities Commission, Labuan Offshore Financial Services Authority (LOFSA) and Bursa Malaysia - together with industry participation from the banking, takaful and capital market sectors in Malaysia.

In the opening of the first leg of the road show, Raja Dr Nazrin met with his Kuwaiti counterpart, Crown Prince Sheikh Nawaf Al-Ahmad Al-Jaber at the Seif Palace here, where they discussed among others the potential to further strengthen ties in Islamic Finance between the two countries.

Tomorrow, the Malaysian regulators and market players would be meeting with their respective counterparts to network and vie for potential business linkages.

Participants from the private sector at the meet include representatives from Khazanah Nasional Bhd, RHB Islamic Bank, Maybank Islamic, AmBank, i-VCAP Management Sdn Bhd, Kuwait Finance House and Nomura Asset Management Malaysia.

The delegation would be leaving for the second leg of the road show to Riyadh, Saudi Arabia on Oct 24 for another three-day meeting.

Malaysia sharia bank launches fund, sees opportunity

Reuters - Malaysian Islamic lender Asian Finance Bank launched a 1 billion ringgit ($282.2 million) Islamic fund on Thursday, saying the global downturn presented an opportunity for investors to buy assets on the cheap.
The ASEAN sharia corporate governance fund, which allows investors in the Gulf Cooperation Council (GCC) countries to invest in ASEAN firms, comes as a global downturn is hurting corporate profits and sending financial markets into a free fall.

Asian economies and companies have, so far, weathered the crisis better than their Western counterparts although analysts think it is only a matter of time before the contagion spreads.

"This is the most opportune time for us to take advantage of the undervalued assets in the region," Asian Finance chief executive Mohamed Azahari Kamil told reporters.

"The emphasis is on corporate governance and especially after the financial meltdown, the emphasis of investors has always been on management and for transparency and corporate governance."

ASEAN comprises Singapore, Thailand, the Philippines, Indonesia, Malaysia, Brunei, Vietnam, Laos, Cambodia and Myanmar.

Asian Finance, which is backed by Gulf investors, will distribute the fund while fund manager Corston-Smith Asset Management would manage it.

Azahari said Gulf investors are expected to take up about half of the fund while the rest would be from Malaysians.

Qatar Islamic Bank and its associates have a 70 percent share in Asian Finance. RUSD Investment Bank Inc of Saudi Arabia has 20 percent and Global Investment House of Kuwait has 10 percent.

Middle East investors have flocked to Malaysia in recent years, pouring their money into projects ranging from property to biodiesel, drawn in part by the country's fast-developing Islamic finance industry.

The Malaysia International Islamic Financial Centre, a central bank-led body to develop the industry, said on Thursday it was visiting Kuwait and Saudi Arabia to drum up investor interest in the Southeast Asian country.

Malaysia wants to be a global Islamic finance hub, specialising in the origination of Islamic bonds, Islamic fund and wealth management and international Islamic banking and insurance.

Malaysia has the world's largest Islamic bond market, with $66 billion or 62.6 percent of global outstanding sukuk issuance as at end-June.

Azahari said Islamic banks were likely to be less severely affected by the current crisis, than conventional lenders.

"We do not have any instruments where it's on credit default swaps or any over leveraging position," he said.

"There could be some exposure in terms of foreign exchange but on a product-to-product basis, I don't anticipate any much dent."

UK looks to become a global provider of Islamic finance

Mortgage Strategy : A government organisation is looking to educate financial institutions in a bid to help the UK become a global provider of Islamic finance.
UK Trade & Investment, which incorporates the work of the Foreign & Commonwealth Office, has leant its support to a breakfast briefing hosted by the Association of Corporate Treasurers.
The aim of the briefing is to give financial companies more understanding of Islamic finance by explaining whom it applies to, how it can complement existing financial services strategy, and what the benefits are.

Sharia Islamic law forbids the practice of making money from money, such as charging or paying interest.

Sharia-compliant mortgages involve the bank buying the property with the buyer then buying it back and renting it at a slightly inflated price. Buyers also have to be sure that the money the bank is using to buy the property has come from permissible sources.

The sector is currently thought to be worth $500bn (£294bn) and it is predicted the sector will grow by a further 15% per annum over the next few years.

Andrew Cahn, chief executive of UK Trade & Investment, says: “In these tough times it's more important than ever that we make the most of growing sectors like Islamic finance.

"That's why it is important the UK's financial industry provides an open door and positions London as a leading western financial centre for Islamic finance.”

Richard Raeburn, chief executive of ACT, says: “A reduction in funding options with markets offering continually more expensive rates means that seeking alternative funding away from the traditional routes is an increasing trend.

"Islamic funding may not have been at the forefront of borrowers’ minds but the credit crunch has made an understanding of this market essential.”

There is a solution to this crisis – in Islamic finance

Guernsey Press and Star:In the last of three articles, Toby Birch (pictured), who, under the pseudonym Hugo Bouleau, wrote The Final Crash: Addictive Debt and the Deformation of the World Economy, suggests a serious shake-up of what we do with our money.

MY FIRST article summarised the cause of the credit crisis and the second examined a historical calamity resolved with a local solution.

In this final piece, we hope to answer the trillion-dollar question – what do we do now? The current assumption is that all financial institutions must be saved, whatever the cost.

While we still need banking, we could do without its recent business models. Their role of orchestrating savers and borrowers has never been in doubt, but there remain two intertwined conflicts of interest at the core of this collapse. The first is the temptation of excess credit creation and the second is that of interest. It begs the question of how savers are to be rewarded and banks paid for their labours, which is the aim of this article.

Considering the design of a new financial system is not one of escapism but of forward thinking as economic turbulence is the usual precursor to political turmoil. Human history is blighted by extremes of Left and Right and big government versus market forces, which always end in tears.

True cohesion seems to occur only in wartime, when we cherry-pick the best people and plan to unite against an external enemy.

We need an economy that combines positive elements of capitalism and communism and a banking system that is symbiotic and not self-seeking.

Fairness, balance and altruism in finance may sound Utopian or old-fashioned, but we are in desperate need of ancient acumen. If only we could abide by the Quaker maxim, ‘my word is my bond’, transactions would then be typified by transparency, honesty and the avoidance of uncertainty.

Some might consider these thoughts to be fanciful, but this system already exists and is called Islamic finance.

Had this article been entitled ‘Islamic finance for all’, it is unlikely that many readers would have got this far. It is human nature to distrust what we don’t understand and for some Westerners a phrase that combines Islam and finance inevitably carries connotations of terrorist funding.

Malaysia wants global Islamic bank standards

Reuters : Malaysia wants Islamic financial authorities to push for common global standards, saying that differences are very small and that the process of integration needs to be accelerated for the market to grow.

Malaysia has the largest sukuk market in the world, but a lack of standardised documentation and practices has been repeatedly highlighted by the Islamic finance industry as one of the key constraints on the rapidly growing sector.

"There is no basic difference in what is Islamic and what is not. We agree on 95 percent of the products. We differ on only 5 percent of the products," Malaysia's Second Finance Minister Nor Mohamed Yakcop said on Tuesday.

Islamic law is open to interpretation, which leads to differences in banking practices depending on the financial institution's advisors. Moves towards standardisation have been mooted but a plethora of bodies claiming to enforce standards has emerged.

"That (integration) process needs to be accelerated and we have this opportunity to promote Islamic banking," Nor Mohamed told a financial conference in Kuala Lumpur, without specifying who should drive or oversee the establishment of global standards.
Assets invested according to Islamic guidelines have been growing at roughly 20 percent a year worldwide, reaching $900 billion in 2007, and are set to grow to $2 trillion by 2010, accountants Ernst & Young estimated.

Islamic Banks Survive Financial Crunch

Islam Online:With many conventional banks crumpling and going for bankruptcy in the current global financial crunch, the booming Islamic banking industry has largely escaped the fallout.
"Islamic banking has, thus far, remained positive, despite the current challenging global financial environment," Zeti Akhtar Aziz, Malaysia Central Bank Governor, told Agence France-Presse (AFP) on Monday, October 20.

A financial crisis swept the US last month after the collapse of Lehman Brothers, the fourth-largest investment bank, and the financial woes of a number of Wall Street giants.

This triggered a domino effect across the world leaving conventional banks short of credit.

Western government have since pumped billions of dollars into their troubled banks to keep credit flowing and prevent a complete financial meltdown.

"In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions," Kuwait Finance House said in a recent report.

"The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system reevaluates its business model."

The rules of Islamic banking and finance read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

Boom

Experts, however, warn that the booming Islamic banking system could be hit if the financial turmoil worsens and real assets start to crumble.

"Islamic banks, especially in the Middle East, got heavily into private equity and real estate investments, and a lot of loans may be backed by properties," notes Jennifer Chang, a partner at Pricewaterhouse Coopers in Kuala Lumpur.

"So if the property market goes down, there will be an impact," she said.

"If a borrower is not able to pay then the bank will foreclose and the question is -- can you sell the property in the market and at what value? These are issues which all banks can face."

Abhishek Kumar, a senior research analyst at Financial Insights, a company under market research and analysis firm International Data Corp (IDC), shares the same concern but is more optimistic.

"We're not really sure what the real extent of the impact is, and whether we've passed the worst of it or not, but the extent is not going to be as bad as in the mainstream sector."

He predicts that many world countries would start taking a leaf out of the book of Islamic finance.

"More and more institutions will be interested in providing Islamic services to diversify their risk portfolio."

Islamic finance is already one of the fastest growing sectors in the global financial industry.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

Could sharia car insurance save you a fortune?

Guardian.co.uk:This week the snappily named Salaam Insurance announced it was taking its "halal car insurance" to a wider audience than Britain's 2 million Muslims. And with good reason - this sharia-compliant product is attractive enough to give many established insurers a run for their money.

For years the UK has had sharia-compliant mortgages engineered so that borrowers pay for their loan without incurring interest charges - something outlawed by sharia rules. But until now, according to Farrukh Raza of Islamic Finance Advisory & Assurance Services, Muslim car owners have had to put their beliefs to one side when buying a policy. "These new products are sharia-compliant but the insurance works in exactly the same way as conventional policies."

Salaam says its car policies conform to the principle of takaful - a form of sharing risk. Any surplus is returned to customers as discounts on their next renewal.

You'll know the money was invested ethically, too. It cannot, for example, be sunk into businesses that are prohibited to Muslims - such as casinos or pornography.

The big question is, will it undercut your current premium? Yesterday I got a quote from Salaam to insure my 10-year-old Toyota estate. It came it at £233 - almost exactly the same as we pay our current insurer, the Co-op. So it certainly looks competitive. Next time your car insurance renewal comes through, it could be worth going halal.

IFSB Seminars To Address Takaful Industry

Bernama -- The absence of clear regulatory frameworks, prudential standards and codes of good practice could be the limiting factors in the potential growth and development of the Takaful industry, says the Islamic Financial Services Board (IFSB).
These limitations should be addressed early as the failure to do so will have a negative impact on the development of the Islamic financial services industry (IFSI), it said in a statement Friday.

As part of its efforts to facilitate the industry growth, the board is organising two seminars this November.

Hosted by the Monetary Authority of Singapore, a seminar on Rating of Takaful and Retakaful Firms will be held on Nov 25 while another seminar on Regulation of Takaful will be from Nov 26 - 27.

The one-day Rating of Takaful and Retakaful Firms seminar will address the need for ratings vis-a-vis the expansion of the Takaful and Retakaful industries, the rating methodologies employed by rating agencies and the perspectives of rated institutions.

It will also discuss the building blocks in developing the necessary transparency framework to allow a better understanding of the Takaful industry among the various stakeholders.

The seminar on the Regulation of Takaful, will discuss the issues of risk management, treatment of underwriting surplus, solvency framework as well as regulatory issues in relation to Takaful undertakings.

According to IFSB, the proceedings and discussions of three seminars previously held on the Regulation of Takaful have greatly contributed to its efforts in developing industry guidelines for Takaful.

The first guiding principle for the industry entitled "Guiding Principles on Governance for Islamic Insurance (Takaful) Operations" is scheduled to be issued as an exposure draft by end of this year.

Among the industry experts who have confirmed their participation as chairpersons and speakers for the two seminars are Dr Abdul Rahman Khalil Tolefat, Allianz Takaful, Bahrain; Andrew Cunningham, Financial Services Corps, Egypt; Professsor Volker Nienhaus, University of Marburg, Germany; Martin Roberts, Beachcroft Consulting, UK; Murad Al Haj Mahmoud, Insurance Commission of Jordan; Dr Omar Zuhair Hafiz, Allied Cooperative Insurance Group, Saudi Arabia; and Salah El Din Musa Mohamed, Shiekan Insurance Company, Sudan.

Both Seminars will be held at the Grand Hyatt Singapore.

For more information on the seminars, please visit www.ifsb.org/takaful2008.

Currently there are at least three Takaful (insurance based on Islamic principles) models that are widely used based on the contractual forms of mudaraba, wakalah and waqf or combinations of these.

Whilst the existence of these models demonstrates the flexible and practical nature of Takaful principles, they also raise the questions of contractual relationship between parties and their respective rights and obligations, as well as the need to ascertain the types of risk peculiar or common to each model.

The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors.

Bank Negara to help varsity

New Straits Times: La Trobe University will introduce a master's course in Islamic banking and finance next year with the help of Bank Negara.

It will provide students with post-graduate training in technical skills required by the global Islamic capital markets and institutions.

Industry-based certification will be provided by the International Centre of Education in Islamic Finance, a training subsidiary of BNM.

The course will help students develop expertise in Islamic banking, insurance and capital markets.

On graduation, the student will be granted full exemptions from the Chartered Islamic Finance Professional (CIFP) Part One requirement for international professional recognition.

BNM established CIFP to address the shortage of qualified people in the Islamic banking and finance sector.

Associate Prof Dr Ishaq Bhatti of La Trobe's Department of Economics and Finance, said the course, the first in Australia dedicated to Islamic banking and finance, would appeal to students from Southeast Asia, the Middle East and African countries.

Local banks -- the National Australia Bank, Kuwait Finance House, HSBC and the Muslim Community Cooperative Australia -- have offered support for the course.

"The Islamic banking and finance market has experienced substantial and unexpected growth in recent years, growing at a rate of 10 to 15 per cent a year."

To be accepted into the La Trobe Master of Islamic Finance programme, a student must hold a bachelor's degree and be proficient in English. -- Bernama

Finance with a moral foundation

BBC News:In the midst of turmoil in the global financial system, there is one branch of finance that aims to operate within strict moral and ethical boundaries - Islamic finance.

But how will it survive in the current climate?

Opposite London's largest mosque, in the heart of the capital's Muslim community, is a branch of the Islamic Bank of Britain.

It is one of eight branches around the UK that bring Islamic finance to the high street.

It looks just like any other high street bank – but manager Abu Fozoll tells me that it offers finance with a difference.

“Every single product we offer here is all Sharia compliant. From home purchase plans to direct savings, these are all governed by Sharia principles.”

That means there's no mention of interest – instead, savers are offered a projected share of profits.

In practice, Muslims can still get a return on their investment, but without compromising their religious principles.

High street Islamic finance is just one small part of a thriving industry.

In London's Canary Wharf, I attended a conference of financiers assessing the prospects for Islamic finance.

Talk of the credit crunch was never far away, but some delegates believe the ethical principles that underpin Sharia-based finance mean it will better weather the current financial storm.

Mufti Mohammed Zubair Butt is chairman of the UK's first panel of sharia scholars, who rule on whether particular products or services meet strict Islamic criteria.

He is optimistic about the sector's future: “It has an alternative to present. It has a method to show to the world that things can be done in a different way which is more ethically sound and more financially sound too”.

One expert on Islamic finance, Durham University professor Rodney Wilson, points out that no Islamic financial institution has yet failed in the current crisis.

He contrasts “excessive risk-taking” in the mainstream financial sector with “a fairly classical banking model” still followed by Islamic institutions.

Regulation

But there are challenges facing Islamic finance.

One key concern is the lack of regulatory framework within the sector, meaning that Sharia scholars are free to differ over what constitutes Sharia-compliance.

It can lead to inconsistency when it comes to rulings about what sort of investments are appropriate.

Andy Critchlow, middle east managing editor for Dow Jones, warned that Sharia boards consulted by financial institutions may not always be as independent as they appear.

“Companies appoint their own Sharia compliancy boards. Companies pay those Sharia compliancy boards to actually structure the Sharia compliant agreement for them,” he says.

“The industry in many respects is a house without foundation in that it doesn't have the foundation of regulation underpinning it.”

Of course, the value of regulation is currently hotly contested throughout the financial industry, but proponents of Islamic finance believe that its in-built adherence to Islamic law means it offers a fairer, more ethical financial system.

What no one can predict is the extent to which Islamic finance's principles will mean it is better shielded from the current financial storms.

Some fear that it is already so entwined with mainstream finance that its future is as risky as any other part of the global financial industry.

Indonesia may delay first global Islamic bond

reuters: Indonesia’s first global Islamic bond is likely to be delayed because of financial market turmoil, a minister said on Friday, a further blow after the government cancelled all domestic debt auctions for the rest of this year.

Southeast Asia’s biggest economy had originally hoped to raise between $500 million to $1 billion from the sale of the Islamic bond, or sukuk, but “is unlikely to do it now, given market conditions,” Minister Paskah Suzetta told Reuters.

“I expect it would not be a good idea to raise debt, because the market is very competitive and there are many competitors. Everybody is aiming at the Middle East,” Suzetta added.

Indonesia has responded to the current global financial crisis with measures ranging from greater protection for bank deposits to efforts to improve liquidity and avoid a credit crunch.

The central bank has intervened in currency markets to support the rupiah while the Indonesia Stock Exchange halted trading for three days last week in an attempt to prevent heavy losses. The government had planned to sell the dollar-denominated sukuk, which was expected to have a maturity of 5-10 years, in November, with a road show scheduled for the fourth week of October.

The Finance Ministry had originally said the amount could be around $1 billion, but more recently it said that the amount would depend on market conditions.

Last week, Indonesia’s finance ministry said it would cancel planned domestic debt auctions this year due to turmoil in financial markets, and would only consider resuming the debt sales if conditions stabilised. The most populous Muslim nation raised 4.7 trillion rupiah from the sales of its first Islamic bonds in late August, short of its five trillion rupiah target.

Analysts said that while the sales were lower than targeted, with domestic investors buying almost 90 percent of the bonds, the issue still signalled strong growth potential for Islamic finance.

Indonesia has a population of 226 million people, and about 85 percent are Muslim.

Europe Islamic banking to slow on global crisis

Gulf Daily News: The rise of Europe's nascent Islamic banking sector will be slowed as paralysed credit markets dampen demand for Sharia bonds and weak property prices hurt the industry, European Islamic Investment Bank said yesterday. A slowing global economy would also weigh on the sector, the London-based lender said, reinforcing a growing view that Islamic finance - despite its strict lending rules - may prove to be more vulnerable to the global downturn than earlier thought.

European banks, along with US lenders, have been badly hit by the global credit rout. European Union leaders vowed action on Thursday to underpin growth after world governments pledged $3.2 trillion to stabilise the financial sector.

Sharia banks would, however, be spared some of the fallout affecting conventional lenders as they are not exposed to subprime loans, European Islamic Investment Bank chief executive John Weguelin said.

"Islamic financial institutions should be no different from other institutions to the extent that they operate in the money markets and the money markets have been impacted - both Islamic and conventional - in the same way with the tightening of liquidity," Weguelin said.

"Clearly one of the areas that have been impacted is the sukuk market because of the credit crunch and the lack of demand within the sukuk market for those products," he said.

The industry's "concentrated exposure to limited asset classes particularly real estate" means it would not escape the global fallout unscathed, he said.

Islamic financing deals are backed by assets, commonly real estate and commodities, due to the Sharia requirement that transactions must involve real economic activity.

The $1 trillion Islamic finance sector has flourished in recent years, helped by huge reserves of Gulf oil earnings and growing demand for ethical investments.

Some industry experts argue that the industry's conservative lending principles have helped it avoid the complex and opaque lending structures that brought down the conventional banking system.

Weguelin said troubled financial markets presented opportunities for the Islamic industry.

"We think the valuations are going to make it very interesting in the coming months for people with cash to acquire assets at very attractive valuations," he said.

In Europe, demand for Islamic products is expected to be led by the UK, France and Germany due to the size of their Muslim populations, he said. About 20 per cent of Europe's population, including Turkey, are Muslims, he added.

"Islamic finance is starting to become mainstream in terms of the financial markets and therefore should become, over time, a viable alternative to conventional finance particularly the potential attraction of being able to tap into new pools of liquidity," Weguelin said.

Workshop on Syariah law and halal certification ends

Borneo Bulletin:The workshop on Syariah rules and law, and the execution of halal certification and halal brand of 2005 ended yesterday with a closing ceremony and certificate presentation.

The ceremony took place at the auditorium of Tahfiz Al-Quran Sultan Hj Hassanal Bolkiah in Temasek. Present at the event were heads of departments, enforcing officers of various government agencies, senior government officers, facilitators and course participants.
The guest of honour at the event was Dato Paduka Awg Hj Abdul Rahman bin Hj Mohiddin, Permanent Secretary at the Ministry of Religious Affairs who also presented the certificates.

In his speech, the guest of honour urged the participants of the course to use the knowledge accordingly and as a guideline for proper execution of their duties.

The guest of honour called on the participants to understand and memorise the facts and guidelines and laws for factual references when inspection or enforcement is required.

The objective of the course was to enable a better understanding of the laws and Syariah rules.

There were 266 participants at the three-day course that were divided into several groups. The participants of the course were Syariah Affairs Department, Islamic Religious Council, State Mufti Office, Royal Brunei Police Force, Customs and Excise Department, Agriculture Department, Accreditation and Standardisation Department, Health Services Department, District Offices of Brunei-Muara, Tutong, Temburong and Belait and Municipal Boards of Bandar Seri Begawan, Tutong, Kuala Belait and Seria.

Forex in Islam

FOREX TRADING

1. The Basic Exchange Contracts

There is a general consensus among Islamic jurists on the view that currencies of different countries can be exchanged on a spot basis at a rate different from unity, since currencies of different countries are distinct entities with different values or intrinsic worth, and purchasing power. There also seems to be a general agreement among a majority of scholars on the view that currency exchange on a forward basis is not permissible, that is, when the rights and obligations of both parties relate to a future date. However, there is considerable difference of opinion among jurists when the rights of either one of the parties, which is same as obligation of the counterparty, is deferred to a future date.

Every Ustaz who wants to give any Fatwa on FOREX must understand this article line by line.To elaborate, let us consider the example of two individuals A and B who belong to two different countries, India and US respectively. A intends to sell Indian rupees and buy U.S dollars. The converse is true for B. The rupee-dollar exchange rate agreed upon is 1:20 and the transaction involves buying and selling of $50. The first situation is that A makes a spot payment of Rs1000 to B and accepts payment of $50 from B. The transaction is settled on a spot basis from both ends. Such transactions are valid and Islamically permissible. There are no two opinions about the same.

The second possibility is that settlement of the transaction from both ends is deferred to a future date, say after six months from now. This implies that both A and B would make and accept payment of Rs1000 or $50, as the case may be, after six months. The predominant view is that such a contract is not Islamically permissible. A minority view considers it permissible. The third scenario is that the transaction is partly settled from one end only. For example, A makes a payment of Rs1000 now to B in lieu of a promise by B to pay $50 to him after six months. Alternatively, A accepts $50 now from B and promises to pay Rs1000 to him after six months. There are diametrically opposite views on the permissibility of such contracts which amount to bai-salam in currencies. The purpose of this paper is to present a comprehensive analysis of various arguments in support and against the permissibility of these basic contracts involving currencies.

The first form of contracting involving exchange of countervalues on a spot basis is beyond any kind of controversy. Permissibility or otherwise of the second type of contract in which delivery of one of the countervalues is deferred to a future date, is generally discussed in the framework of riba prohibition. Accordingly we discuss this contract in detail in section 2 dealing with the issue of prohibition of riba. Permissibility of the third form of contract in which delivery of both the countervalues is deferred, is generally discussed within the framework of reducing risk and uncertainty or gharar involved in such contracts. This, therefore, is the central theme of section 3 which deals with the issue of gharar. Section 4 attempts a holistic view of the Sharia relates issues as also the economic significance of the basic forms of contracting in the currency market.

2. The Issue of Riba Prohibition

The divergence of views1 on the permissibility or otherwise of exchange contracts in currencies can be traced primarily to the issue of riba prohibition.

The need to eliminate riba in all forms of exchange contracts is of utmost importance. Riba in its Sharia context is generally defined2 as an unlawful gain derived from the quantitative inequality of the countervalues in any transaction purporting to effect the exchange of two or more species (anwa), which belong to the same genus (jins) and are governed by the same efficient cause (illa).

Riba is generally classified into riba al-fadl (excess) and riba al-nasia (deferment) which denote an unlawful advantage by way of excess or deferment respectively. Prohibition of the former is achieved by a stipulation that the rate of exchange between the objects is unity and no gain is permissible to either party. The latter kind of riba is prohibited by disallowing deferred settlement and ensuring that the transaction is settled on the spot by both the parties. Another form of riba is called riba al-jahiliyya or pre-Islamic riba which surfaces when the lender asks the borrower on the maturity date if the latter would settle the debt or increase the same. Increase is accompanied by charging interest on the amount initially borrowed.

The prohibition of riba in the exchange of currencies belonging to different countries requires a process of analogy (qiyas). And in any such exercise involving analogy (qiyas), efficient cause (illa) plays an extremely important role. It is a common efficient cause (illa), which connects the object of the analogy with its subject, in the exercise of analogical reasoning. The appropriate efficient cause (illa) in case of exchange contracts has been variously defined by the major schools of Fiqh. This difference is reflected in the analogous reasoning for paper currencies belonging to different countries.

A question of considerable significance in the process of analogous reasoning relates to the comparison between paper currencies with gold and silver. In the early days of Islam, gold and silver performed all the functions of money (thaman). Currencies were made of gold and silver with a known intrinsic value (quantum of gold or silver contained in them). Such currencies are described as thaman haqiqi, or naqdain in Fiqh literature. These were universally acceptable as principal means of exchange, accounting for a large chunk of transactions. Many other commodities, such as, various inferior metals also served as means of exchange, but with limited acceptability. These are described as fals in Fiqh literature. These are also known as thaman istalahi because of the fact that their acceptability stems not from their intrinsic worth, but due to the status accorded by the society during a particular period of time. The above two forms of currencies have been treated very differently by early Islamic jurists from the standpoint of permissibility of contracts involving them.

The issue that needs to be resolved is whether the present age paper currencies fall under the former category or the latter. One view is that these should be treated at par with thaman haqiqi or gold and silver, since these serve as the principal means of exchange and unit of account like the latter. Hence, by analogous reasoning, all the Sharia-related norms and injunctions applicable to thaman haqiqi should also be applicable to paper currency. Exchange of thaman haqiqi is known as bai-sarf, and hence, the transactions in paper currencies should be governed by the Sharia rules relevant for bai-sarf. The contrary view asserts that paper currencies should be treated in a manner similar to fals or thaman istalahi because of the fact that their face value is different from their intrinsic worth. Their acceptability stems from their legal status within the domestic country or global economic importance (as in case of US dollars, for instance).

2.1. A Synthesis of Alternative Views

2.1.1. Analogical Reasoning (Qiyas) for Riba Prohibition

The prohibition of riba is based on the tradition that the holy prophet (peace be upon him) said, "Sell gold for gold, silver for silver, wheat for wheat, barley for barley, date for date, salt for salt, in same quantities on the spot; and when the commodities are different, sell as it suits you, but on the spot." Thus, the prohibition of riba applies primarily to the two precious metals (gold and silver) and four other commodities (wheat, barley, dates and salt). It also applies, by analogy (qiyas) to all species which are governed by the same efficient cause (illa) or which belong to any one of the genera of the six objects cited in the tradition. However, there is no general agreement among the various schools of Fiqh and even scholars belonging to the same school on the definition and identification of efficient cause (illa) of riba.

For the Hanafis, efficient cause (illa) of riba has two dimensions: the exchanged articles belong to the same genus (jins); these possess weight (wazan) or measurability (kiliyya). If in a given exchange, both the elements of efficient cause (illa) are present, that is, the exchanged countervalues belong to the same genus (jins) and are all weighable or all measurable, then no gain is permissible (the exchange rate must be equal to unity) and the exchange must be on a spot basis. In case of gold and silver, the two elements of efficient cause (illa) are: unity of genus (jins) and weighability. This is also the Hanbali view according to one version3. (A different version is similar to the Shafii and Maliki view, as discussed below.)

Thus, when gold is exchanged for gold, or silver is exchanged for silver, only spot transactions without any gain are permissible. It is also possible that in a given exchange, one of the two elements of efficient cause (illa) is present and the other is absent. For example, if the exchanged articles are all weighable or measurable but belong to different genus (jins) or, if the exchanged articles belong to same genus (jins) but neither is weighable nor measurable, then exchange with gain (at a rate different from unity) is permissible, but the exchange must be on a spot basis. Thus, when gold is exchanged for silver, the rate can be different from unity but no deferred settlement is permissible. If none of the two elements of efficient cause (illa) of riba are present in a given exchange, then none of the injunctions for riba prohibition apply. Exchange can take place with or without gain and both on a spot or deferred basis.

Considering the case of exchange involving paper currencies belonging to different countries, riba prohibition would require a search for efficient cause (illa). Currencies belonging to different countries are clearly distinct entities; these are legal tender within specific geographical boundaries with different intrinsic worth or purchasing power. Hence, a large majority of scholars perhaps rightly assert that there is no unity of genus (jins). Additionally, these are neither weighable nor measurable. This leads to a direct conclusion that none of the two elements of efficient cause (illa) of riba exist in such exchange.

Hence, the exchange can take place free from any injunction regarding the rate of exchange and the manner of settlement. The logic underlying this position is not difficult to comprehend. The intrinsic worth of paper currencies belonging to different countries differ as these have different purchasing power. Additionally, the intrinsic value or worth of paper currencies cannot be identified or assessed unlike gold and silver which can be weighed. Hence, neither the presence of riba al-fadl (by excess), nor riba al-nasia (by deferment) can be established.

The Shafii school of Fiqh considers the efficient cause (illa) in case of gold and silver to be their property of being currency (thamaniyya) or the medium of exchange, unit of account and store of value . This is also the Maliki view. According to one version of this view, even if paper or leather is made the medium of exchange and is given the status of currency, then all the rules pertaining to naqdain, or gold and silver apply to them. Thus, according to this version, exchange involving currencies of different countries at a rate different from unity is permissible, but must be settled on a spot basis. Another version of the above two schools of thought is that the above cited efficient cause (illa) of being currency (thamaniyya) is specific to gold and silver, and cannot be generalized. That is, any other object, if used as a medium of exchange, cannot be included in their category. Hence, according to this version, the Sharia injunctions for riba prohibition are not applicable to paper currencies. Currencies belonging to different countries can be exchanged with or without gain and both on a spot or deferred basis.

Proponents of the earlier version cite the case of exchange of paper currencies belonging to the same country in defense of their version. The consensus opinion of jurists in this case is that such exchange must be without any gain or at a rate equal to unity and must be settled on a spot basis. What is the rationale underlying the above decision? If one considers the Hanafi and the first version of Hanbali position then, in this case, only one dimension of the efficient cause (illa) is present, that is, they belong to the same genus (jins). But paper currencies are neither weighable nor measurable. Hence, Hanafi law would apparently permit exchange of different quantities of the same currency on a spot basis.

Similarly if the efficient cause of being currency (thamaniyya) is specific only to gold and silver, then Shafii and Maliki law would also permit the same. Needless to say, this amounts to permitting riba-based borrowing and lending. This shows that, it is the first version of the Shafii and Maliki thought which underlies the consensus decision of prohibition of gain and deferred settlement in case of exchange of currencies belonging to the same country. According to the proponents, extending this logic to exchange of currencies of different countries would imply that exchange with gain or at a rate different from unity is permissible (since there no unity of jins), but settlement must be on a spot basis.

2.1.2 Comparison between Currency Exchange and Bai-Sarf

Bai-sarf is defined in Fiqh literature as an exchange involving thaman haqiqi, defined as gold and silver, which served as the principal medium of exchange for almost all major transactions.

Proponents of the view that any exchange of currencies of different countries is same as bai-sarf argue that in the present age paper currencies have effectively and completely replaced gold and silver as the medium of exchange. Hence, by analogy, exchange involving such currencies should be governed by the same Sharia rules and injunctions as bai-sarf. It is also argued that if deferred settlement by either parties to the contract is permitted, this would open the possibilities of riba-al nasia.

Opponents of categorization of currency exchange with bai-sarf however point out that the exchange of all forms of currency (thaman) cannot be termed as bai-sarf. According to this view bai-sarf implies exchange of currencies made of gold and silver (thaman haqiqi or naqdain) alone and not of money pronounced as such by the state authorities (thaman istalahi). The present age currencies are examples of the latter kind. These scholars find support in those writings which assert that if the commodities of exchange are not gold or silver, (even if one of these is gold or silver) then, the exchange cannot be termed as bai-sarf. Nor would the stipulations regarding bai-sarf be applicable to such exchanges.

According to Imam Sarakhsi4 "when an individual purchases fals or coins made out of inferior metals, such as, copper (thaman istalahi) for dirhams (thaman haqiqi) and makes a spot payment of the latter, but the seller does not have fals at that moment, then such exchange is permissible........ taking possession of commodities exchanged by both parties is not a precondition" (while in case of bai-sarf, it is.) A number of similar references exist which indicate that jurists do not classify an exchange of fals (thaman istalahi) for another fals (thaman istalahi) or gold or silver (thaman haqiqi), as bai-sarf.

Hence, the exchanges of currencies of two different countries which can only qualify as thaman istalahi can not be categorized as bai-sarf. Nor can the constraint regarding spot settlement be imposed on such transactions. It should be noted here that the definition of bai-sarf is provided Fiqh literature and there is no mention of the same in the holy traditions. The traditions mention about riba, and the sale and purchase of gold and silver (naqdain) which may be a major source of riba, is described as bai-sarf by the Islamic jurists. It should also be noted that in Fiqh literature, bai-sarf implies exchange of gold or silver only; whether these are currently being used as medium of exchange or not. Exchange involving dinars and gold ornaments, both quality as bai-sarf. Various jurists have sought to clarify this point and have defined sarf as that exchange in which both the commodities exchanged are in the nature of thaman, not necessarily thaman themselves. Hence, even when one of the commodities is processed gold (say, ornaments), such exchange is called bai-sarf.

Proponents of the view that currency exchange should be treated in a manner similar to bai-sarf also derive support from writings of eminent Islamic jurists. According to Imam Ibn Taimiya "anything that performs the functions of medium of exchange, unit of account, and store of value is called thaman, (not necessarily limited to gold & silver). Similar references are available in the writings of Imam Ghazzali5 As far as the views of Imam Sarakhshi is concerned regarding exchange involving fals, according to them, some additional points need to be taken note of. In the early days of Islam, dinars and dirhams made of gold and silver were mostly used as medium of exchange in all major transactions. Only the minor ones were settled with fals.

In other words, fals did not possess the characteristics of money or thamaniyya in full and was hardly used as store of value or unit of account and was more in the nature of commodity. Hence there was no restriction on purchase of the same for gold and silver on a deferred basis. The present day currencies have all the features of thaman and are meant to be thaman only. The exchange involving currencies of different countries is same as bai-sarf with difference of jins and hence, deferred settlement would lead to riba al-nasia.

Dr Mohamed Nejatullah Siddiqui illustrates this possibility with an example6. He writes "In a given moment in time when the market rate of exchange between dollar and rupee is 1:20, if an individual purchases $50 at the rate of 1:22 (settlement of his obligation in rupees deferred to a future date), then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the $50 purchased on credit at spot rate)" Thus, sarf can be converted into interest-based borrowing & lending.

2.1.3 Defining Thamaniyya is the Key ?

It appears from the above synthesis of alternative views that the key issue seems to be a correct definition of thamaniyya. For instance, a fundamental question that leads to divergent positions on permissibility relates to whether thamaniyya is specific to gold and silver, or can be associated with anything that performs the functions of money. We raise some issues below which may be taken into account in any exercise in reconsideration of alternative positions.

It should be appreciated that thamaniyya may not be absolute and may vary in degrees. It is true that paper currencies have completely replaced gold and silver as medium of exchange, unit of account and store of value. In this sense, paper currencies can be said to possess thamaniyya. However, this is true for domestic currencies only and may not be true for foreign currencies. In other words, Indian rupees possess thamaniyya within the geographical boundaries of India only, and do not have any acceptability in US. These cannot be said to possess thamaniyya in US unless a US citizen can use Indian rupees as a medium of exchange, or unit of account, or store of value. In most cases such a possibility is remote.

This possibility is also a function of the exchange rate mechanism in place, such as, convertibility of Indian rupees into US dollars, and whether a fixed or floating exchange rate system is in place. For example, assuming free convertibility of Indian rupees into US dollars and vice versa, and a fixed exchange rate system in which the rupee-dollar exchange rate is not expected to increase or decrease in the foreseeable future, thamaniyya of rupee in US is considerably improved. The example cited by Dr Nejatullah Siddiqui also appears quite robust under the circumstances. Permission to exchange rupees for dollars on a deferred basis (from one end, of course) at a rate different from the spot rate (official rate which is likely to remain fixed till the date of settlement) would be a clear case of interest-based borrowing and lending.

However, if the assumption of fixed exchange rate is relaxed and the present system of fluctuating and volatile exchange rates is assumed to be the case, then it can be shown that the case of riba al-nasia breaks down. We rewrite his example: "In a given moment in time when the market rate of exchange between dollar and rupee is 1:20, if an individual purchases $50 at the rate of 1:22 (settlement of his obligation in rupees deferred to a future date), then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the $50 purchased on credit at spot rate)" This would be so, only if the currency risk is non-existent (exchange rate remains at 1:20), or is borne by the seller of dollars (buyer repays in rupees and not in dollars).

If the former is true, then the seller of the dollars (lender) receives a predetermined return of ten percent when he converts Rs1100 received on the maturity date into $55 (at an exchange rate of 1:20). However, if the latter is true, then the return to the seller (or the lender) is not predetermined. It need not even be positive. For example, if the rupee-dollar exchange rate increases to 1:25, then the seller of dollar would receive only $44 (Rs 1100 converted into dollars) for his investment of $50.

Here two points are worth noting. First, when one assumes a fixed exchange rate regime, the distinction between currencies of different countries gets diluted. The situation becomes similar to exchanging pounds with sterlings (currencies belonging to the same country) at a fixed rate. Second, when one assumes a volatile exchange rate system, then just as one can visualize lending through the foreign currency market (mechanism suggested in the above example), one can also visualize lending through any other organized market (such as, for commodities or stocks.)

If one replaces dollars for stocks in the above example, it would read as: "In a given moment in time when the market price of stock X is Rs 20, if an individual purchases 50 stocks at the rate of Rs 22 (settlement of his obligation in rupees deferred to a future date), then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the 50 stocks purchased on credit at current price)" In this case too as in the earlier example, returns to the seller of stocks may be negative if stock price rises to Rs 25 on the settlement date. Hence, just as returns in the stock market or commodity market are Islamically acceptable because of the price risk, so are returns in the currency market because of fluctuations in the prices of currencies.

A unique feature of thaman haqiqi or gold and silver is that the intrinsic worth of the currency is equal to its face value. Thus, the question of different geographical boundaries within which a given currency, such as, dinar or dirham circulates, is completely irrelevant. Gold is gold whether in country A or country B. Thus, when currency of country A made of gold is exchanged for currency of country B, also made of gold, then any deviation of the exchange rate from unity or deferment of settlement by either party cannot be permitted as it would clearly involve riba al-fadl and also riba al-nasia. However, when paper currencies of country A is exchanged for paper currency of country B, the case may be entirely different. The price risk (exchange rate risk), if positive, would eliminate any possibility of riba al-nasia in the exchange with deferred settlement. However, if price risk (exchange rate risk) is zero, then such exchange could be a source of riba al-nasia if deferred settlement is permitted7.

Another point that merits serious consideration is the possibility that certain currencies may possess thamaniyya, that is, used as a medium of exchange, unit of account, or store of value globally, within the domestic as well as foreign countries. For instance, US dollar is legal tender within US; it is also acceptable as a medium of exchange or unit of account for a large volume of transactions across the globe. Thus, this specific currency may be said to possesses thamaniyya globally, in which case, jurists may impose the relevant injunctions on exchanges involving this specific currency to prevent riba al-nasia. The fact is that when a currency possesses thamaniyya globally, then economic units using this global currency as the medium of exchange, unit of account or store of value may not be concerned about risk arising from volatility of inter-country exchange rates. At the same time, it should be recognized that a large majority of currencies do not perform the functions of money except within their national boundaries where these are legal tender.

Riba and risk cannot coexist in the same contract. The former connotes a possibility of returns with zero risk and cannot be earned through a market with positive price risk. As has been discussed above, the possibility of riba al-fadl or riba al-nasia may arise in exchange when gold or silver function as thaman; or when the exchange involves paper currencies belonging to the same country; or when the exchange involves currencies of different countries following a fixed exchange rate system. The last possibility is perhaps unIslamic8 since price or exchange rate of currencies should be allowed to fluctuate freely in line with changes in demand and supply and also because prices should reflect the intrinsic worth or purchasing power of currencies. The foreign currency markets of today are characterised by volatile exchange rates. The gains or losses made on any transaction in currencies of different countries, are justified by the risk borne by the parties to the contract.

2.1.4. Possibility of Riba with Futures and Forwards

So far, we have discussed views on the permissibility of bai salam in currencies, that is, when the obligation of only one of the parties to the exchange is deferred. What are the views of scholars on deferment of obligations of both parties ? Typical example of such contracts are forwards and futures9. According to a large majority of scholars, this is not permissible on various grounds, the most important being the element of risk and uncertainty (gharar) and the possibility of speculation of a kind which is not permissible. This is discussed in section 3. However, another ground for rejecting such contracts may be riba prohibition. In the preceding paragraph we have discussed that bai salam in currencies with fluctuating exchange rates can not be used to earn riba because of the presence of currency risk. It is possible to demonstrate that currency risk can be hedged or reduced to zero with another forward contract transacted simultaneously. And once risk is eliminated, the gain clearly would be riba.

We modify and rewrite the same example: "In a given moment in time when the market rate of exchange between dollar and rupee is 1:20, an individual purchases $50 at the rate of 1:22 (settlement of his obligation in rupees deferred to a future date), and the seller of dollars also hedges his position by entering into a forward contract to sell Rs1100 to be received on the future date at a rate of 1:20, then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the 50 dollars purchased on credit at spot rate)" The seller of the dollars (lender) receives a predetermined return of ten percent when he converts Rs1100 received on the maturity date into 55 dollars (at an exchange rate of 1:20) for his investment of 50 dollars irrespective of the market rate of exchange prevailing on the date of maturity.

Another simple possible way to earn riba may even involve a spot transaction and a simultaneous forward transaction. For example, the individual in the above example purchases $50 on a spot basis at the rate of 1:20 and simultaneously enters into a forward contract with the same party to sell $50 at the rate of 1:21 after one month. In effect this implies that he is lending Rs1000 now to the seller of dollars for one month and earns an interest of Rs50 (he receives Rs1050 after one month. This is a typical buy-back or repo (repurchase) transaction so common in conventional banking.10

3. The Issue of Freedom from Gharar

3.1 Defining Gharar

Gharar, unlike riba, does not have a consensus definition. In broad terms, it connotes risk and uncertainty. It is useful to view gharar as a continuum of risk and uncertainty wherein the extreme point of zero risk is the only point that is well-defined. Beyond this point, gharar becomes a variable and the gharar involved in a real life contract would lie somewhere on this continuum. Beyond a point on this continuum, risk and uncertainty or gharar becomes unacceptable11. Jurists have attempted to identify such situations involving forbidden gharar. A major factor that contributes to gharar is inadequate information (jahl) which increases uncertainty. This is when the terms of exchange, such as, price, objects of exchange, time of settlement etc. are not well-defined. Gharar is also defined in terms of settlement risk or the uncertainty surrounding delivery of the exchanged articles.

Islamic scholars have identified the conditions which make a contract uncertain to the extent that it is forbidden. Each party to the contract must be clear as to the quantity, specification, price, time, and place of delivery of the contract. A contract, say, to sell fish in the river involves uncertainty about the subject of exchange, about its delivery, and hence, not Islamically permissible. The need to eliminate any element of uncertainty inherent in a contract is underscored by a number of traditions.12

An outcome of excessive gharar or uncertainty is that it leads to the possibility of speculation of a variety which is forbidden. Speculation in its worst form, is gambling. The holy Quran and the traditions of the holy prophet explicitly prohibit gains made from games of chance which involve unearned income. The term used for gambling is maisir which literally means getting something too easily, getting a profit without working for it. Apart from pure games of chance, the holy prophet also forbade actions which generated unearned incomes without much productive efforts.13

Here it may be noted that the term speculation has different connotations. It always involves an attempt to predict the future outcome of an event. But the process may or may not be backed by collection, analysis and interpretation of relevant information. The former case is very much in conformity with Islamic rationality. An Islamic economic unit is required to assume risk after making a proper assessment of risk with the help of information. All business decisions involve speculation in this sense. It is only in the absence of information or under conditions of excessive gharar or uncertainty that speculation is akin to a game of chance and is reprehensible.

3.2 Gharar & Speculation with of Futures & Forwards

Considering the case of the basic exchange contracts highlighted in section 1, it may be noted that the third type of contract where settlement by both the parties is deferred to a future date is forbidden, according to a large majority of jurists on grounds of excessive gharar. Futures and forwards in currencies are examples of such contracts under which two parties become obliged to exchange currencies of two different countries at a known rate at the end of a known time period. For example, individuals A and B commit to exchange US dollars and Indian rupees at the rate of 1: 22 after one month. If the amount involved is $50 and A is the buyer of dollars then, the obligations of A and B are to make a payments of Rs1100 and $50 respectively at the end of one month. The contract is settled when both the parties honour their obligations on the future date.

Traditionally, an overwhelming majority of Sharia scholars have disapproved such contracts on several grounds. The prohibition applies to all such contracts where the obligations of both parties are deferred to a future date, including contracts involving exchange of currencies. An important objection is that such a contract involves sale of a non-existent object or of an object not in the possession of the seller. This objection is based on several traditions of the holy prophet.14 There is difference of opinion on whether the prohibition in the said traditions apply to foodstuffs, or perishable commodities or to all objects of sale. There is, however, a general agreement on the view that the efficient cause (illa) of the prohibition of sale of an object which the seller does not own or of sale prior to taking possession is gharar, or the possible failure to deliver the goods purchased.

Is this efficient cause (illa) present in an exchange involving future contracts in currencies of different countries ? In a market with full and free convertibility or no constraints on the supply of currencies, the probability of failure to deliver the same on the maturity date should be no cause for concern. Further, the standardized nature of futures contracts and transparent operating procedures on the organized futures markets15 is believed to minimize this probability. Some recent scholars have opined in the light of the above that futures, in general, should be permissible.

According to them, the efficient cause (illa), that is, the probability of failure to deliver was quite relevant in a simple, primitive and unorganized market. It is no longer relevant in the organized futures markets of today16. Such contention, however, continues to be rejected by the majority of scholars. They underscore the fact that futures contracts almost never involve delivery by both parties. On the contrary, parties to the contract reverse the transaction and the contract is settled in price difference only. For example, in the above example, if the currency exchange rate changes to 1: 23 on the maturity date, the reverse transaction for individual A would mean selling $50 at the rate of 1:23 to individual B. This would imply A making a gain of Rs50 (the difference between Rs1150 and Rs1100). This is exactly what B would lose. It may so happen that the exchange rate would change to 1:21 in which case A would lose Rs50 which is what B would gain. This obviously is a zero-sum game in which the gain of one party is exactly equal to the loss of the other.

This possibility of gains or losses (which theoretically can touch infinity) encourages economic units to speculate on the future direction of exchange rates. Since exchange rates fluctuate randomly, gains and losses are random too and the game is reduced to a game of chance. There is a vast body of literature on the forecastability of exchange rates and a large majority of empirical studies have provided supporting evidence on the futility of any attempt to make short-run predictions. Exchange rates are volatile and remain unpredictable at least for the large majority of market participants. Needless to say, any attempt to speculate in the hope of the theoretically infinite gains is, in all likelihood, a game of chance for such participants. While the gains, if they materialize, are in the nature of maisir or unearned gains, the possibility of equally massive losses do indicate a possibility of default by the loser and hence, gharar.

3.3. Risk Management in Volatile Markets

Hedging or risk reduction adds to planning and managerial efficiency. The economic justification of futures and forwards is in term of their role as a device for hedging. In the context of currency markets which are characterized by volatile rates, such contracts are believed to enable the parties to transfer and eliminate risk arising out of such fluctuations. For example, modifying the earlier example, assume that individual A is an exporter from India to US who has already sold some commodities to B, the US importer and anticipates a cashflow of $50 (which at the current market rate of 1:22 mean Rs 1100 to him) after one month. There is a possibility that US dollar may depreciate against Indian rupee during these one month, in which case A would realize less amount of rupees for his $50 ( if the new rate is 1:21, A would realize only Rs1050 ).

Hence, A may enter into a forward or future contract to sell $50 at the rate of 1:21.5 at the end of one month (and thereby, realize Rs1075) with any counterparty which, in all probability, would have diametrically opposite expectations regarding future direction of exchange rates. In this case, A is able to hedge his position and at the same time, forgoes the opportunity of making a gain if his expectations do not materialize and US dollar appreciates against Indian rupee (say, to 1:23 which implies that he would have realized Rs1150, and not Rs1075 which he would realize now.) While hedging tools always improve planning and hence, performance, it should be noted that the intention of the contracting party - whether to hedge or to speculate, can never be ascertained.

It may be noted that hedging can also be accomplished with bai salam in currencies. As in the above example, exporter A anticipating a cash inflow of $50 after one month and expecting a depreciation of dollar may go for a salam sale of $50 (with his obligation to pay $50 deferred by one month.) Since he is expecting a dollar depreciation, he may agree to sell $50 at the rate of 1: 21.5. There would be an immediate cash inflow in Rs 1075 for him. The question may be, why should the counterparty pay him rupees now in lieu of a promise to be repaid in dollars after one month. As in the case of futures, the counterparty would do so for profit, if its expectations are diametrically opposite, that is, it expects dollar to appreciate. For example, if dollar appreciates to 1: 23 during the one month period, then it would receive Rs1150 for Rs 1075 it invested in the purchase of $50. Thus, while A is able to hedge its position, the counterparty is able to earn a profit on trading of currencies. The difference from the earlier scenario is that the counterparty would be more restrained in trading because of the investment required, and such trading is unlikely to take the shape of rampant speculation.
4. Summary & Conclusion

Currency markets of today are characterized by volatile exchange rates. This fact should be taken note of in any analysis of the three basic types of contracts in which the basis of distinction is the possibility of deferment of obligations to future. We have attempted an assessment of these forms of contracting in terms of the overwhelming need to eliminate any possibility of riba, minimize gharar, jahl and the possibility of speculation of a kind akin to games of chance. In a volatile market, the participants are exposed to currency risk and Islamic rationality requires that such risk should be minimized in the interest of efficiency if not reduced to zero.

It is obvious that spot settlement of the obligations of both parties would completely prohibit riba, and gharar, and minimize the possibility of speculation. However, this would also imply the absence of any technique of risk management and may involve some practical problems for the participants.

At the other extreme, if the obligations of both the parties are deferred to a future date, then such contracting, in all likelihood, would open up the possibility of infinite unearned gains and losses from what may be rightly termed for the majority of participants as games of chance. Of course, these would also enable the participants to manage risk through complete risk transfer to others and reduce risk to zero. It is this possibility of risk reduction to zero which may enable a participant to earn riba. Future is not a new form of contract. Rather the justification for proscribing it is new.

If in a simple primitive economy, it was prevention of gharar relating to delivery of the exchanged article, in todays' complex financial system and organized exchanges, it is prevention of speculation of kind which is unIslamic and which is possible under excessive gharar involved in forecasting highly volatile exchange rates. Such speculation is not just a possibility, but a reality. The precise motive of an economic unit entering into a future contract - speculation or hedging may not ascertainable ( regulators may monitor end use, but such regulation may not be very practical, nor effective in a free market). Empirical evidence at a macro level, however, indicates the former to be the dominant motive.

The second type of contracting with deferment of obligations of one of the parties to a future date falls between the two extremes. While Sharia scholars have divergent views about its permissibility, our analysis reveals that there is no possibility of earning riba with this kind of contracting. The requirement of spot settlement of obligations of atleast one party imposes a natural curb on speculation, though the room for speculation is greater than under the first form of contracting.

The requirement amounts to imposition of a hundred percent margin which, in all probability, would drive away the uninformed speculator from the market. This should force the speculator to be a little more sure of his expectations by being more informed. When speculation is based on information it is not only permissible, but desirable too. Bai salam would also enable the participants to manage risk. At the same time, the requirement of settlement from one end would dampen the tendency of many participants to seek a complete transfer of perceived risk and encourage them to make a realistic assessment of the actual risk. .
Notes & References

1. These diverse views are reflected in the papers presented at the Fourth Fiqh Seminar organized by the Islamic Fiqh Academy, India in 1991 which were subsequently published in Majalla Fiqh Islami, part 4 by the Academy. The discussion on riba prohibition draws on these views.

2. Nabil Saleh, Unlawful gain and Legitimate Profit in Islamic Law, Graham and Trotman, London, 1992, p.16

3. Ibn Qudama, al-Mughni, vol.4, pp.5-9

4. Shams al Din al Sarakhsi, al-Mabsut, vol 14, pp 24-25

5. Paper presented by Abdul Azim Islahi at the Fourth Fiqh Seminar organized by Islamic Fiqh Academy, India in 1991.

6. Paper by Dr M N Siddiqui highlighting the issue was circulated among all leading Fiqh scholars by the Islamic Fiqh Academy, India for their views and was the main theme of deliberations during the session on Currency Exchange at the Fourth Fiqh Seminar held in 1991.

7. It is contended by some that the above example may be modified to show the possibility of riba with spot settlement too. "In a given moment in time when the market rate of exchange between dollar and rupee is 1:20, if an individual purchases $50 at the rate of 1:22 (settlement of his obligation also on a spot basis), then it amounts to the seller of dollars exchanging $50 with $55 on a spot basis (Since, he can obtain Rs 1100 now, exchange them for $55 at spot rate of 1:20)" Thus, spot settlement can also be a clear source of riba. Does this imply that spot settlement should be proscribed too ? The fallacy in the above and earlier examples is that there is no single contract but multiple contracts of exchange occurring at different points in time (true even in the above case). Riba can be earned only when the spot rate of 1:20 is fixed during the time interval between the transactions. This assumption is, needless to say, unrealistic and if imposed artificially, perhaps unIslamic.

8. Islam envisages a free market where prices are determined by forces of demand and supply. There should be no interference in the price formation process even by the regulators. While price control and fixation is generally accepted as unIslamic, some scholars, such as, Ibn Taimiya do admit of its permissibility. However, such permissibility is subject to the condition that price fixation is intended to combat cases of market anomalies caused by impairing the conditions of free competition. If market conditions are normal, forces of demand and supply should be allowed a free play in determination of prices.

9. Some Islamic scholars use the term forward to connote a salam sale. However, we use this term in the conventional sense where the obligations of both parties are deferred to a future date and hence, are similar to futures in this sense. The latter however, are standardized contracts and are traded on an organized Futures Exchange while the former are specific to the requirements of the buyer and seller.

10. This is known as bai al inah which is considered forbidden by almost all scholars with the exception of Imam Shafii. Followers of the same school, such as Al Nawawi do not consider it Islamically permissible.

11. It should be noted that modern finance theories also distinguish between conditions of risk and uncertainty and assert that rational decision making is possible only under conditions of risk and not under conditions of uncertainty. Conditions of risk refer to a situation where it is possible with the help of available data to estimate all possible outcomes and their corresponding probabilities, or develop the ex-ante probability distribution. Under conditions of uncertainty, no such exercise is possible. The definition of gharar, Real-life situations, of course, fall somewhere in the continuum of risk and uncertainty.

12. The following traditions underscore the need to avoid contracts involving uncertainty.

Ibn Abbas reported that when Allah's prophet (pbuh) came to Medina, they were paying one and two years advance for fruits, so he said: "Those who pay in advance for any thing must do so for a specified weight and for a definite time".

It is reported on the authority of Ibn Umar that the Messenger of Allah (pbuh) forbade the transaction called habal al-habala whereby a man bought a she-camel which was to be the off-spring of a she-camel and which was still in its mother's womb.

13. According to a tradition reported by Abu Huraira, Allah's Messenger (pbuh) forbade a transaction determined by throwing stones, and the type which involves some uncertainty.

The form of gambling most popular to Arabs was gambling by casting lots by means of arrows, on the principle of lottery, for division of carcass of slaughtered animals. The carcass was divided into unequal parts and marked arrows were drawn from a bag. One received a large or small share depending on the mark on the arrow drawn. Obviously it was a pure game of chance.

14. The holy prophet is reported to have said " Do not sell what is not with you"

Ibn Abbas reported that the prophet said: "He who buys foodstuff should not sell it until he has taken possession of it." Ibn Abbas said: "I think it applies to all other things as well".

15. The Futures Exchange performs an important function of providing a guarantee for delivery by all parties to the contract. It serves as the counterparty in the exchange for both, that is, as the buyer for the sale and as the seller for the purchase.

16. M Hashim Kamali "Islamic Commercial Law: An Analysis of Futures", The American Journal of Islamic Social Sciences, vol.13, no.2, 1996.

Source:sukuk.net