ISLAMIC FINANCE CAN HANDLE GLOBAL STORM

Prime Minister Datuk Seri Abdullah Ahmad Badawi is optimistic the Islamic financial system will ride out the global economic downturn.

He said the Islamic financial system had remained unscathed by the difficulties affecting the conventional international financial system.

"This is a testament to its integrity and validity. I see Islamic finance becoming an important part of the international financial system.

"Malaysia hopes to leverage on its experience in the sector to strengthen its trade and investment ties across the globe," Abdullah said in his keynote address at the 50th anniversary of Bank Negara Malaysia on 23 February 2009.

Present were Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz and Hong Kong Monetary Authority chief executive Joseph Yam.

Yam echoed Abdullah's view on Islamic finance, and said it was increasingly recognised as an alternative channel of financial intermediation not only within Islamic communities.

"As Governor Zeti has persuasively argued, Islamic finance encourages business activities and generates legitimate profits and rests on principles of fairness, shared risk and ethical practices. "There is, I think, much for us all to reflect on when considering how badly things have gone wrong recently in what might be called traditional finance."

Abdullah praised Bank Negara for regulating and evolving a financial sector capable of meeting economic challenges on a strong footing.

"In particular, the mobilisation of savings to fund economic activities has been a major element in sustaining broad-based economic growth.

"In this regard, I hope banks will not unreasonably curb lending and keep liquidity flowing into the economy.

"The government will continue efforts to stimulate the economy in these difficult times, but the financial sector must continue to play its role."

He stressed the need to reinvent oneself in the competitive global environment.

Economic flexibility was central to the exploitation of new areas of growth, he said.

"In addition to the rapid growth of the traditional services sub-sector, new service industries have also emerged and are growing rapidly, particularly in the areas of finance, ICT, logistics, health, higher education and tourism."

He said the progress of a nation could only be secured if there was shared prosperity.

"A crucial thrust of Malaysia's development strategy is to give equal emphasis to growth and equity.

"The public sector undertakes the role of economic recovery and the private sector takes up the role of economic growth."

(Courtesy of New Straits Times)

DELOITTE CHOOSES MALAYSIA AS ISLAMIC FINANCE HUB

Deloitte has set up an Islamic finance centre of excellence in Malaysia to provide consultation on Islamic finance for the Asia Pacific region.

This is the professional services firm's only such centre in the region and one of its three globally together with London and Dubai.

Deloitte's Asia Pacific chief executive officer Chaly Mah Chee Kheong said the company had started to build a team of between eight and 10 professionals to be based in the Kuala Lumpur office and would continue to recruit more.

"The concept of a centre of excellence will be a core of people to understand Islamic finance and all the complexities around this product," Mah said at a media conference here today.

"We have similar teams in the Middle East and London as well," he said.

Deloitte's Islamic finance specialist Daud Vicary Abdullah said the centre of excellence was complementary to Islamic banking services.

"We are not a training centre although we are prepared to train. We do business directly with clients at our level of expertise," Daud said.

"Generally we work together with them (Islamic banks). We can provide services to them because we have some expertise which banks don't have or perhaps strategically don't want to focus on and don't want to create a specialised team to do things internally," he said.

Daud also said that many traditional non-Muslim countries such as Singapore, the United Kingdom, Japan and Hong Kong have expressed interest in becoming major players in the Islamic finance industry.

"Some have even gone as far as to amend their legislations and tax regimes to accommodate requirements unique to Islamic finance," he said.

EXCERPTS OF MALAYSIA PRIME MINISTER'S SPEECH IN 5TH WIEF

Malaysia Prime Minister Abdullah Ahmad Badawi said as the conventional financing system continued to collapse, having a serious impact on the global economy, it was high time for the Muslim world to turn the "adversity into an opportunity".

"The world is beginning to appreciate the need for alternative arrangements to the current international financial system. At the same time, Islamic finance is gaining credibility as an alternative," he said.

Badawi said he believed Islamic finance had a bright future but that banking and finance standards needing harmonizing and Islamic financial products really required greater innovation. "As long as our markets remain divided by different jurisdictions and interpretations of shariah standards, Islamic finance is unlikely ever to grow beyond the shore of Muslim countries.

"It is therefore imperative for decision-makers to work hard to set up a harmonised standard which can be accepted and adhered to by the Islamic banking community as a whole," he said.

Abdullah, who is also the patron of the WIEF, said there were some encouraging signs, citing as an example, the world beginning to appreciate the need for an alternative arrangement to the current international financial system.

He said there were discussions on the need for regulations and prudence in the management of the financial system and at the same time, Islamic finance was gaining credibility as an alternative system.

"Islamic finance is fundamentally based on the principle of 'no risk, no reward'. Only those who decide to take risks will benefit," he said, adding that there was a huge departure from conventional finance where considerable gains could still be made on zero-risk.

Abdullah said such a system has opened the doors to irresponsible lending where greed has been allowed to take control, citing the sub-prime mortgage crisis as the classic case.

He said the second challenge was for Muslim countries to be continuously innovative and come up with new Islamic finance products.

"To be competitive, they need to develop products which can set themselves apart from their conventional counterparts. We need to explore ways to create attractive financial packages. Indeed this is a daunting task but I am confident that, with collective effort and dedication, this will not be beyond our means to do so," he said.

Abdullah urged Muslim countries to attract more young and bright practitioners to join the Islamic finance industry as they were crucial for developing the intellectual capacity to meet the above challenges.

"To enlarge the pool of intellectuals, Muslim countries must encourage more students to embark on professional studies in Islamic finance and more academies such as the International Centre for Education in Islamic Finance in Kuala Lumpur should be set up in Muslim countries.

"The Islamic Development Bank can also play a pivotal role here," he said.

On the global financial crisis, he said, it was obvious the conventional financial system has collapsed with serious implications on the global economy, causing numerous countries to struggle to overcome recession.

"Massive funds are being pumped in to revitalise their respective economies. We have inherited a system where people can trade what they do not own and the resulting inflationary pressures on the global market have caused immense damage to the economic well-being of the world's poor," he said.

He said such was the impact of unbridled greed in a financial system with no accountability on money lending.

"The question before us now is -- How do we turn this huge adversity into an opportunity for the Muslim world?" he asked some 1,000 participants at the forum, which ended today.

ISLAMIC BANKING ASSETS UP 23 %

KUALA LUMPUR, March 2 2009 (Bernama) -- The country's Islamic banking system continued to expand last year where assets, deposits and financing recorded annual increase of 23 %, 26.9 % and 22.5 % respectively.

Deputy Finance Minister, Datuk Ahmad Husni Mohamad Hanadzlah said total Islamic banking assets as of to date stood at RM192.8 billion, deposits RM154.6 billion and financing RM104.6 billion.

The risk rated capital ratio meanwhile stood at 15.2 % and surplus capital was RM8.0 billion as at end of December last year an net non performing loans meanwhile declined to 2.4 %.

Ahmad Husni said that Bank Negara Malaysia had taken comprehensive steps to develop the country's Islamic financial sector to ensure that it continued to contribute to the country's economic growth. The sector is well supported by prudent and progressive legislation and regulations and governed by risk based regulatory functions in line with the conventional banking system, he said.

At the international level, Ahmad Husni said Malaysia played an active role in the setting of standards for financial institutions through the Islamic Financial Services Board.

WEALTH AND FREEDOM IN ISLAM

• Islam looks at wealth as life sustaining, to be used efficiently. God says:

“Give not unto the foolish your wealth which Allah has made a means of support for you”. (Quran, 4:4).

• Private ownership is affirmed but viewed as a trust:

“Believe in Allah and His messenger, and spend of that whereof He hath made you trustees.” (Quran, 57:7).

• Islam encourages enterprise, efforts to create wealth, which has been characterized as God’s bounty:

“And when prayer is ended, then disperse in the land and seek Allah’s Bounty”. (Quran, 62:10).

• Muslims are obligated to fulfill contracts and keep their promises:

“O you who believe fulfill your undertakings”. (Quran, 5:1)
“…And be true to every promise, for, verily, (on judgment day) you will be called to account for every promise you made”. (Quran, 17:34)

• All exchange should be with willing consent of the parties concerned:

“O you who believe squander not your wealth among yourself in vanity Except it be a trade by mutual consent”. (Quran, 4:29)

• Use of wealth and exercise of freedom of enterprise is constrained by the obligation not to harm others. The Prophet ruled:

“No injury, and no inflicting of injury”. (Ibn Maja, Sunan: chapter on Ahkam)

These clear texts provide a sound basis for a positive attitude towards wealth creation and economic activity. Clear and secure individual ownership rights, one’s right to the fruits of one’s efforts and contracts enforceable through a social authority, strengthen that attitude and provide a wide arena for it.


Limits of Freedom

Having put production and exchange of wealth on a firm basis, Islam proceeds to define a framework for these activities so that justice and fairness is ensured for all concerned. This comprises do’s as well as don’ts. I focus on the don’ts, as they are more relevant to our discussion. The following are prohibited:

• Riba, i.e. interest on loans and exchange of unequal quantities of similar fungibles. Gold or silver or a particular paper currency must be exchanged in equal quantities. When gold or silver or different paper currencies are exchanged with one another, the quantities can be unequal but the exchange must be simultaneous. Prohibition of interest on loans is clearly implied by the text of the Quran:
  

“And if you repent you have your principal, wrong not and you shall not be wronged”. (Quran, 2:279)

As we shall note later on, this and the prohibition of gambling which is next on the list, target justice in distribution. Islamic law does not distinguish between high rates of interest characterized as usury and lower rates characterized as interest. Any excess over and above the sum lent is disallowed. There have been some modern scholars taking a different view but classical jurists as well as overwhelming majority of modern scholars take the stand reported above. It is this view which is reflected in Islamic banking and finance.

• Maysir,i.e. gambling, bets and wager. The essence of gambling is taking a risk deliberately created or invited, which is not necessary in economic activity, to gain thereby. This is unlike the risks taken by other economic agents, entrepreneurs, speculators, insurers, which are there as an inalienable aspect of reality.
  

• Ghabn,i.e. fraud and deception.
  

• Ikrah,i.e. coercion, e.g. imposing a contract, or a condition therein, on an unwilling party.
  

• Bay’ al -mudtarr,i.e. exploitation of need, e.g. by charging an exorbitantly high price.
  

• Ihtikar,i.e. withholding supplies of essential goods and services with a view to raising prices.
  

• Najsh,i.e. raising prices by manipulating false bids.
  

• Gharar,i.e. hazard or uncertainty surrounding a commodity, its price, time of payment, time of delivery, quantity,.. etc. makes the deal invalid. But some little gharar can be ignored as it may be humanly impossible to eliminate it.
  

• Jahl mufdi ila al-niza’,i.e. such lack of information about a commodity, its quantity, price, etc. as may lead to dispute.
  

This list is by no means all inclusive, rather it serves the purpose of highlighting what the Shariah (Islamic Law) cares about in order to guide men and women towards an efficient and just economy.