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.

5TH WORLD ISLAMIC ECONOMIC FORUM

Approximately 1500 delegates from 35 countries have arrived in Jakarta (Ritz Carlton Pacific Place Hotel) for the 5th World Islamic Economic Forum (created to establish dialogue through business partnerships amongst Muslim entrepreneurs as well as between Muslim and non-Muslim businessmen and seeks to foster channels of communication to help address and resolve important economic issues within the Muslim and non-Muslim world). An opening ceremony by Indonesian President Susilo Bambang Yudhoyono, began the day-long Pre-Forum program of the 5th World Islamic Economic Forum which focused on two key issues imperative to the development of the Islamic business community – businesswomen and young entrepreneurs.

The three plenary sessions of the Businesswomen Forum entitled Opportunities beyond Borders, Evolving role of Women in Business, Transforming Market Challenges into Opportunities and “Growing” the next Generation of Women Entrepreneurs: Engaging Young Women & Girls in Entrepreneurship jointly raised the agenda of how best to overcome the obstacles women faced in business and highlighted the unique role women play in this capacity. The key point stressed by multiple panelists was of the multifaceted role women perform in the social, organizational and individual context. This notion was flanked by the acknowledgement that indeed, the challenges faced by women in business are the same as that of their male counterparts.

Dato’ Dr. Norraesah Mohamad, Chairwoman WIEF Business Network, commenting during the Opportunities Beyond Borders plenary session stated, “The event today gives women in business a platform to foster cooperation amongst women industrial players from all parts of the globe and build a solid understanding of their common needs not only as women but also as key decision makers in business. This Forum provides a unique opportunity for us to make business connections across borders.”

Ms. Rina Fahmi Idris, Chairwoman of IWAPI (Indonesia Women Business Association) and member of the 5th WIEF Organizing Committee, added to this, stressing the need for a working plan, stating “These sessions actually provide a medium to invite women in business to connect and thereafter establish plans to collaborate and regroup after such an event to extend more detailed information, and develop strategies to sitting together after this big event and exchange more detail information on business side answering the same global challenges faced by our counterpart.”

The Young Leaders Forum, with plenary sessions entitled The Leadership Imperative: Towards a Good Succession Plan, Employment in the 21st Century: Understanding the Global Workplace, Banking on Integrity: The prospects of Islamic Finance in a Plural Society and Plugging ideas into Business: Creating Innovative Industries broached the strategic discussion of succession planning to provide better opportunities for leadership in young entrepreneurs and the role of Islamic finance at this time of global financial crisis.

Dato’ Sri Nazir Razak, Chairman of the WIEF Young Leaders Forum said “This is a golden opportunity for the Muslim community to leverage on the growing prominence of Islamic capital and finance as a means to revitalize Muslim leadership and advance its position on the world stage”.

ISLAMIC FINANCE RISES ON RUINS OF CONVENTIONAL BANKS

The Islamic finance industry, which refers to the banking activity conducted in accordance with the principles of Shariah (Islamic law), gained the limelight over the past two months during the global financial turmoil as one of the relatively safe havens for investments.

There are currently over 800 billion dollars' worth of deposits and investments lodged in Islamic banks, mutual funds and insurance schemes known as 'takaful,' more than five times the volume compared with 150 billion dollars in the mid-1990s.

Islamic financial institutions are reportedly expanding their balance sheets as demand continues to grow in Europe for financial products that avoid paying interest, in line with strict religious rules. These products instead pay profits from an underlying business or rent from a building used as collateral to raise money. The expansion of Islamic finances rests on a lack of exposure to toxic assets and derivatives, often related to mortgages that prompted the collapses in the United States and elsewhere in October 2008.

Besides its wide geographical scope, the expansion of the Islamic finance has been also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market instruments.

The most striking phase could be the growth of Sukuk, the most popular form of securitized credit finance within Islamic finance. Sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in shariah-oriented finance contracts into marketable securities without interest rate charges. The rise of the Sukuk market as an alternative investment activity, is attracting the attention of an increasing number of private sector and official circles across the globe including the British government which is reportedly mulling to become the first Western government to buy this kind of Islamic bond.

According to a new study by the International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely 'unscathed' from the current world crisis. It attributed its findings mainly to the fact that Islamic financial institutions make little use of many of the complicated instruments blamed for the current problems in conventional banks such derivatives and short-selling.

FINANCIAL CRISIS WIDENS THE APPEAL OF ISLAMIC FINANCE

The financial crisis has widened the global appeal of Islamic finance as Western governments and institutions attempt to tap into deposits from the Islamic world, by courting Islamic Financial Institutions (IFI), which remain relatively unscathed by the sub-prime mortgage crisis.

IFIs comply with Shariah, or Islamic law, and one of the fundamental principles is that it is forbidden to sell what you do not own. Unlike other banks around the world, IFIs did not trade bundles of sub-prime mortgages, and therefore have no direct exposure to the sub-prime mortgage crisis.

In fact, finance that complies with Shariah now accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Services. There has never been a more opportune time to open the doors to Islamic finance, and to drive the growth of the Islamic finance industry as a whole.

The International Quality & Productivity Centre (IQPC) is pleased to announce a perfect platform for conventional and Islamic industry leaders to address key issues in today's economic climate, and carry out business vital to sustain growth.

Leaders in Islamic Finance 2009, a global summit taking place on 19-21 April 2009 in Doha, Qatar, will see prominent figures in the financial world gather to discuss the main challenges currently facing the Islamic finance industry.

Khalid Yousaf, Vice President, Investments and Capital Markets, Siraj Capital, and former attendee and speaker at the 2008 summit in Istanbul, describes Leaders in Islamic Finance 2009 as 'the ultimate meeting place for Sharia scholars, Islamic financial institution principals, ministers, governors and regulators.'

Chris Corander, Senior Conference Director at IQPC, explains 'Islamic finance is an increasingly attractive prospect because it demonstrates good banking behaviour that has perhaps been lost in the last decade or so. Despite this, the industry still has problems of its own which need to be addressed in order to drive the Islamic finance industry forward.'

Two large problems that remain are the global standardisation of Islamic finance and the desperate need for innovation in terms of products and structures. Neither challenge can be addressed without the input of revered Shariah scholars, who sit on a vast number of advisory boards for IFIs and determine what is and what is not Shariah-compliant.

Chris adds 'This is why we have acquired the services of seven world-renowned scholars at Leaders in Islamic Finance 2009, who will take part in forums, roundtables and panel sessions throughout the main two-day summit. There will also be a full-day workshop led by Dar Al Sharia, a subsidiary of Dubai Islamic Bank, which is guided by the distinguished Shariah scholar Dr. Hussain Hamed Hassan.'

In addition, the summit is also supported by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is leading the way in standardising many aspects of the global industry, and the Qatar Financial Centre.

Qatar is emerging as one of the most dynamic economies in the Middle East. It has the highest per capita income in the world and enjoys one of the fastest growing GDPs, reaching 13.3% real GDP, and valued in 2008 at over US$80 billion. The economy is rapidly expanding in practically every sector and industry. A combination of government investment and the participation of multi-national companies is creating a culture of opportunity. In terms of Islamic finance, Qatar is home to some of the largest Islamic Financial Institutions in the world and is fast becoming another pivotal centre for this sector within the GCC.

DOW JONES ISLAMIC MARKET WORLD INDEX

The Dow Jones Islamic Market World Index was launched in February 1999 as the first benchmark to measure the performance of a global universe of Shariah-compliant investable equities. Over the past decade, the Dow Jones Islamic Market Index series has expanded to more than 100 indexes for all major established and emerging financial markets, regions and sectors. Amongst these are Islamic indexes for the ASEAN, BRIC and GCC regions as well as for global and Malaysian blue-chips.

Dr. Nasser H. Saidi, chief economist, Dubai International Financial Centre Authority (DIFCA), said “The sub-prime crisis has led to the extensive collapse of the conventional banking and financial systems leading to a questioning of underlying market mechanisms, corporate governance, regulatory failure and the effectiveness of boards and risk management. Clearly the Basel II framework and self-regulation have failed. We need a new paradigm. Islamic finance, based on partnership, risk sharing and management, embodies the sound principles of corporate governance and ethics and enforces greater transparency and accountability. The global Islamic finance industry is expected to grow to some $3.5 trillion in the next 5 years."

“Islamic Finance has proved, to date, resilient to financial contagion and crisis. The timing is right for governments responding to crisis to develop and use Islamic finance instruments, primarily Sukuk, as an integral part of public finance, deficit financing and for financing public works and infrastructure. Governments and regulators should seize this historical opportunity to integrate Islamic Finance into the mainstream of banking of finance.”

Stating that Islamic finance is a more robust and reliable option especially with the economic crisis threatening to usher in widespread global recession, Mr. Ali Afshar, senior vice president, Head - Institutional & Investment Banking, Al Hilal Bank said “With the financial crisis further deepening and with its impact being felt in all developed, developing and transitional economies, the relative success and sustenance shown by the Islamic finance industry has been quite noteworthy. Conventional financial institutions and capital markets have been severely affected but the Islamic finance industry has relatively come through unscathed.”

Mr. Afshar further added “The basic principles of Islamic finance that necessitate transactions being backed by tangible assets, prevent it from investing in loans, options, derivatives and hedge funds, prohibit speculation, hence make Shariah compliant products less exposed to the potential risks resulting from over exposure and speculation as compared to conventional products.”

The strict industry and financial ratio screenings for Shariah compliance defined by the unique and sophisticated methodology of the Dow Jones Islamic Market Indexes have made the Dow Jones indexes the most widely used Islamic indexes by market participants across the globe as a benchmark to measure Shariah-compliant investable equities.

Besides launching the first Dow Jones Islamic Market World Index, Dow Jones Indexes were also the first movers in sukuk indexing and combining Islamic with sustainability criteria in the Dow Jones Islamic Market Sustainability Index. Dow Jones Indexes was the first index provider to license its indexes as the basis for the first ever Islamic exchange-traded fund worldwide.

LIQUIDITY MANAGEMENT IN ISLAMIC FINANCE

The 3rd Islamic Financial Services Forum : The European Challenge will be held at The Westin Paris on 4th March 2009 and is jointly organized with the Financial Stability Institute and hosted by Banque de Paris.

The itinerary showed that it will focus on liquidity management - I guess this is due to the financial crisis that is happening all over the world right now.

Liquidity is about having access to a determinate amount of cash - and when you need it. This can be either through the asset side or the liability side of the bank or financial institution. On the asset side, it is about the preservation of capital on demand. That means that the asset must have undoubted quality with minimal credit risk. And it must be seen to have that quality behind it. That also means it must be free from price risk.

The Liquidity Management Centre and the International Islamic Financial Market in Bahrain and others have done some excellent work and new Islamic liquid instruments such as the Sukuks issued by Malaysia, Bahrain, the IDB and more recently by several corporates are coming on stream on a regular basis. Malaysia of course has had such instruments in its domestic market for some time. There have been great strides made but much more work needs to be done. Without an efficient capital market to operate within, Islamic banking finance will not continue to grow meaningfully. The market requires liquidity and price transparency to enhance a secondary market. It is all very well having entire issues oversubscribed – but there has to be an exit route to demonstrate liquidity. And this lack of truly liquid assets has paradoxically increased the demand for liquid instruments.

Islamic banks investing in long-term assets are still faced with a problem in that most of their deposit liabilities are very short-term leading to a massive liquidity problem. Liquidity management tools that are both flexible and undeniably Shari'h compliant are lacking. Although Sukuks can be traded most are held to maturity. This lack of market liquidity is often seen as the major constraint to the development of an integrated Islamic financial system. Malaysia is an exception where they even have overdrafts.I

It is inevitable that competition between various conventional banks and Islamic ones has led to segmentation and prevented a really substantial market being developed leading to an upwardly spiralling virtuous vortex of liquidity. For things to change there will need to be more co-operation amongst Islamic banks and between them and their Conventional counterparties.

The LMC and IIFM are providing just such a lead. In addition to the lack of long-term assets to invest in and get out of, Islamic banks face another serious problem in balance sheet management: the lack of an Islamic inter-bank market on the scale of similar sized Conventional markets. Because Islamic banks unlike Conventional banks cannot borrow at interest to meet unexpected withdrawals from their depositors, it is difficult for them to run mismatched asset and liability portfolios. And this is aside from the interest rate risk they run when they invest long at fixed rate and have their liabilities re-price frequently.The way banks have most commonly solved this problem is to have more liquid assets than would be in the case of Conventional banks and these are placed with commodity Murabahas on the understanding that they can get liquidity when required through early cancellations at an explicit or hidden cost. These are done through agency agreements or break clauses. But a facility for early cancellation does not come without cost explicit or otherwise.

There are a few Islamic liquidity vehicles but these are fairly small and could not withstand a several hundred dollar injection or withdrawal. There needs to be a market-wide central solution that allows institutions to park funds in between medium to long term investment sales and purchase. We need a solution that involves high quality, standardisation, gets away from bilateral Murabaha investments by the investor with all the problems of break clauses, listing and price transparency and be able to transact in substantial size.