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.

MOU - BNM AND UKTI

Bank Negara Malaysia (BNM) had signed an MoU on 26 February 2009, with the UK Trade and Investment (UKTI) to establish a collaborative framework to promote co-operation in the field of Islamic finance. This will pave the way for Malaysia and United Kingdom to strengthen co-operation in the development of talent, expertise, business linkages and infrastructure support in islamic finance.

This is indeed good news as it reflects the commitment to further develop the Islamic finance industry in the United Kingdom and Malaysia.

Sir Andrew Cahn, the Chief Executive Officer of UKTI has rightly mentioned in the news conference, " As conventional liquidity has become difficult to come by, companies are looking for alternative financial options, thus helping Islamic finance become part of the mainstream international finance market."

STANDARDIZATION OF ISLAMIC FINANCE PRACTICES

This is another article worth commenting - see Finding the middle ground. The article was from Islamic Finance Asia (Feb/Mar 2009 issue).

For the information of all, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has been set up to set standards to be followed by Islamic Financial Institutions to streamline and provide standardization of Islamic finance practices and build the confidence of customers and other stakeholders while promoting the sustainable growth of the industry. As I've commented in my earlier post, not many organizations and/or countries wish to adopt the standards issued by AAOIFI.

However, I disagree with some of the panelists in the article - standards should be set up even if the industry is still new. Islam does not restrict what you want to do provided the act is within the parameters of Shariah. Now, the parameters are unclear - they depend on interpretation of each Shariah scholar sitting in the Shariah Board - this should not be the way. As a result, you can see that certain "Islamic product" like Bai Bithaman Ajil (in Malaysia) is not being accepted in the Middle East.

Therefore, standardization is a requirement. Now, it is a matter of adoption of these available standards by the organizations/countries - this is the main problem.

ISLAMIC FINANCE HAS TO RETURN TO ITS ROOTS

When I first read this article Islamic finance has much to learn from the West, I felt a sense of regret that the author quoted the US as having "more shariah compliant financing" mechanism than practiced by Islamic banks in Islamic countries. I quoted here the basis for his argument - "American venture capital groups annually provide about $25bn in capital financing to entrepreneurs, scientists and engineers with new ideas. As a consequence of the availability of this type of financing the venture capital industry in the US has given birth and nurtured scores of Silicon Valley companies, including modern day icons such as HP, Cisco, Intel, Sun Micro Systems, Apple, Netscape, Ebay, and Google. All were created in the past 30 years or so from ideas grounded in science and technology. Scientists and engineers came up with the ideas, innovations and inventions while the venture capital industry provided the capital on a partnership basis. Millions of new jobs have been created as a result."

I believe the correct phrase would be Islamic finance has to go back to its roots (even the article's author wrote that the west's renaissance partly came as a result of learning from the Islamic world). Islam encourages development and abhors hoarding and idle of wealth, thus, encourages investments. True, the most popular mode of Islamic financing now is murabaha (cost plus), but there are Islamic financial institutions who have made the necessary steps to opt for other Islamic modes of financing e.g. musyarakah, which is a form of partnership (profit and loss sharing).

I would like to reiterate that we (especially the Muslims) must give Islamic finance a chance - major revamps need to be made so as they are able to compete with their conventional counterparts. The hardest part to make this a reality is - to obtain the consensus of all for standardization of shariah rulings.

There are many conventions and/or seminars on Islamic finance taking place every month in all parts of the world - changes can be seen, however, it is not at a rate that we hoped. Every Muslim has a duty to contribute (no matter how small a contribution) to ensure that Islamic finance (or Islam in general) is no longer being ridiculed by others. Islam is our religion and we must stand united to guard it at all cost.

CAN ISLAM SAVE THE ECONOMY?

Governments worldwide are struggling to manage the global financial crisis, with no end to the downturn in sight. But at least so far, one sector has been unscathed: the $1 trillion-and-growing business of Shariah-compliant banking.

That’s right, Shariah. The same combination of medieval Islamic law and modern post-colonialism that makes the terrorist clique supposedly so hateful of Western freedoms. Where finance is concerned, most muftis—Islamic religious scholars—agree that God prohibits charging any amount of interest on loans. Trading debt and risky speculation are off-limits too, as is investment in immoral enterprises like gambling, prostitution, and war profiteering. Transactions should be highly transparent and risk, as well as return, should be shared by all parties. You can’t trap people into owing more than they can pay. Basically, most everything that caused the current mess isn’t allowed. “Given their constraints, they actually don’t hold any conventional debt or conventional mortgages,” explains Samuel Hayes, emeritus professor of investment banking at Harvard. “They don’t have any of these derivatives or outright subprime loans. There’s no doubt that they have weathered this better than the conventional banks.”

From the view of Islamic law, writes Umar Chapra, a leading economist in Saudi Arabia, “while economic growth is essential, it is not sufficient for attaining real human well-being.” Rather, we depend on “spiritual health at the core of human consciousness, and justice and fair play at all levels of human interaction.” Much more than a business model for specialty banks, he and many others believe that Islamic economics offers a much wider vision. The conventional view of the homo economicus—super-rational, selfish utility maximizer—dehumanizes people, denying the divine stamp on our nature. A truly Islamic economic theory, they believe, should restructure consumer preferences, ensuring that basic necessities are plentiful and luxuries come only after everyone is provided for. People should feel motivated to work by knowing that they share equitably in the produce of their labors. Shariah guidelines for inheritance distribute wealth among families in ways that prevents too much accumulation. More than an economics in the usual “dismal science” sense, this is a comprehensive rulebook for playing well with others. It also claims its authority from God.

The theory has something in mind for governments as well. They are responsible for administering the zakat tax, one of the Five Pillars of Islam. Though often translated as “almsgiving,” it literally means “that which purifies.” These funds should be directed primarily toward redistributive purposes, to soften the market’s burden on the poor. However, they can also be used to fund religious causes, a fact which medieval regimes sometimes used to usurp zakat funds for expansionary warfare. But modern Islamic economists, by and large, discourage military spending wherever possible.

ISLAMIC FINANCE COULD HAVE SAVED THE WORLD

(Article was extracted from International Financial Law Review - author : Simon Crompton)

Lawyers in Islamic finance firmly believe that if company financing had been done entirely along shariah lines, this financial crisis would not have happened.

A session at the Middle East Financial Law Congress in Doha, Qatar on 17 - 18 February 2009 saw passionate disagreement on the subject.

Panelists from western banks argued that there was nothing wrong with the due diligence that went into local companies when they issued conventional debt. Islamic debt would not have fared any better.

The argument for shariah was put by one speaker particularly strongly, who said: "Islamic finance has been mixed and matched with conventional debt in companies’ financing, with the result that none of them are really Islamic. Even the Islamic parts of their debt have been watered down and adapted to conventional structures."

When asked whether he really thought that the world would not have had a financial collapse under Islamic financial law, he replied: "Yes, absolutely. Islamic debt is about investment; conventional debt is about trading money for its own sake. Islamic law would have prevented the kind of leverage ratios we saw in Dubai."

Dubai real estate company Nakheel became the focus for the discussion, as it had both Islamic and conventional funding and has seen its spreads widen dramatically as investors refuse to buy the debt for fear of it going bust.

A speaker from a western bank disagreed with the Islamic lawyers. "Let’s get this straight," he said. "Everyone that invested in Nakheel knew they were exposed to big real estate risk. They knew the projects that Nakheel had lined up. They knew how it was plowing the profits of one project into another; it was all over the papers.

"There was big real estate risk in a market obviously driven by expectations. But they did their due diligence and took the gamble. They weren’t stupid." He carried on the point out that given the growth predictions for Nakheel at the time it issued most of its debt, the leverage ratio was no higher than any other real estate company anywhere else in the world.

No one disagreed that Islamic finance has become disconnected from its foundations. Rather than being involved from the very start of a deal, it is sometimes brought in at the last minute for a rubber stamp. One straightforward Islamic structure is not picked at the beginning – instead the company’s needs are shoehorned into a tweaked or adjusted structure.

One speaker referred to it as Islamic beer. "You go to the imam and get ask him whether it is compliant with shariah to tie a rope to a door handle. Then you ask him whether it is compliant to lie on the floor. Then to tie a beer bottle to the rope. When someone walks in, the bottle tips over and you happen to be lying there with your mouth open. That is Islamic beer."

He continued: "We must give Islamic finance a chance. We must keep it pure and start over again with companies, making sure all financing is compliant. The rest of the world has a lot to learn from shariah, but only if it remains consistent."

A speaker from the floor agreed. He argued that local investors in the Gulf had just become capitalistic, picking whichever type of financing happened to give greater returns. There was no concern over shariah compliance.

With the number of companies in trouble in the Gulf, particularly in Dubai, this could be the perfect opportunity for Islamic lawyers to get their way and restructure corporate debt along entirely Islamic lines.

My comment :

Islamic finance despite having its origins 1,400 years ago, was only commercially practiced in the last 3-4 decades ago. Yes, we must give it a chance - to purify and start again, while ensuring its compliance to shariah rom the very beginning and safeguarding it against manipulation and intervention from its conventional counterparts. This time around, there should be control and standardization - after all, Islam is one religion and there should only be one shariah guide (that should be obtained by consensus by all jurists) for the interest of the ummah.

GOLD DINAR

The idea of using Islamic gold dinar was first mooted in 2001 by Malaysia's ex-premier (Tun Dr Mahathir Mohammed). He proposed a new currency that would be used initially for international trade between Muslim nations, i.e., the islamic gold dinar and it was defined as 4.25 grams of 24 carat (100%) gold. He promoted the concept on the basis of its economic merits as a stable unit of account and also as a political symbol to create greater unity between Islamic nations. The purported purpose of this move would be to reduce dependence on the United States dollar as a reserve currency, and to establish a non-debt-backed currency in accord with Islamic law against the charging of interest.

The return to the gold standard is supported by many followers of the Austrian School of Economics, Objectivists and libertarians largely because they object to the role of the government in issuing fiat currency through central banks.

Few lawmakers today advocate a return to the gold standard, other than adherents of the Austrian school and some supply-siders. However, many prominent economists have expressed sympathy with a hard currency basis, and have argued against fiat money, including former US Federal Reserve Chairman Alan Greenspan (himself a former Objectivist). Greenspan famously argued the case for returning to a gold standard in his 1966 paper "Gold and Economic Freedom", in which he described supporters of fiat currencies as "welfare statists" hell-bent on using monetary printing presses to finance deficit spending. He has argued that the fiat money system of today has retained the favorable properties of the gold standard because central bankers have pursued monetary policy as if a gold standard were still in place.
The current global monetary system relies on the US dollar as a reserve currency by which major transactions, such as the price of gold itself, are measured. Currency instabilities, inconvertibility and credit access restriction are a few reasons why the current system has been criticized.

Taking the 1997 Malaysian economic and financial crisis as an example, it shows that the fundamental cause of business cycles, unemployment and inflation is rooted in some of the features of the present day financial system, namely fiat money, fractional reserve requirements and interests rates. It then shows how these features also indirectly bring about many social problems to such an extent that they threaten the culture and sovereignty of nations. Even Islamic banks cannot truly operate on Islamic principles in the present system.

Most Islamic financial products are tied to the market interest rate - the very thing they are supposed to avoid. A return to a gold payment system - like the Islamic dinar - could solve many of the woes of today's economic system. The return is not only desirable from the economic, political, social and religious perspectives, but also urgent in the present era of globalization and existing world recession, besides providing a conducive environment for Islamic economics, banking and finance to flourish.


The following articles are important to strengthen our understanding on the issues at hand :

1) Seriousness of Gold Dinar

2) Gold, Paper..Or Is There A Better Money?

STORY - AL ZUBAYR IBN AL-AWWAM

Remember my earlier post on the issue of Wadiah versus Qard? Well, my lecturer did provide a case study to substantiate the issue, which I have reproduced here :

Al-Zubayr Ibn Al-Awwam was a Companion of the Prophet Muhammad s.a.w., and one of the ten who were promised paradise. People always wanted to deposit their money with him (wadiah) for his honesty. If he took it as wadiah, his liability would be fault-based had the money been lost while in his custody - which means, that with no negligence or wongful doing on his part, the owner could not sue him for the loss. Neither could the owner sue him for loss due to factors beyond human ability to guard against natural hazards or disasters.

However, he could not utilize the wadiah for his own purposes as a trustee because wadiah is only for safekeeping.

What he did was asking the people to deposit the money with him as qard/loan instead of as wadiah. Now, his shariah legal position has changed to that of a borrower. As a borrower, he assumed the duty to repay the owner in whatever circumstances. He also assumed ownership over the money and risk of loss was transferred to him. As such, it was legitimate for him to utilize the fund for his own purposes.

It was reported that he managed to make nearly 3 million dinars in the venture : this was halal return based on risk for return principle.

Point to note :
Benefit to Al Zubayr (as borrower)
a) He can use the money any way he likes

Benefit to the lender (the depositors)
a) Full guarantee of payment by borrower (in whatever circumstances)

The Qard principle, if used in the Islamic banking system for savings and current accounts, proves to be a win-win situation for all parties.

**The ten people promised paradise (Arabic: Al-Asharatu Mubashshirun or Al-Mobashareen Bel-Jannah) are : The Rightly Guided Caliphs or The Righteous Caliphs ( transliteration: ) is a term used in both Sunni and Shia Islam to refer to the rightly guided Caliphs prophesised in the famous tradition, Hold firmly to my example (sunnah) and that of the Rightly Guided Caliphs (Ibn Majah, Abu Dawood). ...

1. Abu Bakr As-Siddiq (51 B.H - 13 A.H; 573 - 634 C.E)
2. Umar bin Al-Khattab (40 B.H - 23 A.H; 584 - 644 C.E)
3. Uthman ibn Affan (47 B.H- 35 A.H; 577-656 C.E)
4. Ali ibn Abi Talib (23 B.H - 40 A.H; 600 - 661 C.E)
5. Talha ibn Ubayd-Allah (28 B.H - 36 A.H; 596 - 656 C.E)
6. Zubayr ibn al-Awwam (28 B.H - 36 A.H; 596 - 656 C.E)
7. Abd al-Rahman ibn Awf (d. 31 A.H; 654 C.E)
8. Sa'ad ibn Abi Waqqas (23 B.H - 55 A.H; 600 - 675 C.E)
9. Abu-Ubaida ibn al-Jarrah (40 B.H-18 A.H; 584-640 C.E)
10. Said ibn Zayd (d. 51 A.H; 671 C.E)