VOL.2, NO.1
1434H (2013G)
CHALLENGES FACING ISLAMIC TRADE
FINANCE IN MUSLIM COUNTRIES
P
IN THIS ISSUE
Articles:
2
3
Reports:
9
Message from Director General, IRTI
- Challenges Facing Islamic Trade Finance in Muslim Countries
- Islamic Microfinance: Issues with Alternative Models
- Islamic Finance Country Reports (IFCRs)
- Risk Management in Islamic Finance
- Islamic Financial Sector Assessment Program (iFSAP)
- Strengthening Islamic Social Finance Sector: Zakat, Awqaf,
and Islamic Microfinance
- IRTI Annual Forum
- Mid-Term Review of the IFSI Development
P
Regions Under Focus
21
Publications
29
IRTI Working Paper
34
Book Reviews
At a Glance
36
39
- Shariah Ecosystem in Turkey
- Zakat and Awqaf Institutions in Turkey
- Overview of Turkish Islamic Banking Industry
- Microfinance Environment in Tunisia and Turkey
- The Emergence of Islamic Finance in Morocco
- Role of Islamic Finance in Development of IDB Member Countries
- Zakah Management for Poverty Alleviation
- ­A Theory of Profit Sharing, Income Inequality and Capital
Accumulation
- Research Activities at IRTI
- Training Activities at IRTI
29
ROLE OF ISLAMIC
FINANCE IN
DEVELOPMENT
OF IDB MEMBER
COUNTRIES
P
3
33
ZAKAH
MANAGEMENT
FOR POVERTY
ALLEVIATION
IRTI - The Islamic Research and Training Institute is an affiliate of the Islamic Development
Bank Group responsible for leading the development and sustenance of a dynamic
and comprehensive Islamic Financial Services Industry that supports socio-economic
development in Member countries.
www.irti.org
MESSAGE FROM THE DIRECTOR GENERAL
I
RTI has taken rapid strides since
its new strategy has been in place.
A major strategic move was the
formation of clusters around which
all research activities in IRTI are
organized. The formation of these
clusters around themes, such as,
Islamic banking, capital markets, trade
finance and comprehensive human
development has successfully ensured
a balance in IRTI’s contribution
towards growth of different sectors and
subsectors of the Islamic economy.
IRTI recognized early that the
Islamic social finance sector needs a
strong fillip and must not lag behind
the mainstream Islamic banking,
insurance and capital markets. To this
end, IRTI has embarked on producing
an annual Islamic Social Finance
Report focusing on the zakah, awqaf
and Islamic not-for-profit microfinance
sectors. The balanced approach is
also reflected in another of its new and
flagship product - the Country Reports
– produced in collaboration with
Thomson Reuters and CIBAFI, which
analyzes the Shariah Eco-system and
the zakah and awqaf sector in addition
to the mainstream Islamic financial
institutions in the country under focus.
Another dimension of IRTI strategy
has been to work with globally reputed
partners on projects of mutual interest
with strong research underpinnings.
IRTI and the Global Association of
Risk Professionals (GARP) have been
working on a joint pilot project to map
and measure risks in Islamic financial
instruments to develop practice-driven
learning material for risk professionals.
Recently, IRTI organized a consultative
meeting of experts to take the
project forward. IRTI also organized
another important meeting of experts
to discuss further progress in its
Islamic Financial Sector Assessment
Program (iFSAP) being undertaken
in association with the World Bank
and the IMF. Further, in collaboration
with Islamic Financial Services Board
Knowledge Review
(IFSB), IRTI has embarked on a
project involving the Mid-Term Review
of the Islamic Financial Services
Industry Development: Ten-Year
Framework and Strategies, which
was first published in March 2007.
This will bring significant benefits
to the Islamic financial services
industry, particularly in providing an
understanding of what the industry
has achieved so far and in guiding
on what areas need to be enhanced
in the Ten-Year Framework. Detailed
reports on all these initiatives are
included in this issue of the Review.
As you will find, the current issue of
the Review is different in significant
ways from its earlier versions with
expanded contents and a strong
emphasis on sharing of knowledge
and not of mere information about
various IRTI programs and activities.
You will find in this issue of the
Review, articles, book reviews and
detailed analytical reports that reflect
the priorities and strengths of various
IRTI professionals in diverse fields.
Let me take this opportunity to
thank the editorial team as also
all contributors to this issue of the
Review. At the same time, let me
also invite you to share your views
and opinions about how to further
improve its value to the reader(s). Your
comments are a source of inspiration
and of immense value to us.
Prof. Dr. Mohd. Azmi Omar
Director General, IRTI
Islamic banking, capital
markets, trade finance
and comprehensive
human development has
successfully ensured
a balance in IRTI’s
contribution towards
growth of different sectors
and subsectors of the
Islamic economy.
IRTI recognized early that
the Islamic social finance
sector needs a strong fillip
and must not lag behind
the mainstream Islamic
banking, insurance and
capital markets.
ARTICLE
CHALLENGES FACING ISLAMIC TRADE
FINANCE IN MUSLIM COUNTRIES
By: Dr. Abd elrahman Elzahi Saaid Ali,
Senior Economist, IRTI
T
he recent development of financial
technology and transportation has
facilitated the movement of capital
and investment between countries. This
phenomenon is called international
finance in which countries of high financial
surplus lend or invest in enterprises of
other countries that are short in funds.
The technological era has also made the
movement of goods and services among the
nations easier than before. These recent
developments have made international
trade to be one of the most essential tools
for countries’ integration, and economic
prosperity. Despite these developments
international trade finance is facing the
challenges of liquidity shortage due to the
recent financial crisis. This crisis caused
by the collapse of the US banking system,
weakened the global financial system and
limited its ability to grant more conventional
financing. The problem of promoting
international finance has become even
more severe due to the current developed
euro-zone debt crisis. The ongoing eurozone debt crisis has also shrunk the ability
of banking system to grant lending. It has
pushed banks to cut lending and hence
slowing down the exports in Europe and
the rest of the globe including China and
Asia. In addition to that the euro debt
crisis eroded the euro zones countries’
competitiveness due to the widening of
the deficit despite of the capital inflow
from other euro zones countries, and
eventually created more difficulties for
the importers to finance their settlement.
These financial and debt crises have
reduced the confidence of the international
market players on the conventional credit
system and highlighted the importance
of Islamic trade financing as a legitimate
alternative not only for Muslim countries
but also for non-Muslim ones looking for
diversification. While these challenges
have highlighted some short-comings for
the conventional finance, these have given
more opportunities for the growth of Islamic
financing in its home countries as well as at
the global level.
Islamic Trade Financing Instruments
In trade buyers would like to avoid paying
cash for their purchases. Hence they always
search for pre-shipping financing which is
necessary for them to acquire raw materials
and pay for other pre-shipping trade
activities. Likewise, the sellers or exporters
also need to know the best possible way to
get short term financing to settle their postshipping expenses until they are receiving
the payment for their goods and services.
For Islamic trade finance to play effective
role in promoting business growth, it must
develop effective trade financing methods
and instruments to provide the traders with
best pre and post-shipping financing.
Many Islamic trade financing instruments
have developed to facilitate pre and postshipping trade financing services including
providing enterprises with required working
capital. Most of the businesses in Muslim
countries are of small scale and hence
might badly need to use these Islamic
instruments either to increase
their working capital, manage
their trading risk or to secure
settling of their payment.
The availability of such
Islamic instruments might
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Islamic Research & Training Institute
help in solving the problems arising from
their budget constraints. The common
Islamic financial instruments currently used
in trade financing can be classified into
more than one groups. The first essential
group is the Islamic trade financing
instruments that helps in providing working
capital, pre-shipping and post-shipping
financing such as Istisna’a, Murabahah,
Ijarah Muntahia Bi al-Tamlik, Salam,
Musharakah, Mudarabah, Installment Sale
or Bay’ Bithaman Ajil (BBA). Another group
of Islamic trade financing instruments are
that adopted by the traders to transfer
away the economic, trade and political risk
between the trading partners which include
the Islamic Cross Currency Swap (ICCS),
Islamic insurance, bank guarantee and
Islamic documentary of collections such as
Inward Bills for Collection-i (IBC-i), Outward
Bills for Collection-i (OBC-i), Letter of
Credit-i (LC-i) and Trust Receipt (TR-i).
However, despite the considerable
developed Islamic financial instruments
in Muslim countries to promote reliable
Islamic trade financing, the Islamic
based lending as proportion of GDP in
OIC countries is very low. This might be
attributed to other obstacles related to
the trade infrastructure development and
Islamic financial infrastructure development
in these countries.
Trade Infrastructure Development
Challenges
Trade infrastructure development
represents the most critical element for
economic growth and hence for trade
financing in Muslim counties. The rail
network, the most cost-effective in-land
transportation, carries only four percent
of the total cargo, At the same time road
transportation is not as good as the railways.
The high costs of transportation and
energy lead to lower energy consumption
particularly in the production, which also
raise its cost and reduce the country’s
competitiveness. The improvement of
the warehouses is a priority requirement
for Islamic trade financing. Unlike its
conventional counterpart, Islamic trade
finance cannot be effective without certain
type of infrastructure, such as, availability
Knowledge Review
of the good warehousing facilities. That
is because many Islamic financing modes
such as Salam, Muzar’ah, Murabahah,
Mudarabah, etc. depend on financing the
product in kind, which is very different
from debt financing that exists in the
conventional banking system.
The regulation and the effective
implementation of trade rules (trade
facilitation) is another trade infrastructure
challenge facing Islamic trade financing in
these countries. Trade facilitation means
the systematic rationalization of procedures
and documentation for trade that minimize
the transaction costs while maintaining an
effective level of government control. The
existence and efficient implementation
of Islamic rules and regulations that
associated with Islamic trade finance
represents a big constraint for the Islamic
financial institutions in most Muslim
countries. Fliess & Busquets (2006) found
that procedural barriers to trade such as
arbitrary customs valuation, subjective
interpretations, and arbitrary decisions of
clearance goods through customs, technical
barriers, laws and regulations regarding
the various rules of trade represent the
major obstacles for the development of
trade in Muslim countries. Oker (2002) has
also showed that OIC member countries
particularly those in Africa with vast land
borders are lacking trade infrastructure and
resources and accordingly, they depend
on high custom duties in their economic
policies and have developed extensive
informal economic sectors. Therefore,
to promote Islamic finance in a smooth
and cost effective manner the Muslim
countries need to replace trade facilitation
with the traditional trade control policies.
Trade facilitation might help in eliminating
trade barriers, bureaucratic and regulatory
hindrances to trade and eventually
constrain its potential development.
Islamic Financial Infrastructure
Development Challenges
In order for the borrowers to have easy
and smooth access to Islamic financing,
Muslim countries are required to develop
an adequate Islamic financial infrastructure.
There are many factors influencing
the development of Islamic financial
infrastructure. Among these factors are
efficient supervision, regulations, well
trained Islamic banking professionals and
Shari’ah supervisors and Shari’ah audits
experts. Prior evidence has shown that the
impact of financial infrastructure on trade
is not less than the trade infrastructure
development barriers. Moreover, the
affordability of Islamic financial instruments
highly depends on the level of Islamic
financial infrastructure development. In
order for Islamic trade financing to be
effective and to have significant impact on
trading, Muslim countries need to provide
enabling macroeconomic environment for
Islamic trade financing by developing sound
financial policies, good governance, and
strong Islamic banking system.
Islamic trade finance accessing will
also be determined but not limited
to the current trade performance of
trade, foreign resources, the degree of
the indebtedness of these countries to
external parties, exchange rate policies
Trade infrastructure
development represents
the most critical element for
economic growth and hence
for trade financing in Muslim
counties. The rail network,
the most cost-effective inland transportation, carries
only four percent of the total
cargo, At the same time road
transportation is not as good as
the railways. The high costs of
transportation and energy lead
to lower energy consumption
particularly in the production,
which also raise its cost
and reduce the country’s
competitiveness.
and their legal environment. The current
business performance is very essential
for the development of Islamic financial
infrastructure. The business performance
might be determined by the level of the
countries regulations relating to labor
wages, fiscal policies, monetary policies
impacting inflation and uncertainty. There
is a need for Muslim countries to adopt
very effective and inclusive Islamic legal
framework which incorporates accounting
standards, corporate governance and
bankruptcy laws.
Muslim countries have to develop Islamic
legal and regulatory system to encourage
promoting Shari’ah based trade financing
system. The reality is that the majority
of these countries is adopting either
conventional laws or mixed laws. The IDB
member countries partnership strategy
report on Turkey showed that the trade
related regulatory factors such as the
absence of specific accounting standards
and the non-existence of the collaterals with
the banking systems weakened the trade
financing infrastructure and have negatively
influenced the financial infrastructure,
raising the risk of lending and preventing
small enterprises from accessing finance in
Turkey.
The availability of foreign resources in form
of FDI and grants would improve the level
of domestic business, help in technology
transfer, accessing of large markets
and hence, positively influence Islamic
trade finance and improve the country
competitiveness. Past studies have found
that most of the IDB member members are
not strong in attracting enough FDI and
have recommended that policy decisions
must be taken to give more incentives to
attract FDI to Muslim countries. Therefore,
Muslim countries need to exert more efforts
and implement reasonable measures to
attract more external financial resources
to improve Islamic trade financing
infrastructures that lead to economic
growth. The external debt also has a
negative impact on Islamic trade financing
and has drained the local finance from
most of the Muslim countries. Evidence
has proved that external debt represents
one of the bigger challenges to some
Muslim countries. Hamour (2000) showed
that large group of OIC countries faced
serious problems with their debts as well as
shortage foreign currency. The shortage
of foreign currency deteriorates the value
of the domestic currency and constrains
the country’s ability to import goods
and services. Thus the severe external
debts and shortage of liquidity in the
poorest Muslim countries might indirectly
constrain the development of Islamic
trade finance infrastructures and bring
unfavorable business environment for the
trading firms to grow. Furthermore Islamic
trade financing will be influenced by the
exchange rate policies. Muslim countries
need to develop appropriate exchange rate
policies for better Islamic trade financing
climate. Overvalued exchange rate leads to
a reduction in exporters’ competitiveness
and hence their ability in accessing the
foreign markets.
In addition to the above, Muslim countries
also need to establish Islamic trade related
intuitions to support Islamic trade financing
in general. Many of them are used to keep
almost all the ownership of the trade related
financial institutions, such as, export credit
insurance and export- import banks in the
hands of the governments. Moreover, some
governments may use these trade-related
institutions to regulate the trading sector
and hence create additional hindrances for
Islamic trade financing to play appropriate
role to promote trading business. The
trade related institutions may also include
central banks, ministries of finance and
ministries of trade. The central banks must
promote Islamic trade finance through the
tools of Islamic financing supervision and
regulations that have been developed by the
ISFB as well as through the regulations of
the foreign currencies. Ministries of finance
on other hand might play an essential
role in Islamic trade development through
providing tax incentives to encourage
particular trade sector such as SMEs. Other
similar trade related institutions which
are likely to influence the development of
trade finance are the ministries of trade
which are responsible for regulating and
implementation of country’s trade policies.
To achieve better Islamic trade financing
infrastructure development, Muslim
countries need to develop highly efficient
and effective trade related institutions and
strictly implement the already developed
Islamic financial supervision and regulatory
standards. Finally, the availability of highly
qualified staff in these Islamic trade-related
financial institutions, adequately skilled
workers and entrepreneurs might also
represent one of the challenges to the
Muslim countries. There is a huge shortage
in the high qualified staff on Sharia’h based
financial services.
To sum up, this review investigated the
challenges facing Islamic trade finance
in Muslim countries. Trade represents
one of the important drivers of growth
of the economy as well as an essential
labor intensive sector that might help
in raising income levels and reducing
the high unemployment rates in most
of Muslim countries. The results of the
review indicated that Islamic trade finance
faces many challenges. Weaknesses
in trade infrastructure development,
trade facilitation and the Islamic finance
infrastructure development have created
an unfavorable environment for Islamic
finance to be easily accessed by the trading
enterprises. Accordingly the trading
companies in these geographical areas
have become less competitive due to the
high financing costs, traditional trade
policies, high tariffs and taxes, compared
to international standards. Since trade
can be one of the best drivers of economic
growth, can provide more jobs and raise the
standard of living in the Muslim countries,
both Muslim governments and IDB as a
multilateral bank, need to exert more efforts
to provide an enabling environment for
Islamic trade finance.
References
1.
Mohieldin M, Iqbal Z., Rostom A, Fu, X, The Role
of Islamic Finance in Enhancing Financial Inclusion
in Organization of Islamic Cooperation (OIC)
Countries, Islamic Economic Studies, Vol.20, No.2,
Dec.2012, Pg 55-120.
2.
ESCAP, Trade Facilitation Handbook (2002),
(www.unescap.org).
3.
United Nations, International trade center (2005),
Trade Finance Infrastructure Development
Handbook for Economies in Transition, ST/
ESCAP/2374.
4.
IDB Member Countries Partnership Strategy
Document on Turkey, accessed from http://
www.isdb.org/irj/go/km/docs/documents/
IDBDevelopments/Internet/English/IDB/CM/
Publications/Parnership_Strategies/Turkey.
5.
IDB Annual Report 1425H, Economic Cooperation
among Member Countries, Chapter two.
6.
Dabour. N. Md. (2000), The Role of Foreign
Direct Investment (FDI) in Developing Growth
in OIC Member Countries,
Journal of Economic Cooperation,
21, 3, (2000) 27-55.
7.
Hamour, EL-Waleed A., Debt
Restructuring in OIC Countries,
Journal of Economic Cooperation
21,3 (2000), 57-97.
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Islamic Research & Training Institute
loans, with loan sizes linked to the
performance of village bank members in
accumulating savings. As a village bank
accumulates sufficient capital internally, it
graduates to become an autonomous and
self-sustaining institution.
ARTICLE
Islamic Microfinance:
ISSUES WITH ALTERNATIVE MODELS
By: Dr. Mohammed Obaidullah,
Senior Training Specialist, IRTI
T
he Islamic microfinance scene is
now characterized by varied models,
which may be broadly divided into two
categories. First, one finds models that exist
in both conventional and Islamic domains.
The Islamic experiments are essentially
replications of successful conventional ones
with Shariah-compliant products replacing
interest-bearing products. Second, there
are models that are essentially indigenous
and took shape as a benevolent response to
the problem of poverty.
Islamic Replications of Conventional
Models (IRCMs)
Joint-Liability-Groups: More popularly
known as the Grameen model, it has
witnessed replications far and wide and
also in the Islamic domain. The key features
of this model are group financing and
graduated financing. The notion of joint
liability replaces collateral as a mechanism
to mitigate risk of default and delinquency.
Among the notable replications, the Rural
Knowledge Review
Development Scheme of the Islami Bank
Bangladesh stands out. It uses a microcredit product based on bai-muajjal
(deferred sale) that costs far less than
comparable conventional products.
Finance-Plus: More popularly known as the
BRAC model, it has witnessed replications
in both conventional and Islamic domains.
The model recognizes that micro-enterprise
development and wealth creation in the
micro-economy requires much more that
provision of finance. It seeks to provide a
comprehensive range of support to microentrepreneurs to ensure the success of
their ventures. Among the notable Islamic
replications, is the Bank Al-Usrah, a
microfinance bank based in Sudan.
Village-Banks: The model involves an
implementing agency that establishes
individual member-based village banks
and provides “external” capital for onward
financing to individual members. A bank
repaying in full is eligible for subsequent
Credit-Unions: A credit union is based
on the concept of mutuality. It is in the
nature of a financial cooperative owned
and controlled by its members. It mobilizes
savings, provide loans for productive and
provident purposes and have memberships
which are generally based on some
common bond. Credit unions or financial
cooperatives are quite popular in Asia.
Due to relatively lax regulatory framework
applicable to cooperatives, such institutions
have been established in countries like
India, which otherwise restricts Islamic
finance in mainstream banking and
financial sector.
ROSCAs: A Rotating Savings and Credit
Association or ROSCA is a group of
individuals who agree to meet for a defined
period in order to save and borrow together.
Each member contributes the same amount
to a common pool or pot at each meeting,
and one member takes the whole sum
once. As a result, each member is able to
access a larger sum of money during the
life of the ROSCA, and use it for whatever
purpose she or he wishes. ROSCAs are
simple and transparent (every transaction is
seen by every member during the meetings
and since no money has to be retained
inside the group, no records have to be
kept) and therefore, popular in communities
with low levels of literacy and weak systems.
A conventional ROSCA usually involves riba
when the recipient of the pot is determined
not by lot but sold to the lowest bidder.
Islamic ROSCAs exist, but are rare.
Pawnshops: Pawnshops are traditional
collateral-based mechanism for borrowing.
The quantum of loan is tied to the value
of the asset offered as collateral. While
conventional pawning involves interest,
A Village-bank repaying in
full is eligible for subsequent
loans, with loan sizes linked
to the performance of
village bank members in
accumulating savings. As
a village bank accumulates
sufficient capital internally,
it graduates to become an
autonomous and selfsustaining institution.
Islamic pawnshops charge custodial fees
for safekeeping of the collateral. Islamic
pawnshops popularly exist in South East
Asia.
Issues with IRCMs
Except for ROSCAs, the other models
mentioned above are part of the formal
financial system. Most of such programs
use simple and transparent financing
mechanisms and standardized procedures
& documentation. These are also
characterized by higher staff efficiency
and professionalism. These seek to benefit
from their accumulated wisdom and
replicate best practices from conventional
microfinance.
The Islamic replications of conventional
microfinance unfortunately bring with
them the weaknesses of the parent model.
The strategy of retaining the overall model
intact while substituting the interestbased products with Shariah-compliant
ones like murabaha has major pitfalls as
discussed earlier. In addition to breakdown of conditions relating to sequencing
of the contracts, thus pushing the MFI’s
gains beyond the boundaries of legitimacy,
murabaha also implies lesser emphasis
being accorded to economic viability of the
micro-enterprises. Similar to conventional
microfinance, such Shariah-compliant
murabaha-centric microfinance involves
high cost and hence, is not meant for the
ultra-poor. It perpetuates debt-culture and
strikes at the roots of family cohesion with
its “women-only” approach.
Indigenous Islamic Models (IIMs)
Qard Hasan Funds: Qard Hasan Funds
are operating in the Iranian financial
sector for over three decades with their
current number estimated at more than
3000 funds. These are essentially nonprofit institutions in which members of
a community set up a savings and loans
society. Members deposit their savings
with the fund (give qard to the fund) in
order that other needy members may be
extended a qard from this fund. In line with
the rules of fiqh governing the contract of
qard, members are free to withdraw some
or all of their deposits if and when they
want (or at short notice). As the members
are known to each other, there is less room
for default on loans. The operations of the
society are run by volunteers, using some
free office space. Other overheads, such
as, costs for stamps, stationery, transport,
communication and so on are covered,
in some Qard Hasan Funds, through
engagement of funds in business activities.
In most of the others, the borrowers are
charged the actual costs or less.
Bayt al-Mal wa-al-Tamwils (BMTs): Bayt
al-Mal wa-al-Tamwil (BMT) is an indigenous
model of Islamic microfinance in Indonesia.
Translated into English, the house of
(charity) funds and (for-profit) financing is a
financial cooperative. Conceptually, BMT is
deemed to be inspired by the institution of
Bayt al-Mal existing in early days of Islam.
Its uniqueness is said to lie in the marriage
of two distinct institutional models. The first
is Bayt al-Mal or a pool of various kinds of
Islamic charity funds, traditionally referred
to as zakah-infaq-sadaqah-waqf funds
(ziswaf). The second is Bayt al-Tamweel or
a pool of funds directed at profit-seeking
financing using Shariah-compliant modes.
The latter comprises funds in the form
of founder equity, micro-savings and
investment deposits. A more recent avatar
of this institution is Bayt al-Mal wa-alTamwil wa-al-Ta'min (BMTT) with addition
of micro insurance (tamin) as a third line
of activity. The development of Islamic
Saving and Loan Cooperatives or BMTs in
Indonesia has been impressive. According
to a study by the Centre of Business
Incubation and Small Business (PINBUK)
the number of BMTs in Indonesia stood at
over 4000 at end-2007 with assets of about
USD150 million (PINBUK, 2008).
Zakah & Sadaqah-Based Institutions:
Rooted in Islamic charity, such institutions
have existed since the advent of Islam
and are found in all Muslim societies.
However, these lie mostly in the informal
sector with the exception of a few recent
initiatives that have graduated as distinct
models, are part of the mainstream and
are also being replicated elsewhere. The
first is the economic empowerment model
developed and practiced by Dompet
Dhuafa in Indonesia. The model involves
intense involvement and participation by
the organization, especially in the initial
stages of intervention in formation of groups
and provision of technical, managerial and
(low-cost) financial services. It also involves
a high degree of community participation,
development of local cadres and creation
of a local member-based organization to
provide sustained assistance in meeting
the challenge of poverty. A second model
that has caught the attention of many is
Akhuwat in Pakistan. This model aims
to institutionalize charity, good giving
and voluntarism and thereby, provide
cost-free financial services to the poor.
According to recent estimates, over onethird of operational cost of the organization
is absorbed by donations made by its
own past clients who have successfully
progressed out of poverty.
Issues with IIMs
A very strong positive with Dompet
Dhuafa and Akhuwat models is their
ability to demonstrate that charity can
be a dependable and sustainable
source of raising funds. Additionally the
institutionalization of voluntarism along with
other creative strategies has the effect of
drastically cutting down operational costs.
Thus, microfinance is now provided at low
or zero costs, making it affordable to the
poorest of the poor. Further the high degree
of involvement of local communities as in
case of the Dompet Dhuafa model leads to
true and sustainable economic and sociopolitical empowerment.
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Islamic Research & Training Institute
While the above initiatives have distinct
elements of superiority over the many
conventional high-cost microfinance
providers, the fact remains that most other
indigenous institutions do not share in
their dynamism, professionalism and good
governance. A large majority of charitybased Islamic institutions operate in the
informal sector. Many of these institutions
are characterized by lack of transparency,
poor accountability and governance
structures, low operational efficiency
and consequently, high operational
costs. They report practices that provide
encouragement to continued dependency
on charity. Further, most of them have poor
linkage with the formal financial system
and operate in a regulatory vacuum. A case
in point is the Indonesian BMT that does
not have a uniform legal status. Most small
BMTs function as informal entities without
any distinct legal form. Most of medium
and large BMTs are registered as Shariah
Cooperatives (KJKS) with the Ministry of
Cooperatives and SME. Since the rationale
underlying the creation of a cooperative is
to provide services to its members, the law
of cooperatives is not very demanding in
terms of accountability, transparency and
governance of the institutions and many are
able to evade compliance on account of lax
supervision.
Combining Philanthropy with Profits
Islamic replications of conventional
microfinance as well as the indigenous
models are characterized by unique
positives and negatives. The former
involves a market-driven for-profit approach
while the latter is rooted in philanthropy
and benevolence. Can these two distinct
approaches be combined in a composite
model? Can such a composite model retain
the efficiency and transparency of the
former and the low-cost feature of the latter?
Theoretically of course, this is a possibility.
In such a model, zakat and charity funds
may be applied for provision for basic
consumption needs of the poor. Such funds
may also be applied for enhancement of
Knowledge Review
skills and provision of other services that
the poor need. The organization also raises
investment funds that are applied for
provision of Shariah-compliant microfinance
on a for-profit basis. Indeed, a few recent
experiments have important lessons. A case
in point is the Deprived Families Economic
Empowerment (DEEP) project operational
in Palestine. The project envisages creation
of an endowment fund in the framework of
waqf that could provide for a sustainable
source funds for provision of safety net. The
Indonesian BMTs are also clear examples
of composite models.
Mixed models come with their pros and
cons. On the positive side, these models
could combine access, sustainability and
affordability considerations, combine
mission-based approach with market-based
instruments resulting in use of best-fit
instruments and modes and therefore,
could go for flexible pricing and product
design. On the flip side, however, such
models may involve serious problems due
to conflicting organizational culture and
conflicting policy and regulatory framework.
As has been observed in case Indonesian
BMTs, most of them have over time,
preferred to do away with their philanthropic
aspirations (as house of charity) and
concentrated on for-profit murabaha
financing (as house of financing). The twintrack nature of the model seems to have
been abandoned for all practical purpose.
Last, but not the least, combining Islamic
charity, especially zakat collection and
application with for-profit financing involves
serious transparency and governance
issues associated with commingling of
funds. A major condition with raising zakat
funds requires such funds to be directly
channeled into the hands of the eligible
beneficiaries or the poor and cannot simply
be credited to the organization capital.
In the absence of relevant accounting
standards and regulatory norms to ensure
the above, the Shariah scholars have
generally discouraged the use of zakat
funds in economic empowerment initiatives
preferring the direct channels of distribution
for consumption purposes instead.
It appears that successful philanthropy
and cooperation-based models of Islamic
microfinance are largely micro-level
interventions without similar initiatives
at the meso or macro levels. The
operationalization and mainstreaming of
such models though clearly desirable, face
serious challenges. At a meso level, there
is an urgent need for developing relevant
accounting and governance standards
for all the key modes, e.g. zakat, sadaqa,
waqf, qard and kafala. There is also a need
to develop quality education and training
programs for the sector. Further, most
Muslim societies have archaic, if at all,
regulatory frameworks for zakat, waqf and
other Islamic nor-for-profit institutions. An
enabling macro-economic environment is
a sine qua non for development of such
models of intervention.
Islamic replications of
conventional microfinance as
well as the indigenous models
are characterized by unique
positives and negatives. The
former involves a marketdriven for-profit approach
while the latter is rooted in
philanthropy and benevolence.
Can these two distinct
approaches be combined in a
composite model? Can such
a composite model retain the
efficiency and transparency
of the former and the lowcost feature of the latter?
Theoretically of course, this is
a possibility. In such a model,
zakat and charity funds may
be applied for provision for
basic consumption needs
of the poor.
REPORT
ISLAMIC FINANCE COUNTRY REPORTS
A Joint Initiative by IRTI, CIBAFI and Thomson-Reuters
By: Prof. Dr. Mohamed Azmi Omar,
Director General, IRTI
S
ince its Inception in 1981, the Islamic
Research and Training Institute
(IRTI) has been one of the major
institutions contributing to the development
and dissemination of knowledge in Islamic
economics and finance through research,
advisory, capacity building and provision
of information services. Today IRTI is even
more ambitious in its mission, aiming to
be the global knowledge center for Islamic
economics and finance by 1440H. The
different of IRTI activities have consistently
contributed, whether directly or indirectly,
to the development of the Islamic financial
services industry (IFSI) which has
witnessed a steady and strong growth in
terms of assets, mobilization of savings and
diversification of investments.
The recent financial and economic crises
and the political-social transformation
in many countries after the Arab Spring
have accentuated the interest in the IFSI.
In this context, an increasing number
of policymakers, practitioners and
researchers are looking for credible and
rigorous information and analysis about
the available opportunities of the IFSI in
different countries, especially those where
governmental incentives to the development
of this industry are increasing. For this
reason IRTI has established a long term
strategic partnership with CIBAFI and
Thomson Reuters, two other institutions
which having complementary expertise,
in order to enhance the development
of the IFSI. One of the outputs of this
partnership is the Islamic Finance Country
Report (IFCR) which aims to provide
comprehensive coverage of the Islamic
finance industry’s characteristics in each
of the OIC countries with the final target to
attract the domestic and foreign investors
to the existing opportunities of the IFSI that
match the economic development needs of
the countries. The three firsts reports cover
Tunisia, Turkey and Egypt and the four
division of IRTI are committed to contribute
by in-depth and high quality analyses to
these reports.
The first report dedicated to Tunisia was
launched on 13th of June in Tunis during
a special workshop “Tunisia’s entry to
Islamic Finance: Cautiously Optimistic”
organized by Thomson-Reuters and hosted
as a parallel event of the Tunisia Investment
Forum 2013 “New Tunisia: towards a
new investment sustainable strategy”
(13th-14th June). The launch session of
the report was inaugurated by Mr. Elyès
Fakhfakh, Tunisian Minister of Finance and
Dr. Slim Besbes, Minister Advisor to the
Prime Minister in Charge of Government
Finance. After the two keynote speakers,
Dr. Ahmed Ibrahim Iskanderani, Director
of Research and Advisory Department,
IRTI, presented a speech about IRTI, its
activities and involvement in Tunisia. The
rationale of the collaboration between
IRTI, Thomson Reuters and CIBAFI, was
presented by Dr. Mahmoud Sami Nabi,
Senior Researcher Economist, IRTI, who
talked about the objectives of the new
series of Islamic Finance Country Reports,
specifically linking the development of the
Islamic Financial Services Industry in OIC
countries to the economic development
priorities. The launch session was
attended by around 300 participants from
different backgrounds (policy makers,
entrepreneurs, academicians, financial
analysts, journalists,…). The event was also
well covered by the media (national radio,
television, press).
It is also to note that a soft launch of the
Islamic Finance Country Report-Tunisia
2013 took place on 11th of June during
the first day of the Islamic Finance Days
of Zeitouna Bank (11-15th June). The soft
launch session was attended by around
200 participants and inaugurated by a
speech from the Dr. Mahdi Mabrouk,
Tunisian Minister of Culture. It is to note
that the two events (Tunisia Investment
Forum (13-14th June) and Islamic Finance
Days of Zeitouna Bank (11-15th June)
were organized under the patronage of
HE Mr. Ali Laarayedh the Tunisian Prime
Minister and in presence of HE. Ahmed
Mohammed Ali Al-Madani
the president of IDB Group.
The English and French
versions of IFCR-Tunisia
2013 will be available for
download at www.irti.org.
9
Islamic Research & Training Institute
Consultative Meeting on
RISK MANAGEMENT IN
ISLAMIC FINANCE
By: Dr. Salman Syed Ali, Senior Economist and
Dr. Hylmun Izhar, Economist, IRTI
in the first consultative meeting (held on
10 December, 2012) or participated in the
survey (conducted prior to the meeting) will
be invited to join. The session-wise detailed
report is provided hereunder:
The opening session was addressed by
Prof. Dr. Azmi Omar (Director General,
IRTI), Mr. Richard Apostolik (President,
GARP), and Dr. Ahmad Jachi (Chairman,
Islamic Finance Group at GARP). The
speakers welcomed the participants and
talked about the significance of the present
consultative meeting. The also provided the
background of the project.
Survey Findings
R
isk management is one of the
important issues in Islamic finance.
Due to the challenge of aligning
risk management principles with Shariah
requirements, there is a need for risk
professionals to systematically understand
the unique characteristics of Islamic
financial products.
In 2011, IRTI and Global Association of
Risk Professionals (GARP) commenced
a discussion about carrying out a joint
pilot project to map and measure risks
in Islamic financial products to develop
practice driven learning material for risk
professionals. An MoU was also signed
earlier between IRTI and GARP to hold
a consultative meeting for face to face
discussion with the industry players. In this
context, this consultative meeting involving
invited industry players and regulators was
held with the main objective to exchange
ideas, develop a general consensus
among Islamic finance experts and peers,
and ultimately help in determining the
priority areas in risk management for
Islamic financial products and services.
The meeting was attended by financial
institutions, central banks, Shariah scholars,
and academia and an e-mail based survey
was also conducted prior to the meeting.
The Consultative Meeting on Risk
Management in Islamic Banking took place
on 10 December 2012 at IDB Headquarters
from 9:00 to 3:00pm. It was inaugurated
by Director General IRTI, President GARP
and Chairman of Islamic Finance Group at
GARP. The meeting was attended by over
30 participants from 13 banks and financial
institutions including the World Bank, IDB,
and GARP. The meeting was first presented
Knowledge Review
with the findings of the survey. It was
followed by general discussion of the issues
in which plenty of opportunity was provided
to the participants to speak and voice their
opinions and guide us in determining the
priority focus areas and the methodology
of the project. In the last session some
concrete proposals to move forward were
finalized.
The participants agreed on the need to
create material that will map, measure,
and provide methods to manage the
risks in Islamic financial instruments (or
modes of Islamic finance) rather than
products – since numerous products
can be created by combining various
instruments. For this purpose a pilot project
will be initiated by IRTI and GARP on risk
mapping measurement and mitigation of
murabahah instrument only. The scope can
be extended to other instruments after the
successful conclusion of the pilot project.
The participants of this consultative meeting
showed their willingness, without any
binding commitment, to help in the project
by sharing information, providing advice
and insight for the successful completion of
the pilot project.
The way forward is for IRTI and GARP to
start the project under their joint name
and controlled by a Steering Committee
comprising of experts from these two
organizations. Further, for efficiency in
work, a Sub-Committee for consultation
with the Islamic finance industry will
be formed comprising of 3 to 4 Islamic
financial institutions, along with IRTI,
GRMD, FPDC, FPP of IDB and GARP. To
maintain transparency of the project some
institutions among those who participated
In an attempt to make the consultative
meeting more productive, a survey
comprising a set of questions which
focused on general issues in risk
management, risk classification,
governance and risk control system,
Shariah issues in risk management,
regulatory and supervisory framework, and
macro and financial stability; was circulated
to more than 50 institutions and individuals
(including the invited participants to
the meeting) three months before this
consultative meeting. The respondents
of the survey ranged from senior Islamic
financial practitioners, Shariah scholar
academics and regulators from leading
institutions and organizations from Asia,
Middle East, USA and the UK. The
response rate was 34%. The survey helped
us focus on specific sets of questions for
each session in the consultative meeting,
identifying and prioritizing particular areas
of concern to be addressed.
The results will also become useful in
guiding the project in developing standard
practice-driven approaches for identifying,
assessing, measuring, monitoring, and
controlling the risks associated with Shariacompliant financial products.
The survey results were presented in this
session of the meeting by Dr. Hylmun.
The results revealed that while there
is a general consensus for the need of
a conceptual alignment between risk
management principles and Shariah
requirements, the importance of focusing
on developing acceptable instruments
and mechanism for risk mitigation is
much needed. Though there is not much
difference on the definition of risks between
Islamic and its conventional counterpart;
however, the nature and sources of risk
can be substantially different due to
operational differences and various Shariah
restrictions. Therefore, a modification in the
identification, measurement and mitigation
methods may be required.
The survey also suggests that the most
dominant risk in Islamic banking is credit
risk; hence, the development of credit risk
management in Islamic banking should be
prioritized.
On Shariah issues related to risk
management, contrary to what has
been perceived as to be the divergence
on such issue between Asia and GCC; the
survey, surprisingly shows that there is a
much similarity on perception of questions
and issues between the two regions.
Nevertheless, all the respondents
acknowledge the need to develop a proper
legal environment to support sound risk
management in Islamic banking.
The Consultation Sessions
The participants had a clear realization that
there is a strong need for guidelines and
technical notes that can translate Islamic
financial principles and the standards
pertaining to risk management into rules
and manuals. This was expressed very
clearly by the participants.
The discussion flowed from this realization
and covered many diversified issues of
risk management in the application of
Islamic finance. These risks originate
from sources that are internal as well
as external to Islamic finance industry.
However, the main focus of the discussion
remained on determining the priority as
well as importance of the type of risk or
type of financing instruments that should
be selected for a pilot project on risk
management. Dr. Salman moderated the
discussion of the session summarized
below.
Following issues were discussed in the
second half of Session-2:
Risk professionals apply their techniques
learned under conventional system to
Islamic finance. Hence, there is too much
carry over from conventional finance
training to Islamic banking and finance. The
need is to crystalize the key issues of risk
management and identify which methods
can be and which methods cannot be
carried over to Islamic banking and finance.
Then the next step would be to develop
manuals to assess the risk of various
products.
One opinion was to give priority to clarifying
accounting principles and their application
to various Islamic modes of financing
because most of the risk in Islamic banking
and finance is emanating from this route.
Basel standards and rules treat banking
and trading books different from the Islamic
finance perspective. Although AAOIFI has
come up with accounting and Shariah
Standards they are not yet adopted in many
countries hence different Islamic financial
institutions are using a variety of accounting
practices thus creating a confusion and risk
in itself.
Among the risks that are important for
Islamic finance, credit, operational and
legal cum shariah interpretation risks were
highlighted during the discussion. Market
and liquidity risks were also discussed.
It was felt that all these risks have some
common and some distinct elements
between Islamic and conventional finance.
For example, credit risk in murabahah,
istisna’a, ijarah etc., (fixed obligation
transactions) have many commonalities
with credit risk in conventional loan
transactions. However, there are major
differences in the philosophy, operative
principles and ownership transmission
between Islamic modes and the
conventional loans that bring in the
differences in credit risk, both in its level
and its sub-categories.
Likewise, operations and procedures for
similar instruments differ across Islamic
banks. The operational risk and the
procedural differences are also factors in
emanation of credit risk. Since any single
risk category cuts commonly across many
Islamic finance instruments, one possible
approach to could be to take one risk
category at a time and develop the requisite
manual for that risk.
However, this approach was debated out
and dropped in favour of selecting one
financial instrument at a time and mapping
all kinds of risks associated with it along
with devise methods of measurement and
mitigation of those risks for that instrument
category.
There are several advantages of instrument
by instrument approach. First, each
Islamic finance instrument has specific
genome or its own DNA, thus many
bank/brand specific products can be
analyzed under more general instrument
specific characteristics. Second, issues
of asset ownership, its risk transmission
and operational requirements which
impact risks have commonality within an
instrument category (say within murabahah
for example). Third, this method is able to
cover all financial risks embedded in one
Islamic financial instrument while those
risks transform from one type to another
throughout the life of the instrument.
Fourth, this approach will provide complete
guidance to financial institutions and
practitioners for at least one type of
instrument that they can apply and put
to practical use rather than only one risk
component in a product.
A very important comment was that the
present focus of most risk management
techniques and processes is to simply
tailor the conventional risk management
policies to Islamic finance. This approach
not only kills the risk appetite of the society
but it also molds Islamic products and
instruments to fit closely to the conventional
model.
Operational risk was highlighted as an
important category after the credit risk and
before liquidity risk by many experts. A key
aspect of Islamic finance is that ownership
risk cannot be avoided; this is the color
of the skin of Islamic banking. Therefore,
operational risks in Islamic finance are
not simply of procedures, documents and
availability of back-up systems of the usual
type.
Another important comment made was on
differentiating between risks and capacity
to manage risk. Islamic financial institutions
have not yet developed in-house capacity
to manage risks which in itself becomes a
source of risk.
Discussion also took place on implications
of Basel III for Islamic banks and risk
management, particularly, the Liquidity
Coverage Ratio, Net Stable Funding Ratio,
etc. Participants were of the view that
while the new Basel requirements would
increase cost of compliance, they are
also an opportunity for Islamic banks to
address these issues and also assert at
the international level why their business
model is superior and more stable. Some
central banks have already started
preparing for quantitative
impact assessment of Basel
III on their banking system.
How to build a framework
for risk management? This
is an important issue for
11
Islamic Research & Training Institute
Islamic banks having implications for all
types of risks. For example credit risks have
three stages:
•
•
•
Pre-assessment
Post disposal, and
In-between problems such as default.
In many cases of default the beneficiary
had the resources to pay but just
remained unwilling to pay on time.
Legal proceedings take long time. There
have been such real cases where in
order to avoid payments and penalties
one party or the other claimed that the
original financing contract was Shariah
non-compliant. Such issues point to
the necessity of harmonization of legal
framework and increasing the efficiency
in disposing of such default cases.
Another legal cum regulatory issue,
for example, is that murabahah, since
it is trade related transaction, is not
registered by credit information bureaus
in many jurisdictions. Thus proper credit
rating information about the debtor (and
sometimes also of creditor) is not available.
These issues point to the need for business
rating bureaus as well as the need to
make the rules that require murabahah
be registered with credit business in all
jurisdictions.
It was pointed out that risk mapping,
measurement, and management
techniques have witnessed significant
development during last 10 to 15 years,
however Islamic finance has not looked into
those approaches due to lack of basic data.
On the one hand there is a need to develop
systems of data collection and reporting. On
the other hand modular approach can be
devised for risk management in each mode
or instrument category such that they can
be combined later to give an over-all risk
position.
The current format of data reporting is such
that Islamic finance cannot be traced in
the balance sheet of banks that are not fullfledged Islamic banks but operating Islamic
windows only.
To sum up, it was felt that Islamic finance
transactions are real trade transaction and
investments, but often treated as pure
financing transactions. Many real issues
arising from this dichotomy are pushed
under the carpet without properly tackling
them. They require solutions at very basic
level. Thus an exercise to map and measure
risks of each major mode or instrument of
Islamic finance would not only help to bring
out the issue to forefront for management
of the risk at the institutions’ level but it
will also press the industry the regulators
and the governments to develop basic
infrastructure.
The risk mapping and quantitative
measurement exercise will help in linking
the practices to the standards on risk
management and accounting and shariah
principles already produced by IFSB
and AAOIFI. Due to the work of IFSB
and AAOIFI the standards do exist but
at a higher level (as principles). Their
operationalization and translation into
Knowledge Review
practice needs guidance and examples
that are much needed. The project on risk
mapping can help in creation of guidance
notes and understanding in the area of risk
related standards.
Risk implications of type (i) financing
murabahah depends on a variety of factors
such as:
Even in most simple type of murabahah
based financing, the credit and operational
risks clearly stand out. The pilot project may
focus on this simple and less controversial
trade related murabahah financing. Earlier
available works on murabahah have shown
risk transformation at various stages of
murabahah contract, for example. The
pilot project will not only create a risk map
but also endeavor to quantify the risks.
However, the quantification of operational
risk would be difficult. It would also look into
risk mitigation techniques for murabahah
including options embedded in murabahah,
along with possibilities of necessary
institutional developments.
•
Murabahah is usually offered for short
to medium term financing. Longer term
financing uses istisna’a, for example, for
project finance. However, for the purpose
of pilot project only murabahah instrument
would be selected.
Session 3 of the discussion provided further
focus and a structure for the pilot project.
The last session provided further focus
to the discussions of the day and chaired
by Dr. Jachi. In light of the consultations
during the day and the institutional
capacities of IDB-IRTI and GARP it was
decided that a pilot project on risk mapping
measurement and mitigation will be
started. The pilot project will consider only
murabahah instrument. To keep matters
simple and less controversial the derivative
products based on murabahah or tawarruq
will not be considered under the pilot
project.
•
•
•
The participants in the consultative meeting
agreed with this final conclusion about
the pilot project that IRTI and GARP are
contemplating to start. The participants
of this consultative meeting also showed
their willingness, without any binding
commitment, to help in the project by
sharing information, providing advice and
insight for the successful completion of
the pilot project. Once this pilot project
on murabahah instruments risk mapping,
measurement and mitigation is completed
then undertaking of other instruments of
Islamic finance may be considered for risk
mapping exercise.
The way forward is for IRTI and GARP to
start the project under their joint name
and controlled by a Steering Committee
comprising of experts from these two
organizations. Further:
•
Financial institutions are currently using
murabahah in three contexts:
i) Financing clients based on murabahah
ii) Funding financial institutions’ own
operations based on murabahah
funding deals.
iii) Liquidity management of financial
institutions based on murabahah
transactions.
The type (ii) and (iii) are mostly based
on commodity murabahah or reverse
murabahah which are not part of the pilot
project. Only the type (i) financing side
murabahah will be evaluated.
whether murabahah was collateralized
or non-collateralized;
whether it was promised based or not
promised based;
the nature of underlying commodity or
item;
whether the finance operation was
funded by un-restricted investment
accounts, restricted investment
accounts or from demand deposits.
•
For efficiency in work a Sub-Committee
for consultation with the Islamic finance
industry will be formed comprising of 3
to 4 Islamic financial institutions, along
with IRTI, GRMD, FPDC, FPP of IDB
and GARP. To maintain transparency
of the project some of those institutions
who participated in the first consultative
meeting (held on 10 December, 2012)
or participated in the survey (conducted
prior to the meeting) will be invited to
join the Sub-Committee.
For further openness we will periodically
update the status of our work to IFSB,
AAOIFI and IIFM. The pilot project is
expected to take about 8 months.
If this initial project of risk mapping,
measurement and its ameliorating methods
is successful, it will feed into the
development of Islamic financial risk
management (iFRM) program in the
longer-run.
REPORT
Expert Group Meeting on
ISLAMIC FINANCIAL SECTOR
ASSESSMENT PROGRAM (iFSAP)
By: Dr. Dadang Muljawan,
Senior Economist, IRTI
I
n the framework of IDB – World Bank
Working Group on Islamic Finance,
IDB-IRTI had started in 2009 a project
on development of templates that could
supplement the joint World Bank – IMF
executed Financial Sector Assessment
Program (FSAP) for a proper assessment
of the Islamic financial sector. In the first
phase of this project, an analysis of the
gaps between conventional FSAP and the
needs of Islamic financial sector was made
during 2010 and published. In the second
phase of this project, Draft Templates for
assessment of Islamic financial sector
have been developed during this year and
circulated for consultation. A survey aiming
at identifying the stage of development
of Islamic financial industry in a number
of countries and the opinion toward the
development of more proper measures for
the assessment process has been sent.
In order to crystallize the idea, IRTI invited
related parties including international
regulatory setters and financial authorities
to an Expert Meeting. The objectives of
the Expert Meeting are to identify (i) stage
of development of the Islamic financial
systems in selected member countries
in terms of market share, availability of
regulations, supporting infrastructure, and
adoption of international standards, (ii)
methods and assumptions in the areas of
financial policies covering the inclusion of
Islamic financial system in general financial
policy and financial surveillance, and (iii)
perception towards the potential adoption
of Islamic finance prudential standards
and the assessment contents in the FSAP
initiative.
An Expert Group Meeting (EGM) to discuss
the draft templates for Islamic Financial
Sector Assessment Program (iFSAP) was
held on 11 December 2012 in IDB Head
Quarters. It was attended by over thirty
experts that included representatives from
the World Bank, International Monetary
Fund, IFSB, AAOIFI, Central Banks of
Bangladesh, Brunei, Bahrain, Indonesia,
Jordan, Malaysia, Mauritius, Nigeria,
Pakistan, Sudan, Kazakhstan, and Dubai
Financial Services Authority. Other experts
included Professor Maximillian JB Hall, IDB
Chief Economist, and representatives of
ICD, ICEC, Country Operations Department,
GRMD, Treasury, IFS Department, and
IRTI. In general, the meeting discussed 3
main agenda. The Director General of IRTI,
Prof Azmi Omar opened the program and
addressed the significant of this project in
supporting the Islamic financial industry in
the future.
In the first session, Murat Arslaner of the
Word Bank spoke about the FSAP from the
developmental perspective. Inwon Song
of the IMF spoke about FSAP from the
perspective of financial stability. Professor
Maximillian JB Hall of the Loughborough
University gave his comments on the
initiative and the draft of iFSAP document.
Dr Dadang Muljawan presented the result
of the survey participated by 18 regulatory
and supervisory authorities.
In session 2, Dr Salman Syed Ali presented
the draft of the proposed templates
covering all aspects in the existing FSAP
initiative. Khairul Nizam of the AAOIFI and
Abdullah Haron of the IFSB presented their
view and programs by the AAOIFI and IFSB
respectedly. This session shows how the
iFSAP program is relevant to their programs
and the importance of the adoption of
international regulatory standards for
Islamic financial development and stability.
In session 3, some financial authorities put
their views on the relevance of the iFSAP
to their programs. The session was
started by short presentation
by Bank Indonesia. Dr Rifky
Ismal shared the experience
of Indonesia in developing
the Islamic money market
and link between Islamic
banking system
13
Islamic Research & Training Institute
and the monetary authority in terms of
Islamic monetary instruments and Lender
of the Last Resort. Aysha Jalahma of
Central Bank of Bahrain shared Bahrain
experience in adopting Islamic international
regulatory standards issued by AAOIFI
and IFSB. Khairul Iswar of Bank Negara
Malaysia share the Malaysian experience in
developing regulatory framework of takaful
industry and their adoption of standards
of Association of Insurance Supervisors
(AIS) and IFSB. Dr Irfan Beik presented an
Indonesian experience in developing Zakat
and Wakaf system including its regulatory
framework.
Flow of Discussions
Session 1 started with the background of
FSAP initiative that served as a response
to the Asian financial crisis in 1997-1998.
Over 100 countries have undergone the
assessment process. The assessment
process has been useful in helping the
assessed countries identify the weaknesses
in their financial system and come up
with proposal of financial reforms. The
speakers emphasized the importance
of supporting infrastructure, including
proper legal framework, supportive tax
regime, comprehensive macro and micro
prudential regulatory framework. The
speakers also emphasized the importance
of having sufficient capability in financial
data analysis at the institution level as
well as at the macro level. This capability
should be supported by proper adoption of
international accounting standards, proper
financial reporting and policy. Besides the
financial reforms, the results of the analysis
are used for loan agreement (and technical
assistance) and policy discussion. The
initiative taken by IRTI-IDB to work on the
potential documents supplementing the
existing assessment framework was very
much appreciated by the World Bank, IMF
and Prof Hall as the main person who gave
comments on the draft of the document.
The final document is seen very potential
to give more additional knowledge to the
assessors in the FSAP when conducting
financial assessment in countries operating
Islamic financial institutions. This opinion
is strengthened by the result of the survey
that indicates strong support towards the
development of supplementary measures in
the assessment of Islamic financial system.
Almost all the countries participated in the
survey have undergone the FSAP exercise.
The respondents are in a view that an
effort to supplement the existing FSAP with
Islamic financial assessment elements is
very important. This expectation poses
the challenges to the international Islamic
financial regulatory setters to come up
with more comprehensive and technically
sound standards that are compatible to the
conventional counterpart.
Knowledge Review
Session 2 started with a presentation on
the proposed templates for Islamic financial
sector assessment. The presentation
highlighted the potential difference between
the existing assessment process and the
areas which are unique to Islamic financial
system. Those include (1) the recognition
of sharia compliant aspects in the financial
transaction, (2) development of Islamic
specific sectors like zakat and wakaf sector,
and (3) emphasis more on developmental
aspects (recognition of development stage
which may be different from one country to
another). The IFSB and AAOIFI presented
their work program relating to their effort
to come up with more standards and
programs for getting more recognition
by the financial authorities. So far, the
level of recognition increases as indicated
by recent survey conducted by IFSB.
The IFSB and AAOIFI have been trying
to establish joint program with financial
authorities and provide technical assistance
in implementing the standards technically.
The meeting called for better technical
coordination among the institutions despite
mutual memberships between Islamic
regulatory setters (IFSB and AAOIFI) and
conventional regulatory setters (like BIS,
IOSCO, IASB and IAS).
During session 3, all the attending
regulatory authorities applauded the
program on iFSAP as it may serve as a
catalyst in speeding up the development of
Islamic financial industry despite significant
challenges still remain. Some authorities
were invited to give their comments on the
initiative and the draft of the document. The
representatives of the financial authorities
were in an opinion the proposed templates
are relevant. However, the representatives
of financial authorities asked for more
technical documents to be developed.
Some of the examples that are given in
the meeting are: (1) the data treatment of
Islamic financial data in the credit bureau,
(2) solvency regime for Islamic financial
contracts, (3) data consolidation process
between Islamic finance and conventional,
(4) technical guidance (identification,
measurement and mitigation) for risk
management in Islamic finance, (5)
consistency of providing conducive tax
regime in providing a level of playing field,
(6) recognition of fatwa authority and the
adoption of its ruling into governing law
effectively, etc.
The meeting recommended the following
points:
1. The EGM appreciated the efforts of
IRTI-IDB towards the development
of iFSAP project and particularly the
creation of iFSAP Draft Templates.
2. The EGM found the iFSAP Draft
Templates very useful in providing a
method for development and stability
assessment of Islamic financial sector.
3. It further recommended that IRTI-IDB
jointly with IFSB and other standard
setters should take lead in carrying
out pilot assessments of one or two
countries. This will provide opportunity
to revise and refine the iFSAP templates
as well as develop the internal
capacities of IDB and IFSB in this area.
4. Involvement of World Bank and IMF in
iFSAP is highly recommended either in
the form of their direct participation or
their technical assistance for pilot iFSAP
assessment. This will also build internal
capacities.
5. All infrastructure organizations in
Islamic finance such as IFSB, AAOIFI,
etc. may be asked to make some
elements of iFSAP that are relevant to
them a part of their work program.
6. Since the assessment also includes
measuring the compliance to codes
and standards, therefore adoption of
IFSB and AAOIFI standards become
more important. Thus iFSAP will also
encourage early adoption of Islamic
financial standards issued by
organizations such as IFSB and
AAOIFI etc.
REPORT
International Workshop on
STRENGTHENING ISLAMIC SOCIAL FINANCE SECTOR:
ZAKAT, AWQAF, AND ISLAMIC MICROFINANCE
By: Dr. Dadang Muljawan,
Senior Economist, IRTI
Z
akat, Awqaf and Islamic microfinance
(Islamic Social Sector (ISS)) are
the sector that are relatively less
developed than other Islamic financial
sectors like Islamic banking, Islamic capital
market and takaful. In most countries,
ISS is operating with minimum supporting
infrastructure such as sufficient legal
foundation, regulatory framework, reporting
system, and good corporate governance.
As a result, this sector has not been able
to significantly perform. In order to attract
participation from the stakeholders, ISS
should be able to build trust through
sound management practices that shows
minimum potential moral hazard in its
operations. Conceptually, ISS may play
an important role in sustaining economic
development, particularly in promoting
financial inclusion that open up more
access to the society (low income society)
and serving as potential financial safety-net.
Some countries may have tried to develop
proper supporting environment like
related governing acts (i.e. zakat act,
awqaf act and microfinance act). Some
countries may have developed efficient
collecting and disbursement practices,
sound awqaf management system, and
regulatory framework. An efficient platform
can be established to facilitate stronger
cooperation among the OIC countries
in the areas of regulatory development
and information exchange program. The
workshop in Bogor was organized by IRTI/
IDB in collaboration with Indonesian Zakat
Authority (BAZNAS) and Bogor Institute of
Agriculture (IPB) during 29 – 30 April 2013
at Bogor, Indonesia. The program was a
part of a grand initiative in developing ISS
internationally and serves as one possible
platform for stronger and more constructive
cooperation among them. The initiative put
South and South-East Asia in the first round
of program that will be followed-up with
other regions where ISS can significantly
perform its functions.
Flow of Discussions
The Inaugural session witnessed three
welcome speeches made by the Rector
of IPB, Dr. Mohammed Obaidullah, IRTI,
and the Chaiman, BAZNAS. There were
two keynote speeches by Nasarudin Umar,
Vice Minister of Religious Affairs and Dr.
Sugiharto, former Minister of Indonesian
State Enterprise. The first keynote speech
emphasized possible efforts to optimize
zakat, waqf and Islamic Microfinance in the
process of national economic development,
and the second emphasized the importance
of developing entrepreneurship.
Session 1 was dedicated to zakat which
had five speakers to present their views.
The session was chaired by Dr. Dadang
Muljawan. The first speaker was Dr. Ahmad
Mukhlis Yusuf who represented BAZNAS.
He shared his view on possible regulatory
regime of Zakat collection can be set to
achieve optimal collection of Zakat. The
second speaker was Hasan Jahangir Alam
who represented Bangladesh. He shared
his view on the fiqh foundation of zakat. The
third speaker was Hajjah Rose Abdullah
who represented Brunei. She showed that
zakat system can also play important role
in Brunei that is already considered as
prosperous country. The fourth speaker
was Ms Nana Mintarti who represented
Indonesia. She shared the result of her
survey study that indicated the growing
trend of zakat sector in Indonesia and how
zakat sector has contributed in poverty
alleviation program. The last speaker was
Haji Mohd Rais Alias who represented
Malaysia. He shared his view on how
good practices of zakat operation should
be sustained by sound managerial skills
including development of vision, marketing
strategy, efficient operation, and particularly
good governance.
Session 2 was devoted to awqaf
development. It had five speakers and
was chaired by Dr. Hylmun Izhar. The first
speaker was Dr. Mustafa Edwin Nasution
who represented Indonesia. He shared
the latest Indonesian awqaf development
covering the contents of the newly ratified
governing act and its potential regulatory
development. The second speaker was Dr.
Shamsiah Abdul Karim who represented
Singapore. She shared Singaporean awqaf
management that has been successfully
developed awqaf asset into its optimum
productivity. The third speaker was M Nurul
Huda who represented Bangladesh. He
shared his views in the area of conceptual
development relating to fiqh interpretation.
The fourth speaker was Dr. M Aslam
Haneef who represented academics
in Malaysia. He shared his views
on possible cross-sector
development with zakat
sector that might potentially
improve its effectiveness in
serving the society. The last
speaker was Dato’ Syed
15
Islamic Research & Training Institute
Ghazali Wafa who represented Malaysia. He
shared his experiences in developing awqaf
system in Malaysia and suggested some
potential breakthrough to further develop
awqaf sector.
Session 2 was devoted to Islamic
microfinance. It had four speakers and
was chaired by Dr. Obaidullah. The first
speaker was Dr. Ataul Huq Pramanik
who represented the academia from
Bangladesh. He shared his thoughts
about the important position of Islamic
microfinance institutions in opening-up
fair chance to financial access and how
small entrepreneurs are also bankable
if they are treated properly. The second
speaker was Arshad Ajmal who represented
India. He shared the experience of India in
developing microfinance institutions. The
last speaker was Dr. Nunung Nuryartono
who represented Indonesia. He shared the
Indonesian experiences in developing Baitul
Maal wa Tamwil (BMT) that exist to serve
micro entrepreneurs.
The program was concluded by the
reading of communiqué by Dr. Dadang
Muljawan and closing remarks by the
Dean of IPB. The communiqué underlined
some important points resulted from the
discussion and suggested some follow-ups
to be taken. Some representatives showed
its interest and commitment to take part in
future potential development process.
Besides inviting local participants
representing local authorities, the workshop
had also attracted some international
participants who had been very active in
the discussion. Those participants were Dr.
Mustafa Omar Mohammed (Uganda), Dr.
Abideen Adewali (Nigeria), Fouad Mohd
bin Amin (Bangladesh), Dr. Yusuf Jelili
Amuda (Nigeria), Dr. Muhammad Aliyu
Dahiru (Nigeria), Dr. Sheila Nu Nu Htay
(Myanmar), Dr. Umar Mohammed Idris
(Nigeria), and Amran Hazali (Malaysia).
Key Issues under Focus
The following are highlights and important
points that were presented and discussed
in the workshop.
Zakat Sector
1. In terms of collection, Zakat sector
has shown a tremendous growth. For
example, Indonesian zakat system
has recorded 52 percent of growth in
the last 5 years. This growth can be
maintained through better collection
mechanism and channel such as using
more advanced technology (mobile and
internet based).
2. High managerial skill has been
introduced and implemented in
some zakat collecting institutions.
The managerial skill is reflected by
more number of zakat professionals
that hold higher formal education,
implementation of strategic and better
planned operational activities of zakat
institution. Malaysian experience shows
the best example of zakat management
that equips zakat institutions
with well-versed vision, mission,
marketing program, implementation
of good corporate governance, and
organizational structure.
3. Zakat sector has proved its contribution
to poverty alleviation program in
sectors including consumption,
education, economic production
(entrepreneurship), health programs,
and housing facilities.
4. In term of legal infrastructure,
Indonesian zakat sector has shown its
significant development through the
issuance of newly ratified zakat law
that serves as strong foundation for
regulatory and supervisory framework.
The zakat authority has also introduced
some financial indicators that can be
used to indicate operational soundness
of zakat institutions like operational
costs and mustahiq – muzzaki
transformation rate.
5. Scarcity in fulfilling the needs of
qualified human resources has been
very crucial for future development. The
establishment of formal and vocational
programs for zakat management is
considered important. Despite high
demand, zakat institutions are still
incapable of delivering high incentive to
attract highly professionals that demand
for higher salaries. This can only be
overcome by increasing operational
efficiency through better management
(including good governance) and
achieving critical mass of collection.
6. The success of zakat operations rely
on public trust. Some countries have
required zakat institutions to be audited
internally as well as externally. Reports
indicating the operational efficiency of
zakat institutions in disbursing the funds
with proper and well-designed programs
are also considered very important to
earn more trust from the public. This
calls for better regulatory framework that
could minimize potential moral
Awqaf Sector
1. The presentations showed that awqaf
sector has started to develop. In
Singapore, despite the absence of
legal foundation, awqaf management
has been very efficient in transforming
dormant awqaf assets into very
productive ones. A transformation into
combination of religious, education
and commercial properties has
been successfully exercised. The
development of awqaf properties has
supported financially by the issuance
of sukuk. This proves that cross-sector
development is very important.
2. In the area of legal foundation,
Indonesia has shown significant
development through the ratification
of awqaf act giving the Indonesian
awqaf board (Badan Wakaf Indonesia)
a mandate to register and monitor
the usage of awqaf assets across the
country. The development of cash
awqaf has also taken place enabling
more people to contribute to the
development. The awqaf act has
established cross sector activities with
Islamic banking sector through mutual
recognition by the two sectors. This
arrangement can harmonize the any
possible synergy and minimize potential
regulatory arbitrage.
3. Another academic view that expresses
the importance of cross sector approach
was also presented. The empirical
evidence showed that awqaf concept
and Islamic microfinance can be
mutually supportive in poverty alleviation
program set by the government. The
study used Malaysian data that is still
relevant to other countries.
4. Bangladesh has also reported
significant development in awqaf sector.
The awqaf activities are supported by
38 active regional offices across the
country.
Knowledge Review
2. The establishment of an international
initiative may provide an opportunity for
IRTI to establish strategic cooperation
with the relevant authorities within these
sectors in the areas of data compilation,
training and advisory activities.
3. In a more strategic view, the
development of these sectors may
significantly contribute to the Financial
Sector Assessment Program (FSAP) for
Islamic financial industry. The existence
of regulatory principles and sound
regulation and supervisory practices,
these sectors can be seen as another
formidable pillar to support robust and
sustainable economic development.
Islamic Microfinance Sector
1. Islamic microfinance services may
cover micro-financing, micro takaful,
micro pension. Those are commercial
segments that provide services to
low-income society that are normally
remote from commercial banking and
takaful services. Cross-sector activities
of the microfinance institutions can
be established with the commercial
banking and takaful sectors and Islamic
social sectors (zakat and awqaf).
countries shows a high growth despite
a small number of collection and
disbursement program as compared
to GDP. Different countries may have
different level of advancement in
different sectors.
3. These facts open-up opportunities for
international cooperation seeking for
more progressive development among
the countries that have and wish for
significant zakat, awqaf and Islamic
microfinance in their economy.
2. In some countries, Islamic microfinance
activities have got sufficient legal
foundations like microfinance act and
other regulatory frameworks that are
relevant to microfinance activities. Apex
structure has also been practiced to
conduct supervisory activities more
efficiently.
4. The results of discussion can be more
systemically expressed in the following
SWOT analysis.
3. Unavailability of sufficient and qualified
human resource and sound supervisory
framework has been the issues to
be overcome. Due to uniqueness of
its operations, Islamic microfinance
industry should be able to keep up its
innovation to accommodate the real
needs.
1. Zakat, Awqaf and Islamic microfinance
have a great potential to provide
significant contribution to economic
development and particularly to
financial inclusion program. The
development of these sectors should
take place as an integral part of the
government economic development
program.
2. Current development shows that
these sectors have started to attract
attention of academics, policy makers
and particularly public. Data in some
5. It is also recommendable for IRTI
to establish a strategic cooperation
with one or two main member
No
SWOT
Items
1
Strengths
- Enthusiasm by segments in the society (academics, government and the public)
- Development in legal framework
- Some countries have shown significant development in some different areas.
Weaknesses
-
3
Opportunities
- There are huge potential of zakat collection and assets of awqaf to be optimized.
- There is an opportunity to speed-up development process by establishing
better platform for cooperation among zakat and awqaf operating countries.
- With a better approach and methodology, the development may be integrated
into national program.
4
Threats
- Incentives given by other commercial sectors are higher. This may hinder the
capacity of these sectors to attract professionals.
- Lack of proper regulation and supervision may create potential fraudulent
practices without being monitored and minimized.
2
Conclusions and Follow-up
Based on the presentation and discussion
by the participants the workshop concluded
some important points:
4. An establishment of a working group
that consist of a project manager
and working group members coming
from financial authorities is worth
considerable. The working group will
work on the development of regulatory
standard in zakat, awqaf and Islamic
microfinance sectors. The project
manager will hold a mandate/obligation
to develop the materials (the principles
and other regulatory standards) to be
reviewed regularly with the working
group members.
Scarcity in capable human resources
Legal and regulatory frameworks have not been comprehensively implemented.
Small number of zakat collection and productive awqaf assets.
Incentive given to the management is not very attractive. Some are even under-paid.
Some recommendations that are worth
considering as the follow-up of the
workshop are the followings:
1. An international initiative serving as a
platform that facilitates cross-border
cooperation is worth considering. The
objectives of the initiatives cover: (1)
setting-up principles of regulations and
supervision for zakat, awqaf and Islamic
microfinance; and (2) platform for
information exchange among countries
that have significant experiences in
the operation and those that are in the
development stage.
countries in the implementation of this
developmental initiative.
6. This initiative can potentially support the
reverse linkage program promoted by
IDB and serves as an effective platform
for information sharing of best practices
by member countries. As mentioned
earlier, the platform may promote
infrastructural
development (such
as supervisory and
regulatory framework)
and development of
business model.
17
Islamic Research & Training Institute
REPORT
THE EIGHTH IDB GLOBAL FORUM ON
ISLAMIC FINANCE
By: Dr. Salman Syed Ali,
Senior Economist, IRTI
T
he 8th IDB Global Forum on Islamic
Finance was successfully held on
09 Rajab 1434H (May 19, 2013)
at Kokhi Somon in Dushanbe, Tajikistan
in conjunction with the 38th Annual
Meetings of the IDB Group. It was very
well attended by more than 150 people.
The event was organized in collaboration
with National Bank of Tajikistan (local host
institution), the General Council of Islamic
Banks and Financial Institutions (CIBAFI),
and IFS Department of IDB. The event
helped promote Islamic finance and its
potential role for economic development
in the Central Asian countries. A total of
17 people spoke on several aspects of the
issue (this includes the speakers in the
inaugural session and chairmen of the
subsequent sessions). IRTI Occasional
Paper no 14 “Role of Islamic Finance for
the Development of IDB Member Countries:
A Case Study of Kyrgyz Republic and
Tajikistan” was also distributed along with
the launch of Russian language translation
of some of the IRTI books and presentations
about the IRTI and IFS Department
programs.
The Forum recommended that Islamic
Finance may be given a chance in the
Knowledge Review
Central Asian countries and suggested the
authorities to make room for introduction of
Islamic finance not only in the private but
also in the public sector.
A detailed report of the event is provided
below.
The IDB Global Forum on Islamic
Finance was initiated in 2006 by the
Islamic Research and Training Institute
(IRTI) member of the IDB Group in close
collaboration with various international
organizations and different entities of the
IDB Group. This annual event presents an
excellent platform for academics, experts
and practitioners to participate in a strategic
policy dialogue and sharing the experiences
of countries and institutions towards the
development of the various segments of the
Islamic Financial Services Industry (IFSD).
It also aims at identifying key challenges to
the industry’s development in an integrated
manner, promoting cooperation and
knowledge sharing, thus enhancing its
competitiveness and stability.
This year, the theme for the Forum
was “Role of Islamic Finance for the
Development of IDB Member Countries in
Central Asia”. Centered on the IDB Group
Annual Meeting theme of innovation,
this Forum provided good opportunity to
promote Islamic finance as an effective
mechanism - for central banks and
governments of IDB Member Countries in
the Central Asia region - to foster economic
growth and sustainability. This eighth
Forum in the series, was organized in
collaboration with the General Council for
Islamic Banks and Financial Institution
(CIBAFI); the National Bank of Tajikistan;
and the State Committee on Investment and
State Property Management of the Republic
of Tajikistan.
Flow of Discussions
The opening session commenced with a
welcoming note by Dr. Azmi Omar, Director
General of IRTI, followed by welcoming
speech by Dr. Ahmed Mohammed Ali
the President of IDB Group. The opening
speech was delivered by the H. E. Mr.
Davlatali Saidov, Chairman IDB Board of
Governors. Dr. Omar Hafiz presented a
statement on behalf of H.E. Sheikh Saleh
Kamil, Chairman of CIBAFI. In the inaugural
ceremony IRTI Occasional Paper 1434H on
the theme of this forum was also launched
along with presentation of some IRTI books
translated into Russian language. It was
followed by a short presentation on IRTI
and its programs for development of Islamic
economics and finance.
The key note addresses were given by Mr.
Neil D. Miller and Dr. Zamir Iqbal.
Mr. Neil D. Miller explored the meaning
of ‘development’ in the financing
context; considered the role of ‘for profit’
organizations, as opposed to governmental
or ‘not for profit’ organizations in economic
development; and examined whether the
ethical imperative embedded in Islamic
finance demands a substantively different
approach. He emphasized that the role that
‘law’ might play in helping stakeholders
enforce different behavior. He suggested
an alternative modus operandi is needed to
achieve the objectives of Shariah.
Dr. Zamir Iqbal spoke on the aspect of
financial inclusion or access to finance
as an essential contributor to economic
development. Islam’s perspective on
financial inclusion is based on a balanced
approach through risk-sharing in business
transactions complemented by the
redistributive instruments targeted at the
poor segments of the society. Policy makers
in IDB member countries can take certain
steps to enhance the inclusion.
The final presentation in the Session 1
was made by Mr. Khaled Al-Aboodi, CEO
of ICD who spoke on the ICD’s role and
experiences in Central Asia and Caucasus.
Session 2 was devoted to the theme: Role
of Islamic Finance for the Development
of IDB Member Countries in Central Asia.
During this session the IRTI Occasional
Paper for 1434H “Role of Islamic Finance
for the Development of IDB Member
Countries: A Case Study of Kyrgyz Republic
and Tajikistan” authored by Dr. Salman
Syed Ali, Dr. Nasim Shirazi and Dr.
Mahmoud Sami Nabi was presented. This
paper seeks to explain how Islamic finance
can promote equitable and sustainable
development of IDB Member countries.
It specially focuses on Kyrgyz Republic
and Tajikistan by firstly reviewing their
socioeconomic development and analysing
the binding constraints on their sustainable
economic growth. A broader approach has
been followed in the study for highlighting
the underlying issues and indicating how
Islamic finance can address them to
alleviate some of the identified constraints.
The paper also discusses some specific
sectors, in the countries under study, where
Islamic finance can make a difference. It
concludes that Islamic finance can play
a great role in promoting inclusive growth
and enabling the considered countries to
follow a more equitable development path
with the objectives to achieve high income
and social cohesion simultaneously. Since
Islamic finance is not currently practiced in
these countries, the study also explains the
nature of Islamic finance before pointing to
the ways in which it can help address the
challenge of alleviating the development
constraints.
During the second half of this session,
key findings of a study on Islamic
Social Finance sector in South Asia and
South East Asia were presented by Dr.
Mohammed Obaidullah and Dr. Nasim
Shirazi. The findings primarily related
to comparative analysis of regulatory
framework for zakat, awqaf and Islamic
microfinance sectors. Findings also
included good practices relating to
efficiency, transparency and governance in
selected successful entities. The countries
covered were Indonesia, Malaysia,
Brunei Darrussalam, India, Pakistan and
Bangladesh. The study examined the broad
regulatory and policy environment at the
macro level as well as good practices at the
micro level to facilitate policy dialogue.
Session 3 was devoted to the practitioners’
perspective on the role of Islamic Finance
for the development of IDB Member
Countries in Central Asia. Dr. Akram Laldin
of ISRA made a presentation about the
different options available to kick start
Islamic finance in Central Asia region
taking into account the experience of other
jurisdictions, which have embarked on
the journey of Islamic finance. It focused
on the different instruments of banking,
Islamic insurance and capital market that
are available and which are the priorities
in Central Asia. In addition, the challenges
in developing a comprehensive legal,
regulatory, taxation and Shariah governance
framework for Central Asia region were also
discussed.
Mr. Faheem Ahmad, CEO of IIRA focused
his presentation on the importance of
a well-developed capital market to a
balanced and inclusive financial system.
The presentation highlighted the role of
rating agencies and particularly national
scale ratings in the development of the
same. The presentation also comprised
a section on the contribution of the SME
segment to various developed economies,
its relevance in developing economies
and how improving their access to capital
markets through ratings can play a role in
the economic development of Central Asia
countries.
Dr. Adalet Djabiev of Badr Finance
and Investment said that at the time
of independence of CIS countries, a
population of approximately 300 million was
fraught with a mixture of fears, uncertainty
and at the same time, hopes for a better
life, prosperity, development, political and
socio-economic sovereignty. Since that time
much has been achieved, however, a lot
more needs to be done in terms of socioeconomic development. It is, therefore,
feasible for these countries that in addition
to the current economic and financial
models, they should also adopt the Islamic
finance model, which entails fairness and
results in a just society.
On the IDB’s contribution to the
development of Islamic finance in Central
Asian member countries, Mr. Wasim
A. Abdulwahab, IFSD, IDB Group said
that one of IDB’s main strategic thrusts
as identified in the ‘Vision 1440’ is the
“Expansion of the Islamic financial services
industry”. In this context, IDB Group is
working in Tajikistan, Kyrgyzstan and
Kazakhstan to develop the Islamic financial
sector. The presentation highlighted
IDB’s global achievements
in the development of
Islamic finance in general and
elucidated the work being
carried out in the Central Asia
countries in particular.
19
Islamic Research & Training Institute
REPORT
The Mid-Term Review of the Islamic Financial
Services Industry Development:
TEN-YEAR FRAMEWORK AND
STRATEGIES
14 MAY 2013
MTR Forum,
KL - Malaysia
12 September
2013
MTR Forum,
Istanbul,
Turkey
December 2013
MTR Approval at
IFSB Conucil
Meeting
6 April 2013
MTR Roundtable,
Doha, Qatar
By: Dr. Salman Syed Ali,
Senior Economist, IRTI
T
he Islamic Research and Training
Institute (IRTI), in collaboration
with Islamic Financial Services
Board (IFSB), has embarked on the
publication of the Mid-Term Review
of the Islamic Financial Services
Industry Development: Ten-Year
Framework and Strategies, which
was first published in March 2007.
The objectives of this project are
mainly to (a) assess the impact on the
respective Islamic finance segments
arising from the development in the
global financial system post-crisis,
(b) examine the progress and current
status of the priorities and initiatives
suggested in the Ten-Year Framework
Knowledge Review
and Strategies, (c) identify the gaps
involved in implementing the priorities
and initiatives, and (d) assess the need
of a reorientation of such priorities and
initiatives.
by all stakeholders through their
representatives in the IFSB Council it
will be officially released.
It is envisaged that the review will
bring significant benefits to the Islamic
financial services industry, particularly
in providing an understanding on what
the industry has achieved so far and
in guiding on what areas need to be
enhanced in the Ten-Year Framework.
It is envisaged that the
review will bring significant
benefits to the Islamic
financial services industry,
particularly in providing
an understanding on what
the industry has achieved
so far and in guiding on
what areas need to be
enhanced in the TenYear Framework.
The project is on track. The mid-term
review project also involve a roundtable
discussion, surveys and two open
forums to get views of all stakeholders.
We expect to submit the document
for approval of the relavent bodies by
December 2013. After its approval
REGIONS UNDER FOCUS
SHARIAH ECOSYSTEM IN TURKEY
By: Ahmad Fadhlan,
Shariah Specialist, IRTI
T
he Ottoman Caliphate had ruled the
Muslim world, from what has become
now the Republic of Turkey, for
nearly six hundred years (27th of July
1299- 29th of October 1924). Having
a caliphatic legacy from the Ottoman
Caliphate where Hanafi school was adapted
as an official fiqhi school of the empire, as it
is clearly evident in the Majalla, Turkey fiqhi
fundamental today is dominantly inclined
towards the Hanafi fiqhi school, whereas
the Shafi’e composed the least followers.
The genesis of Islamic banking and finance
in Turkey tracks back to the year 1983,
when a decree that paved the way for
Islamic banking was made which led to the
emergence of some financial institutions
known as ‘Special Finance Houses’.
Partnered with Turkish businessmen, two
Saudi princes helped establish the first
Special Finance Houses namely the Faisal
Finance Institution and Albaraka Turkey
Finance House, in the 1980s.These houses
started offering Islamic financial products
and services to the public. At first, these
participation banks are not governed under
banking law. But later the government
decided to put them under the law, similarly
to other conventional banks. The name
Special Finance House was changed to
Participation Bank. On ability to attract
foreign inflow to the Turkey economy,
participation banks are more successful
than their conventional peers in attracting
Gulf financial capital and transforming it to
real investments in the economy. Today,
Turkey is a host to four major Participation
banks; Albaraka Turk, Bank Asya, Kuveyt
Türk and Türkiye Finans.
The Central Bank of the Republic of Turkey
(CBRT) does not have any separate laws,
bills or enactments that specifically govern
the participation banks and distinguish
them from the conventional. These
participation banks apply the same Turkey
Banking Law as their peers in conventional
segment. Under the current central bank’s
legal framework, it is not a requirement
for these banks to set up a Shariah Board
in order for them to obtain their operating
license. Nevertheless, perhaps due to
global Islamic financial norms, all these four
participation banks have the Shariah Board
function established. These Shariah Board
members do not have any limitation to sit
in more than one participation bank. There
is also no minimum or maximum number
of Shariah Board members in establishing
the Shariah Board. A self-imposed by the
industry that these Shariah Board members
have to be at least a graduate from
theology faculty and they should have some
exposure in trade and finance.
On the inclination towards a specific Fiqhi
school when deliberating issues related
to Islamic banking and finance, Turkish
scholars do not restrict and limit their
views only from the Hanafi Fiqhi school,
although Hanafi is a dominant Fiqhi school
in Turkey. Prominent Turkish Scholars are
Prof. Hayreddin Karaman, Prof. Hamdi
Döndüren, and Assistant Prof. Ishak Emin
Aktepe are just to name a few.
As for Shariah banking ecosystem (also
known as Shariah governance framework),
Republic of Turkey opts for a single tier
ecosystem model which is similar to Saudi
Arabia, Kuwait and Qatar where they have
a fatwa council established at national level.
Similarly to these three countries, Turkey’s
Shariah banking governance witness no
interference from national Fatwa council
for matters related to Islamic banking and
finance. Turkey’s national Fatwa council
which is administered by the Department
of Religious Affairs is a recognized authority
to issue fatawa but such fatawa do not
have any effect on Participation banks
nor the Shariah Board of these banks
are answerable to the Fatwa Council.
Harmoniously, the Fatwa Council and
Shariah Board members do sit together to
discuss on issues related to Islamic banking
and finance. However, the Fatwa Council
may affect the confidence of Participation
Banks’ client as a result of their fatawa,
specifically when their view is in conflicting
with the view of Shariah Board of these
banks.
From a corporate governance reporting
matrix perspective, the current Turkey’s
Shariah banking ecosystem puts the
Shariah Board of a participation bank
answerable to the banks’ General
Managers, unlike in other ecosystems
where the Shariah Boards are at least
answerable to the Board of Directors of
the banks if not to the General Assembly
in some governance structures. Such
structure of Turkey’s participation
banks however, judging
from good corporate
governance’s outlook, will
potentially compromise the
independence of their
Shariah Board.
21
Islamic Research & Training Institute
REGIONS UNDER FOCUS
ZAKAT AND AWQAF INSTITUTIONS IN TURKEY
By Dr. Turkhan Ali Abdul Manap,
Senior Economist, IRTI
T
he foundation of institution has been
the major philanthropy vehicles in
Turkey for thousands of years. Today,
foundations are once again emerging
as agents of change in the country’s
development and democratization agenda.
Along with the growth of importance of the
Islamic factor in the political and social life
of Turkey (since the end of the 1940s) the
process of reanimation of institutional bases
of Islam began. One of those basic Islamic
institutions were waqfs and the waqf system
with a long history of existence which goes
back to the first centuries of Islam and
the early Islamic tradition of giving alms
(sadaqa). The institutions of zakat and waqf
are among several instruments instituted
by Islam to combat poverty and enhance
welfare in the society.
Zakat, as one of the five tenets of Islam,
has been instituted for the purpose of
purification of a person’s wealth and soul
and as a means of achieving al-‘adl’ (social
justice) in relation to particular members
of the society. Historically, zakat was not
collected by the state in the form of ordinary
Knowledge Review
tax, though both Zakat and tax played
important role in supporting the wellbeing of
the society. However, tax was spent for the
benefit of the society according to discretion
of the state while zakat was meant for
specific eight groups of beneficiaries
mentioned in the Quran. Nonetheless,
under the Ottoman Empire, there was no
formal method of wealth assessment for
zakat, the amount paid was a matter of
personal conscience.1 In the early twentieth
century, as the Islamic caliphate started to
decay and gave way to colonized or semicolonized nation-states, many governments
gave up collecting zakat, the decision of
whether or not individual citizens should
pay Zakat was officially left up to them. The
Turkish Aeronautical Association (founded
in 1925) was designated as a non-profit
organization to which citizens could pay
Zekat. Other civic organizations have also
emerged for collection and distribution of
McChesney, R. D. “Charity and Philanthropy in
Islam: Institutionalizing the Call to Do Good.” Essays on
Philanthropy, no. 14. Indianapolis: Indiana University
Center on Philanthropy, 1995.
1
zakat. Indeed, in contemporary Turkey,
zakat has become a very important financial
source for nongovernmental charity
organizations and civil society. However,
due to the secrecy of distribution of Zakat,
it is impossible to trace to what extent has
zakat contributed to the society.
Waqfs are common form of philanthropy in
the Islamic tradition. Waqf (Vakıf in Turkish)
is not only a religious and judicial institution
but also a very important social and
Zakat, as one of the five
tenets of Islam, has been
instituted for the purpose
of purification of a person’s
wealth and soul and as a
means of achieving al-‘adl’
(social justice) in relation
to particular members of
the society.
economic category which even nowadays
hasn’t lost its significance in the Islamic
societies. Zakat as well as Awqaf have been
deeply rooted in the cultural and religious
ground of Turkey. Waqf first emerged in
the 12th century and played a crucial
role in social and economic development
throughout Ottoman Era and the waqf was
the premier institutional mechanism for
philanthropic provision of public services.
This is because there was no budget or
a defined system for Ottoman State to
provide the basic services of justice, safety,
freedom of religion and the possibility of
individual self-development, foundations
became the sole providers of services such
as education, health, culture, religion and
property holdings. These services were
administered, financed, organized, built,
and maintained by the foundation system.
In essence, the waqf institutions have not
only provided many services that modern
state and local governments provide,
such as provision of health care and
elementary education, road maintenance,
and distribution of clean water to towns
and cities. But also served the poor and
needy, as well as promoted social harmony
and reduced the gap between rich and
poor. It is worth to note that the Awaqf
(Foundations) covered the lives of every
individual without any discrimination of
rich or poor, Muslim or not, old or young in
those years. These waqf were established
by the elite segments, the Middle income
individuals and families as well as women
who contributed about 40% of the Waqfs.
The Directorate General of Foundations
(DGF) was established in 1924 to continue
to oversee Waqfs established prior to the
establishment of the Turkish Republic
(1923). According to the DG, by the end
of the Ottoman Empire, an estimated
41,720 foundations were established
by private individuals for various aims.
These foundations are now mostly without
decedents, and administered by the DGF
in the Prime Ministry. While an exact
figure is not known, income generated
from these foundation assets (mainly real
estate which is leased or otherwise utilized
for income generating purposes) makes
a significant contribution to the national
budget. As such, foundations in Turkey
have not only left a cultural legacy, but also
a considerable asset base which continues
to provide a social return.
The foundation sector today is significantly
smaller than it was during the Ottoman
era. The waqf system has been neglected
and almost became extinct since the early
days of the modern Turkish state until
the 1967 act that reconstituted the legal
conditions of awqaf in the Turkish law.
It is recorded that merely 72 new waqfs
were established between 1923 and 1967
while this number is calculated to be more
than 4000 since 19672. The increase of
the number of the foundations is due to
the state’s encouragement policy and legal
arrangements, especially in 1967, when the
Council of Ministers was given the authority
to grant tax exemptions to the foundations,
and the donations made to the foundations
were encouraged with various arrangements
in the tax laws. Since then, the waqf system
has been revitalized, though still under state
monitoring and control. The number, size
(in terms of revenue), and scope of awqaf
flourished dramatically through the 1980s
and 1990s, despite several attempts to limit
the waqf system’s potential.
In addition to oversee those 41,720 fused
foundations in order to fulfil their deeds of
trust; The DGF also inspects 283 appending
foundations (whose managements
stipulated to the descendants of the
founders, and which are managed by their
trustees today); 4571 new (contemporary)
foundations and 161 community
foundations in accordance with the
contemporary standards and EU Criteria.
The most significant public institutions,
the Turkish Diyanet Vakif (The Turkish
Religious Foundation) , which was founded
in 1975 and has its headquarters in Ankara,
is a juristic entity under the supervision of
the DGF. As of 2007, the Foundation had
branches in 914 cities and districts. The
branches of the Foundation abroad followed
the same path as those within the borders
As Waqfs were regarded mostly as inefficient economic
structures with vast resources, large confiscations and
sales of the waqf property were observed in Turkey
during 1920- 1949 and 1960-1970.
2
of Turkey. The foundation provides 485
mufti offices and 4,325 personnel houses
throughout the country; the number of
Qur’an learning centres owned by the
Foundation was 1,666 as of 2007. In its
first 20 years, the Foundation provided the
needy with medicine, paid for their hospital
expenditures, and supplied medicine
and medical equipment to healthcare
organizations in which 94, 72,505 people
benefited from social aid provided by
the TDF in its own medical centres and
hospitals. The foundation owns one of
the largest banks in the country, Vakıf
Bank, which employs more than 38,000
people. In recent years, the Turkish Diyanet
Foundation also has been delivering the
zakat and Zatk al-fitr made by Muslims to
the needy according to the rules.
Today, Turkey enjoys the existence
of waqf institutions either founded by
secular or religious motives. The great
majority of the foundations, which
display a great diversity according to the
objectives of their establishment, are
aimed at social assistance, education
and health. Furthermore, in addition
to religious foundation, in recent years
there are significant increases in the
number of foundations engaged in
subjects such as science, technology,
research, democracy, human rights,
environmental protection, etc. The
Contemporary Education Foundation,
Turkish Democracy Foundation, Turkish
Human Rights Foundation, Foundation
for the Strengthening of the Physically
Disabled, Contemporary Women’s and
Youth Foundation, Turkish Foundation for
the Struggle Against Erosion, Afforestation
and Protection of the Natural Assets
(TEMA), Turkish Economic and Social
Studies Foundation (TESEV) and Social
Democracy Foundation (SODEV) are some
of the foundations engaged in influential
activities in Turkey today. The rise of waqfs
is not associated with the decline of
governance bodies in a
society. Rather, they play
a complementary role to
the government policies
regarding their social
dimensions.
23
Islamic Research & Training Institute
REGIONS UNDER FOCUS
OVERVIEW OF TURKISH
ISLAMIC BANKING INDUSTRY3
By: Br. Mehmet Fehmi Eken,
Financial Analyst, IRTI
The business expansion of Islamic banking
industry has also supported by the increase
of branch offices and the employees (see
Exhibit 3). By the end of 2011, the Islamic
banking industry has been supported by
685 branch office (growing at 26 percent
annually) and 12.703 employees (growing
at 31 percent annually) across the country.
Exhibit 4: Non-performing loan to
Total Assets and Equity
b) Growth and share
Dr. Dadang Muljawan,
Senior Economist, IRTI
Summary
-
-
Islamic banks in Turkey are known as
participation banks. They offer financial
services in accordance with Sharia
principles.
The industry consistently grows above
the national banking industry in the last
7 years despite small base number. The
growth is also supported by sufficient
physical outreach and man power.
-
Whilst maintaining high growth, the
industry can still maintain the quality of
exposures within acceptable loan quality
and financial performance. In general,
the banks have moderate ratings from
international rating agencies.
-
Economically, the participation banks
have contributed in supporting various
economic sectors like manufacturing,
real estate, etc.
Industry performance
Turkish Islamic banking industry has been
developing very rapidly from USD 3.7 billion
in 2004 to USD 29.8 billion in 2011 with
around 38 percent annual growth rate (see
Exhibit 1). This is much above the national
growth banking industry at 17 percent
annually. The growth of Islamic banking
industry is always above the national
growth, despite small number of business
volume.
The share of Islamic banking to total
banking industry has also increased from
around 1.6 in 2004 percent to 4.1 percent
in 2011.
Exhibit 2: Growth and Exchange Rate
In terms of quality of exposures represented
by the ratio of non-performing loan to total
assets (NPL to TA), Turkish Islamic banks
are slightly below the conventional with
average of 2.9 percent to 1.9 percent (see
Exhibit 4). The Islamic banks have also
slightly lower risk absorbing capacity when
compared to the conventional. On average,
the Islamic banks have 23.9 percent
non-performing loan ratio and 15.8 for the
conventional.
Exhibit 5: ROA and ROE
The ups and downs of the Turkish Islamic
banking are also correlated with the
fluctuation of the value of Turkish Lira (see
Exhibit 2) with the correlation coefficient of
0.72.
Exhibit 3: Number of branches and
employees
Turkish Islamic and conventional banks
have almost the same level of operation
efficiency which is indicated by the same
average of Return on Assets at around
1.6 percent (see Exhibit 5). However, the
Islamic banks can generate slightly higher
Return on Equity. The ROE of Islamic
banking is around 18.5 percent and 16.2
percent of the conventional.
Exhibit 6: Share of Sector Financing4
Exhibit 1: Assets & Growth of Islamic
banks
0
a) Assets
20
1
18
2
4
19
4
34
CD
SE
All information contained in this report was compiled
from publicly available sources in an edited version such
as annual report.
Knowledge Review
BN
RE
CD: Consumer durables, TR:
Trading, BN: Banks & financial
institutions, AG: Agriculture, TRN:
Transportation, SE: Services, MA:
Manufacturing, RE: Real estate &
Construction, OT: Others.
4
3
TR
MA
AG
OT
TRN
As shown in Exhibit 6, Turkish Islamic
banks allocate 34 percent of their financing
in manufacturing sector, followed by
real estate and construction, trading,
transportation, services, agriculture, and
bank and financial institutions at 19, 18, 4,
4, 2 and 1 percent respectively.
Islamic banking industry
Islamic bank are known as Participation
bank in Turkey. There are 4 participation
banks operating:
- Albaraka Participation - the bank was
founded in 1984. It is owned by ABGBahrain (66 percent), publicly listed (23
percent), and others (11 percent).
- Kuveyt Turk Participation the
bank was founded in 1989. It is owned
by Kuwait Finance House – Kuwait
(62 percent), General Directorate for
Foundation (18 percent), and others (20
percent).
- Asya Participation the banks was
founded in 1996. It is owned by public
(53 percent) and others (47 percent).
- Turkiye Finans Perticipation the
bank was founded in 2005. It is owned by
National Commerce Bank (NCB) – KSA
(65 percent) and others (35 percent).
The participation banks can also maintain relatively high profitability as indicated by ROE6
between 10.4 to 15.9 percent in 2011. The highest (15.9 percent) is achieved by Al
Baraka and the lowest (10.4 percent) is achieved by Aysa Participation.
Exhibit 9: Growth and Equity to Total Assets7
Exhibit 9 shows the comparison between annual
business growth and Equity to Total Asset Ratio
E/TA
20.0
(ETA). The ETA ranges between 9.7 percent
14.8
13.9
(Aysa Participation) to 12.3 percent (Kuwait Turk
12.3
11.9
9.7
9.8
9.6
10.0
Participation). Assuming that ETA closer to Tier 1
to Total Assets ratio, the current rate of expansion
0.0
can still be maintained for the next 3 to 4 years.
Albaraka
Aysa
Kuwait
Turkish
The participation banks have relatively moderate
Fin
rating standards by 3 international rating agencies
(Standard and poor’s, Fitch, and JCR-ER). 3 participation banks have recently got BB- to
BBB rating (see Exhibit 10).
30.0
Exhibit 10: Ratings of KFH Group
#
1
2
3
4
Exhibit 7: Market share
18.6
30.8
26.5
Albaraka
Aysa
Kuwait
Exhibit 8: Growth and financial
performances
20.0
G(TA)
NPF/TA
ROE
14.8 15.9
27.4
13.9
14.4
13.6
9.8
10.0
1.6
3.5
Last Rating 1
JCR -ER (BB Long), (B Short), Stable (April2012)
Last Rating 2
S&P (BB, Negative, B)
(August 2012)
Asya Participation Bank
JCR -ER (BB- Long), (B Short), Stable (May 2008)
Kuveyt Turk Participation Bank
Fitch Rating (BBB), (F3 Short), Stable (Jan 2013)
Turkiye Finans Participation Bank
-
Years
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total Assets
869,275
1,090,141
1,458,961
1,767,243
3,181,059
3,130,136
4,305,311
5,458,637
5,534,860
Albaraka Turk Participation Bank, Turkey (000' US$ ) Financial Figures
Equity
NBT
NAT
Prov Murabaha Leasing
NPL
153,491 12,952
12,952
22,780
420,278
38,250
0
117,079 25,622
25,622
8,987
578,842 105,301
0
135,178 30,816
34,169
6,445 1,014,900 95,166
23,097
174,401 50,799
49,206
6,259 1,324,342 106,675 24,606
460,155 92,691
73,258
25,875 2,351,767 137,874 36,962
417,060 112,050 89,047
34,207 2,432,997 65,563
69,163
476,957 88,428
70,657
88,436 3,210,451 35,895 114,152
553,659 107,582 87,042
68,251 4,178,192 16,831 123,929
531,350 106,965 84,738
56,265 3,927,879 11,720
90,971
#Staff #Branches
545
27
742
36
909
43
1,156
63
1,481
80
1,796
100
1,935
101
2,175
109
2,601
123
Years
2003
2004
2005
2006
2007
2008
2009
2010
2011
Asya Finance Participation Bank, Turkey (000' US$) Financial Figures
Total Assets Equity
NBT
NAT
Prov Murabaha Leasing
NPL
969,446
79,184
13,122
12,170
6,037
497,052 105,683
0
26,852
21,051
776,530 106,516
0
1,386,443 113,243 26,852
1,956,987 219,596 67,667
61,409
27,177 1,066,227 219,367 81,961
3,023,562 465,813 147,363 114,521 24,528 1,651,377 186,701 91,190
5,417,427 726,359 202,964 166,630 73,015 3,129,138 242,839 203,152
5,330,071 913,578 155,122 155,122 112,278 3,328,274 152,729 212,254
7,718,758 1,102,213 219,781 182,030 131,548 4,646,117 106,491 306,181
9,520,127 1,252,795 213,150 170,860 108,801 7,020,299 68,488 290,358
9,179,098 1,130,684 146,380 117,536 120,740 6,795,571 157,540 325,783
#Staff #Branches
993
43
1,331
62
1,798
71
2,372
91
3,329
118
3,806
143
4,074
158
4,275
175
4,542
200
Years
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total Assets
945,223
1,214,841
1,750,716
2,093,216
3,327,599
3,737,711
4,573,756
6,230,042
7,882,324
Kuwait Turkish Participation Bank, Turkey (000' US$) Financial Figures
Equity
NBT
NAT
Prov Murabaha Leasing
NPL
97,250
2,312
2,312
16,262
521,942 193,820 92,002
4,229
10,388
771,699 152,179 125,351
158,510
4,229
170,601 13,376
13,376
5,583 1,151,066 127,116 65,044
191,576 28,338
28,338
16,031 1,530,226 121,083 79,143
348,640 74,066
57,826
31,154 2,439,443 141,822 104,968
450,131 76,322
59,652
54,529 2,472,125 78,137 166,581
44,356 2,995,911 36,775 204,717
548,645 114,785 90,121
828,419 136,252 109,255 45,099 4,424,381 59,657 167,275
760,835 129,871 103,197 87,121 5,411,664 70,303 110,807
#Staff #Branches
647
40
948
55
1,254
69
1,386
79
1,794
87
2,245
113
2,447
121
2,850
141
3,326
180
Years
2005
2006
2007
2008
2009
2010
2011
Total Assets
2,242,356
2,915,745
4,807,881
4,643,239
5,838,687
6,942,766
7,157,859
Turkish Finance Participation Bank, Turkey (000' US$) Financial Figures
Equity
NBT
NAT
Prov Murabaha Leasing
NPL
188,192 60,754
58,021
14,113 1,514,999 182,110 50,787
310,526 102,063 102,063 10,583 1,641,189 145,895 71,435
509,564 153,505 126,430 34,176 3,042,263 178,825 92,219
654,546 132,510 104,989 51,120 2,832,238 87,111 124,405
801,136 144,379 115,026 120,931 4,094,660 41,328 172,950
913,049 164,142 133,460 55,520 5,122,814 15,782 158,339
853,788 155,249 122,533 71,496 5,434,340 29,804 129,893
#Staff #Branches
1,788
107
2,200
122
2,611
137
3,185
174
3,346
180
3,403
182
3,382
182
Turkish Fin
In year 2011, Kuwait Finance House has
been leading in growth (27.4 percent) and
maintained the quality of exposures (NPF/
TA of 1.4 percent). Albaraka, Aysa and
Turkish Fin have been growing at 14.8
percent, 13.9 percent, and 9.8 percent
respectively (see Exhibit 8). In general, the
participation banks in Turkey can maintain
high growth rate with low problem loans5.
30.0
Bank
Albaraka Participation Bank
Appendix 1: Selected Items on Balance Sheet and information
Turkish Islamic banking industry is shared
evenly among the 4 market players. ASYA
Bank holds the biggest share with 30.8
percent market share, followed by Kuwait
Finance House, Turkish Finance and
Albarakah with shares of 26.5 percent, 24.1
percent, and 18.6 percent respectively (see
Exhibit 7).
24.1
27.4
G(TA)
1.4
1.8
Kuwait
Turkish
Fin
0.0
Albaraka
Aysa
The classification of Non-Performing Assets (NPF) in
each subsidiary follows the existing asset classification
in each hosting country. The classification normally
considers delinquency period, business outlook and
trend of related industries.
5
ROE is a ratio of Net Income (NI after tax and zakat) divided by average of
Shareholder Equity (E)
7
Equity to Total Assets ratio can be used as proxy to estimate Cooke ratio and other
representation of gearing ratio.
6
25
Islamic Research & Training Institute
REGIONS UNDER FOCUS
MICROFINANCE ENVIRONMENT
IN TUNISIA AND TURKEY
By: Dr. Mahmoud Sami Nabi,
Senior Economist, IRTI
Tunisia:
During the few last years and specially
after the revolution Tunisia has been
implementing multiple reforms and looking
to establish a national strategy to develop
the Microfinance sector and enhance its
role in alleviating poverty and creating jobs.
A study8 financed by the European Union in
2010 estimated the potential of new clients
of micro-credit to 1 million which represents
around three times the number of current
active clients. But the challenge for Tunisia
is to develop not only micro-credits but
also the other services of microfinance
(micro-saving, micro-insurance). Currently
the microfinance services are reduced
to micro-credits which are provided by
the Tunisian Bank of Solidarity (directly
or through the multiple Development
Associations it finances) and by Enda-Inter
IBM Belgium (2010) "Etude sur le marché de la
microfinance en Tunisie: Contexte réglementaire, offre,
demande et conditions de développement".
8
Knowledge Review
Arabe. The Tunisian Bank of Solidarity
(TBS) was established in 1997 with 60
agencies covering the entire territory, 160
000 active clients and TND 79 million of
outstanding credit in March 2011. Around
266 000 clients benefited from the total
amount of TND 482 million disbursed from
its creation to March 2011. In 2012 TBS
has been recently charged of implementing
the IDB financed project9 (TND 75 million
over 15 years) in support of the low-income
and young unemployed people. The second
major provider of micro-credit is Enda-Inter
Arabe an NGO established in the country
since 1995 and endowed with a network
of 59 agencies. In January 2013 ENDA
counts 201 638 of active clients with an
outstanding credit of TND 132 867 million.
From its inception to January 2013 ENDA
granted 1 204 261 loans to 395 007 clients
with a total amount of TND 855 million. In
February 2013 ENDA benefited of TND
The scope of this project consists of: (i) Technical
Assistance Program to build an Inclusive Sharia’a
compatible Micro & SMEs Financial Systems, (ii)
Investment Facility for Micro and SMEs development,
(iii) Monitoring and Evaluation, and (v) Project
Management Support.
9
4 Million financing line from the French
Development Agency with the objective
of developing its micro-credit services for
agricultures in the rural regions.
The Ministry of Finance which supervises
the microfinance sector has prepared
new legal framework for the microfinance
sector which were enacted in October
2012 and January 2013. This new
legislation enables more flexibility for the
development of the sector by: i) permitting
the emergence10 and the transformation
of the existing associations in specialized
microfinance societies and ii) enlarging
the services of microfinance to include
micro-insurance, and iii) introducing the
supervisory and regulatory framework.
It is worth to note that the European
Investment Bank (EIB) and the Government
of Luxembourg are supporting the country
in developing its microfinance sector
namely through technology transfer and
regional cooperation. This cooperation will
Planet Finance Group has recently announced its
intention to enter the microfinance Tunisian market
to support young people’s undertaking their own
projects.
10
support the in the establishment of a credit
bureau, adopting the best practices in risk
management and transparency, developing
mobile money for financial inclusion
through the postal system and introducing
micro-insurance in addition to the microcredit services.
Turkey:
Turkey is the seventeenth most populous
country in the world, with a population of
73.6 million people. According to The World
Bank 4.2% of the population was living
below the poverty headcount ratio at $2 a
day (PPP) and 18.1 % of the population
was below the national poverty line in 2009.
Poverty is higher in the eastern regions,
and the unemployment rate reached 11.9
% in 2010. In 2012 the share of informal
employment in the Turkish labor markets
equaled 38.4% and this share was even
higher with 82.8% informal employment
in agriculture11. These numbers justify the
estimation of 5 million potential clients of
microfinance services. Despite this great
potential the penetration rate is estimated
to 19% only and the microfinance
environment is both challenging and
underdeveloped.12
According to the report UNDP-Turkey
(2003)13 there are four potential segments
for the microfinance market in Turkey:
They want to diversify their financing
sources, and benefit from other account
services, like current accounts and credit
cards.
Households employed in the agricultural
sector having a range of agricultural
and non-agricultural income generating
activities. They seek both loans and other
account services to manage variable
income streams.
The UNDP report estimates that this market
segmentation would be reflected in a
demand for loans ranging of loan sizes from
$200 up to $7,000 with the majority falling
between $500 and $3,000.
As per the supply of the microfinance
services, they are mainly provided by the
two state banks Halk Bank and Ziraat Bank
and the two NGOs: Turkish Grameen
Microfinance Program (TGMP) and Maya
Enterprise for Microfinance (Maya). In
June 2002, the Foundation for the Support
of Women’s Work (KEDV) established the
first NGO in Turkey to offer Microcredit
to low income women: Maya Enterprise
for Microfinance (“Maya”). This enabled
KEDV (which operates under the Law
Governing the Activities of Foundations) to
lend through Maya on a not-for-profit basis
and to target the activities of childhood
education, development, economic
empowerment, and disaster preparedness.
Based in Istanbul, Maya has four branches
in Kocaeli ,Sakarya, Kartal and Eskisehir
having totaled 1,917 active clients and a
gross loan portfolio of USD 0.8 million in
March 2012. TGMP was founded in July
2003 by the Turkish Foundation for Waste
Reduction (TISVA). Based in Ankara, TGM
provides financial services, small business
skills, and encouragement to women
entrepreneurs through its 90 branches
located principally in the higher-poverty
regions of the south and east. From 2003
to 2012, TGMP has disbursed over US
$92.4 million to over 93,000 clients. Its
outstanding credit portfolio equaled US
$19.1 million in July 2012. TGMP launched
a microinsurance program in December
2011.14
The development of new Islamic
Microfinance Institutions will contribute to
deepen the supply of microfinance services.
Although the regulatory and supervisory
environment are still weak the hosting
by Istanbul of the Islamic Microfinance
conference “Scalable Business Models
For Islamic Microfinance” in 30th January
– 1st February 2012 would signal a new
development in the regulatory environment.
14
http://grameen-jameel.com/turkey/
Self-employed and unregistered, informal
sector businesses owned and operated by
family members.
Micro/small low-growth businesses
with one, perhaps more employees, or
several partners working together. These
businesses are likely to be denied from the
formal sources of credit and have limited
access to informal finance and internally
generated funds (profits).
Established registered strong-growth
businesses, with assets that can be used to
secure loans. They may rely on internally
generated funds or ask for banks’ financing.
Turkstat.
http://grameen-jameel.com/turkey/
13
“Microfinance in Turkey: A Sector Assessment
Report”.
11
12
27
Islamic Research & Training Institute
REGIONS UNDER FOCUS
THE EMERGENCE OF
ISLAMIC FINANCE IN
MOROCCO
By: Dr. Mahmoud Sami Nabi,
Senior Economist, IRTI
D
uring the last five years, Morocco
has undertaken several steps
to introduce Islamic finance
progressively in the scene of the financial
system. As a first step in 2007, Bank AlMaghrib (BAM) authorized three Islamic
financial instruments, Murabaha, Ijara and
Musharaka. However at this time, the tax
legislation was not adjusted accordingly to
make the instruments as competitive as the
conventional ones. This has not prevented
some banks from launching these Islamic
instruments.
As a second step, Morocco revised
regulations to facilitate the development
of Islamic finance. The 2009 Finance
Law annulled the double registration fees
on fixed assets financed by Murabaha.
Subsequently, the 2010 Finance Law and
Tax Office Circular Note 718 reduced
the VAT on Murabaha from 20% to 10%
Knowledge Review
and permitted banks to spread their tax
liability across the life of the transaction.
In addition, the VAT applies to the bank’s
margin only, no longer to the repayments
of the principal, and the VAT payments on
the margin were deductible from the bank’s
profit tax.
Bank Al-Maghrib’s current regulations
permit Islamic finance windows within
banks. They also allow a bank subsidiary
to provide alternative products, including
Islamic finance instruments. Two
subsidiaries of Attijariwafa bank also
offer Sharia’ah compliant instruments:
Dar Assafa, a 100% subsidiary, provides
Murabaha financing for auto, home/real
estate and consumer goods purchases; and
the consumer finance company Wafasalaf
offers car leasing and home improvement
financing, while its Taksit program for
auto and household equipment financing
structured on a Murabaha basis.
After the elections of November 2011,
the new Government announced that
the introduction of Islamic finance in the
Kingdom is one of its priorities and making
the Kingdom a regional hub of Islamic
banking is in line with the Casa finance
city project. Meanwhile, he announced a
gradual introduction of Islamic banks to
preserve the competitiveness of the existing
conventional banks. It is expected that a
new law organizing Islamic banking will
be approved by the Parliament in the next
few months. This will open the door to
the establishment of the first full-fledged
Islamic bank in 2013. The government
announced that foreign Islamic banks
will be authorized to take at most
49 percent of the capital of the
new bank.
PUBLICATIONS
ROLE OF ISLAMIC FINANCE IN DEVELOPMENT
OF IDB MEMBER COUNTRIES:
A Case Study of Kyrgyz Republic and Tajikistan
IRTI Occasional Paper No.14
successful in achieving growth and
controlling unemployment.
Authors:
Salman Syed Ali,
Nasim Shah Shirazi and
Mahmoud Sami Nabi
However, like many other developing
countries, due to many internal and external
factors the economies in these countries
have been vulnerable to shocks and face
constraints in sustaining the economic
growth. They also face high inflation, high
incidence of poverty and worsening income
distribution. Kyrgyz Republic registered
high unemployment during the last decade,
but Tajikistan reduced the unemployment
due to the emigration of workers to Russia
and other countries and benefitted from the
receipt of huge foreign remittances. Both
countries are facing high saving-investment
gap, declining foreign direct investment
(FDI), declining net official assistance and
foreign aid, huge trade and current account
deficits, increasing fiscal imbalances and
increasing burden of external debt.
F
inance is expected to play a major
role in equitable and sustainable
economic development. However,
the track record of conventional finance
is not encouraging for the task. It has
not been very successful in addressing
unemployment and poverty. Indeed, the
stylized facts show that many countries
suffer from increasing income and
opportunities inequalities along with
economic and financial instabilities. Can
Islamic finance offer a solution where
conventional finance has failed in the task
of equitable socio-economic development?
The present paper seeks to explain how
promotion of Islamic finance can help in
the development of low-income countries.15
This potential role of Islamic finance
is discussed in the context of a case
study of Kyrgyz Republic and Tajikistan.
Development of Islamic financial sector is
high on the agenda of Islamic Development
Bank in its efforts to partner in the socioeconomic development of its member
countries and restoration of human dignity.
The paper notes the achievements as well
as identifies some key constraints faced
by Kyrgyz Republic and Tajikistan in their
aspiration for socio-economic development.
These constraints are a combination of
financial, governance and political factors
that are interlinked. Therefore, a broader
approach is followed in the present study
of highlighting the issues and indicating as
how Islamic finance can address them to
alleviate some of the identified constraints.
It also discusses, as examples, some
specific sectors in the countries under
For operational and analytical purposes, the World
Bank classifies economies into four groups according
to gross national income (GNI) per capita. The groups
are: low income, $1,025 or less; lower middle income,
$1,026 - $4,035; upper middle income, $4,036 $12,475; and high income, $12,476 or more.
15
study where Islamic finance can make a
difference.
Socio-Economic Progress and
Challenges
Kyrgyz Republic and Tajikistan have
made a considerable progress since their
independence given the huge task of
socio-economic transformation that they
faced. For example, Kyrgyz Republic
has been successful in transforming
the economy from central control to the
market economy and has achieved a great
success in economic growth and poverty
reduction compared to the early years.
Similarly, Tajikistan has been successful in
many fronts. It has been recognized as a
democratic country internationally. It has
focussed its efforts on socio-economic and
political reforms, converting a socialist to a
market economy, building good relations
with other countries for the promotion
of trade and creating an investment
environment in the country. It has been
The financial markets are not sufficiently
developed in the whole Central Asian
Region. The financial market in Kyrgyz
Republic and Tajikistan is shallow as
indicated by the M2-GDP ratio. Availability
of domestic credit to the private sector
is very low along with very high and
discouraging lending interest rate. Small
firms are getting insignificant finance from
Development of Islamic
financial sector is
high on the agenda of
Islamic Development
Bank in its efforts to
partner in the socioeconomic development
of its member
countries and
restoration of
human dignity.
29
Islamic Research & Training Institute
the banking system compared to large
firms.
Microeconomic risks appear very strong
in both Kyrgyz Republic and Tajikistan.
Although Kyrgyz Republic has made efforts
to create business friendly environment
which has improved its doing-business
indicators such as starting a business,
registering property, protecting investors,
but weaknesses remain in getting
electricity, paying taxes, trading across
border and closing contracts. Business
firms consider policy instability, corruption,
Government instability, inefficient
government bureaucracy and access to
finance as the major factors constraining
doing business in Kyrgyz Republic.
Similarly, firms in Tajikistan are exposed
to a very weak business environment and
experience constraints on doing business
in the area of access to finance, tax rates,
tax regulation, corruption, foreign currency
regulation and inefficient government
bureaucracy. Furthermore, the countries
under this study are urged to improve
their governance, human development,
labour productivity and overall level of
development toward industrialization
and eventual transition to the knowledge
economy. Furthermore, Kyrgyz Republic
and Tajikistan are characterised with poor
quality of infrastructure, weak quality of
institutions and are very weak in terms of
global competitiveness.
Binding Constraints
Analysis of these challenges brings out
three factors as binding constraints on
the sustainable development of Kyrgyz
Republic: i) Low level of public investment
(about 6 percent per annum during the last
decade), ii) declining private investment &
FDI and iii) weak software of growth. Low
public investment is caused by budget
deficit, poor governance, weak institutions
and lack of human capital. The private
investment has been high compared to
public investment. However, it has been
declining over the recent years and can
be a potential binding constraint in the
sustainable development. Similarly FDI is
also falling. The low private investment and
low FDI inflow are caused by poor physical
and human capital, microeconomic risks
factors and macroeconomic vulnerabilities
including huge deficit in trade and current
account, budget deficit, increasing debt
services, high unemployment and high
lending cost. Overall economic growth is
also constrained by the weak software of
growth such as weak global competitiveness
due to the low expenditures on R&D,
low quality of education, low overall level
of development towards the knowledge
economy and the low labour productivity
In Tajikistan, the binding constraints on
sustainable growth are (i) the low level
of private investment (4.36 percent per
Knowledge Review
annum during the last decade), (ii) low
public investment and (iii) weak software
of growth. The low private investment
is caused by weak financial sector, low
domestic savings, poor intermediation,
microeconomic risk factors, and macro
risks such as trade and current account
deficits, huge budget deficit, low foreign
exchange reserves, increasing debt
services, and high inflation. Low public
investment is affected by budget deficit,
poor governance, weak institutions and
lack of human capital. Weak software
of growth is resulted by weak global
competitiveness due to the low R&D
expenditures, low quality of education
and low level of development toward the
knowledge economy and relatively low
labour productivity.
ensures financial and social stability, and
(iv) promotes comprehensive human
development and fairness. It links finance
with the real economy and maintains
that link at each point in time in fair and
transparent manner.
Relationship between Finance and
Growth
Limiting Budget Deficits and Rationalizing
Government Borrowing:
Although economics literature finds
positive association between the financial
development and economic growth, the
traditional finance has failed to prevent
crises, encouraged pro-cyclical policymaking and rendered the national financial
systems non-transparent and impossible
to regulate. It has failed in providing
sustainable and equitable growth, reducing
unemployment and poverty.
High and persistent government budget
deficits are usually the result of government
assuming too many responsibilities
outside its main areas of concern, which
necessitates borrowing from public and
abroad. The possibilities to borrow on
interest and the perceived needs by the
government for higher expenditure often
reinforce each other to create a spiralling
cycle of public sector borrowing and
spending, which also contributes to the
crowding out of the private sector investment
and consequently economic growth.
The countries under study have been
experiencing a number of constraints as
pointed out above. The Islamic finance
can play a great role in promoting inclusive
growth and enabling the considered
countries to follow a more equitable
development path with the objectives to
achieve high income and social cohesion
simultaneously. Since Islamic finance is not
currently practiced in these countries, the
study also explains the nature of Islamic
finance before pointing to the ways in
which it can help address the challenge of
alleviating the development constraints.
Islamic Finance and Development
Constraints
Islamic finance is different from
conventional finance in its close attention to
all aspects of society’s development. Islamic
financial system: (i) help and stimulate
economic activity and entrepreneurship,
(ii) addresses poverty and inequality, (iii)
How Islamic Finance Can Alleviate
the Development Constraints?
The challenges of low public and private
investment, gap between savings
and investment and declining foreign
direct investment can be addressed
through measures and incentives that
rationalize government borrowing; but
increase development expenditures;
enhance financial inclusion; and promote
entrepreneurship.
Prohibition of interest would constraint
excessive government borrowing by
removing the incentive to lend and by
disallowing the rollover of debt. However,
the governments will be able to raise
finance either for pure public goods and
services or for other revenue generating
social projects. It will also have other
sources of revenue such as taxation and
voluntary contributions from the public.
Zakat (and 'ushr) will be earmarked
exclusively for supporting the poor,
the needy and for the other prescribed
categories. Many social needs will be
met through voluntary philanthropy for
which the government will only need to
provide coordination and encouragement
services. Thus Islamic financial system
along with abolishment of interest
would constraint government
borrowing and ensures best use of its
internal and external resources in socially
and economically useful projects while
it frees up resources for investment and
economic growth through private sector.
Savings & Investment Gap, High Cost of
Finance, Financial Access, & Developing
Entrepreneurship:
Islamic finance can foster better financial
access and financial inclusion through
making finance compatible with the
religious and social values of solidarity as
exemplified by the profit and loss sharing
principle which reduces reliance on
collateral. Moreover, by avoiding interest
it makes credit tied to economic activity.
Islamic financial system, by emphasizing
profit and loss sharing, develops healthy
risk appetite in the society at all levels.
This would develop entrepreneurship and
willingness for real investments, which are
key drivers for innovation, economic growth
and stability. This key advantage when
combined with higher financial inclusion
leads to faster, diverse and broad-based
growth.
Linking Finance to Real Economy:
It is one of the hallmarks of Islamic finance
that it always keeps finance linked to the
real sector activity. The delink between
the real and financial sectors is avoided by
prohibiting interest (Riba) and the selling
of debts and the rolling-over of the unpaid
debts as well as the prohibiting of excessive
uncertainty or avoidable uncertainty
(Gharar) in contracts, and promoting
ethical norms that ensure fairness and
transparency. The linkage between finance
and real economy ensures that stability and
economic progress is not lost by frequent
crises.
What Islamic Finance Can Do
in Various Economic Sectors of
Countries under Study?
Cotton Sector:
Cotton is one of the major exports of
Tajikistan contributing a substantial portion
of its GDP. In the cotton sector, Islamic
finance modes such as salam, murabahah
and ijarah can be used to provide inputs
like seeds, fertilizer, sowing and harvesting
machines. At the output harvesting stage
Islamic financial modes can be utilized to
buy and process cotton. At the export stage,
Islamic finance can be used for export
financing and pre-shipment financing. It
can also be used in creating a mechanism
to store, transport and smoothly sell cotton.
Islamic finance can also be used as a way
to bringing FDI in the yarn manufacturing
and weaving sectors to produce high value
added products for exports.
All this will add to creating new possibilities
and freeing the farmers from the double
exploitation of monopoly and monopsony
that they currently face. To promote cotton
exports at better terms a network of local
storage facilities and certification system for
the quality and quantity of cotton can be
created and institutionalized. Warehouse
certificates against these cotton bales
can serve as guarantees as well as sale
instruments for execution of international
trade and trade financing by Islamic
financial institutions.
Foreign Direct Investment:
Another avenue is to attract FDI in
processing of fine quality yarn and cloth
from the raw cotton. This will result not
only in high value added goods but a
whole line of associated services will also
come into play for economic development.
However, the business environment and
official procedures need to be made
investment friendly. By recognizing and
institutionalizing Islamic modes of finance
and allowing Islamic financial institutions
to operate in the countries there is more
likelihood that the Gulf capital may flow
to the region and contribute in various
projects, cotton and cotton related industry
being one of them, through FDI. Thus
allowing for operations of Islamic financial
institutions itself will attract FDI.
the creation of new countries instead
of supplying to local consumers. In this
context, project financing based on Islamic
modes can be utilized for construction
of electrical power generation units and
creating suitable distribution networks
for local use of electricity as well as for
exporting it to the neighbouring countries
on quid pro quo basis. Islamic project
finance will utilize combination of istisna[,
murabahah, ijarah, and salam contracts
at various stages of the project to address
the economic development needs. Project
specific sukuk are another alternative to
raise funds from internal and external
sources. These instruments will also be
useful in developing a secondary capital
market providing additional features of
flexibility and liquidity. If these are issued
in small denominations they can attract
more diversified investors base that include
individuals as well as large institutions.
Infrastructure Sector:
Roads are very important for trade and
commerce in landlocked countries. Not
only new roads for intra- and inter-city
transportation are needed but old ones
also require maintenance and expansion.
Islamic modes of financing such as istisna[
and lease-to-sell (Ijarah Muntahiyah bi-alTamlik) are some of the suitable modes
for this purpose. The financing of toll road
projects can also be undertaken through
issuance of sukuk.
Tapping of Remittances and putting them
to Productive Use:
Remittances constitute substantial part
of the GDP of the countries under study.
These are currently being used either for
consumption or remain idle as savings
outside the formal financial sector.
Channelling of these financial resources
and remittances into national level
Energy Sector:
Kyrgyz Republic and Tajikistan are
facing electricity shortages for use in
the household and industrial sectors.
The problems are not only insufficient
production of electricity but also the poor
distribution networks. Many electric lines
that exist from pre-independence era are
such that they now go cross border after
Islamic project finance
will utilize combination of
istisna, murabahah, ijarah,
and salam contracts at
various stages of the
project to address the
economic development
needs. Project specific
sukuk are another
alternative to
raise funds
from internal
and external
sources.
31
Islamic Research & Training Institute
investment would first require promoting
localized and regional investments. For
this the use of appropriate institutions
and such financial instruments are
needed that enable local investment and
build confidence and trust at all levels,
individuals, firms and the government.
Moving towards national level investments
government issued project specific sukuk
for funding of specific projects that pay out
from the returns of these projects are likely
to develop new avenues of cooperation and
trust in the efficiency of the government.
The support infrastructure institutions and
practices created for such sukuk will also
become useful for the functioning of private
sector businesses and reducing the cost of
doing business for private firms as well.
Use of Voluntary Sector and
Cooperation for Economic
Development
Activation of voluntary sector, such as
awqaf and Zakat institutions, is another
source for creation of such support and
infrastructure that can improve corporate
governance and reduce cost of doing
business. Many of the awqaf properties
are amenable to securitization through
issuance of sukuk. The proceeds can be
used to expand the operations and build
new social projects. Awqaf can be used
not only for poverty alleviation through
simple transfers but they can be used as a
system of social protection and assistance
in addition to Zakat and targeted to a wider
group than the Zakat recipients. Awqaf can
even be used to build the missing social
and public institutions which the private
for-profit-sector may not have incentives
to develop but which nevertheless are
needed for economic development. For
example, institutions for better governance,
development of accounting standards,
providing education and training, creation
of system for property and collateral
registration, and institutions to settle minor
trade disputes all are possible through
awqaf.
Obligation of Zakat and encouragement of
charity directly addresses the poverty issues
and provide mechanisms to bring people in
the mainstream economic activity including
their access to formal financial sector.
Knowledge Review
There are studies showing that Zakat
has the potential to alleviate poverty form
Tajikistan by raising the income of the poor
who earn below 1.25 dollar a day above
this threshold. However, if Zakat is used in
more planned manner to enable the poor
not only meet their immediate consumption
needs but also develop their skills and
provide them capital to start their own small
businesses and become self-sustained then
the impact of Zakat will be higher.
Improving Business Environment and
Relations with Neighbouring Countries:
Improving the business environment
and managing relations and promoting
cooperation with the neighbouring
countries is necessary in stimulating private
investment and flow of foreign direct
investment, and more so in the context of
landlocked Central Asian countries. The
translation of Islamic teachings of rights and
responsibilities, justice and benevolence
into economic and financial dimension
will enhance efficient enforcement of
contracts and rules, protection of rights of
both the investors and the workers, and
promotion of sale. All of these matter very
much for inflow of funds, their investment,
and economic growth. Cooperation
and harmonization of relationships
are fundamental to a healthy society
and economic growth. In the countries
understudy growth in GDP and social
wellbeing requires attention to growth in
trade, agriculture, cotton sector, and SMEs
as targets for near future. For the longer
term development of non-cotton agriculture,
power, mining, and human capital will be
the key to growth.
Microfinance Institutions:
The efficiency of MFIs depends on their
outreach, the available infrastructure and
support institutions. Regulatory frameworks
for MFIs exist in countries under study
and lending and leasing both are already
recognized within these frameworks. The
need is to add mark-up sale (murabahah)
and partnership opportunities in the
allowable transactions and create
necessary infrastructure for their use by
MFIs. In addition to deposit taking MFIs,
cooperative based structures for MFIs are
also needed to promote Islamic finance.
At present the credit rating institutions
and collateral registration institutions are
either non-existent or very weak requiring
urgent attention. Efficient working of such
infrastructure institutions will give a boost to
MFIs. To make the micro-finance programs
a success social capital formation and
cooperation is necessary. In addition to
group-based mutual guarantee schemes
there is a need to build the cooperation by
inculcating Islamic norms of cooperation
and mutual help. The smallest unit of social
cooperation is family, to which Islam gives
more importance. Therefore, the family
as a unit should be supported to grow out
of poverty and get linked to the chain of
mainstream economic activity at the next
higher level of scale and scope.
Harnessing the Untapped Opportunities:
The declining FDI can be reversed and
the exports can also be diversified by
making financial sector laws conducive
for Islamic banking and finance. Indeed,
Islamic banks and financial institutions
from other countries where such finance
is more developed would find attractive
opportunities to enter the market. Such
banks and financial institutions would
bring with them expertise of Islamic
finance and can help in developing
the necessary financial infrastructure
and training of human resources. The
entry of Islamic financial institutions is
also likely to bring in foreign investors
interested in other economic sectors and
doing business through these financial
institutions. However, stable policies,
currency convertibility and easy currency
transfer policies are also needed for
entry of financial firms. Another potential
area in exports that can be developed
through Islamic finance is halal products
of processed and fresh meat, poultry and
agricultural commodities that can find a
good market in the GCC and other countries.
To make the micro-finance
programs a success social
capital formation and
cooperation is necessary.
In addition to groupbased mutual guarantee
schemes there is a need
to build the cooperation by
inculcating Islamic norms
of cooperation and mutual
help. The smallest unit of
social cooperation is family,
to which Islam gives more
importance.
PUBLICATIONS
ZAKAH MANAGEMENT
FOR POVERTY ALLEVIATION
Training Manual
Author: Mohammed Obaidullah
R
ealizing that human resource
development for the Islamic charitybased and not-for-profit organizations
constitutes a major challenge to their
survival and growth, the Islamic Research
and Training Institute has embarked on
an ambitious activity to develop a series
of training manuals intended for use by
training organizations in this sector. The
present manual on Zakah Management for
Poverty Alleviation is the first in this series.
It has the following modest objectives:
(i) to serve as core learning package for
training in the field of zakah management;
(ii) to add to the supply of trained zakah
professionals; (iii) to provide respectability
and professionalism to the profession of
Amil Zakah; and (iv) to serve as a tool of
advocacy with government policy makers
and regulators, specifically in IsDB member
countries for consideration of zakah as a
strategic poverty alleviation tool.
This manual on Zakah Management for
Poverty Alleviation is divided into seven
stand-alone modules. Module One
titled “What the Poor Need” provides
the participants with an appreciation
of the challenge of poverty and the role
of financial and non-financial services
in addressing this challenge. Module
Two describes the Islamic Approach to
Poverty Alleviation seeking to provide the
participants with an understanding of
why poverty alleviation is a key objective
of Islamic Shariah and how it is sought to
be achieved. Module Three titled “how to
estimate zakah liability” seeks to strengthen
the participants’ knowledge and skills in
estimating zakah liability of individuals
and businesses, provide a thorough
knowledge of fiqhi rules of zakah and their
implications for zakah liability. Module
Four titled “how to distribute zakah aims
to strengthen the participants’ knowledge
of Shariah rules regarding utilization of
zakah, the eligibility criteria of beneficiaries
and related issues. Module Five deals with
issues in how to expand outreach and the
role of various stakeholders in the process,
such as, the government, the Islamic
networks, the Islamic charity organizations,
the Islamic scholars and activists, the
zakah professionals, the Islamic banks &
microfinance institutions, the zakah payers
and the zakah beneficiaries. Module Six
deals with the important issue of how
zakah-based institutions may enhance
credibility through better accountability,
transparency and governance. Finally,
Module Seven discusses how to design,
implement and evaluate performance of
zakah-financed economic empowerment
programs involving micro-credit, microequity and micro-takaful.
The manual suggests that while lecturediscussions will be conducted by experts
or resource persons to explain the
concepts, principles and best practices
in zakah management, these need
to be supplemented by Question and
Answer (Q&A) sessions that will give the
participants the opportunity to elaborate
and clarify significant issues and concerns
on the given topic. Sharing by participants
of their experiences from their respective
organizations or countries will enable crosslearning among the participants on the
various methods and practices flourishing
in different cultures and regions. The Group
Assignments will be conducted to give way
for the participants to apply or express their
internalized and assimilated knowledge
during the lecture and discussion sessions.
Finally, the manual prescribes field visits to
zakah organizations in the region to enrich
learning from the lectures and workshops
with the reality of actual field operations
and the application of best practices,
thus validating how these concepts are
working. Evaluation of the sessions and
other activities of the training will also form
part of the program. Considering the broad
coverage of zakah, the concentration of the
contents of the training package is mostly
confined to practical issues in mobilization
and utilization of zakah from the stand
point of not-for-profit organizations (NPOs)
engaged in poverty alleviation initiatives.
This manual is intended for professionals,
key officials, managers and training
specialists involved in the implementation of
zakah collection and distribution programs.
It provides the tools for the trainer to deliver
the entire course in a way that stimulates
adaptation and learning. It will also enable
the trainee to gain an understanding of
and enhance his/her skills in zakah
management. It is hoped that
this publication would further
contribute to the wealth
of knowledge on zakah
management and form the
basis of a more extensive
text on management of
Islamic charity.
33
Islamic Research & Training Institute
IRTI WORKING PAPER
A THEORY OF PROFIT SHARING,
INCOME INEQUALITY AND
CAPITAL ACCUMULATION
IRTI Working Paper Series No. WP-1433-03
Author: Dr. Mahmoud Sami Nabi
T
he analysis of the relationship
between economic development
and income inequality has been
debated by economists for a long time
since the seminal work of Kuznets
(1955). According to Simon Kuznets’
theory the relationship between
economic development and income
inequality has the form of a U-inverted
curve. The justification is based on
the observation that in preindustrial
societies, almost all the population is
poor and therefore inequality is low.
When people begin moving from lowproductivity agriculture to the more
productive industrial sector - which
offers higher incomes - inequality of
revenues rises. The third phase which
marks the downward part of Kuznets’s
curve occurs when the society becomes
sufficiently rich so that the urban-rural
gap is reduced and inequality reduces
due to the social transfer mechanisms
(pensions, unemployment benefits,
etc.). The stylized facts (see figure 1)
show that this theory is not matching
with the continuously widening of
inequality throughout the globe.
Even in the OECD countries where
we have expected the fulfilling of
Kuznets’s theory, inequality of incomes
has increased since mid-1980s such
that the income of the richest 10% of
people was nearly nine times that of the
poorest 10% in 2005 (OECD, 2008).
To cope with these real world story, a
new theory of persistent inequality has
been developed (e.g. Banarjee and
Newman, 1993; Piketty, 1997) trying
to explain why poor people face limited
investment opportunities. The Economic
Science Nobel Prize’s Laureate Amartya
Sen has stressed in his work a broader
approach of inequality which is the
inequality of capabilities which could
be defined as the freedom to achieve
valuable beings and doings. One of the
dimensions explaining the impossibility
of poor people to end by catching up
Figure 1. Gini coefficient (last available observations in period 1995-2005)
65
60
Africa
Latin America
55
Asia
50
45
Eastern Europe &
Central Asia
40
35
Developed
30
25
20
Source: Gasparini et al. (2009)
Knowledge Review
the wealthy people - even in advanced
stage of development – is the access
to finance. As expressed by DemirgüçKunt and Levine (2009, p.2) " The
financial system influences who can
start a business and who cannot, who
can pay for education and who cannot,
who can attempt to realize one’s
economic aspirations and who cannot.
Thus, finance can shape the gap
between the rich and the poor and the
degree to which that gap persists across
generations.”
Demirgüç-Kunt and Levine (2009)
show that an improvement in financial
markets, contracts, and intermediaries
reduces income inequality. Therefore,
it is not surprising that the access to
finance has been acknowledged by
the World Economic Forum (WEF) as
one of the criteria to judge the degree
"The financial system
influences who can
start a business and
who cannot, who can
pay for education and
who cannot, who can
attempt to realize one’s
economic aspirations
and who cannot. Thus,
finance can shape the
gap between the rich and
the poor and the degree
to which that gap persists
across generations."
Demirgüç-Kunt and
Levine
of financial system development. The
WEF (2012) defines the financial
development as “the factors, policies,
and institutions that lead to effective
financial intermediation and markets,
as well as deep and broad access
to capital and financial services”.
However, even if awareness exists
among policy makers on the urgent
need to enhance the broader access to
finance, they are most likely unarmed
with the right and effective financial
instruments namely (Clarke et al.,
2003). Indeed, observing the recent
widening of income inequality in most
of the countries we might conclude
that the influence of policy makers
on “finance” through taxation and
monetary policy is ineffective.
It is therefore legitimate to imagine
a new financial mechanism leading
to lower inequality while insuring
sustainable growth and it is from this
perspective that the contribution of
Islamic economics is considered in this
paper. According to Chapra (1985)
economic growth isn’t by itself of
prime importance if not accompanied
by the reduction of inequalities,
full employment and broad-based
economic well-being. In order to
achieve these goals he advocates for
the establishment of equitable money
and banking system. Criticizing the
traditional capitalism he argues that
“high or low interest rates are the
result of restrictive or liberal monetary
policies adopted in the larger national
interest. There is no reason why the
entrepreneur or the financier should be
the only one to suffer or benefit from
such polices. Why shouldn’t the gains
or the losses be equitably distributed
between them?” (Chapra, 1985, p.
217). In order to achieve what he
called equitable distribution of gains
and loss between the entrepreneur and
the financier, he suggest considering
a profit-and-loss sharing mechanism
which guarantees the convergence of
the two parties’ interest while interacting
with the economic conditions as the
interest rate do.
In this paper (“A Theory of Profit
Sharing, Income Inequality and Capital
Accumulation”) the author analyzes
the effect of introducing profit-sharing
financial contracts (between banks
and entrepreneurs) on the evolution
of the capital accumulation/income
inequality relationship. To this end,
I depart from an existing theoretical
“The factors, policies,
and institutions that
lead to effective
financial intermediation
and markets, as well as
deep and broad access
to capital and financial
services”
World Economic Forum (WEF)
model developed by Aghion and Bolton
(1997) and extend it by incorporating
two new features. The first feature
is the costly contract enforcement
as a second type of credit market
imperfection in addition to the moral
hazard problem. This is justified by the
costly and even impossibility in some
cases, to enforce financial contracts in
the developing countries. The second
feature is enabling, contrarily to Aghion
and Bolton (1997), wealthy agents to
undertake larger projects and therefore
extend their businesses activities.
The theoretical model shows that even
in the context of this more realistic
framework, adopting the profit sharing
contract as a financial instrument
leads to reduction of the income
inequality and their disappearance
in an advanced stage of the capital
accumulation process. For further
details on the drivers of this result
readers are invited to refer to the paper
which is available on IRTI website.
References
• Aghion, P. and P. Bolton (1997), “A
Theory of Trickle-Down Growth and
Development,” Review of Economic
Studies, 59, 151-72.
• Banerjee, A. V and A.F. Newman
(1993), “Occupational Choice
and the Process of Development,”
Journal of Political Economy,
University of Chicago Press, vol.
101(2), pages 274-98, April.
• Chapra, M. U. (1985), “Towards a
Just Monetary System,” Leicester,
UK:The Islamic Foundation.
• Demirguc-Kunt, A. and R. Levine
(2009), “Finance and inequality
: theory and evidence,” Policy
Research Working Paper Series
4967, The World Bank.
• Clarke, G., L. C. Xu, and H-F Zou
(2003), “Finance and income
inequality : test of alternative
theories,” Policy Research Working
Paper Series 2984, The World Bank.
• Gasparini et al. (2019), “Recent
trends in income inequality in Latin
America,” Working Papers 132,
ECINEQ, Society for the Study of
Economic Inequality.
• Kuznets, S. (1955), “Economic
growth and income inequality,”
American Economic Review 45,
No. 1, March, l-28.
• OECD (2008), Growing Unequal?
Income Distribution and Poverty in
OECD Countries, OECD Publishing.
• Piketty, T. (1997), “The Dynamics
of theWealth Distribution and the
Interest Rate with Credit Rationing,”
Review of Economic Studies, Wiley
Blackwell, vol. 64(2), pages 173-89,
April.
• World Economic Forum (2012),
“The Financial Development Report
2012”, http://www.weforum.org/
reports/financial-developmentreport-2012.
“high or low interest rates
are the result of restrictive
or liberal monetary
policies adopted in the
larger national interest.
There is no reason why
the entrepreneur or the
financier should be the
only one to suffer or
benefit from such polices.
Why shouldn’t the gains
or the losses be equitably
distributed between
them?”
Chapra
35
Islamic Research & Training Institute
BOOK REVIEW
THE CHANGING LANDSCAPE OF ISLAMIC FINANCE (2010)
Editor: Rifaat Ahmed Abdel Karim
Publisher: The Islamic Financial Services Board
Reviewed by: Dr. Osman Babiker,
Lead Training Specialist, IRTI
I
be resolved, with negative consequences
for the quality of the legal and regulatory
infrastructure for Takaful.
n addition to the editor, the book has
been authored by another seven writers
combing scholars from academia
and practitioners from the industry. It is
composed of an introduction, six main
chapters and concluding remarks. The
subject of the book is very analytical and
prescriptive in addressing enormous
fundamental challenges all segments of
of the Islamic Financial Services Industry.
Authors from both academic and industry
institutions have vast experience and deep
knowledge of the various issues pertaining
to Islamic Finance.
Chapter 1 on Islamic Finance and
Financial Crisis: Implications for Islamic
Banking is authored by Volker Nienhaus.
Apart from the Introduction, Chapter is of
three main parts. Part One deals with the
problem of an increasing detachment of
the financial sector from the economy. The
accelerated growth of the financial sector
with continuously weakened links to the
real economy, the increasing complexity
of financial techniques and products,
and monetary mismanagement led to the
collapse of the financial system. Part-Two
reviews and assesses the explanations
for the crisis and the conceptual claims
of Islamic Finance and compares these
with the recent practices of Islamic Banks.
Discrepancies between the concept and
the reality of Islamic banking become
obvious. Some internal as well external
reason behind taking Islamic banking
away from ideals of Islamic finance and
being closer to the conventional finance
with all its problems. Part-Three spotlights
the perspectives of Islamic finance. It
deals in particular with fundamental and
incremental reform proposals that have the
potential to bring Islamic banking closer to
its ideal modality and to improve its stability
and efficiency.
Knowledge Review
Chapter 2 on Islamic Finance and
Financial Crisis: Implications for Takaful
is authored by Simon Archer, Rifaat
AbdelKarim and Volker Nienhaus. In
addition to the introduction and conclusion,
Chapter Two is of two main parts:
part-II on Business Models of Takaful
and, part-III is about Takaful Business
Structures and Regulatory Implications.
The main issues discussed in part-III are
(i) Risk Management and Investment of
Takaful, (ii) Takaful Capital Adequany and
Solvency, (iii) Transparency, Disclosure
and Business Conduct of Takaful and,
(iv) Takaful Corporate Governance. The
chapter points out the fact that Takaful
has been developed according to a
hybrid form of insurance undertaking,
in which the participants’ funds operate
on a mutual basis but are managed by
a Takaful Operator, which is a company
with shareholders. This hybrid structure
raises the issues discussed in part-III as
above and that these issues have yet to
Chapter 3 on Emerging Financial
Architecture: Implications for Islamic
Finance is authored by Douglas Arner
and is composed of an introduction and
four parts. Part-II is on the Evolution of
the International Financial Architecture.
Here the chapter identifies three major
periods in which differeing regimes and
dynamics dominated arrangements
respecting international finance: the Bretton
Woods period (1944-73), the period of
internationalization (19741994), and the
period of globalization (1995-present).
The main finding here is that: while it is
possible that the Global Financial Crisis
of 2007-2009 will mark the end of the
period of globalization, it appears that
rather than a shift to a different regime, the
existing regime will be reformed to some
extent and reaffirmed through increased
legalization. Part-III is about Evolution of the
Emerging International Islamic Financial
Architecture. The chapter addresses
intellectual basis of modern Islamic banking
largely formulated by the 1950s and from
this basis during the 1960s and 1970s
initial Islamic banking started in South
East Asia and the Middle East. The 1980s
witnessed support of Islamic banking by
development of legislative and regulatory
set-up and by extensive research relating
to Shari’ah-compliant equity investment.
In the 1990’s, as finance increasingly
internationalized, Islamic finance likewise
developed with emerging infrastructure
institutions like AAOIFI and Islamic
Indices. To underpin the development and
stability of emerging Islamic finance, the
IFSB was established in 2002. PartIV talks about implications of the
Global Financial Crisis on the
International Finance and Part-V takes
up implications on Islamic Finance. The
Chapter mentions here that there are two
primary sets of implications for Islamic
Finance: (i) regulatory issues relating to the
Crisis, and, (ii) the design of the Islamic
financial Architecture in general. For the
future, Islamic financial institutions will
need to pay special attention to financial
stability arrangements focusing on: (i)
crisis prevention through regulatory
and supervisory design and coverage,
(ii) financial regulation and financial
infrastructure and, (iii) mechanisms to
support crisis resolution, especially liquidity.
Chapter 4 on Capital Requirements,
Counter-Cyclicality and Islamic Finance
is authored by Simon Archer. It discusses
the problem of pro-cyclicality of capital
adequacy in the context of a grave
economic recession and how to mitigate
it as not only banks but insurance
undertakings are also affected by the procyclicality. Part-IV of this chapter examines
the problem and the various proposed
minimizers in relation to Islamic banks
and Takaful sector. The writer argues that
Islamic financial institutions (IFIs) could
be inherently less pro-cyclical and this
is why they suffered less in the financial
crisis in 2007 than those conventional
counterparts. Nevertheless, he makes a
thesis that IFIs should consider various
factors to prevent or mitigate pro-cyclicality
through: (i) Macro-prudential Regulation
and Supervision to monitor system-wide
risks, (ii) meeting capital requirements
and maintain counter-cyclical buffers, (ii)
developing funding liquidity standards for
IFIs in particular, (iii) IFIs should apply and
observe maximum gearing limits set by
regulators, (iv) maintaining adequate loan
loss provisions.
Chapter 5 on Islamic Financial Law: Back
to Basics is authored by Barry Rider. The
main thesis of this chapter is the legal
issues and challenges facing IFIs in terms
of their products and services. The writers
opines that there is very little interest in or
learning relating to issues of governance, or
legal risk because law firms have not been
instructed by regulators to address issues
relating to regulation, governance and
institutional aspects of Islamic Finance. The
writer sets the issues in the context of the
development of Islamic finance, including
governance, legal risk and Shari’ah
compliance. He thinks that legal challenges
that confront Shariah-compliant financial
products and services are in many ways
much the same as those offering ordinary or
conventional investments. The jurisdictions
in which the main financial markets are
located generally take the view that Islamic
financial products and services must
conform to the general laws and regulations
that govern access to the markets. The
Islamic character of the product or service
is, in legal terms, an additional dimension.
If Islamic products and services are noncompliant, there is a breach of contract
and/or misrepresentation. In considering
legal challenges of Islamic finance, it must
be remembered that different jurisdictions
may take very different approaches.
Chapter 6 on The Meaning of Ratings
for Islamic Financial Institutions and
Shari’ah-Compliant Instruments is
authored by Anouar Hassoune, Khalid
Howladar and Simon Harris. It mentions
that Shari’ah-compliant asset classes
sometimes differ from those conventional
assets, not so much in their economic
substance, but more in their financial form.
The Chapter points the fact that different
categories of IFIs’ liabilities are addressed
by different rating approaches and Moody
assigns various categories of ratings to IFIs
such as: (i) Bank Financial Strength Rating,
(ii) Global local Currency Deposit Rating,
(iii) Global local Currency Issuer Rating,
(iv) Foreign Currency Deposit Rating and,
(v) Foreign Currency Debt Rating. As an
important Islamic financial product, the
Chapter examines and explains Moody’s
Rating methodologies applicable to Sukuk
depending on whether they are Assetbased or Asset-backed Sukuk. Also,
based on its types, the Chapter review the
Moody’s Approach towards Rating Takaful
Companies. The discussion focusses on
Moody’s approach to how to analyze the
financial strength of Takaful Operators.
The Book is in fact a quality authorship as it
reflects on enormous issues and up-to-date
challenges facing the different segments
IFIs. Writers have deep knowledge and
vast experience in the field of Islamic
finance and raise serious issues and give
commendable suggestions for fixing and
resolving these challenges.
The subject of the book
is very analytical and
prescriptive in addressing
enormous fundamental
challenges all segments
of of the Islamic Financial
Services Industry. Authors
from both academic
and industry institutions
have vast experience and
deep knowledge of the
various issues
pertaining
to Islamic
Finance.
37
Islamic Research & Training Institute
BOOK REVIEW
ISLAMIC TAKAFUL INSURANCE:
FROM JURISPRUDENTS TO
APPLICATION (2012)
Author: Ahmed M. Sabbagh
Publisher: The Islamic Insurance Company (Plc), Amman - Jordan
Reviewed by: Dr. Osman Babiker,
Lead Training Specialist, IRTI
T
he Book is of three main parts and
combines theoretical and Shari’ah
foundations of Islamic insurance with
its practical implementation within various
jurisprudences. Part-One is composed
of (4) four chapters, Part-Two is also of
(4) four chapters and the last Part-Three
is about the role of Shari’ah supervisory
bodies in the Islamic insurance companies.
Part-One (Islamic Takaful Insurance: from
Jurisprudents to Applications) focuses on:
1. Principles of Mutual Takaful Insurance
as a base for Takaful Insurance
(Chapter One). The author addresses
here issues such as concepts,
definitions and history of Mutual Takaful
Insurance;
2. The Islamic Takaful Insurance
Practiced by Islamic Takaful
Companies (Chapter Two): this is a
comprehensive part where the Book
elaborates in details types of Islamic
Takaful Insurance as practiced today
by most Islamic insurance companies.
Issues such as mechanisms, functions,
types and revenues and expenses
relating to Islamic Takaful Insurance are
explained and compared with practices
in conventional insurance. So, ChapterTwo constitutes a central part of the
Book;
3. Practical Applications of Islamic
Takaful Insurance in the Islamic
Insurance Company-Jordan (ChapterThree): the Book indulges here on
very important issues of insurance
and shows how are the practices in
Islamic Takaful Insurance. This part
concentrates on important matters
like coverage limits, exclusions from
insurance coverage, the obligations of
Knowledge Review
the insured, regulations in connection
with types of insurance, various types
of liabilities created and could arise due
to providing insurance services. the
Book discusses here how the Islamic
Insurance Company-Jordan manages
Islamic Insurance in case of all types
of general insurance as well as life
insurance referred to in the Book as
Social Takaful Insurance;
4. Insurance Surplus in Islamic Takaful
Companies (Chapter-Four): speaks
about a very debatable issue of how to
manage and use the surplus created
from providing the Islamic Takaful
insurances. This part of the Book
gives explains clearly the concept
of insurance surplus, criteria for
distribution of this surplus, the factors
that determine insurance surplus and
how the Islamic Insurance CompanyJordan manages this surplus account.
by Shari’ah bodies like Shari’ah Boards
or Fiqhi Academies as well as individual
scholars. the conclusion reached is that
there is no objection to reinsurance as
such and it is only the way the service
is provided which determines legality
of reinsurance. this requirement needs
more governance on activities of Islamic
insurance companies that provide
reinsurance services.
3. Discussion and Preference of
Scholars’ Opinions in Reinsurance
(Chapter Three): Here the Book makes
an assessment of the various Fiqhi
opinions relating to reinsurance. The
author makes an attempt to point out
the limitations of practicing reinsurance
by the Islamic insurance Companies.
The issue of “financial gain” attained
through reinsurance is also elaborated
by the author spotlighting the Shari’ah
judgment in particular.
4. Islamic Solutions to the issue of
Reinsurance in Takaful Companies
(Chapter Four): Here the Book
concludes that, Islamic Insurance
Companies could join hands to establish
like a mega Islamic Reinsurance
Company depending on direct
contributions by these companies. the
author proposes the idea that Islamic
Reinsurance companies could enhance
their insurance capacity by leveraging
their capital through big shareholders.
Part-Three (The Role of Shari’ah
Supervisory Commissions in Islamic Takaful
Companies) addresses various issues
relating to Shari’ah supervision of the
Islamic Insurance Companies. the book
highlights the issue of selecting members
of the Shari’ah boards, their competencies,
their roles and validity and enforcement of
their decisions.
In conclusion, the book is a comprehensive
authorship on the subject of Takaful and
fills a gap in this field.
Part-Two (Reinsurance and its Applications
in Islamic Takaful Insurance Companies)
focuses on:
1. A General Definition of Re-Insurance
(Chapter One): This Chapter describes
reinsurance, gives brief historical
account of re-insurance, then explains
aims and motives of reinsurance
and its methods and finally makes a
comparison between conventional and
Islamic reinsurance. the value added
of the Chapter is in this comprehensive
comparison between the two modalitiesconventional and Islamic reinsurance.
2. Legitimacy Opinions of Islamic
Reinsurance (Chapter Two): In this
Chapter the Book examines almost all
Fiqhi opinions regarding reinsurance.
the author discusses opinions expressed
The Book elaborates in details
types of Islamic Takaful
Insurance as practiced today
by most Islamic insurance
companies. Issues such as
mechanisms, functions, types
and revenues and expenses
relating to Islamic Takaful
Insurance are explained and
compared with practices in
conventional insurance.
AT A GLANCE
RESEARCH ACTIVITIES* AT IRTI
In-house Research Projects in Progress
Evaluating Microfinance Institutions from Customers and Institutions Perspective: Research Proposal and Questionnaire
Constraints on the Intra OIC Trade and Potential Role of Islamic Finance
Value at Risk
Does Size Matter for Islamic Banking Performance during the Financial Crisis? Some Empirical Evidence
The Role of IsDB Group in Supporting Islamic Trade Finance in Member Countries
A Theoretical Analysis of Profit and Loss Sharing and Debt Contracts in the Presence of Moral Hazard
Takaful Insurance: Developments and Challenges
Policy Papers in Progress
Constraints on Intra OIC Trade and Potential role of Islamic Finance
• Roundtable held on 6 April, 2013 in Doha, Qatar.
• Survey under preparation
• MTR Forum held on May 14, 2013 in Kuala Lumpur.
Mid Term Review of Ten Year Framework and Strategies for Islamic
financial sector development
Research Seminars /Conferences /Orientations /Workshops
Title
Collaborating Organization
Date/Venue
1
2nd International Conference on Islamic Economics and
Economies of OIC Countries
IRTI, IIUM
29-30 Jan 2013 in Kuala Lumpur
83 papers presented
2
Sfax 2nd International Forum on Islamic Finance
Sfax University, Tunisia
27-29 June 2013 in Tunis
Partnership in Conferences/Seminars Organized by Other Organizations/Institutions
Title
Collaborating Organization
Date/Venue
1
International Forum on Islamic Finance
School of Business at Grant
MacEvan University, Edmonton,
Canada
27 November, 2012, Edmonton,
Canada
2
Harvard – LSE Workshop on Insolvency & Debt
Restructuring in Islamic Finance
London School of Economics
28 February 2013, UK
3
5th International Conference on “Developing of Financing
Sharif University Technology
System”
5-6 January 2013,
Tehran, Iran
4
5th International Course on Islamic Capital Markets: “A
Window to Betterment and Justice”
28-30 April, 2013,
Tehran, Iran
Securities Exchange Organization
*Activities which have been covered in detailed elsewhere in this issue have been excluded.
39
Islamic Research & Training Institute
TRAINING ACTIVITIES* AT IRTI
Training Manuals Developed & Published
1. Zakah Management for Poverty Alleviation by Dr. Mohammed Obaidullah
2. Awqaf Development and Management by Dr. Mohammed Obaidullah
Training Courses Conducted under Member Country Assistance Program
No.
Course Title
Language
Venue
Coll. Institution
Date
1
Management of Zakah
French
Guinea
National Zakat Foundation, Guinea
24-28/12/2012
2
Developing of Financing System
English
Iran
Sherif University, Iran
06-07/01/2013
3
Principles of Islamic Banking and Finance
for Bankers and Policy Makers
English
Turkey
Economic Policy Research Foundation of
Turkey [TEPAV]
28/01-01/02/2013
4
Principles of Islamic Banking and Finance
English
Iran
Monetary and Banking Research Institute
[MBRI], Central Bank of Iran
02-05/02/2013
5
Sukuk: Shari'ah & Operational Aspects
Arabic
Oman
Central Bank of Oman
02-06/02/2013
6
Principles of Islamic Banking and Finance
for University Teachers
English
Turkey
Economic Policy Research Foundation of
Turkey [TEPAV]
18-22/02/2013
7
Economics for Shariah Scholars
Arabic
Egypt
Saleh Kamel Centre for Islamic Economics,
Egypt
20-24/04/2013
8
Operational Efficiency of Zakat Institutions
Arabic
Sudan
Institute of Zakat Sciences
28/04-2/05/2013
Training Courses (Fee-Based)
Risk Management in Islamic Financial
Institutions
English
-
IDB Headquarters
Islamic Banking and Finance
English
Intermediate Level -I
IDB Headquarters
Islamic Banking and Finance
Arabic
Basic Level-I
IDB Headquarters
Islamic Banking and Finance
English
Basic Level-II
IDB Headquarters
Islamic Banking and Finance
English
Intermediate Level-II
IDB Headquarters
Islamic Banking and Finance
Arabic
Basic Level-III
IDB Headquarters
Islamic Banking and Finance
English
Basic Level-IV
IDB Headquarters
*Activities which have been covered in detailed elsewhere in this issue have been excluded.
ABOUT IRTI
T
he Islamic Research and Training Institute (IRTI) was established in 1401H (1981G).
The purpose of the institute is to undertake research for enabling the economic, financial
and banking activities in Muslim countries to conform to Shari’ah and to extend training
facilities to personnel engaged in economic development activities in IDB member countries.
The Institute is located within the headquarters of IDB in Jeddah, Saudi Arabia.
Contact us
Islamic Research and Training Institute
Member of the Islamic Development Bank Group
P.O.Box 9201 - 21413 Jeddah, Kingdom of Saudi Arabia
General Phone: +966-2-6361400 Fax: +966-2-6378927
Director Gen. Office: +966-2-6466131
E-Mail: irti@isdb.org
Web: www.irti.org
EDITORIAL
COMMITTEE
Chairman
Dr. Mohammed Obaidullah,
mobaidullah@isdb.org
Alternate Chairman
Dr. Mahmoud Sami Nabi,
msnabi@isdb.org
Dr. Wejdan Kenali
wejdan@isdb.org
Br. Mehmet Fehmi EKEN
meken@isdb.org