In the West
with Concentrated Focus on the
The United Kingdom
US Official
Position
Islamic Finance 101
Hosted by the
U.S. Department of Treasury
In association with the
Islamic Finance Project – Harvard Law School
November 6, 2008
1:00 p.m. to 5:00 p.m.
1500 Pennsylvania Avenue NW, Washington D.C
ANALYSIS
FINANCIAL
INSTITUTION
NEWHORIZON April–June 2009
GEOGRAPHICPRESENCE
COMPANYSTRUCTURE/
FUNDINGSOURCE
PRODUCTS
OFFERED
STRUCTURES
USED
UniversityBank
•Headquarters:Detroit,Michigan
•Shari’ah-compliantproductsofferedin:California,
Connecticut,Idaho,Illinois,Maryland,Michigan,
NewJersey,NewYork,Ohio,Pennsylvania,
Virginia
•Statecharteredbank
•Financingproductsareoffered
throughitswhollyowned
subsidiary,UniversityIslamic
Financial
•Residentialrealestatefinancing
•Depositproduct
•Moneymarketproduct
•Mutualfunds
•Murabahaandijara
•Profitsharing
deposits
•Mutualfunds
offeredbyHSBC
Amanah
DevonBank
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferedin:Alaska,
Alabama,Arizona,Arkansas,California,Colorado,
Connecticut,Florida,Georgia,Idaho,Indiana,
Kansas,Kentucky,Louisiana,Massachusetts,
Michigan,Minnesota,Missouri,Nebraska,North
Carolina,NorthDakota,NewHampshire,New
York,Ohio,Oklahoma,Oregon,Pennsylvania,
RhodeIsland,SouthCarolina,SouthDakota,
Tennessee,Texas,Utah,Virginia,WashingtonDC,
Wisconsin,Wyoming
•Statecharteredbank
•Financingproductsareoffered
throughitswhollyowned
subsidiary
•Residentialrealestatefinancing
•Commercialrealestatefinancing
•Realestateconstructionfinancing
•Linesofcredit
•Cashmanagement
•Business&tradefinancing
•Institutionaldepositproducts
•Investmentproducts
•Trustandadvisoryservices
•Murabahaandijara
•Musharakah
•Profitsharing
deposits
•Mutualfunds
offeredbythird
partyproviders
(Amana,Azzad,
Iman,seebelow)
BroadwayBank
ofChicago
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferedinIllinoisonly
Communitybank
•Residentialrealestatefinancing
•Commercialrealestatefinancing
Ijara
RomAsiaBank
Headquarters:MonmouthJunction,NewJersey
Statecharteredbank
Tobedetermined
Tobedetermined
LincolnState
Bank
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferedinIllinoisonly
Statecharteredbank
Residentialrealestatefinancing
Ijara
MutualBank
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferedinIllinoisonly
Commercialrealestatefinancing
Murabaha
ColeTaylor
Bank
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferedinIllinoisonly
Statecharteredbank
Commercialrealestatefinancing
Murabahaandijara
ZayanFinance
•Headquarters:Chicago,Illinois
•Shari’ah-compliantproductsofferednationwide
•Non-bankmortgagecompany
•Fundingprovidedbyforeign
investors
Commercialrealestatefinancing
Diminishing
musharakahandijara
Guidance
Residential
•Headquarters:WestFallsChurch,Virginia
•Shari’ah-compliantproductsofferedin:California,
Connecticut,WashingtonDC,Florida,Georgia,
Illinois,Indiana,Massachusetts,Maryland,
Michigan,Minnesota,Missouri,NorthCarolina,
NewJersey,NewYork,Ohio,Oregon,
Pennsylvania,SouthCarolina,Tennessee,Texas,
Washington
•Non-bankmortgagecompany
•FundingprovidedbyFreddie
Macand/orforeigninvestors
Residentialrealestatefinancing
Diminishing
musharakah
Lariba–
American
Finance
House/Bankof
Whittier
•Headquarters:Pasadena,California
•Shari’ah-compliantproductsofferednationwide
•Non-bankmortgagecompany
•Brokers/offersitsfinancing
productsinsomestates
throughitsaffiliate,Bankof
Whittier
•FundingprovidedbyFreddie
Mac,FannieMaeand/orBank
ofWhittier
•Residentialrealestatefinancing
•Commercialrealestatefinancing
•Homeconstruction
•Business&tradefinance
•Currentaccount/depositproduct
Ijaraplusdiminishing
musharakah,
musharakahand
murabaha
SamadGroup
•Headquarters:Ypsilasti,Michigan
•Shari’ah-compliantproductsofferedinMichigan
only
Non-bankmortgagecompany
Residentialrealestatefinancing
Ijara
BANKS
Statecharteredbank
MORTGAGECOMPANIES
NEWHORIZON Rabi Al Thani–Jumada Al Thani 1430
FINANCIAL
INSTITUTION
GEOGRAPHICPRESENCE
COMPANYSTRUCTURE/
FUNDINGSOURCE
PRODUCTS
OFFERED
ANALYSIS
STRUCTURES
USED
COMMUNITY-BASEDFINANCINGPROGRAMMES/ORGANISATIONS
CityofMinneapolis
–Alternative
Financing
Programme
Headquarters:Minneapolis,Minnesota
•Governmentsponsoredprogramme
forsmallbusinessowners
•Co-financingarrangementswithother
communityproviders(i.e.African
DevelopmentCenter,orotherbanks)
•Realestateconstruction
financing
•Microfinancing
Murabaha
MinnesotaHousing
FinanceAgency,
StateofMinnesota
Headquarters:Minneapolis,Minnesota
•Governmentsponsoredprogramme
forlowincomeparticipants
•FundingprovidedbyStateof
Minnesota
•Low-incomeresidentialreal
estatefinancing;wholesale
providertoDevonBank’s
residentialrealestatefinancing
products
Murabaha
African
Development
Center
Headquarters:Minneapolis,Minnesota
Non-profitcommunitydevelopment
corporation
•Microfinancing
•Residentialrealestatefinancing
•Residentialmortgagebrokerfor
Devon-MinnesotaHousing
FinanceAgencyProject
Murabaha
Non-profitcommunitydevelopment
corporation
Microfinancing
Murabahaand
musharakah
•Non-profitcommunitydevelopment
corporation
•FundingprovidedbyOfficeofRefugee
ResettlementintheUSDepartment
ofHealthandHumanServices
Microfinancing
Murabaha
•Fundingprovidedbyco-opand
investors
Co-opresidentialfinancing
programme
Co-operative
financingstructure
withincome
distributedas
dividends
Neighborhood
Development
Center–RibaFree
Programme
Headquarters:Minneapolis/St.Paul,
Minnesota
WorldRelief
Headquarters:Nashville,Tennessee
Headquarters:PaloAlto,California
AmeenHousing
Co-operative
INVESTMENTADVISORS/MUTUALFUNDCOMPANIES
SaturnaCapital
Headquarters:Bellingham,Washington
Investmentadvisor,assetmanager
Publicinvestmentfunds
(AmanaMutualFunds)
AzzadAsset
Management
Headquarters:FallsChurch,Virginia
Investmentadvisor,assetmanager
Publicinvestmentfunds
(AzzadMutualFunds)
NorthAmerican
IslamicTrust/Allied
AssetAdvisors
Headquarters:BurrRidge,Illinois
Investmentadvisor,assetmanager
Publicinvestmentfunds
(TheImanFund)
INVESTMENTBANKS
Arcapita
Headquarters:Atlanta,Georgia
SubsidiaryofArcapitaBank(Bahrain)
•Privateequity
•Realestatefocusedinvestments
•Venturecapital
InnovestCapital
Headquarters:Cleveland,Ohio
SubsidiaryofGulfInvestmentHouse
(Kuwait)
Realestatefocusedinvestments
TransOceanGroup
Headquarters:Boston,Massachusetts
SubsidiaryofGulfInvestmentHouse
(Kuwait)
Privateequity
UIBCapital–
Chicago
Headquarters:Chicago,Illinois
OverlandCapital
Group
Headquarters:Boston,Massachusetts
SubsidiaryofUnicornInvestmentBank
(Bahrain)
InvestorsincludeGulf-basedfinancial
institutionsandinvestors
Privateequity
•Realestatefocusedinvestments
•Equipmentleasing
•Assetmanagement
In France , the balance of
trade deficit reached EUR
53 billion in 2008.
Downgrade of the credit
rating of France in 2012.
Corporate loan fell :−2,3%
Nov 2009
One in every two new
business fails in the long
run.
Persistence of difficulties
for SMEs to obtain loan
Banks require more
collateral and grant
amounts lower than
those released before the
crisis
Dorsaf, Islamic Banking Finance and Commerce Conference
Oxford 2012
ISLAMIC FINANCE
Profit of conventional
banks fell from US $ 116
billion in 2006 to a net
loss of US $ 42 billion in
2008.
SMEs
CRISIS
ISLAMIC FINANCE, SMEs AND
THE RECENT GLOBAL SHOCKWAVES IN EUROPE
Islamic financial industry
has crossed its $ 1 trillion
mark in 2009.
Islamic bank net profits
increased 9% from 2006
to 2008. From US $ 4.2
billion to 4.6 billion.
Growth in total equity
was 36% for Islamic
banks in 2009.
5
FRENCH INITIATIVES FOR ISLAMIC FINANCE
First approach
since 2007
-Launch of Paris Europlace
Islamic Finance Commission
-Set up of French Shariah
boards
Tax Instructions for Islamic finance
Products: 2010
Going forward
-Fiscal instructions for sukuk ,
murabaha, ijara and istisna
published in August 2010.
-Creation of several certificates
-Qualification as banking
courses in Islamic Finance
operations for Islamic finance
-AAOIFI-Paris Europlace MOU products
for the translation of AAOIFI
-Benefit of the usual tax
standards in French.
treatment of banking
operations.
Dorsaf, Islamic Banking Finance and Commerce Conference
Oxford 2012
-Islamic financial institutions
projects for a banking license
in France .
-Fiscal instructions for
mudaraba, musharaka, salam,
wakala .
-Development of French
banks’ activity in Islamic
Finance in France.
6
British Prime Minister
Speaking at the Islamic Finance and
Trade Conference the chancellor said
he wanted to make the UK "the
gateway for Islamic finance".
He pointed to reforms of the tax
system to make Sharia compliance
easier.
"It is the vibrancy and dynamism of
Britain's Muslims, combined with
Britain's openness to the world and
our historic ties with Muslim countries,
that means the ambition you have set
for yourselves - to make Britain the
gateway to Islamic finance and trade is one I believe Britain is well placed to
achieve," Brown told a conference on
Islamic banking in London.
The Financial Services
Authority is the regulator of
the financial services industry
in the UK
The FSA's policy towards
Islamic banks, and indeed
any new or innovative
financial services company,
can be summed up simply
as "no obstacles, no special
favours". We are keen to
promote a level playing
field between conventional
and Islamic providers. One
thing we are clear about is
that we are a financial, not
a religious, regulator.
UK Government & Its Claims For
Islamic Finance Growth in London
•
Markets and skills base: It has a tradition going back to the seventeenth century, if not before,
of being willing to innovate and respond flexibly to new ideas. London has deep and liquid
markets and the exchanges are among the most frequently used venues for listing and trading
financial instruments globally. The London Metal Exchange has already been mentioned. The
UK financial services industry has a proven record of developing and delivering new products
and a large pool of legal, accounting and financial engineering skills on which to draw. Several of
these firms have now established or expanded offices in other Islamic centres. English law is
already the preferred legal jurisdiction for many Islamic finance transactions.
•
Islamic windows: Several major international institutions such as Citi, Deutsche, and HSBC
have had a presence in the Middle East and South East Asia for several years. As a result, they
have developed considerable knowledge and experience of local markets, including Islamic
ones. To accommodate the new and growing demand for Islamic products, they have
established business lines known as ‘Islamic windows’, some of which are based in the UK and
others in the Middle East and South East Asia. These windows have contributed significantly to
the development of Islamic finance because of the institutions’ global experience in product
development and their access to far greater resources than those available to local institutions
in the Middle East and South East Asia.1
UK Government & Its Claims For
Islamic Finance Growth in London
•
•
•
•
Excess liquidity in the Middle East: The sharp rise in oil prices since 2003 has resulted in huge liquidity
surpluses and a surge in demand for Islamic as well as conventional assets in the countries of the Gulf region.
The capacity of the local financial markets has not, however, been able to develop at the same speed. As a
result, demand for assets has considerably outpaced supply and Middle Eastern investors have been looking, in
large numbers, for suitable alternatives. This demand was quickly identified by Islamic and conventional 8
Islamic Finance in the UK (November 2007) Sukuk are trust certificates representing individual ownership of the
underlying assets. Sukuk are comparable to bonds. institutions that now provide a channel through which assets
within other markets are sold to these investors, often by way of Sharia- compliant transactions. This has been
particularly notable in the UK. A recent example is the acquisition of Aston Martin by two Kuwaiti financial
institutions, using Sharia-compliant financing.
Public policy and taxation: Since the early 2000s the government, for reasons of wider public policy, has
introduced a series of tax and legislative changes specifically designed to remove obstacles to the development
of Islamic finance. The first significant change came in the Finance Act 2003 which introduced relief to prevent
multiple payment of Stamp Duty Land Tax on Islamic mortgages (see below).13 The Finance Acts 2005 and 2006
contained further measures aimed at putting other Islamic products on the same tax footing as their
conventional counterparts. Most recently, the Finance Act 2007 clarified the tax framework further, in the case
of Sukuk. This is very much work in progress.
Single financial regulator: Another contributory factor is institutional. The establishment of the FSA in 1997
combined 11 different regulators into a single body under a single piece of legislation. This has done much to
resolve several of complications and conflicting views stemming from the previous regulatory regime where
functions were divided. In particular, the FSA is able to look across the system as a whole, to assess Islamic
financial institutions and products.
Islamic Bank of Britain
UK's first FSA (Financial Services
Authority) approved Islamic bank
established Sept 2004
First standalone Islamic retail bank in
the Western world
As the first stand-alone, Sharia
compliant, retail bank in the UK to be
authorised by the Financial Services
Authority we aim to provide a friendly,
inclusive and personal service for all
our customers.
Islamic Bank of Britain plc is
incorporated and registered in England
and Wales with Registration No.
4483430. Registered Office: Edgbaston
House, 3 Duchess Place, Hagley Road,
Birmingham, B16 8NH
Islamic Bank of Britain plc is authorised
and regulated by the Financial Services
Authority under Registration No.
229148. Islamic Bank of Britain plc is a
member of the Financial Ombudsman
Service.
The European Islamic
Investment Bank
EIIB was incorporated in January 2005
and received authorisation by the FSA
in March 2006.
Headquartered in London, EIIB's range
of products and services include the
following Sharia’a compliant
investment banking activities:
- Islamic Treasury and Capital Markets
- Sharia’a Advisory.
- Private Equity.
- Asset Management
EIIB seeks to service a market for
Sharia’a compliant investment banking
services in Europe, the Middle East
and Asia that it believes has been
under-exploited by conventional and
Islamic banks, and by non-banking
institutions.
The founding shareholders of EIIB
include Gulf based individuals and
institutions, including a number of
Islamic banks, as well as individuals
and companies based in Europe.
BLME
Bank of London and The Middle East
plc (BLME) was first incorporated in
London on 7th August 2006 under the
name House of London and The
Middle East.
BLME believes that the future of
Islamic finance depends on its ability
to innovate and evolve. The UK and in
particular the City of London provides
direct access to a highly skilled and
experienced workforce.
The key areas of business are Private
Banking, Asset Management,
Corporate Banking, Corporate Advisory
and Markets.
HSBC Amana
Financial Instruments
HSBC Amanah applies a variety of Islamic
financial instruments to develop its
products. Often the same instrument is
used in a variety of products, each
product meeting the needs of a different
type of customer. This section presents
the three most common Islamic financial
instruments and illustrates their uses in
representative products offered by HSBC
Amanah.
Each instrument is explained with a
definition, an overview of the transaction
process and its illustration in a
representative HSBC Amanah product.
Musharaka
Musharaka is a partnership or coownership with profit and loss sharing. It
allows each party involved to share risk
and reward to achieve a return in the
form of a share of the actual profits
earned according to a predetermined
ratio.
HSBC Amana
Financial Instruments
Mudaraba
A Mudaraba transaction is an investment
partnership. In a mudaraba arrangement, the
contract is between an investor (or financier) and
an entrepreneur or investment manager known
as the mudarib. Risk and rewards are shared. In
the case of a profit, both parties receive their
agreed-upon share of the profit. In the case of a
loss, the investor bears any loss of capital while
the mudarib loses his time and effort.
Murabaha
A Murabaha transaction is a sale at a stated
profit. In a Murabaha transaction, the bank
purchases something from a third party and sells
it to the client at a stated profit on a deferred
payment basis. In this way, the client can buy
something without taking an interest-based loan.
Wakala
Wakala refers to an agency appointment to act
on behalf of the principal. In Wakala, the bank
acts as an agent to the client to buy the asset
according to the specific terms and conditions.
Ijarah
An ijarah is an Islamic lease. The bank purchases
an asset and leases it to a client for fixed monthly
payments. An ijarah may include an option for
the lessee to buy the asset at the end of the
lease, though such a provision is not required.
Shariah Supervision
HSBC Amanah stataes that “Shariah
compliance of its business operations
as its most important and strategic
priority. This is reflected in its
Corporate Values. In developing our
products and services, we are
committed to the highest Shariah
standards in the Islamic banking
industry. HSBC Amanah employs a
team of qualified professionals to
ensure that the guidance and advice
received from the Shariah Committees
is implemented in letter and spirit.”
Sheikh Nizam Yaquby
A Bahraini, he holds a Ph.D in Islamic
Law from the University of Wales in
the United Kingdom and a BA in
Economics and Comparative Religion
from the McGill University in Canada,
he sits on the boards of various banks
as a respected Shari'ah advisor.
He is a member of 46 Sharia Boards
including Abu Dhabi Islamic Bank,
Barclays, BNP Paribas, Credit Agricole
CIB, Dow Jones Islamic Index, HSBC
Amanah, Lloyds TSB, and Citi Islamic.
Islamic Investment
In response to the rising demand for
Shariah-compliant investment
opportunities, FTSE has developed a
range of Shariah indices that provide a
broader Shariah index solution for
Islamic investors.
The FTSE Shariah Global Equity index series is based on the
Large and Mid Cap stocks in the FTSE Global Equity Index
Series universe. Screening is then undertaken by Shariah
consultants, Yasaar Research Inc., against a clear set of
guiding principles.
These indices exclude businesses that offer products and
services that are considered non- Shariah-law compliant,
such as stocks of companies that operate in alcohol,
entertainment, financial services, pork-related products and
tobacco, as well as companies where debt is more than 33%
of the total assets. Yasaar scholars, who apply the Shariah
screening to the FTSE Global Equity Index Series, represent
all of the major Shariah schools of thought, creating a best
practice approach that has credibility across all regions of the
Islamic world.
In addition to the FTSE Shariah Global Equity Index Series,
FTSE works with a range of stock exchanges around the
world to offer domestic Shariah-compliant solutions. These
include the FTSE Bursa Malaysia EMAS Shariah Index
Series, FTSE NASDAQ Dubai Shariah Index Series, FTSE
SET Shariah Index and FTSE SGX Shariah Index Series.
More recently FTSE has extended its Shariah investment
opportunities to include other asset classes such as
commodities; with the world's first Shariah-compliant FTSE
Physical Industrial Metals Index Series.
Arguments against
Promotion of Islamic
Finance in the West
Spread of sharia banking in
Britain and America is a significant
part of the attempt to Islamise
Britain and America.
Acceptance of sharia finance
furthers the Islamist objective of
gradually legitimising Islamic
sharia law more generally in the
west.
The most important point to
grasp is that Islam recognises no
authority superior to sharia.
Sharia banks will therefore not
recognise the superior authority
of the law of the land. When
trillions of pounds and dollars are
locked into them, who will argue
with them?
Christopher Holton
Vice President
Centre for Security Policy
USA
America is losing the financial war on
terror because Wall Street is
embracing a subversive enemy
ideology on one hand and providing
corporate life support to state
sponsors of terrorism on the other
hand.
Challenges to the Growth of Islamic Banking &Finance
1- Shortage of Expertise in Industry
2- Lack of Regulatory Harmonisation (v standardisation)
3- Lack of Demand among Muslims (Some Muslim Scholars Opposition and
Conceptual Perplexity = Falafel Syndrome)
4- Limited Choice for Customers
5- Poor Performance of Funds (Lack of all inclusive marriage of state backed and
meticulously planned products and instruments)
6- Insufficient Profitability of Business Model
7- Shortage of Scholars to Approve Products
8- Inconsistent Religious Interpretation
9- Lack of Sophistication in Risk Management
10- Reluctance of Regulators to Grant Licences
11- Fragmented Nature of Industry
12- Negative Perception of Islamic Financial Products and Services
13-Lack of Product Diversification
(Islamic Finance, Challenges & Opportunities, BDO)
Iran
Challenges
•
•
•
•
•
•
International Strategic Initiatives
Publicity of Systems and Products
Engagement internationally
Also works towards reemphasising the
underlying jurisprudential and rational
arguments and reasoning in order to remove
stigma often attached to the Jafari school of
law.
Rethinking the Size of Engagement of the
private sector
Plans Aimed at Redeployment of the Domestic
and International Liquidity
Advantages
•
•
•
•
•
•
Abundantly existing expertise to make
international contributions
Constitutional Integrity of Islamic Law
Contribution towards harmonisation of
regulatory systems
Introduction of Assurances that Iran as an
Islamic state can provide to financial markets
both inside and outside Iran
Dissemination of the diversity of the Islamic
financial products, instruments and schemes
developed in Iran
Dissemination of knowledge about the wealth
of literature generated in the country
addressing the interpretative foundations of
law allowing for the recruitment of instruments
and products. Also works towards
reemphasising the underlying jurisprudential
and rational arguments and reasoning in order
to remove stigma often attached to the Jafari
school of law.