Category Archives: Interviews

Islamic finance in the US: Interview with Devon Bank executive

Islamic finance in the US: Interview with Devon Bank executive

Interview with David Loundy, vice-chairman and head of religion- based financing at Devon Bank. Devon is a Jewish community bank in Chicago, offering Islamic finance.

My comments: It is interesting to see David’s answer to the first question on how Devon, a Jewish community bank, got into Islamic finance: due to demand from the community. This shows that while a top-down demand approach is popular, grassroot-level demand that is effectively and appropriately communicated is often equally productive. Western Muslim communities should follow the example of the Chicago Muslim community and press their local banks to start offering Islamic financing options.

QUESTION: How did a Jewish-owned family bank, Devon, in Chicago, get involved in Islamic finance?

Answer: Although many of our shareholders are Jewish, we are a community bank. We were created by a community to serve the needs of that community. That community is in constant flux. Once, it was predominantly Jewish. It is a “new immigrant community”. People move in, get established, bring family from the old country, and then move on.

Our headquarters is supposedly in the most ethnically diverse neighborhood in the Americas. Indian, Pakistani, African, Eastern European, some Arab. This includes a large Muslim population. They asked us for help. We helped. This is part of our mission-serve members of our community in the ways they need to be served.

Our Islamic finance programme derives from a customer who wanted to open a bookstore. They asked if we could help, but without riba. At the time, we said no, and the group found financing from the United Bank of Kuwait (UBK). When UBK was acquired, it sent away all of its US customers. The customer came back and asked for help again. At that point, the head of our International Department convinced management that there was an unmet need.

The bank started looking into options. As word got out, the demand exploded showing there really was a need, and we were in a good position to help. We had done non-interest-based financing before for the observant Jews, but the strong Muslim demand for such products surprised us.

Q: What have been the challenges internally, community and with the regulators?

A: Internally, our biggest challenge has been to line up needed liquidity. We turn away a million dollars of businesses a day. Some of this we are looking to manage with two prospective sukuk issuances. We would like to put in place a larger permanent solution, but it requires raising quite a bit of funding in a bad market. Our second internal challenge is resource allocation. All bank functions must run well, conventional and Islamic.

We are striving to triple our mortgage volume (conventional and Islamic) in the next 18 months, but that requires an investment in staff, technology, and processes to handle higher volume.

The community is not homogenous. 2010 was the bank’s 65th anniversary. We are generally known and respected in the community. People with prejudices do not respect that we are trying to serve the WHOLE community. I laugh at those that think that any entity providing Islamic finance has to, by definition, be donating to terrorist groups. A local synagogue soup kitchen or the Salvation Army are acceptable recipients for any donations.

The worst prejudice comes from competitors who publicly inquire as to how a non-Muslim institution can be an acceptable source of Islamic products. Answer: Because our products are better. Some in the community see our Islamic finance programme as a step towards peace and understanding. Our Muslim customers are just grateful that someone cares about their needs and is accommodating them.

Regulators are also not a homogeneous group. Banking regulators are largely supportive-they see us as “banking the unbanked” – a good thing. After 65 years in business, our regulators know us. They know we are experienced and careful, bankers. However, I often say that “Islamic finance is easy, dealing with the secretaries of state is the bane of my existence”. The amount of detail that goes into fitting the square peg of Islamic finance into the round hole of a conventional regulatory system, which can vary in each of several thousand counties, can be extreme.

Q:. The sub-prime induced credit crisis devastated the mortgage market, how were the Islamic mortgages impacted in Devon’s portfolio?

Devon Bank didn’t do sub-prime mortgages. Our Islamic portfolio has been performing VERY well compared to larger averages and even our conventional portfolio. In our 7.5 years of providing Islamic product, our write-offs have amounted to less than 90 basis points on originations-mostly due to a fraud and not credit loss. We have been careful in our underwriting, but if a customer losses a job, we both have a problem. An Islamic product has restrictions on what workout options are available, but we have been able to successfully arrange several restructurings.

The sub-prime mess disrupted entire markets. It negatively affected property valuations, and thus reserve requirements. It has scared investors, even in the face of great opportunities. A number of vendors are just plain gone. Things are starting to normalise a bit now, but the reverberations from the meltdown will take years to work out of the system.

Q. What is the profile of your typical Islamic mortgage customer, both residential and commercial?

It is fairly broad across the income spectrum. Usually first- or second-generation immigrants. Initially predominantly Indo-Pak, but now covering a much wider geographic origin. Because of our compliance level, we tend towards the more conservative end of the religious spectrum, but we get a broad range here too. We have forced industry pricing down so customers don’t feel punished for their religious observance. Our customers tend to have family networks helping with the purchase. Credit scores are a bit higher, but are often “shallow”.

Down payments are often either particularly high or low-depending on whether customers were saving to buy with cash or assuming they never would be able to buy at all.

On the commercial side, because we are a small bank, our size and location constraints produce some customer selection. They tend to be small business operators and investors; frequent masjid financing inquiries; an occasional inquiry from a Gulf investment bank.

Q: Has the time arrived for a licensed deposit-taking Islamic bank in the US? If not, what are the challenges?

We are between windows of opportunity. Devon Bank made two attempts to buy a bank to convert to Islamic. One was geographically located in a community where it would have also reached a sect of Christians that follow their religion’s prohibitions on interest as well as accommodating Jewish and Muslim prohibitions. US$6-US$9 million (US$1 = RM3.06) would have bought either institution. We could have cleansed the balance sheet and had the bank operating as a “proof of concept” pending further regulatory discussions. Our regulators were willing to see us try and make it happen in the beginning. We did not, however, have investor support.

A new charter is practically impossible to create, and largely un-economic to buy. When the right opportunity comes along, you have days in which to strike and consummate a deal. It takes a special investor who can work that fast on something novel. Now, the regulators are too busy with failing and flailing banks to put the resources into figuring out how to handle an Islamic bank. They know it WILL happen, but they don’t even know what questions to ask. It will happen, but it will be easier in a few years than it will be today.

The more interesting question is about customer demand. A subset of people will only deal with an “Islamic” bank, either out of prejudice or out of concerns over the “purity” of money coming from a conventional bank.

While we do not respect the first view, the second is one of religious conviction that we must acknowledge. There are solutions to this concern besides the creation of an Islamic bank. An end-to-end syariah-compliant bank would need to start small and demonstrate market demand. I believe there is sufficient demand for such an institution, but most plans are from people who don’t understand the US banking market and how it is regulated.

Q: What kind of interest and inquiries have you received from a Gulf or Malaysia-based institution in Devon Bank and its Islamic portfolio?

All of our businesses and funding so far have been from “onshore” sources. To date, we have not had good contacts in Malaysia. They just don’t know us-it has simply been a mismatch of networks. We have had more visits and potential businesses from Indonesians. We have had a number of contacts from Gulf entities, and I have taken several trips to the UAE, but they have been frustrating.

To some, we are a novelty (Oh look! An American doing Islamic finance! Isn’t that cute!). Others see our potential, but we have been the wrong thing at the wrong time. It is a frustration when you schedule a due diligence trip only to have the next eruption in the financial meltdown scare investors and kill discussions; or you read in the news about your potential partner defaulting on a few billion dollars worth of its debt during your discussions. Others are so fixated on winning the biggest prize that they don’t look at the merits of the race – for example, they are more interested in buying a trophy property rather than smaller more profitable ones.

The right people with the right vision WILL line up with the right time. We believe we have a compelling story and Grand Plans capable of execution – just bad timing. When those in the Gulf and in Malaysia are ready for us, we are ready for them. Our performance speaks louder than our “wasta”. In the mean time, we are not waiting – we have added capital to the bank and are adding more. We expect our business will continue growing.

Q: If you had to start all over for Islamic mortgages, what would you do differently?

I would have been more aggressive about developing infrastructure faster – vendors, staff, technology, business partners, etc. We started our programme slowly to make sure everything worked as it should and that our regulators didn’t see problems we were missing. However, it meant that resources weren’t lined up when needed.

The global credit crisis put an awful lot of plans on hold for a lot of people, and it prevented us from moving more quickly to the next stage. If we had shifted our entire timeline nine months earlier, we could have been functionally several years ahead of where we are now.

Q: What could the state of Islamic finance in the US be in 2020?

There will be an Islamic bank. A major US provider would have been long gone (five minor players pulled out of the market in the last two years). There will be a larger menu of investment options that many will not even know are syariah-compliant.

There will be “crossover” products that are syariah-based and valued for their performance characteristics, not because they fit a moral code, though they will not be widely used.

Many Islamic finance projects will continue to be done quietly in the background. The scope of product offerings will increase as providers stop trying to fit square pegs into round holes as much and develop legitimate de novo alternatives.

The Bigot Brigade will still be warning that Islamic finance is the road to Armageddon – without doing any more fact-checking than they have done today. The market will go from under-served to adequately served, though “adequately served” will not mean (fortunately) what people might have wanted it to mean three years ago.

Source: http://www.btimes.com.my/articles/jewbi/Article/

 

A Shariah scholar’s place on the board: Interview with top Shariah scholars

Gulf News: A Shariah scholar’s place on the board: Interview with top Shariah scholars

boardroom

Funds-at-Work, a research-based strategy consultancy focusing on the investment industry, recently released "Shariah Scholars – A Network Analytic Perspective," which links Sharia scholars to board positions. It is a more comprehensive study than previous Sharia scholar reports. Rushdi Siddiqui puts some challenging questions to four international Sharia scholars to get their view points:

  • Dr Hussain Hamid Hassan (HHH), eminent scholar and chairman of many Islamic financial institutions
  • Dr Mohammad Daud Bakar (MDB), international scholar and founder and managing director of Amanie Islamic Finance Consultancy and Education;
  • Yousuf Talal DeLorenzo (YTD), leading US scholar; and
  • Dr Mohammad Akram Laldin (MAL), Executive Director, ISRA, Malaysia.

Research is an important area in Islamic finance and you are well aware of the Funds-at-Work study, linking scholars to Sharia boards. What is your impression of the study?

HHH: The Islamic finance industry is young but growing. It needs specialists, not just in Sharia, but in law, accounting and feasibility studies.

There are very few scholars who combine the qualifications and experience needed for this field.

Therefore, it is only natural that they would carry a heavy load, for the industry is in need of development and the invention of new products which should be compliant with the Sharia, valid in civil law, and commercially viable.

There just aren’t a sufficient number of specialists in these areas in light of the rapid growth and remarkable development of this industry.

In time, the young will gain experience, and people will then seek them out, after the generation that preceded them has passed away; and they, in turn, will be succeeded by another generation of young practitioners. That’s the way of the world.

Furthermore, this study was lacking in precision, for it ignored a great number of up-and-coming scholars who are working as members of these same Sharia boards along with their teachers, in order to learn from them. Why didn’t the study focus on them?

It focused instead on the first generation, whose careers developed apace with the growth of the Islamic finance industry and the Islamic banking movement.

The number of these [young scholars] far exceeds the number of senior scholars, who are now well over 60 years of age.

How can the study demand that the new Islamic finance industry be led by the young to the exclusion of those with long experience, who are considered the fathers and theorists of the Islamic finance industry (IFI)?

MDB: What is lacking in this research is the clear hypothesis of the research and in what way the readers could actually benefit from the research, as the data presented is quite extensive (although not necessarily accurate), but the data analysis needs to be improved.

YTD: The goal of research is knowledge and its application. There are very likely a great deal of practical applications for the Funds-at-Work study and this is welcomed.

Networking aside, there are far more important considerations, or there should be, in evaluating Sharia scholars and their work: Published work? Academic background? Affiliation with one juristic school?

Experience and exposure to various financial products and instruments? Relationships with international legal firms? Ability to function effectively as team members and meet deadlines? Ability to represent, if necessary, IFIs in international or regional forums or even in informal situations?

All of these are factors that may have varying degrees of importance for IFIs.

MAL: I believe it is a good move to provide the market players with the information about their involvements.

It will definitely assist the market player to engage the suitable Sharia advisor so as not to hinder their progress. I also strongly believe that we are not in shortage of Sharia advisors in the market. We do have competent people but not many are given the chance to serve on Sharia boards as some market players prefer to have certain scholars on their board. As a result you can find that some scholars sit on many boards.

There is increasing conversation about scholars serving on multiple boards and how this might present a conflict of interest. Are you in agreement?

HHH: It has never happened in the history of the Islamic finance industry that the members of any Sharia board divulged secrets that damaged an Islamic bank or an Islamic financial institution.

They are the people most worthy of confidence and trust, for they are leaders and role models.

History has not conveyed to us a single report of a scholar who issued a fatwa that was a secret which only the mustafti (questioner) was privy to, such that the mufti could not issue the same fatwa to someone else.

This criticism is the result of ignorance about the nature of the duty of Sharia board members.

They explain the rule of Allah in the issues presented to them, and their fatwas are not considered the property of the mustafti who asks them, such that the rule of Allah cannot be given to someone else.

We would like to ask: How many times in the history of Islamic banking — which is more than 30 years old — has an Islamic bank complained about a member of a Sharia board that he gave the same fatwa to another bank which he had already given to the first bank?

Indeed, the rule of Allah does not change just because the person asking about it has changed.

It is a principle of the Sharia that a scholar is not allowed to conceal knowledge; rather, he has to bestow it upon whoever wants it, based on Allah’s statement: "You shall make it clear to people and not conceal it" (3:187).

MDB: Conflict of interest is a term, albeit a technical one, which should be used in specific cases is often misunderstood.

For all intents and purposes it disallows a person to be in a position whereby his decision (of doing or not doing) may be influenced by his own interest.

Could a scholar sitting in various Sharia boards be perceived to be in that position? If established, then this practice should be avoided.

What is the interest that is applicable to a scholar when issuing a fatwa?

Perhaps, many understand that Sharia advisors are equal, or should be treated similar to board of directors, hence, the perception of conflict of interest. Scholars are essentially not in the position of serving as the board of director of a bank, for example.

They are similar to other professionals such as lawyers, accountants, auditors, and actuaries.

YTD: The problem I see is not a conflict of interest but one of capacity, in terms of both quantity and quality.

A scholar who serves on multiple boards in addition to a fulltime teaching position at a university, for example, will have to be careful to balance his schedule so as to allot ample time for each of his responsibilities.

That’s a matter of quantity; and each individual will have to make up his own mind as to what constitutes a reasonable workload. Some people simply have more energy than others. We have examples in our industry of scholars at advanced ages who serve on many boards; and continue to contribute in a positive manner. We also have examples of scholars who have cut back their commitments, or who have limited them to no more than a certain number.

Insofar as quality is concerned, I think the industry is beginning to demand a greater degree of specialisation, even from its Sharia scholars.

Thus, the concerns of equity fund supervision, of bank supervision, of takaful, leasing, real estate, infrastructure, private equity, home finance, commodity trading… all of these are different and require more than an introductory understanding, hence, the future will be toward specialisation because greater attention to detail will be required of scholars.

MAL: Yes there are many who sit on multiple boards and I have no objection to this provided that the respected scholars are able to discharge their duties in efficient manner. As for the conflict of interest, I do not see any issue for individual scholars sitting on different boards.

However, at present we see a number of scholars are operating Sharia advisory companies and if the person operates the company and at the same time provide advisory services, there might be some question regarding serving the interest of the company and providing independent Sharia views.

This conflict of interest may rise to Sharia compliance risk as not enough time to review all documents, hence, a real risk management issue for IFIs. Are you in agreement?

HHH: The Sharia boards undertake their duties regarding the transactions presented to them, based on their belief that all this is a religious duty which cannot be approached on the basis of whims. Rather, it requires penetrating and rigorous academic research.

Their conscience and sense of duty prevent them from deliberately issuing a fatwa opposed to the Sharia; as for mistakes, they do occur.

If one of them happens to make a mistake, he will be corrected by the other members of his own Sharia board or by another board altogether. At any rate, the Prophet Mohammad (Peace Be Upon Him) said that if someone makes ijtihad and is wrong he gets a single reward, and if he’s right he gets a double reward.

And where are these risks that the Islamic banks have faced due to hasty or erroneous fatwas?

Are they issued by the senior members rather than the junior members?

The claim that Islamic banks are facing dangers due to the inability of the members of their Sharia boards to properly carry out their duties is a claim that is not based on reality or evidence.

MDB: If this perception is established, it must not be restated as conflict of interest term, as its misleading.

The issue of quality of works by advisors is the issue of the performance and not of the policy of having scholar on various boards.

This issue should be addressed administratively and not from a policy and regulation perspective, unless the bad performance is rather a phenomenon in modern Islamic finance industry.

YTD: If scholars do not have enough time to review documents, or if they require months to review documents and then need to schedule and reschedule before they can meet and take decisions, then something is clearly wrong.

But the fault is not necessarily that of the scholars. When establishing a Sharia board, an IFI must be cognizant of the scholars’ other responsibilities.

Even the matter of time zones should be taken into consideration. And the IFI will need to be diligent and proactive in its management of the Sharia board’s affairs so that meetings are scheduled well in advance of deadlines and time is managed effectively.

Many problems can be avoided by making a realistic and practical selection of scholars for the IFI’s Sharia board.

MAL: I agree that if a person sits on too many boards, he might not be able to scrutinise all the details of the transactions, documents etc and it will lead to what is termed as "Sharia compliant risk" for the market player. On this issue, I am not blaming the scholars solely. The market practitioners are equally responsible as they are the ones who approach the scholars and appoint them.

With only a handful of scholars on so many boards, is there a risk to IF, especially looking at issues of age, health, and the travel demands of scholars?

HHH: This is not correct, for at this time we have specialised leadership in the Islamic finance industry and we have hundreds of young people who are members of Sharia boards. Therefore, the task is not limited to a handful of scholars.

The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has a Sharia Council comprised of 18 members. There is also the Islamic Fiqh Academy that is part of the Muslim World League and the International Islamic Fiqh Academy of the Organization of the Islamic Conference (OIC).

Between them they have hundreds of scholars to whom issues of Islamic economics, Islamic finance and newly developed products are presented, and they issue fatwas and resolutions. So it is not true that those who undertake the issuing of fatwas in Islamic banks and institutions are a small handful of persons.

I totally disagree that those who are leading the Islamic finance industry and its institutions, including banks, takaful companies, and financing and investment institutions, are a small number.

MDB: The meaning of risk in this context is not clear. The risk is and should not be confined to the issues of age, health and travel commitments as these also apply to other sectors in life, be it financial or non-financial.

YTD: Key man risk is always a problem in business. It is no different in our industry. Yet, at the same time, we all know that we need to do more to develop scholars for service in the Islamic financial services industry.

MAL: This is a real issue and if we look at present there are gap between the senior and junior scholars. Many senior scholars are ageing and there are no replacements.

There is a need to put a governance process to regulate the Sharia advisory services. In Malaysia we have started this process since 2005 when the Central Bank issues the guideline on Sharia Advisory services.

One scholar is only allowed to sit on one board as to allow the grooming of new generation of scholars. As a result, we now have more than 100 scholars on our list and the number is increasing especially with many young graduates who are interested in pursuing this career.

Should this type of study in IF be expanded to include law firms? Accounting/management consulting firms?

HHH: Yes. It will soon become clear that specialised expertise in Islamic banking is less expensive than that of firms that offer diversified services to hundreds if not thousands of clients.

Nor should we forget that our Arab and Islamic educational institutions have yet to concentrate on turning out graduates with qualifications and specialisations for careers in Islamic finance.

MDB: On one hand, the research should not be extended to other sectors unless the hypothesis and the benefits of doing this research are made vividly clear. Otherwise, this research may lose [credibility and] respect. Other hand, for comparative purposes, the investigation and examination should also be conducted on other similar services such as law firms, auditing firms, and actuaries, for example, so the industry will be getting a more comprehensive view on this perceived conflict of interest issue.

YTD: Yes.

MAL: Yes it is needed so as to give the information to the market players.

To address shortage of scholars, should scholars be compelled to have a junior (local) scholar (not well known) on the board so as to encourage apprenticeship and expand the supply of scholars?

HHH: This is the actual situation. A large number of up-and-coming scholars work on the Sharia boards along with their teachers. This process is due to the initiative of the elder scholars, who search for those with outstanding abilities in the new generation and nominate them.

However, we must emphasise one point: the danger of nominating an unqualified candidate. It is not appropriate, in the name of expansion, to appoint unqualified persons, for that will cause harm to the industry itself.

Graduating from a Sharia college is not enough by itself, for there are thousands of graduates. It requires experience, personal ability and the combination of knowledge of the Sharia, civil law and accounting.

MDB: In any industry, the practice of compulsion is not a healthy one. It is always about being passionate.

As much as the junior scholars are encouraged to be part of the service, they must demonstrate the minimum capabilities and professionalism required to undertake this task. The task of the scholar and consultant is different from other tasks, such as being an academic as it requires a bit of everything: research, original thinking, understanding of the current market, and it is time consuming.

YTD: I don’t think that compulsion is the solution. But I do think that IFIs should be encouraged to do so. And I also think that the junior scholar solution is a good one.

I have also recommended a rotating scholar solution for SSBs such that one seat may given to a new scholar after the previous scholar has served a term of one or two years.

MAL: Actually, it is not the scholars who should be compelled to do so, but the market player.

This is because the market players determine who sits on the Sharia board and it is their responsibility to ensure that there is mixed of senior and junior scholars in their board.

We have done this in Malaysia and it works as pointed earlier.

In a recent event in Malaysia, Dr Mohammad Elgari presented a paper on Sharia governance. Is this the need of the hour?

HHH: Governance, in the perfect sense of that term, does not exist outside of the Islamic financial system which is based on divine revelation as expressed in the Book (the Quran) and the Sunnah.

No one in the industry can ignore that, or the [AAOIFI] Sharia standards. In addition, there is a further guaranteed level of governance and that is the presence of the Sharia supervisory board itself, made up of three, five or even seven scholars who perform their duties and opine collectively rather than as individuals.

Beyond that, Islamic financial institutions adhere to their own standards, the fatwas issued by fiqh academies, and the teachings and rulings of the classical jurists.

And then there is the academic community that monitors the work of our Islamic banks such that if ever a fatwa is issued which contradicts an Islamic teaching or principle, as a result of faulty reasoning or legal process, our academics will raise a hue and cry until the matter is corrected.

MDB: This is a welcomed paper to address the quality of Sharia advisory services, applicable to both the scholars and the stakeholders of Islamic finance.

The Sharia governance, as presented in the paper, argues for more transparency of the fatwa process and deliberations.

As a matter of fact, this (the detailed process of fatwa issuance and its argument) should be the focus of research of modern researchers instead of the perceived conflict of interest by multiple board membership.

The superiority of any Sharia board is the quality of arguments that lead to a strong and defendable fatwa by the board.

YTD: His was a very important paper and it addresses a pressing need.

As the industry matures, it becomes more and more important to have systems in place that ensure greater transparency and accountability.

Such systems will play an increasingly important role of the future development of this industry and they must be promoted.

MAL: I am one of the commentators on his paper and in many forums I have express my views that it is very important to have a comprehensive Sharia governance framework for Islamic finance.

This shall be spearheaded preferably by the regulator. In Malaysia, ISRA have initiated the establishment of Association of Sharia Advisors (ASA) in order to regulate the Sharia advisory services.

We are in the process of setting up this association and its function will be similar to other professional bodies such as the Bar Council and Medical Association that regulate the practices of its members.

ASA will be the body that regulates the conduct and lays down the ethical code of the Sharia advisors and we will get the body to be the sole body that accredits Sharia advisors for them to practise in the market.

ASA will also provide licence for the scholars to practise in the market.

Funds-at-Work research is welcomed as it shows the landscape of scholars and boards, but needs expansion to include scholars’ total activities and work. And the study should be enlarged to include other stakeholders in the Islamic finance consulting role. Finally, Islamic institutions have not knowingly contributed to over-reliance on name-brand scholars, but must now actively contribute to governance and involve junior scholars to manage Sharia compliance risk, for expansion beyond natural borders.

Introduction to Islamic Finance: Interview with Rod Ringrow of State Street Global Advisers

Introduction to Islamic Finance: Interview with Rod Ringrow of State Street Global Advisers

State Street Global Advisers senior vice president and managing director of the Doha Office, Rod Ringrow, tells Business Spectator’s Isabelle Oderberg how Islamic finance works and why it is set for enormous growth amid the meltdown of western style financial systems.

Isabelle Oderberg: I was wondering if just to start with for some of our readers who aren’t familiar with Islamic finance if you could just go through the fundamentals of it?

Rod Ringrow: The underlying principle for Islamic finance is it’s based on Islamic law and there are a number of key tenets that are critical to how the whole thing hangs to together. So, there’s the underlying premise that social and economic justice go hand in hand. There is a ban on interest. There is a ban to the extent possible on uncertainty. There is the promotion and the concept of risk and profit sharing between the provider of the finance and the recipient. Ethical, socially responsible investments.

So for example, nothing in gambling, armaments, alcohol, pork, obviously for Muslims, and in almost all cases there’s an underlying financial and physical asset that go with the transaction, so the concept of money making money is really what’s behind what is prohibited. So, in many ways it appeals to the Muslim community and also I think a great number of non-Muslims, in the fact that it is back to basics almost in terms of Western finance where there’s a physical asset underlying it, there’s not excess of leverage, etc.

IO: So you can’t invest in, for instance, bonds or anything like that because they pay interest. What kinds of investments would an Islamic fund manager be making?

RR: Well, there’s short-term and longer-term and we’ll come to the bond concept later, but a good example of a short-term fund would be a trading transaction, so the promoter buys a shipment of sugar or iron ore and pre-sells it at a predetermined price, so you buy it at 100 and sell it for 120 and that’s considered acceptable, because as I say, there’s an underlying physical asset and you’re pre-financing that shipment. The uncertainty element’s gone, because you know what you’ve bought it at and you know what you’re selling it at. That’s one example.

You’re right in the true sense of a bond not being able to be invested in, but there are some instruments called sukuks, which are really referred to as ‘Islamic bonds’ and there’s been a huge interest in those. In 2007 there were US$47 billion issued. The market took a bit of a tumble in 2008, but there’s a lot of potential demand out there for sukuk issuance.

There are 14 different kinds of sukuks and that creates another problem which we can come back to later, but in the 14 kinds of sukuks, there’s one called an ijara and that’s more like a lease transaction. Again, there has to be a physical asset underlying the financing here, but that ijara is closest probably to a leasing transaction in western finance. So somebody buys the asset then leases it for a monthly fee to the user. There are bonds issued, backed by that kind of structure, and there are a number of fund management houses beginning to look at how to create investment funds using sukuk as the kind of underlying investment. The traditional sort of Islamic investment funds have traditionally been equity based investment.

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Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

pak qatar

Shahzaib Khanzada interviewed Pervaiz Ahmed, the director and chief executive officer of the Pak-Qatar family Takaful Limited.
Pak-Qatar Family Takaful Limited is the pioneer of the Takaful family in Pakistan. The company is regarded as a technology-driven shariah-compliant company providing need-based and cost-effective Takaful solutions in Pakistan.

SK: Ten months ago, your company was new and your plans were aggressive, and I had spoken to you back then about how realistic those plans were, keeping the situation of the country in view. What difference have you observed over the last 10 months?

PA: When I first spoke to you 10 months back, we had only just received a license and our company was in its launching phase. We had divided our expansion plans into two parts. Firstly, we thought of developing a company with a complete product range and one that is strong operationally, which means making your own house and order.

The second stage was to go into the market in front of the people, and to present an image that was consistent with the Takaful. The operational phase was very challenging, and we were supposed to do some expansion in the second phase. It was critical at that point in time that we should go out in the market and we did not know what kind of response we were going to receive. Generally when we made plans, we thought we were going to have 4,000 to 5,000 consultants over a short period of time, say three to four years. It generally looked optimistic because no other company had been able to achieve that mark.

Alhamdolillah over this short period of time, we have managed to launch a range of products, both for corporate customers and for individuals and now, we are present in all the major cities of Pakistan. We have opened up our offices in 13 cities so far and we are expanding very rapidly; we even have an office in Azad Jammu and Kashmir (AJK). Almost 800 consultants are working for us, we have trained and developed almost 12,000 to 13,000 people, and on the business side, a significant number of corporate clients have come onboard and are doing business with us and similarly a good number of customers have come onboard too.

By the end of the partial year on the 31st of December 2008, we had done business worth Rs 31 million, which is a very good number for a new company like ours. So now we have a full range of products in place, we consider ourselves one of the major players in the market, comparing our product line with any other established player that has been in the market for 12 years or more.

SK: When the country’s situation is such that, there is an inflationary scenario, an economic slowdown, the disposable income of the people has been hurt badly and they have to think twice even before purchasing the basic necessities; there can be two strategies of doing business. One is to carry out test marketing and taking things slowly. Your company on the other hand penetrated very rapidly and the numbers are all very surprising. What was the reason behind that? How is company so aggressive even during these hard times that Pakistan is going through?

PA: Generally, it happens that when you are strategising, there are always two parts to it. Firstly, the situation at the macro level, then there is the sector that you are focusing upon. Usually a lot of companies make the mistake of moving very cautiously in the desired sector just by considering the situation at the macro level. When we were launching this company, we analysed the market closely and found that the market has a lot of potential. The insurance penetration is very low and Islamic finance is needed in the market, so we should go out in the market regardless of the macro level situation.

Because there are a lot of gaps in the market, during this period the whole world including Pakistan was going through a financial and economic crunch. But some of the companies entered the telecommunications industry and they ended up doing pretty well, so basically we were focused on that sector. The nature of our business is actually long term. For example, when we sign a contract with someone; we always sign it for 15 to 20 years. Secondly, expansion in downtime is always easy because you can get quality human resource from the market, and you get the resources at good prices. Then, expansion does not take much.

I think it was a very focused approach, and we are still focused because of the response that we have received in a short period of time. There is only 0.3 percent penetration of the life insurance sector in Pakistan, which can go up to three to four percent. I believe that even if 10 to 15 more companies come, and work here, they will still have opportunities to make inroads.

SK: What you said happens to be a blessing in disguise because we keep saying that Pakistan’s economic boom started in 2002. If the Takaful had entered the market at that time, it would have progressed a lot better. But you think it is the other way around? If there is an economic slowdown, does it offer benefits of its own too?

PA: Yes of course, it has its own benefits. Pakistan did have an economic boom starting from 2002, but the situation of economic uncertainty in Pakistan has continued since the bomb blast in 1998, and the foreign ministers did not consider this a certain situation. I have been working with some foreign investment companies, and I know that we have now learnt how to live and survive in an environment that is uncertain. So if you are living in an uncertain environment, you learn to live and adapt with that, and it is true that this has some of its own advantages. If you are planning any expansion during a slowdown, and if you are doing it wisely, you can make a fortune out of it.

SK: I was going through your company profile and found it very interesting because all the people related to insurance, whether conventional or Takaful, have started talking a lot about the technologies that the bigger companies are investing in this field.

Others say that when they carry out cost benefit analysis, they don’t think that they is any need to invest in technology. You have actually mentioned in the first line of your company’s description that you want to be a technology-driven, Shariah-compliant company. Why is it so important that you have mentioned it in the first line?

PA: Technology is the heart of all the strategies that we are implementing. We are working in the service industry and generally in the service industry, customers’ satisfaction is considered to be the top most priority. Unfortunately, Pakistan is not a service-oriented country, as compared to the Western countries. So there are two elements to providing satisfactory services to the customers.

Firstly, it is the attitude of the people who are working, and number two is basically the tools. Both of these things are very important. For example, if you have the attitude but you lack the tools, you will not be able to survive in the industry. Similarly, if you have the tools but you lack the attitude, you would not be successful then either.

We have invested millions in our business technology, we brought up our business system from Malaysia, which gave us an edge to offer products and services that even the established insurance companies could not offer in the market. We believe that operation efficiency can only be achieved through technology. We wish to work at a low cost to pass on more benefit to the customers. Customer benefit is directly related to our cost, and without technology this is not possible.

SK: Your strategy seems to work well. Best of luck for your plans and thank you for your time.

PA: You are welcome.

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IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com interviews Dr. Mahathir Mohamad as part of their “Meet the Market” podcasts and discuss the global financial crisis, capitalism, and the role of Islamic finance.

Access the podcast here.

Azerbaijan and Islamic finance: Interview with Faig Mammdov, Special Adviser to the Chairman of the International Bank of Azerbaijan

Azerbaijan and Islamic finance: Interview with Faig Mammdov, Special Adviser to the Chairman of the International Bank of Azerbaijan

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The Muslim Central Asian countries (CIS) including Azerbaijan are fast opening up to the global Islamic finance market. After many years of brutal Soviet rule, Azerbaijan, the oil-rich Caspian country with a population of about 9 million and a member of the Jeddah-based Islamic Development Bank (IDB), is reaching out to Islamic finance, especially in the wake of the near collapse of the global conventional banking system as underlined by the credit crunch and the international financial crisis.

More importantly, Baku – the capital – is in the process of reviewing its legislation with a view to introducing laws to facilitate Islamic banking in the country.

Faig Mammdov, special adviser to the chairman of the International Bank of Azerbaijan (IBA), Jahangir Hajiyev, focuses on the current developments and future prospects for Islamic finance in the country and region.

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Interview with Shiro Kutsuma, CEO of Japan-based Deira Asset Management

Interview with Shiro Kutsuma, CEO of Japan-based Deira Asset Management

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Sensing opportunities in the cash rich Middle East, Daiwa Asset Management overcame numerous challenges to become the first Japanese-based company to offer Shari’ah-compliant ETFs. Mohamed Hairul Borhan caught up with Shiro Kutsuma, Executive Officer at Daiwa’s Global Business Development Department.

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