Category Archives: Interviews

Why many Islamic bonds are not Shariah compliant

AME Info: Why many Islamic bonds are not Shariah compliant

Once regarded as the driving force behind the boom in Islamic finance, sukuk have been looked at more critically recently. Hari Bhambra, Founder and Senior Partner of DIFC-based Praesidium Consulting, which specialises in Islamic finance-related regulatory issues, explains why not all Islamic bonds have been structured in line with Shariah.

Q: Currently there are discussions that some 85% of sukuk might be haram (not Shariah complaint). Can you explain what impact this will have on the industry?

Hari Bhambra There have been discussions by some eminent scholars that the concept of profit and loss sharing, which underpins Islamic finance, has not been present in some of the sukuk models that we have seen over the past five to six years.

Typically, sukuk are often held out as being Islamic bonds, which tends to confuse the juristic basis of a conventional bond and sukuk. Sukuk is based on Islamic principles of profit and loss sharing, as the sukuk holders are deemed to be owners of the underlying assets supporting most sukuk structures.

In conventional bonds, bondholders do not have the same perspective. The debate that has arisen in respect of sukuk focuses on the use of guarantees which, at some level, conflicts with the concept of profit and particularly loss sharing.

Unlike with conventional bonds, sukuk holders are deemed to be owners of the underlying assets in the sukuk fund and therefore should be exposed to the risk associated with those assets as well as the profit, which some scholars have indicated has not been the case to date.

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Interview with Mufti Taqi Usmani

Interview with Mufti Taqi Usmani

Dharb-I-Mu’min: In our country, no attentions usually paid on Islamic economics and finance. What prompted you to work in this field?

Mufti Taqi ‘Usmani: During the days of my education when I was a student of Dars-I-Nizami, my father Mufti Muhammad Shafi was struggling for enforcement of Islamic law and Islamic mode of living in the country. In this connection, many people would visit him. As a child, I would see all this and felt that there was an acute need to work in that direction. People would put questions to my father and many issues would come to light to light. At that time, I felt that in deeni madaris (religious institute), there was a lack awareness and research required for explaining the ruling of Shari’ah regarding those issues. Since childhood, I believed that we should have a positive program to show to the world before we launch a campaign for implementation of Islamic system. Since the law and system prevailing in the world was every inch man-made, I strongly felt a desire to introduce the Islamic law. The Islamic law is eternal and all-embracing and nobody can change it, but I thought that the manner to introduce it should be people-friendly So that the can easily understand what the Islamic law is. On the other hand, I realized that finance was the biggest problem of the world. It is the basis of all the economic wars, the basis of duel between communism and capitalism and the basis on which the world powers make their plans. So, I felt a desire that I should understand the current financial system and then present Islam’s economic system as a substitute. Therefore, when I started teaching after completing my dars-I-nisami, I made a resolve to learn the modern science of finance and use my capabilities for the service of Islam.

I started work under unfavorable condition with almost no resources available. I would give lessons for five hours and wrote fatwa was for three hours. In the meantime, I was working on Islamic jurisprudence. After the Asr Prayer, I would board a bus to go to the city. In those days, buses were not easily available and I had to change two buses. I would return at about 11 pm. During this period, I would study the sciences related to finance. Besides, I used to spend time in library. At that time, I was also working on a book “From the bible to the Quran” and some of my time was dedicated for it.

As initiated work on finance, I felt that the biggest fault in the prevailing financial system was Riba (interest) as described in the verses of Holy Quran. At the age of 20, I wrote my third book” Commercial Interest”. Prior to that, I had written two books.

By the grace of Allah Almighty, I got opportunities to bring out my research on finance. Meanwhile, some Islamic banks were established and they contacted me to seek my advice. In this way, I made my way in this field.

Dharb-I-Mu’min: When you stepped in this field, no considerable work had been done on this subject especially in the subcontinent. By the grace of Allah, your struggle resulted in the evolution and revival of Islamic finance. What circumstances did you pass through during this period?

Mufti Taqi ‘Usmani: The most complicated phase of my work was to draw from the sources of Shari’ah the rulings about various Problems and issues regarding the modern trade and finance. This was difficult since there were no books or literature available giving precise rulings on those issues, and I was afraid of lopsidedness on my part. But with the help of Allah Almighty and the blessing of our Shari’ah, whenever I tried to research on an issue, I found guidance in the books of our predecessors. Though it was an arduous task, I did get guidance from the predecessors.

I would not arrive at a decision unless I got guidance from the predecessors or at least found a principal that led me to draw the ruling. Allah’s help was there at every stage of the research. I would not feel complacent with my research until I consult other scholars. I would not publish my Work until it was scrutinized by them.

Some of the Ulama in the Committee of Islamic Jurisprudence are of very high caliber in terms of their knowledge and piety. I would take the opportunity to present my research work before them. So, I was satisfied all the way that all my writings were scrutinized and upheld by Ulama.

Dharb-I-Mu’min: Would you please tell us about your prolonged struggle at government level and inside the court?

Mufte Taqi ‘ Usmani: I tell you the story briefly. At first, I got opportunities to work in the field of finance as a member of Islamic Ideological Council (IIC), which Has been formed during the tenure of late President Zia-ul-Haq. We had two foremost tasks:

(1) To reform the law

(2) To reform the financial system.

It was hitherto said that there was no infrastructure for the interest-free finance. We, in the IIC, first tried to present a structure of Islamic finance. For that purpose, a panel of economists was formed and finally a report was prepared. It was the fist time Islamic banking system was introduced in Pakistan. The report on this subject and, by the grace of Allah, I got opportunities to take an active part in its preparation.

The repot was sent to the government. It was the time when the entire environment was dominated by secular-minded government functionaries who favored secular financial system. On the one hand, there was President’s order to implement the report and on the other, there was Finance Minister’s argument that the implementation would create a lot of problems. He tampered with the report in such a way that the interest-based system would continue under the garb of interest-free system, and no actual change would be brought. Therefore, a formal order was issued hat debarred the banks from dealing in interest. But at the same time, the alternate system, promulgated by the government, incorporated only a few provision of our report, and the essence of the report was neglected with the result that the title was “interest-free” but in fact the system was interest-based.

We protested against it. There was public protest too. So, we had meeting with the finance minister and other people in the presence of President Zia. The meetings sometimes resulted in a partial reform and sometimes ended inconclusive. That situation persisted for a long time.

President Zia passed away but we continued our struggle and put our demands to the succeeding government. In the long run, a commission, named Islamization of Economic Commission, was formed to deliberate upon the issue. I was a member of that commission. We compiled a comprehensive report. The report described the rules regulation required by the State Bank for regulating the whole system. When the matter reached the final phase, the government was suddenly ousted. The change of government reversed the whole progress. The commission was abolished and its report fell in a dark chamber. Some time later, voices were raised for the Shari’ah Bill, which was passed during the second term of Nawaz Sharif. The commission was formed again and the work resumed. The previous report was being updated when the government appealed against the Federal Shari’ah Court.

The Federal Shari’ah Court was assigned to hear and decide appeals against laws repugnant to Quran and Sunnah. It was the advantage of Federal Shari’ah Court that its decisions were not just recommendations but final verdicts to be implemented. But the fiscal laws were excluded from the jurisdiction of Federal Shari’ah Court for a period of ten years on the reason that change in the system needed time.

At last, after the expiry of 10 years period, petitions were filed against interest. In 1991, The Federal Shari’ah Court delivered verdict against interest. An appeal against that verdict was received by us at the Shari’ah Appellate Bench of the Supreme Court. It took us 9 years to start the hearing of the appeal. It was because every time the appeal was to be heard, the government filed a petition that it was itself working for elimination of interest and some time should be given to it. Several times, I urged the Chief Justice for settling the pending appeal. When Justice Ajmal Mian became the Chief Justice, he tried to settle the backlogged cases. The appeal was also put for hearing. There was a need for detail arguments form both sides. The bearing continued for 6 months and then the historic verdict against interest was delivered 7 days before the end of year 2000.

We gave one and a half year time to the government to reform the system. We believed that it might take time to change the whole system in the country and a year or so would be required provided the government acted seriously. Last year, the government asked for another 5-year time. There were suspicions that implementation of the verdict might be delayed for an indefinite time. Again, the government was given one-year time and that time is going to expire too.

Dharb-I-Mu’min: It is a Muslim country and its government is Muslim and the majority of people want to feed their children from Halaal income, the substitute for Riba (Interest) is available, the court has given verdict then what is the unseen power, pressure or conspiracy hindering the elimination of this curse?

Mufti Taqi ‘Usmani: Look, the foremost thing required for bringing the change is firm determination. Until the people at the helm of power make a resolve to do this work, there will be evasion even though you crate favorable conditions. There is a lack of resolution in this matter and there are three reasons for this. The first reason is ignorance as there is a propaganda that financial affairs cannot be run without interest. Nobody ever bothered to see if there is any veracity in that propaganda. The second reason is that benefits of many depend on the interest-based system. They fear that if this system were eliminated, their benefit would suffer. That is why, they make propaganda and the masses as well as the government get impressed by it. The third reason is the sense of inferiority.

Personally, I think that external pressure is not responsible nor do the foreign government have any concern with our internal system it their own benefits are not affected. Islamic banking has emerged as a reality and even in the World Bank; research departments are working on it. I mentioned this fact in my verdict.

During the Zia government, it was announced that interest would not be paid. At that time, the International Finance Corporation (IFC), a World Bank subsidiary, sanctioned loan for a mill being established in Sindh. An IFC team came to inspect the mill and said to the Pakistan officials that since the interest-based system was being eliminated in Pakistan, the IFC was considering giving loans according to Islamic mode of finance. Our officials told the IFC team that it did not need to bother. I personally believe that if there is strong faith then there is no hindrance in convincing the foreign countries.
Loans are always subject to some stipulations and restrictions. Just add a condition that they will sell you goods worth the amount of loan. Thus the loan would be asset-backed and that is called Murabaha. There is no difficulty in converting an interest-based loan into Murabaha dealing, but the only thing important is that we make a determination and get rid of our sense of inferiority.

Our government feels shy to say to the Europeans and Americans that it would make all the dealings under Islamic system. As I said earlier, there are three reasons: ignorance, propaganda and sense of inferiority.

Dharb-I-Mu’min: You often undertake foreign visits. In your opinion, is there any Islamic country going to be the first in the world to implement the Islamic system of economy on a government level?

Mufti Taqi ‘Usmani: Under the prevailing conditions there is only one country in the world and that is Sudan, which has implemented the interest-free system. Not only this, all banks and financial institution of Sudan including the central bank, claim that they are operating on interest-free system. They have formed a committee called ‘Heyath al Raqabat al-Shari’ah’ in the central bank. This committee is comprised of ‘Ulama who monitor the functioning of central and all other banks and financial institutions. Iran also claims to be a country that has implemented interest-free system of economy. Although their some procedures are controversial, they have announced that they have done so. In case of Malaysia, they have fifty-fifty, that is, they have 50 per cent interest system and 50 per cent interest –free system of economy. They have a number of Islamic banks while there are two parallel departments in the central bank. This means there are just two-and-half countries in the world, which have implemented interest-free system of economy. Had the efforts, made during the period of General Zia-ul-Haq, taken seriously and in the right direction, Pakistan would have been the first country to have implemented the interest-free system of economy. But regretfully, this could not be done due to conspiracies and the matter remained half-way. Whatever happened in Sudan and Iran began after Pakistan had taken initiative in this direction.

As far as possibilities and opportunities are concerned, there were far better chances in Pakistan and there are two reasons to this effect. Firstly, the research work on the issue, that Pakistan has done, no country has done so far. Secondly, Pakistan has the honor of having economic experts who besides being experts in economy, also have religious thinking and positive approach. Therefore, they have more capabilities than other economic experts in the world. Under these circumstances, if interest-free system is implemented in Pakistan, there are greater prospects of success as compared to other countries. Its example can be taken in this way that wherever non-Islamic banking system is existing, Pakistan experts are capable enough to find a solution to any problem in this regard. The World Bank has a permanent cell that is working on Islamic Banking and most of official in this cell are Pakistanis. Their papers prove that the knowledge and expertise they have acquired in the field are essentials for Islamic banking.

Dharb-I-Mu’min: At a time when the entire universe is shrouded in the clouds of interest-based economic system, does there any bank or non-banking institution exist anywhere in the world that is operating according to Shari’ah?

Mufti Taqi ‘Usamni:
Not too many, but there are many such institutions and most of them are found in the Middle East while two in Pakistan. Let me tell you that whatever number of such institutions are established in the Middle East they were set up under the circumstances that neither their countries or central banks supported them nor their tax system provided them nay room for better functioning. For example: There is a law in all countries of the world where interest-based banking system is prevailing that no bank can enter into trade whereas the Islamic banking system is based on trade. Therefore, the Islamic banks face a lot of difficulties while dealing with such countries. Its example can be taken this way that any interest system bank extends any loan to anyone and takes interest on this loan then the tax is very nominal or none. But if the same bank earns the money and profit through Islamic and Halal system, it is subjected to heavy tax while in some case this tax is double. For this reason Islamic banks or institutions, which are functioning under Islamic system, are forced to work under pressure and so they have to leave their actual track of Shari’ah. Here I don’t say that all Islamic banks and other institutions are well-established and working according to non-Islamic step, they call it a Sadaqa (charity) and if they earn any amount through non-Islamic means (when they are forced to do so) they do not include this income into their profit or overall earning and give it as a Sadaqa (charity). Their monitors also keep an eye on them and they tell them not to include this income into their overall earnings and give this earning as Sadaqa.

Dharb-I-Mu’min: As you just said that there are a few Islamic banks in Sudan and Malaysia. What are your views about the economic system that was implemented in the Islamic Emirate of Afghanistan? Did the Islamic Emirate over approach you to seek an advice about the type of system to be implemented I the country?

Mufti Taqi ‘Usmani: The situation in Afghanistan was different. They had closed all banks. That means no bank was functioning or doing any business. The reason behind shutting down all the banks in Afghanistan was that banks were functioning on interest-based system and there was a plan that as the administration does not find any alternative system they would not reopen these banks. For this purpose they contacted me. In fact I also contacted the Afghan administration. A delegation comprising officials of central bank led by bank’s vice president came here and stayed here for two or three weeks. I apprised them of the principles of Islamic banking system. But nothing fruitful came out because two or three weeks are not enough to bring each and every point under discussion. There was a need that they should have some economic experts in their circle who know the principles of banking. I later offered my services and told them that I can come to Afghanistan with a few economic experts who would initiate and run the banks under Islamic system and will train their men in the field. However, this plan could not materialize and the biggest incident took place.

Dharb-I-Mu’min: There was news about a year back that some Muslim countries or big Muslim investors (including yourself) had established a financial institution, which would promote Islamic banking in Pakistan. What happened to that plan?

Mufti Taqi ‘Usmani: Pakistan has many a time taken such steps. The first attempt was in the shape of Faisal Bank. This bank was launched on the basis of Islamic system of banking. But, gradually it changed its track and started functioning like other banks. Second attempt was made in the shape of Al-Barraka Bank. Third attempt was made when Meezan Bank was launched. This bank is striving to continue with its Islamic principles and has recently obtained license of commercial bank from the State Bank of Pakistan. Moreover, the State Bank has extended some facilities, which were not extended to any Islamic bank in the past. This example is a good omen. If this continues well there is a possibility that it would be a model for other Islamic banks to follow.

Dharb-I-Mu’min: Over the years, many Islamic banks and financial institutions have been established in the county and there are queries from all quarters whether investing in such banks and institutions is legal and under Shari’ah, but none of the Mufti has given any Fatwa on this issue whether the retired people can invest their life-long earning in these banks or not. What is reason that no Fatwa has been given in this regard?

Mufti Taqi ‘Usmani:
Giving Fatwa on this issue and terming the investment in such banks as Islamic and according to Shari’ah is highly sensitive and carries big responsibility. It is a big decision for any Mufti to give Fatwa on this issue. Because after the Fatwa, people would invest in these banks and the ultimate responsibility would be on the Mufti Sahib if the investment is not according to Shari’ah. Therefore, as long as Muftis are not acquainted completely with the Islamic system of banking they would never come out to give Fatwa on this issue. Under these circumstances, it is the responsibility of banks and financial institute that they should approach the Muftis, describe the banking system to them and tell them how banks are working. When they are be satisfied with all points then only they will be in a position to give any Fatwa on this issue.

Dharb-I-Mu’min: Pakistani people are under heavy burden of foreign debt that is based on heavy interest system. Pakistan is not in a position to retire these debts. In your opinion how can Pakistan get rid of the IMF and other interest-based financial institutions?

Mufti Taqi ‘Usmani: This is the biggest problem of our economy and I have many a time discussed this issue at length. This is a big fraud to say that loans obtained from the World Bank or IMF is helpful in the development of any third world country. The reality is that these loans have never been helpful in the uplift of any third world country. Rather such loans have caused big losses. Regret to mention that our country depended on these institutions and pledged the whole nation. Under this situation, in order to get rid of these interest-based financial institutions of the world, there is a need that the nation should opt for simplicity and cut the coat according to cloth. We should minimize our economy according to our resources, control unnecessary expenditures. As long as we don’t do this we cannot get rid of foreign debts. Almighty Allah has blessed Pakistan with unlimited natural resources. We can be well-off provided we utilize these resources in a proper manner. This way we can come out of economic crisis. We should not give up by thinking “Nothing has happened in past 55 years, what would happen now.” We can still do a lot. Our motto should be ‘work hard and leave the result to Almighty Allah.”

Dharb-I-Mu’min: A few back when economic development was in its initial stage, a 15-day course was organized in which two Muftis from each Madrasah from all over the country participated. Don’t you think if this course is conducted again to apprise the Muftis of the latest development in this regard, it would be better and beneficial and also in the larger national interest?

Mufti Taqi ‘Usani: Not one, we organized two courses for ‘Ulama and Muftis. With the blessing of Almighty Allah these courses proved beneficial and on the basis of these courses a book ‘Islam and modern business and economy’ was written. This is, of course, our shortcoming that we could not continue with this programme due to our extra-ordinary preoccupation. However, there are plans that such courses, separately for Ulama and Muftis and economists, would be organized. At the time we organized a conference on Islamic Banking. We planned to initiate the course also but later it was decided that the series of courses would be initiated after the conference. There is a need that top bankers understand what has been done for the Islamic banking. As I am not a part of federal government, I cannot say whether this would be included in the syllabi or not. But our religious institutes have many a time given this suggestion to the government. We are optimistic that it would be implemented soon. Insha Allah.

Qatar Islamic Bank extending its network to Pakistan

Qatar Islamic Bank extending its network to Pakistan

Qatar Islamic Bank is set to kick-off its operations in Pakistan in 2008. A consortium of Qatar International Islamic Bank, Qatar Islamic Bank, Qatar National Bank, Amwal Group, etc., is behind the establishment of Qatar Islamic Bank in Pakistan. Choudhry Mohammed Wasi, Asst General Manager, Projects Department of Qatar Islamic Bank, disclosed this upcoming venture of his group in Pakistan, to Money Plus in an interview in Karachi. Mr Choudhry had been nominated by the QIB as the President of the bank in Pakistan. He arrived from Qatar to attend the board meeting of Pak-Qatar Takaful Insurance in Karachi and to discuss his group’s plan with State Bank of Pakistan to get licence to start operations in this country.

Q: What would be the amount of paid-up capital of the QIB in Pakistan?

A: Initially, we would start the operations of Qatar Islamic Bank with paid up capital of 100 million dollars and increase it at a later stage.

Q: When the bank is being launched?

A: In principle the State Bank of Pakistan has given its consent for the establishment of the QIB. In 2008 we are planning to start operations of the bank in Pakistan. At present we are fulfilling the legal requirements of the State Bank of Pakistan which are mandatory for the issuance of a licence. The consortium has proposed my name as President, Qatar Islamic Bank, Pakistan.

Q: What fascinated your group to set up QIB in Pakistan?

A: It is part of global expansion plan of our group. We are increasing the presence of our group. We are also extending the network of our group to Malaysia, Lebanon, Bahrain and the United Kingdom. Our consortium wants to extend its business operations to 16 countries in the world, including the Middle East, Europe and Pakistan.

In fact, the financial sector here is growing rapidly. The analysts believe that the share of Islamic banks in the overall banking sector would grow to 10-14 per cent by the year 2012-2013, from existing share of 3 per cent, because of immense potential of growth in this sector in the years to come.

Q: How do you see the scope of Islamic banking here?

A: With a population of over 160 million, Pakistan offers plenty of opportunities for investment and growth in the financial sector. The economy of the country was also showing impressive improvement during the past few years that was luring the foreign investors to develop their stake in Pakistan. At present five full-fledged Islamic banks are operating in Pakistan while the existing commercial banks have also established special windows/operations to capture the Islamic banking business that shows that this segment of banking offers more potential of growth in future.

Q: What is the background of the consortium?

A: The consortium of Qatar International Islamic Bank, Qatar Islamic Bank, Qatar National Bank, Amwal Group, Qatar Insurance Company are listed at Doha Securities Market. The assets of the consortium stand around 55 billion dollars and its equity amounts to 20 billion dollars. Qatar International Bank is one of the fifth largest Islamic financial entity in the world. The QIB is the first Islamic Bank in Qatar. It has 10 per cent share in the Qatari banking market and 57 per cent share in the Qatari Islamic banking market. It also has international investment operations in Asia, Middle East, Europe and North Africa. Qatar Islamic Bank will be the sixth full-fledged in Pakistan.

Q: What would be the strategy of QIB to capture business?

A: During the first two to three years of operations of the QIB we will target corporate sector financing and also invest in Sukuk. Later on we will enhance the scope of operations of the bank to meet maximum local requirements.

Q: What would be the next venture of the consortium in Pakistan?

A: After launching the Qatar Islamic Bank we will also set up Real Estate and other Funds to promote investment in Pakistan. Like financial sector, the real estate and some other sectors have immense potential of growth in future.

Q: Any existing venture of the consortium in Pakistan?

A: The said consortium had already established Pak-Qatar Takaful Insurance in Pakistan to offer Shariah-oriented family and general insurance services. The paid up capital of Pak-Qatar Family Insurance amounts to Rs 500 million while Pak-Qatar General Takaful had been set up with Rs 300 million capital. It is the first private sector investment from Qatar in financial sector in this country. The general insurance has started its operations recently, while family takaful would begin its soft opening by end-February 2008.

Investing the Muslim way

Investing the Muslim way

Nicholas Kaiser founded Saturna Capital in 1984 after being approached by Muslim investors looking to invest without violating Islamic teachings. It’s probably hard for most Americans to imagine a financial world without interest. We earn it in our savings accounts. We pay it when we shop with credit cards. In Silicon Valley, we couldn’t dream of owning a home without a mortgage.

Yet devout Muslims follow strict rules about money, including a prohibition against interest known as riba. In addition, certain businesses are incompatible with Islamic law, including those involving alcohol, gambling, pornography or the production of pork.

Those religious convictions create difficult challenges for Muslims investors. But since 1984 Nicholas Kaiser, founder and president of Saturna Capital in Bellingham, Wash., has managed two highly rated socially responsible mutual funds guided by Islamic tenets: Amana Growth and Amana Income.

Personal finance reporter Mark Schwanhausser talked about the delicate balance of principles and profit when Kaiser visited Palo Alto to speak to investors this month.

Q Can you describe what financial life is like in the Muslim world because interest is prohibited?

A Clearly, the prohibition against interest is the big issue for personal finance. How do you, say, get a mortgage? How do you deal with banks?

The thing that’sprobably not well understood about Islam is that what you do and believe is up to you. Islam is a relationship between you and Allah. You’re allowed a fair degree of latitude. If it’s inconvenient to have a life without interest, that might be all right. That’s up to you. It’s just a teaching that it would be better if you didn’t.

Q What’s the basic concept behind riba, the prohibition against interest?

A What is not acceptable is where you are forced by some contract to pay me back. Therefore, I have an advantage over you. We are supposed to be equal before Allah.

So you restructure it so we’re both sort of partners. Since we’re partners in the deal, you put in more, you’re going to get more back, but you’re also put at bigger risk.

QHow would you structure a mortgage?

AYou should be partners. In other words, if you’re the bank and I’m the borrower, you should actually take an ownership interest, like a partnership. Let’s say you start out owning 90 percent of it, and I own 10 percent. I would be paying you monthly, and my percentage might go up a half of 1 percent every month as I bought that share. I’m buying you out. Eventually I become the majority shareholder. Eventually, you’re out of the deal.

Q How do Islamic tenets limit what you can hold in your investment portfolios?

A I had two scholars one time. One said, “You know, Nick, I’d really like you to concentrate the portfolio in stocks that have no debt.” I did a screen out of the Standard & Poor’s 500 index, and there were 36 stocks that had no debt. He said, “Good, I’d like you to buy those stocks.”

The other scholar said, “You know, Nick, I really don’t want you to have companies that have a lot of cash, because that means they’re earning interest on their cash flows.”

I said, “That eliminates those 36 companies. So, guys, how do I build a diversified portfolio?”

You have to say, well, under American standards, maybe a little interest is OK. So, we use some screening rules, for instance, where long-term debt is not more than 33 percent of the market capitalization. About half the stocks get dropped out.

QWhat else fails to make the cut?

A If companies make money from interest – that’s primarily the financial sector, like banks but even things like brokerages. Then there are some basic screens like no pornography, no alcohol.

But let’s take alcohol. You have Southwest Airlines. They sell drinks. Is that going to cross them out? Well, it’s not their primary business. Their primary business is transportation.

QThen what about a grocery that sells alcohol?

AGrocery is a little tougher. We actually had Albertsons at one time. Their business is to buy it wholesale and sell it to you at retail. We basically allow 5 percent of revenues to come from baram activities, which means prohibited activities. If it’s their primary business, you can’t really do it at all. We sold Albertsons because it’s not allowed, and it’s what they were really doing, selling beer and wine alongside the rest of their groceries.

We had to sell Target recently when we found out they started selling wine in California. Costco is a stock we’d love to own, but they’re the biggest wine retailer in the country, so we can’t own that.

A hotel chain that has casinos – we couldn’t have that. Pornography – that’s always a lot of fun because the screen for pornography is, “I don’t know what it is, but I know it when I see it.” Disney has a subsidiary that makes X-rated movies. “X” is out, but “R” is in.

QDo any technology companies pose special issues?

AIs that Islamic or not? There, the primary business is to make a gazillion on a new drug that will save the world. So, that’s OK.

Q Morals, unlike financial numbers, can’t be quantified. How do you make these decisions? Is it basically judgment calls debated by a team of referees?

A We can ask the board. The board members are all Muslims, except for myself. Most of them are businessmen who have an interest in Islamic finance.

We debate both internally within our firm, and we also have what are known as shariah scholars. We can go ask a consultant. The consultants talk with other professors, imams and scholars. I think there are nine major centers around the world for Islamic finance and scholarship.

Q What drew you to the idea of investing with a Muslim approach?

AI’m just a professional money manager. These guys came in and said, “If you can do this, we’ve maybe got some money.”

I said, “Well, I can run funds. I don’t know anything about Islamic investments, but if you’ll teach me what the rules are, we can make this work.” That was 1984.

Pakistan has worked wonders in Islamic Finance: Shariah Advisor of BankIslami Pakistan

Pakistan has worked wonders in Islamic Finance: Shariah Advisor of BankIslami Pakistan

Irshad Ahmad Aijaz is the Shariah adviser for BankIslami Pakistan and is also a member of the Shariah board. He informed The News on the Shariah aspects of Islamic banking and what issues have arisen with its arrival in the financial sector.

Question: When was the concept of Islamic banking introduced in Pakistan and how did it develop here?

Answer: Islamic banking was initially introduced during the time of Zia ul Haq when the theoretical base was provided by a scholar who said that if Musilms wanted to replace conventional banking, then this was an acceptable system. However, when it went into execution it was to be implemented by bankers, and they said practically it was not possible to follow.

At operational level there were lots of problems and then there were policy problems and there was no one at this introduction level with Islamic banking expertise and so a solution could not be found to the issues that arose. Nonetheless, banks went ahead and launched Islamic banking parallel to conventional banking. Then arose the issue that only the name had changed and it was basically the same theoretically and practically as conventional banking methods.

But the attempt failed. However during the Nineties Islamic banking revived again and policy-makers decided that if Islamic banking was given an individual identity and made a separate institution, then it might work and be a success. This is when the concept of a Shariah body to decide on matters such as laws, policies and conflicts was introduced.

The Shariah body initially also had issues such as they being not taken seriously and stronger decision-makers prevailing over them, an example of which is of the Islami Nazriati Council that raised objections but were convinced. Nevertheless, now the Shariah board has powers even over board of directors and can overrule them, and this makes Islamic banking more successful now as there is a strong foundation established to support it.

Q: What are the tasks of the Shariah board and Shariah advisers?

A: For instance, if there is an issue, then the State Bank of Pakistan (SBP) would ask the Shariah board if they approve of it. If they say it’s not permissible, then that would not be implemented. It also makes strategic level policies such as policies for business finance, house finance and reviews the proposals and then gives approval to concepts presented by Islamic banks.

After approval comes the role of the Shariah adviser. When the time comes for implementation, the documentation, agreement, the process of introduction are all checked by the Shariah adviser to ensure that it is in accordance with the guidelines of the Shariah board. The SBP has made it mandatory that every Islamic bank should have a Shariah adviser and it’s a part of the regulatory law.

Q: What if there are disagreements between the Shariah board and advisers? How are the issues solved?

A: If there are disagreements, then several discussions are held by all the board members. The Islamic Fiqh Academy and the Accounting and Auditing Organisation of Islamic Financial Institution are international bodies where scholars and Muftis gather and vote on issues that have conflicting views.

Q: What job opportunities are there in this sector?

A: First of all, a fact that has to be accepted is that Pakistan has worked wonders in this field. Pakistan, Malaysia and Bahrain have an edge over all other countries.

Unfortunately, even then there are many issues with regard to Islamic banking. The most important is that there are no skilled and informed Islamic banking human resources as there is not a single institution to teach Islamic banking, though the SBP is trying its best. There is a Centre for Islamic Economics at Bait ul Mukarram, Karachi.

These are not enough, however. This sector offers many good opportunities, but the right people are lacking.

There is also a wide gap between business people and Shariah scholars which needs to be bridged. This is important because when Shariah scholars bring ideas, business people say it’s not practicable and vice-versa, so we need people who have knowledge of both the fields to bridge this gap which can be done by creating awareness or by practice. Resolution of this issue is critical to the success of Islamic banking.

Q: What problems Islamic banking is facing?

A: A major problem is lack of awareness of Islamic banking among people. Seminars and conferences should be organised to popularise and remove misleading perceptions about Islamic banking. The media should also play its part because it is the easiest mode to reach out to the masses as Islamic banking may be progressing but people are generally not aware of it.

Dr. Hussein Hamid Hassan: All Arabs will prefer Islamic banking

“All Arabs will prefer Islamic banking”: Interview with Dr. Hussain Hamid Hassan

Hussein Hamid Hassan is considered as the father of Islamic finance. He received his PhD from the faculty of Sharia at the Al Azhar University in Cairo in 1965 and holds two degrees in law from the International Institute of Comparative Law, University of New York. He chairs the Sharia Supervisory Committee of many Islamic banks in the Middle East, and has advised several governments.

An expert in Law, he had been the attorney general for the government of Egypt between 1969 and 1970. He has advised several governments in the Middle East and CIS countries on establishment of Islamic Finance Institutions. According to Mr Hassan, Islamic financing is the most equitable form of financing since it enables the creation of wealth without fuelling inflation or stoking a financial crisis.

In order to do away with the concept of interest rates, Islamic banking entails structuring products in different ways. If it is primarily to acknowledge that there is a price of money, how is it different?

The function of conventional banks is to receive deposits with fixed interest rates and to lend the same to borrowers at a fixed rate. The difference will be the revenue of the bank to meet expenses and distribute profits to shareholders. Conventional banks are not permitted to invest deposits at all, but can only lend it to investors.

Islamic bank doesn’t receive deposits with fixed interest rates. Rather, the deposits are in the form of equity from depositors to be invested, along with shareholders’ equity in one common pool. On the asset side, conventional banks have, since inception, had only one product, that’s loan with interest.

Sharia has unlimited products to suit every customer and every project under any circumstances. For instance, if you need to buy an aircraft or vessel or plant, you come to me for financing. If you want to buy an aircraft for $300 million, I will buy and transfer it you after 10 years after collecting installments with a profit margin. It can be fixed or floating like any benchmark or any index.

This is called Murabahah, to buy with agreed margin. Then there is Mudarba for financing project, where the businessman has full freedom to invest; the bank has no right to interfere in the project. According to Sharia, if something happens beyond your control, a force majeure event like war than I lose the capital 100% and you will lose your share in this limited liability venture. Your share is the expertise that you bring in.

Conventional banks sell loans through securitisation to raise resources. Can Islamic banks do something similar?

Sharia does not allow trading of loans. But if you have a combine, which has up to 30% tangible assets and 70% receivables, you can securitise the portfolio, where you take the assets from the balance sheet and sell them. This I have done it for Islamic banks in Abu Dabhi, Sharjah, and the UAE which have issued Sukuk bonds for several billion.

There is a real estate company called Amlak, which has securitised its portfolio in this manner. I am working on sukuk bonds for Morgan Stanley for $5 billion, but we are fighting with them. They want to make it Sharia-compliant, but they want bondholders to be pari passu with creditors of the company. But I have said no. This kind of bonds cannot be Sharia-compliant. But Morgan Stanley says that according to the American law, they have to make bondholders similar.

This is also what we have been telling central banks for 25 years on capital adequacy. Central banks treat Islamic banks on par with conventional banks and ask for 8% capital. I have been saying this is not correct because depositors of Islamic banks are equity investors and if you treat their money as equity, capital adequacy of Islamic banks will be 90%.

Today, when people want investment avenues to multiply their wealth, can Islamic products generate same returns?

The Sharjah government had asked me to convert Sharjah’s national bank into Islamic bank in 2002. Before they were paying interest of 1.2 to depositors. On June 30, we closed the conventional bank books. The share of the bank was quoting at three dirhams. Overnight from July 1, the share price went up to seven dirhams. After six months, the bank distributed profit of 3.5% for six months.

A lot of money is going to non-dollar assets, which is reflected in euro’s rise, do you think this shift is permanent or temporary?

I think this will continue, they were waiting for this. They are re-evaluating their currency. Kuwait has already gone from the dollar.

Would you advise others to drop the dollar peg and shift to euro?

For the present circumstances I would. Why? because the dollar is coming down and why should I lose. Business is business. Everyone has a right to protect themselves. If after 25 years, things come back to where they were, we can move back. One should mitigate his risks. For any risk, it is compulsory that you mitigate for yourself. This is not religion. Religion does not prescribe what currency one should select. This means that fortunately, every country should look at its own interest.

Given the rise in revenues of the Arab world, one would have expected Islamic banking to grow faster.

Not everyone invests in Islamic banks. But every week and every day, conventional banks are converting into Islamic banks. This is happening gradually. I can guarantee that all Arabs will move and prefer only Islamic banks. This is my personal belief as I have my own analysis and research on this. When we built the first Islamic bank in 1975, it was easier to say Islamic whisky than Islamic bank. I myself could not imagine that the Islamic banking industry would grow that fast.

Are there bankruptcy laws in Islamic banking for recovery from defaulters?

We have in Egypt a proverb, “giving the keys of the food store to the cat”. Conventional banking does that. In Islamic banking, I am not giving money to you to buy equity in your name or your wife’s name. Instead, I will buy an aircraft and lease it to you for 10 years. In return, I will get fixed rental and I will also get variables as a percentage of your profits. If you default, the lease is terminated and the asset is leased to someone else. Under Islamic financing, default means to commit financial suicide.