Category Archives: Reports and publications

Reserve Your Free Copy of Ethica’s 700 Page E-Book

“Ethica’s Handbook of Islamic Finance (2013 Edition)”…700 Pages of Practical, Usable Knowledge!

Ethica's Handbook of Islamic Finance - Cover

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“Ethica’s Handbook of Islamic Finance (2013 Edition)” is the industry’s first practical, user’s guide for implementing change. It may also be the only e-book in Islamic finance with a detailed and expansive subject index for your convenience. An indispensable desktop reference for practitioners and students alike, this book puts everything you need in one place.

* We Believe: Ethica’s manifesto.
* Speech: Use this speech or the accompanying video at your conference, training session, bank or university.
* Petitions: Use these sample petitions to bring standardized Islamic finance into your community.
* Articles: Use these articles to inform yourself and others about the basics of Islamic finance.
* Meezan Bank’s Guide to Islamic Banking by Dr. Imran Usmani: Use this section for a more detailed understanding of the industry’s core products from one of its leading scholars.
* Islamic Finance Contracts: Use these sample contracts to educate yourself and your bank about various Islamic finance instruments.
* CIFE™ Study Notes: Use these study notes to help you prepare for Ethica’s Certified Islamic Finance Executive™ (CIFE™) program.
* Recommended Reading for Practitioners: Use this reading list to help develop your worldview on finance.
* Recommended Reading for Entrepreneurs: Use this reading list to help you jump start your Islamic finance idea.
* Islamic Finance Q&As: Use this database of 1,000+ scholar-approved answers to guide your commercial dealings.
* Glossary of Commonly Used Terminology: Use this section to understand the industry’s most commonly used terminology.
* About Ethica Institute of Islamic Finance
* About the Certified Islamic Finance Executive™ (CIFE™)
* Press Releases
* Contact Ethica
* Subject Index: Use this detailed index to quickly search the entire e-book.

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About Ethica Institute of Islamic Finance (


Winner of “Best Islamic Finance Qualification” at the Global Islamic Finance Awards, Ethica is chosen by more professionals and students for Islamic finance certification than any other organization in the world. With over 20,000 paying users in 44 countries, the Dubai-based institute serves banks, universities, and professionals across over 100 organizations with its 4-month Certified Islamic Finance Executive™ (CIFE™) program delivered 100% online. The CIFE™ is the only globally recognized certificate accredited by scholars to fully comply with AAOIFI, the world’s leading Islamic finance standard. To watch an Ethica training video click here.

Report: Islamic Finance and Global Financial Stability

Islamic Finance and Global Financial Stability: A joint report published by the Islamic Financial Services Board (IFSB), Islamic Research and Training Institute (IRTI) and Islamic Development Bank (IDB)

Report extract:

The global financial crisis of 2008-09 has brought to the forefront issues concerning the stability and resilience of financial systems.At the heart of the crisis is the near-breakdown of the functioning of the financial intermediation process, amid a generalised loss ofconfidence in the financial system.

Many factors have been cited as the cause of the crisis. They include a combination of misalignments in the incentive structure and unbridled financial innovation which led to indiscriminate lending and excessive risk-taking. Other contributory factors include the erosion of sound prudential practices, with banks compromising on underwriting and risk management standards in pursuit of short-term gains and market share. While the banking institutions had employed increasingly sophisticated financial engineering techniques to repackage mortgages into complex structured securities, such financial innovation was not supported by commensurate enhancements to their governance processes and risk management infrastructure and practices.

In the wake of the crisis, the global financial community has intensified efforts to reform the international financial architecture to ensure its stability and resilience in a more challenging environment.The challenge before us is to not only undertake the necessary regulatory reform that will minimise potential risks, but to also build a new financial architecture that will promote greater efficiency in the financial intermediation process, including across borders.

In the search for a new financial architecture, there is a general consensus on the need to return banking to its basic function – to provide financial services that add value to the real economy. This in fact represents the very essence of Islamic finance. These are the very elements found in the Shari’ah principles that form the foundation of Islamic finance. It is these inherent elements that contribute towards the overall stability and resilience of the Islamic financial system. This foundation is further reinforced by the values that are extolled in Islamic finance that are similar to those found in ethical finance and socially responsible investment. The key strength of the Shari’ah injunctions is its emphasis on a strong linkage to productive economic activity, its inbuilt checks and balances and its high level of transparency and disclosure. The Islamic financial services industry has thus been in a relatively stronger position to weather the global financial crisis, demonstrating its robustness as a stable form of financial intermediation. The inherent features of Islamic finance have the potential to serve as a basis to address several of the issues and challenges that have surfaced in the conventional financial system during the current crisis. As the role and relevance of Islamic finance in the global financial system gains significance, it has potential to contribute to greater global financial stability and towards strengthening global growth.

Read the full report here.

Hedging in Islamic finance, by Sami Al-Suwailem

Hedging in Islamic finance, by Sami Al-Suwailem


A study on Shariah-compliant hedging techniques and associated financial engineering and fiqh-related issues.

Islamic insurance under IFRS: KPMG – Frontiers in Finance

Islamic insurance under IFRS: KPMG – Frontiers in Finance

Takaful, or Sharia-compliant insurance, is a relatively young market with a potentially huge customer base. With significant growth outside their current major markets of the Middle East and Malaysia, a large number of Takaful businesses are reporting under International Financial Reporting Standards (IFRS), which gives rise to complex accounting and reporting issues. The reason for this complexity goes back to fundamental differences between Takaful and conventional insurance models.

How Takaful works

Islamic finance law abhors any kind of speculation and outlaws uncertainty (Gharar), gambling (Maisir) and usury (i.e. interest, or Riba). Takaful is structured to avoid these prohibited elements, introducing elements of mutual help (Tawaun) and donation (Tabaru).

Policyholders’ premiums — which are treated as donations — make up a fund from which any insurance obligations are met. Takaful operators manage funds and settle obligations in return for an agency fee (Wakala fee), a profi t and loss share (Mudarabah share), or both. Any surplus in the fund belongs to the policyholders. If there is a shortfall in the fund, the operators make an interest-free loan (Qard-e-Hasan) to finance the defi cit.

Why current application of IFRS is problematic for Takaful businesses

A Takaful insurance fund is co-owned by its customers, who jointly agree to take on the insurance risk, and share out any surplus or shortfall arising in the fund. This means that there is no transfer of risk: Takaful participants are effectively both the insurer and the insured. Since Takaful operators never actually own fund contributions, they are essentially in the position of an agent or fund manager.

Despite these key conceptual differences, regulations in many jurisdictions treat Takaful operators exactly the same as conventional insurance companies. This gives rise to accounting and reporting treatments under IFRS which can be at best a poor fit, and at worst fundamentally unsuitable to refl ect Takaful principles.

For example:

  • Definitions under IFRS relating to insurance contracts and insurers do not reflect the risk sharing nature of Takaful contracts: IFRS assume a transfer of risk.
  • In order to present comparable financial information, IFRS largely ignores actual Takaful structures. Contributions from participants are treated as revenue, when it would be more accurate to record them as liabilities. Claims and other expenditure paid out of Takaful funds are recorded as expenses, when in fact they are a reduction of liability.
  • Some Sharia scholars argue that funds received by Takaful operators are fiduciary in nature and therefore should not even be shown on the operator’s balance sheet.
  • The IFRS accounting treatment of agency fees earned by the Takaful operator and charged to the fund can result in a confusing mismatch within the fi nancial statement. This is because fees are deferred in the Takaful fund as an acquisition cost, but recognized upfront in the operator’s income statement as service revenue.

Alongside these and many other complex discrepancies, many Sharia scholars also feel that IFRS does not offer the level of transparency and disclosure required under Islamic law. For example, Sharia principles require total segregation of the participants’ and Takaful operators’ assets and liabilities, and all schemes under the management of one operator must be segregated. This allows a fair share of surplus or deficit to be allocated to the participants of each scheme in a transparent way.

However, in almost all jurisdictions, Takaful businesses have to publish their financial statements on a combined corporate entity level, which can make it difficult for stakeholders to assess and understand results. To get around this problem, many companies reporting under IFRS present a se parate revenue account for each Takaful fund under management along with a separate income statement for the Takaful operator. Some also use columnar balance sheets showing the assets and liabilities of the operator side by side with those of the fund, together with the aggregate balance.

Dialogue required to enhance Takaful’s potential

It’s clear that current application of IFRS for Takaful companies represents an uneasy compromise for the business, customers and Sharia scholars. Yet it is obviously important for Takaful companies to be regulated under international standards if they are to move forward as part of a global industry. To develop a consistent presentation and transparent disclosure that reflects the true essence of Takaful, a productive dialogue between Sharia scholars and the wider industry should continue.

Frameworks already exist which should help provide insight and a basis for future development, including the accounting standards and guidelines for Takaful created by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the Malaysian Accounting Standards Board (MASB) and the Central Bank of Malaysia (BNM). With a harmonized dialogue at global level, Takaful can reach its full potential.

Islamic Finance coming of age: KPMG – Frontiers in Finance

Islamic Finance coming of age: KPMG – Frontiers in Finance

Last year may go down in history as the watershed year for the financial services industry. However, as Dr. John Lee and Anita Menon explain, while Islamic finance was not entirely unscathed by the vagaries of the economy and the contagion effect of the conventional finance sector, the industry still recorded compounded annual growth rates of 28 percent from 2006 to 2009. Islamic banks also recorded an increase in assets by 28.6 percent in 2009 to US$822 billion.1

This in itself is interesting, as a couple of years ago at the height of the previous growth cycle for Islamic finance, many felt that the true test of the resilience of the system would be when there was a shock to the system, and when the liquidity in the Middle East dried up. However, skeptics would also claim that this was due to Islamic institutions general investment prohibitions which meant that they were less exposed to subprime assets.

2009 also saw the entrance of a number of new players which indicate that interest in this burgeoning sector is as yet, unabated. As at end 2009, there were 1,124 Islamic financial institutions globally.2 While issuance of sukuk3 dropped in 2009 on the back of tightening liquidity and concern on possible defaults, the demand for quality sukuks continued to be there and issuance increased by 40 percent for the first 10 months of the year, as compared to the corresponding period in 2008.4 Saudi Arabia led the issuance followed closely by Malaysia; with one of the largest issuances by Malaysia’s national oil and gas company Petronas totaling US$1.5 billion.

Outlook for the rest of this year and into 2011

The outlook for the remainder of 2010 remains positive with some analysts saying5 that Saudi Arabia is expected to continue to lead issuance, although investors are expected to be somewhat spooked by the recent Dubai World crisis, sukuk defaults and the problems seen to be encountered by some of the institutions in the Middle-East. Dar-Al Arkan, Saudi Arabia’s largest property developer by market value, successfully issued a sukuk in February this year raising US$450 million and analysts believe that the number of issuances for the rest of 2010 is likely to grow to pre-crisis levels.

KPMG in Malaysia’s analysis indicates that the Islamic finance market is steadily growing both deeper and wider, with the emergence of new Islamic finance markets such as the Maldives, Korea, Kenya, Nigeria and also stronger interest from EU countries like France and Italy. Korea for instance, is currently working on amendments to its legislation that may see the first Korean sukuk being issued as early as 2010 or 2011. In Malaysia, the interest continues to grow and, among the recent liberalization measures is the issuance of two new Islamic banking licenses to foreign players; with a paid-up capital of at least US$1 billion, along with two family Takaful licenses towards the middle of this year. Malaysia continues to be a leading market outside the Middle East with assets of almost 11 percent of the global market and with Islamic assets making up almost 19 percent of the banking and finance market in Malaysia. However, the UK is emerging as a key market holding close to 2.5 percent of global assets.6

Within the Asia-Pacific region, relative newcomers such as Singapore and Hong Kong have expressed their desire to also become centers, while the most populous Muslim nation – seen by many as the next big growth zone – Indonesia has still a long way to go if estimates of asset size are anything to go by. Bank Indonesia, the central bank of Indonesia, has indicated that shariah assets are projected at US$7.6 billion as at end 2009, which places the nation’s Islamic finance assets at 2-3 percent of the total banking assets.7 This is attributed to the nascent infrastructure and regulatory system for Islamic finance. While there is a new law which was set to be effective in April 2010 that would remove the double-taxation on some Islamic banking transactions, there are still issues around this area that hold back the otherwise huge untapped potential in this country.

The global Muslim population is continuing to grow faster than the non-Muslim market; recent estimates place the Muslim population at 1.57 billion, 23 percent of the global population.8 There is also a large Muslim population in the Asia-Pacific region – China for instance has more Muslims than Syria; while Russia has more Muslims than Jordan and Libya combined. This translates to immense opportunities for shariah compliant finance in as yet untested markets. The potential for Islamic finance continues to be enormous. The only impediment to its growth may be that the conventional regulatory structure is currently unable to support the introduction of Islamic products.

Through the adoption of a progressive face as opposed to an overtly religious tone, in countries such as Malaysia, the Islamic finance industry has continued to make inroads in the non-Muslim market. This may also be the approach adopted in countries such as India and certain African countries with large Muslim populations, but, where the projection of an Islamic face would be anathema to the political regime.

Islamic finance is also gaining acceptance where it is seen as an ethical alternative to the conventional system, bridging the gap between socialism and capitalism. According to the Vatican’s official newspaper Osservatore Romano in its March 2009 issue, “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service.” Ethical investors also are drawn to the principles that underlie Islamic financial transactions. Therefore growth is expected to come from this segment of consumers as well who are not necessarily attracted by its faith-based appeal, but more from its socially responsible outlook.

The future of Islamic finance

The ongoing debate on whether products are shariah compliant or shariah based and the lack of standardization, continues to be an issue. Additionally, other major hurdles that remain or have become more apparent with the recent financial meltdown include:

  • the need for robust risk management practices that would be able to drive product innovation and development;
  • the need for a legal and regulatory framework for dispute resolution, especially on cross-border transactions;
  • the ongoing requirement for trained practitioners in this field that have a strong understanding of shariah requirements, but are also in tune with market and consumer demands.

Notwithstanding that, many Islamic institutions are expected to undergo a transformation in their approach and strategy, and more importantly in their business models as well. This will enable them to encompass more of the ideals of shariah principles and to move away from the predominance of debt-based structures as in the past. When Islamic finance was first introduced into the market, the approach was to adopt products that were familiar to the generation of consumers and clients brought up on conventional financial products. Therefore, Islamic financial products were shariah compliant mirrors of their conventional equivalents. Furthermore, the initial target market was retail customers who are generally risk-averse and therefore, fixed rate products were more appealing to this segment of the market.

Increasingly however, a radical shift from the current norms will be required and this would fuel the anticipated growth in Islamic finance. The pursuit of social objectives would gain emphasis alongside the pursuit of commercial objectives; since Islamic finance is meant to be the antithesis of the previous conventional financing norms – where excessive risk-taking led to the ultimate downfall of many players. The financial crisis has heightened the interest in Islamic finance and it’s future; the concepts of risk-sharing should be ingrained further through the development of more profit and risk sharing mudaraba and musyaraka products. This would require a shift in banking business models as well. Increased product sophistication and market awareness-building would also need to go hand-in-hand with the advancement of the financial and legal infrastructure.

Over the next 18 months Islamic finance institutions are expected to come of age.

1. Banker’s Top 500 Islamic Financial Institutions survey published in association with HSBC Amanah,, November 5, 2009.
2. “The Future of Islamic Finance”, Financial Times Special Report, December 8, 2009.
3. sukuk – an Islamic financial certificate, similar to a board in Western finance, that complies with shariah law.
4. “Moody’s reports: Sukuk issuance surges, dominated by government-related issuers,”Global Credit Research,, November 10, 2009.
5. “Saudi seen leading 2010 sukuk issuance,”, February 17, 2010.
6. Banker’s Top 500 Islamic Financial Institutions survey published in association with HSBC Amanah,, November 5, 2009.
7. “Indonesia embracing growth Islamic finance,”, April 5, 2010
8. “Global muslim population hits 1.57 billion,”, October 7, 2009.

Source: KPMG – Frontiers in Finance June 2010