TAKAFUL IN TANZANIA:WHERE WE COME FROM AND WHERE WE ARE-FINAL

Current Global Takaful Landscape.

E & Y recently published report titled "Global Takaful Insights 2014: market updates" observes that the global takaful market is estimated to continue its double-digit growth momentum of about 14% in 2014. By 2017, the global takaful industry may reach over US$20 billion. Overall, global gross takaful contribution is estimated to reach US$14 billion in 2014 from an estimated US$12.3 billion in 2013. Compared to 2006 contribution estimates were around $2.6 billion and 2009 contributions reached US$ 7 billion. This is a remarkable growth. Definitely, this positive growth momentums is mainly driven by the key markets of Saudi Arabia, UAE, Malaysia and other GCC countries.

As it has been in previous years, many of the multinational insurers that are expanding into this sector have established subsidiaries in either Bahrain or Malaysia, or thorough M & A. For example in 2013, E & Y reports that Malaysia’s insurance industry attracted new players from Canada and the US who were keen to acquire local operators and grow their regional business further. Among the M & A are: Khazanah Nasional Bhd’s partnership with Sun Life Financial Inc. in their 98% acquisition of CIMB Aviva Assurance Bhd for US$560 million (RM1.8 billion) and American International Assurance Bhd’s1 acquisition of ING’s 60% stake in ING Public Takaful Ehsan Berhad.

Way back in 2006 and 2007, a significant number of takaful and retakaful operations were established by major conventional re/insurance players e.g. Munich Re, HSBC, Hannover Re, Prudential, AIG, Tokio Marine and Swiss Re in 2006; Aviva and Allianz in 2007 and many more joined since then. Andrew Murray note that "these players see takaful as a way to protect market share in growing
Islamic markets as well as to leverage their existing expertise to reach a new client base."

There are also key developments on regulatory fronts led by Indonesia, Oman, Bahrain KSA UAE and Malasyia. E & Y reports " Indonesia’s takaful sector is advancing into a fully capitalized environment with window operations being phased out." Oman has moved quickly to develop regulations for takaful. The draft insurance law only permits the formation of fully fledged Islamic insurers, distinct from the provision made for Islamic banking windows. As per the this regulation, takaful operators must be publicly listed and have a minimum capital of OMR10 million (US$26 million). In late 2013, Oman launched two takaful IPOs, i.e., Al Madina Takaful and Takaful Oman Insurance, catalyzing the growth of the takaful market in Oman. In Bahrain, The Central Bank of Bahrain (CBB) is in the pr ocess of drafting a new and enhanced framework for the takaful and retakaful sectors. It is aimed to strengthening the solvency position of the firms, enhancing operational efficiency of the business and safeguarding the interest of all stakeholders. Finally, In late 2013, Bank Negara Malaysia issued a concept paper, the Life Insurance and Family Takaful for Everyone (LIFE) framework. The proposals cover a wide range of areas including operating flexibility, product disclosure, delivery channels and market practices.

So far the share of global gross takaful contribution is dominated by KSA (48%) of share of global gross takaful contributions.ASEAN countries, namely Malaysia and Indonesia, account for nearly one-third (30%) of total gross takaful contributions, followed by other GCC7 countries at 15%. Africa, South Asia and Levant account for 7% of global takaful contributions. Africa alone account for 3%.

Takaful in Tanzania-Where we come from and where we are?

Since 2008/2009, there were discussions in the inner cycles followed by board resolutions of some insurance companies to offer takaful products under takaful window. One such company was Zanzibar Insurance Corporations which went ahead to form a steering committee to study and report on how best and what needs to be done to enable the company offer takaful products. This author remembers to have provide a one day training to the steering committee members on the basics of takaful to enable them accomplish their work. This team must have positively found the way forward for ZIC to start offering Takaful products however the regulator (TIRA) may have not been ready by then to grant approval for such undertaking citing the presence of regulatory framework for Takaful is paramount before permitting Takaful to kick off.

Time passed without substantial progress until 2011, TIRA formed a three member team to undertake a study on the subject followed with a report in 2012 titled TIRA Study Report and Recommendations: viability of introduction of takaful products and its associated regulatory framework in Tanzania. The report finds that in a country where a large proportion of the population is Muslim, there is likely to be significant and growing demand for Takaful. To ensure a level playing field and given the likely sensitivities where financial products structured around religious beliefs are concerned, it is essential that the right regulatory framework be put in place for Takaful before it is allowed to be practiced in the market. The proposal is to develop a separate Takaful Act and Regulations in 2013, with formal introduction of Takaful operations expected by 2014.

For some reasons that time frame is far from reach. However, progress have been made to prepare the regulation. This author participated in one of such deliberations towards preparations of a robust regulation for Takaful industry. Meantime, it is believed that the draft regulations must be in a shape just waiting relevant approval authority to bless it. I, therefore, expect that by early 2015 they may be gazetted and operational. I wait and pray for this historic moment.

With this positive development, those interested must start or finalize preparing themselves for undertaking Takaful business. ZIC is leading the front and expected to enter first, however, there are other investors though might not be know but are also waiting for license while others are organizing themselves. I pray for them to succeed in their efforts to provide Tanzanians alternative insurance products for betterment of their lives.

TAKAFUL IN TANZANIA: WHERE WE COME FROM AND WHERE WE ARE-PART 1

Takaful (Islamic Insurance) has been established in its modern form for more than 28 years and firms that offer Shari’ah-compliant insurance protection have grown significantly in both number and scale. Takaful contributions (premiums) are expected to increase in volume substantially over the next decade.

What is Takaful?

Islamic insurance or takaful is a concept of mutual cooperation to guarantee mutual protection of the members. Takaful is derived from the Arabic word kafalah, which is a pact that guarantees individuals in a group against loss or damage sustained by anyone of them. According to Takaful Act of Malaysia 1984: “a scheme based on brotherhood, solidarity and mutual assistance which provides for mutual financial aid and assistance to the participants in case of need whereby the participants mutually agree to contribute for that purpose”. According to AAOIFI Sharia standard no 26 provides "is an agreement between persons who are exposed to risks to protect themselves against harms arising from the risks by paying contributions on the basis of 'commitment to donate' (iltizam bi al tabarru')." The Islamic Financial Services Board and International Association of Insurance Supervisors gives the following descrition "Takaful is the Islamic counterpart of conventional insurance, and exists in both life (family) and general forms. It is based on the concept of mutual solidarity and a typical Takaful undertaking will consists of a two tier structure that is hybrid of a mutual and commercial form of company."


The development of takaful in modern times was initially undertaken in Sudan in 1979 and Malaysia in 1984. As the result of the 1985 fiqh Academy ruling declaring that conventional insurance was haram (forbidden), while insurance based on cooperative principles, sharia compliance, and charitable donations are acceptable.

The performance of Islamic insurance widely known Takaful has showed a remarkable growth from time to time. It can be seen by, a lot of Takaful operators in the present day and of course the average growth rate, it is 20% per year currently.

Why Takaful and not conventional Insurance.

There are two or three reasons.

First and foremost, incompatible with Sharia rules and principles.

Conventional insurance suffers from fundamental problems in its modus operandi, mainly due to occurance of Sharia non-compliant elements i.e. Gharar (uncertainty), Riba (Interest) and Maysir (gambling).

Uncertainty (Gharar).
The word carries a wide range of negative connotations such as deception, risk, hazard, uncertainty, ignorance etc.Any transaction entered into should be free from excessive uncertainty. The purpose of this prohibition is to avoid fraud, injustice and exploitation. In a conventional insurance, uncertainty arises when insured pays a premium but does not know whether he is going to make a clam in the future. And the amount of financial benefit to be received is not known as well. Similarly, the insurer does not know whether he is going to be called upon to pay claims under the policy, nor the amount to be paid to the insured.

Gambling (Maisir).
It means taking risk that is created by the contract itself (contract risk as opposed to trade / commercial risk).Gambling is obviously not permissible under Islamic law. In a game of gambling, one party is always hoping for a gain as a cost of loosing for another party. In the context of insurance, the policyholder hopes (bet) to gain a large sum from his small amount of contribution. What the policyholder actually hopes is that the claim will exceed his contribution. In this case, the company would probably be in deficit. However, the policyholder would loss the money paid for premium if the insured event does not occur. Here, the gambling is playing its role. When the policyholder does not make any claim during the period, the insurance operator may obtain all the profit at the expense of the policyholders.

Interest (Riba)
It means every excess in return of which the no reward or equivalent counter value is paid. An insurance contract wherein the policyholder expects to obtain a fix amount of profit that is greater than what he has contributed is considered as riba. on the other hand, the occurance of riba on conventional insurance is usually through the investment of premiums payments in interest bearing instruments such as Treasury bills or Term deposits.

Conventional insurers will often fail all of the prohibitions noted above in addition to having non-compliant product design and investments in prohibited industries.

Second, the problem of moral hazard.

Moral hazard refers to the notion that individuals will make different choices when they are covered by an insurance policy than when they are not (Ashley Gray, 2006). Moral hazard is a result of asymmetric information; it exists when a party with superior information alters his behavior in such a way that benefits him while imposing costs on those with inferior information (Ashley Gray, 2006). In the case of medical insurance (which has an increasing popularity in Tanzania nowadays) for example, cecause the insured’s health care is theoretically being paid by a third party (insurance company), he has an incentive to use health care less economically. It is worthy to quote Ashely Gray in full here to describe the moral hazard problem "There are two primary and widely-discussed types of moral hazard resulting from consumers’ actions and behaviors. First, insurance may discourage fully insured consumers to take preventative measures. Insured individuals have less motivation to take care of themselves and lead healthy lifestyles in order to prevent the need of future health care... Second, insurance may encourage consumers to obtain medical care that is not necessary or crucial to his health. For example, this moral hazard occurs when an insured person spends an extra day in the hospital than is required or purchases some procedure that he would not otherwise have purchased. In both situations, health insurance creates a moral hazard problem because insured consumers tend to overuse medical services that, under uninsured circumstances, they would not have." Due to the moral hazard problem, this year National Health Insurance Company was forced to exclude treatment of certain types of diseases.

Though moral hazard problem may exists even in Islamic insurance, it is to a higher degree mitigated by the mode operandi of the takaful business which provides disincentive to policyholders to engage in such practices. This is due to the fact that under Takaful (mudharaba model) scheme, in case of revenue exceeds claims made, policy holders receive a share of surplus/income from the participant takaful fund at the end of the year. This means that, Takaful besides having built in mitigating of moral hazard risk, it is an economic venue that provide protection against a risk but also income to policy holders.

What is the basis and objectives of Takaful?

According to the Institute of Islamic Banking and Insurance, the objectives of Takaful is "to diversify the risk among the members. In a practical sense, the main difference in this area between conventional insurance and takaful is that in insurance the Risk is transferred to the insurer while in takaful the Risk is shared mutually by the members of the common Takaful Fund under the takaful scheme." In brief, takaful aims

1. Help protect the community from the negative impact of adverse circumstances.
2. Improve quality of life through the peace of mind that comes from security.
3. Save and invest money through a shared system that distributes profit on premiums (subscriptions/contributions) invested by policyholders on an annual basis.

The Sharia basis of takaful can be deduced from the holy Qur'an and Sunnah. In the Qur'an, Almighty says " Help (ta'awun) ye one another in righteousness and piety.."(5:2).

The Prophet pbuh also urges people to help one another to overcome hardship of others: "Whoesoever removes a worldy hardship from a believer, Allah will remove from him one of the hardships of the hereafter."

In addition to above, the Prophet pbuh recommended for people to take certain precautions or strategies to mitigate or reduce risk. The Prophet pbuh notice a Bedouin leaving a camel and asked him " why don't you tie down your camel?" The Bedouin replied " I put my trust to Allah." The Prophet said, "Tie your camel first, then put your trust in Allah." This Hadith teaches us to take measures to safeguard our properties against risk of loss.

Finally, there is also a legal maxim that is relevant to takaful, which reads; "ad darar yuzal" meaning "damage or harm is removed" The maxim entails that once any damage occurred, efforts must be made to remove it. In this sense, takaful can be considered as an effort to remove damage or harm as and when it occurs, through the payment of compensation or coverage to the victim or his family.

Differences between takaful and conventional insurance.

According to Jacky Lim and others, these are the main points of different between takaful and conventional insurance:

1.Conventional insurance is a buy-sell (sale) contract in which the insurance company offers and sells protection and the participants (policyholders) accepts and buys at a certain price.The contract under takaful is usually involves the concepts of tabarru, mudaraba and wakala.

2.Conventional insurance accepts the transfer of risk from the insured against the price i.e premium. In Islamic insurance, the
members share all risks mutually and no transfer of risk is involved.Participants pooling their contributions essentially own the takaful fund and the Takaful Operator acts like a trustee of that pool to manage the business professionally with insurance know-how and provide the resources for doing so. The participants are the insured and the insurers in the first instance. The risk is
therefore borne by the participants collectively and they share in any surplus or loss from the pool.

3.Conventional insurance is based on profit-motive and its goal is to maximize revenue to shareholder. Islamic insurance, in contrast, is based on the motive of community welfare and protection. The nature of business is non-profit oriented though the Shari’ah upholds profit incentives from business ventures provided these are achieved by ethical ways and means for the overall benefit of society and the environment without undue excesses and exploitations.

4.In case of conventional insurance, when there is no claim during the period agreed, the policyholder will lose his premium that has been paid to the insurer. In Islamic insurance, however, when there is no claim being made during the period agreed, the underwriting surplus is given back to the policyholder, or donated to charity.

5.In conventional insurance the investment of premiums is completely at the judgment of the insurer with no involvement by policyholder. As such investment usually involves prohibited elements of riba and maisir. In contrast, the takaful contract specifies how and where the premiums would be invested. Usually, the takaful operator will invest the premiums in shari’ah compliant areas.

6.Conventional system of insurance is subject to exploitation. For example it is possible to charge a high premium (especially in monopolistic situations) and full benefit of such over-pricing goes to the company. The takaful system has a builtin mechanism to counter such over-pricing through its feature of profit sharing. No matter what premium is charged, if the overall results are good, any surplus goes back to the participants in proportion to their contributions.

7. The Islamic insurance company has an additional obligation to pay annual zakat while in conventional insurance, there is no such obligation.


To continue...

RIBA SHOWS ANOTHER FACE IN DAR ES SALAAM BY TARGETING COIN SEEKERS.

I remember it was in the morning standing at the crowded bus station in one of our Tandika shops when I come across a strange business which attracted my attention. I found a gentlemen move around the conductors of daladala with a lot of coins. Initially, I thought the gentlemen tries to help may be his colleagues by providing enough coins to carry their business smoothly but that was not the case as informed by my friend. He said ' the gentlemen is selling coins to them.' In disbelief I had to gather evidence and hence I called the gentlemen and started some talks which revealed my friend was true.

In the course of my discussion I asked the gentlemen (a Muslim), if he knows what he does is earning interest since for each TZS 1000 he provide 700 i.e 30% less? He confidently says 'interest is charged by banks'! What does this tells you? Of course a number of points:

1. Riba, its meaning and types is less known.
2. Riba is confined to banks.

In this brief article, I examine what we need to do to promote awareness of Riba in its broadest connotations and manifestations in the short run and the long run. However, before I proceed me share with you why should we bother with the question of promoting awareness on Riba and call people to stand against it.

The Motives.

Two reasons or motives, one religious motive and the other economic motive.
On the religious motive, we remind one another that according to Jabir : The Prophet sallallahu alayhi wasallam said, may cursed the receiver and the payer of interest, the one who records it and the two witnesses to the transaction and said: "They are all alike [in guilt]." (Muslim, Kitab al-Musaqat, Bab la'ni akili al-riba wa mu'kilihi; also in Tirmidhi and Musnad Ahmad). Another more thought provoking statements that appear to have received less attention is the prophecy in the prophetic statement; "There will certainly come a time for mankind when everyone will take riba and if he does not do so, its dust will reach him." We may debate whether such time was then or now or in future or whether by this statement it means if we stand against it or not the time will come but certainly what we can all agree is that no one can live under the shade of dust. Moreover, the Prophet said, "Avoid the seven great destructive sins." The people enquire, "O Allah's Apostle! What are they? "He said, "To join others in worship along with Allah, to practice sorcery, to kill the life which Allah has forbidden except for a just cause, (according to Islamic law), to eat up Riba (usury), to eat up an orphan's wealth, to give back to the enemy and fleeing from the battlefield at the time of fighting, and to accuse, chaste women, who never even think of anything touching chastity and are good believers. [Sahih al-Bukhari, Sahih al-Muslim] Finally, we should know that avoiding riba is a tool to succeed, Allah says "O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.(3:130).

On the economic motive, there is a lot of uncertainty and financial problems associated with Interest. Those who have examined it such as Maurice Félix Charles Allais a French economist, and was the 1988 winner of the Nobel Memorial Prize in Economics once said "The structural crisis witnessed by the world economy at present is due to the brutal liberal leadership of the economy. The current situation is on the verge of a volcano, which may erupt under the pressure of the double crisis (debts and unemployment). To get out of this crisis and regain balance again, two things should be done: reducing interest rates to near zero and revising tax rates to nearly 2%, which is completely consistent with the annihilation of riba and the Zakat rate in the Islamic economic system." Former President of Nigeria, Mr. Obasanjo once said "“All that we had borrowed up to 1985 or 1986 was around $5bln and we have paid about $16billion yet we are still being told that we owe about $28 bln. That $ 28 bln came about because of the injustice of the foreign creditors interest rates. If you ask me what is the worst thing in the world, I will say it is compound interest.”

What can we do?

Despite the recent crisis which you will expect our politician to re-examine our financial and economic approaches, it appears third world politicians are less concerned about it despite growing threat of increasing national debt caused by reckless over borrowing and interest rates. Why they don't care to take bold steps rather than crocodile cries of high interest rates to get media attention? Are they the benefactor of it? Are they unable to think beyond the box? Not fair to answer for them though to a certain extent answers are obvious.

Muslim scholars must be applauded for speaking against interest in many occasions though their voice never reach the masses because in most occasions they speak either in the Masjids or to their students or in front of limited audience. This efforts should definitely continue however we must expand this by doing the following.

1. Arrange Public Talk.

We should arrange public talk across the major towns in the country using the open space available to promote awareness about interest and its evils and the alternatives to it. This should include Muslims scholars and Christians clerics who share us with us on the prohibition of interest. Though seems daunting task, my view is this is double and effective to change the public opinion on interest and the message reach to politicians or public officials. The methodology and ways to make this effective are open to further discussions.

2. Engage politicians.

It is clear that there are politicians who abhor interest, spoke against it but feel they lack public support to aggressively campaign against it. We should show our support by way of recognizing these politicians and provide them a forum to attend the public talk and get awards for doing that. The same can be done for other. Furthermore, we may write to all MP seeking their support to pressure the government to find way to gradually free itself from interest. This though need to be done in a persuasive and convincing manner bearing in mind, our politicians are confined to think within the box.

3. Message in every public event.

Last but not least, we the 'campaigners against interest' should use every public event to condemn interest and tell people about the alternative ways to avoid it.

Hopefully with other methods we shall be able to educate the public and put the message across. I believe this campaign worthy taking and rewardful in our world affairs and the hereafter. Finally, I like to quote remarks from Prof. Hamza Njozi which has inspires me in countless of ways "It is socially and morally wrong to acquiesce to injustice. Muslims have the moral and political responsibility to expose and to fight against all forms of social injustice and discrimination even if their efforts would always end in failure. Heroic failure in fighting injustice is far better than success in entrenching an unjust order.” Riba is such one form of instruments of injustice and may Almighty assist us to stand against it.

Shariah Requirements for Conventional banks (offering Islamic Financial Services).

By Sheikh Nizam Yaquby
Shariah Scholar, Bahrain

Many conventional banks and financial institutions are increasingly becoming interested in Islamic finance and investment. How can these conventional banks and institutions enter this market? Is it possible or not? This paper is an initial attempt to lay down the conditions necessary for conventional institutions to comply with and implement when doing so. The most important of these required conditions are: complete segregation of funds; the existence of a Sharia supervisory board; management committed to Islamic financial concepts; safeguarding Muslim investors' funds from negligence, trespass, and fraud; and compliance with the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

Introduction

This write up is a modest contributory note that sets out the most important conditions to be fulfilled when conventional banks and financial institutions, their Articles of Association of which do not comply with the tenets of Islamic law (the sharia), set up any Islamic bank, window, or fund. The importance of this issue cannot be overstated, particularly in view of the wide spread of this trend, over the past few years, and the oft-repeated claims by many parties that their transactions and dealings fully comply with the provisions of the sharia when subjected to scrutiny and examination, this proves otherwise. Little or no research appears to have been conducted on this matter, and therefore this note is a beginning toward this end. It is hoped that specialist research and studies by scholars and academics will follow.

Forms of collaboration and their permissibility

Before delving into the details of these requirements, we have to note that cooperation and overlap between Islamic and conventional financial institutions in managing investments has taken several forms. These include the following:
1) An Islamic financial institution (IFI) offers an investment portfolio, backed by its sharia expertise, but vests management of this portfolio in an external investment manager who undertakes to comply with the IFI's conditions and applies the criteria and standards laid down by the IFI when managing investment.
This is permissible under the sharia if the investment manager complies with the Islamic conditions and his or her success has been proven in more than one instance.
2) A conventional financial institution or bank sells and markets an Islamic product, introduced and planned by an IFI through its sharia expertise. This is also sanctioned by the sharia if it has been proved successful in more than one practical example.
3) Alternatively, a conventional financial institution or bank opens an "Islamic window" on its premises, introduces an investment product marketed as "Islamic," such as a fund, or sets up a private Islamic bank or company. This is the subject of the present discussion.

Some scholars believe that this is not permissible, because conventional financial institutions do not comply, in the first place, with the sharia in terms of their incorporation and statutes. If they do not comply with Islamic law in their basic charters, how can they claim to comply with it in their funds, branches, or windows?

In addition, the funds of these conventional financial institutions are drawn from prohibited earnings, so how can they invest unlawful funds in Islamic products? The rationale cited by scholars is that these financial institutions or banks are only intent on exploiting practicing Muslim investors and in so doing unfairly compete with Islamic financial institutions.

On the other hand, there is a group of contemporary scholars who permit this type of investment product as long as the sharia conditions laid down for them are satisfied. They argue that dealing, in compliance with the teachings of the sharia, in transactions and their Islamically sound contracts is not confined to a certain group of people. In this view, it is permissible-indeed incumbent-upon whomever can conduct dealings in accordance with the provisions of the sharia to do so. If it is impossible to do so in all contracts, at least one should start with those that are possible. In response to the argument that the source of these funds is unlawful earnings, one may reply that there is nothing to prevent such funds from being purified, cleansed, and subsequently directed to lawful and permissible channels. Jurists say that it is permissible to deal with commingled (mixed) funds-funds that are not purely lawful funds, but rather are mixed, containing both lawful and unlawful money. This is as stated by Ibn Taymiyyah, in his Collection of Fatawa, and by other eminent scholars.

Moreover, the claim that traditional financial institutions desire to unfairly compete with Islamic financial institutions can be refuted by saying that competition is always in favour of the most suitable, efficient, and fittest. This kind of competition may prompt Islamic financial institutions to exercise more diligence and care to introduce better quality products and conduct their activities more efficiently. This is in fact evident in many nations in which competition exists. On the other hand, conventional financial institutions may gradually convert into full-fledged IFIs if they find this viable and if they have acquired adequate practical experience and sharia practices in this field. There are practical examples to substantiate this argument.

Among scholars and jurists who hold this view are Yusuf AI Qaradawi, Abdul-Sattar Abu Ghuddah, M. Taqi Usmani, Nazih Hammad, Abdullah Al Muslih, and Abdullah bin Sulaiman Al Manea. Economists who also espouse this view include M. Ali Elgari and Monzer Kahf. They all concur that the required conditions, outlined below, necessitate strict compliance.

Required conditions

The most important of these required conditions are: complete segregation of funds; existence of a sharia supervisory board; management that is committed to Islamic financial concepts; safeguarding of Muslim investors' funds from negligence, trespass, and fraud; and compliance with the standards of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI).

a) Complete Segregation of Funds
The funds of the Islamic investment product and those of the financial institution in which sharia provisions are not observed must be completely segregated. The funds of investors who are very diligent and anxious to earn lawful income should not be commingled with those of conventional investors who are not observant of the sharia. Therefore, there should be separate accounts, books, and computer programs evidencing this complete segregation of funds. This matter is not difficult or problematic in view of the availability of modern computer systems, assuming that intentions are sincere and the required expertise is available. This compliance should be enshrined and expressly stated in the statutes or the prospectus.

b) Sharia Supervisory Board
There should be a sharia supervisory board for any institutional Islamic investment body, and that Board should consist of trustworthy scholars who are highly qualified to issue fatawa (religious rulings) on financial transactions. In addition, they ought to have considerable experience with knowledge of modern dealings and transactions. The Articles of Association, prospectuses, or statutes (depending on the type of activity) should provide for the existence of a sharia board, whose fatawa and resolutions should be binding upon the financial institution's management. It should be independent and free to give opinions on proposed contracts and transactions. The role of the sharia supervisory board should be concurrent with that of the financial institution itself in the sense that it should be formed from the moment the financial institution is incorporated, and that it should provide continued supervision and permanent checking of contracts, transactions, and procedures. This should be expressly provided for in the Articles of Association or the prospectus.

c) Managerial Commitment
The financial institution's management, which is undertaking such business activities, should be fully convinced of the concept and fully committed and dedicated to it. It should be anxious to implement it and comply with the teachings governing it. Unless the entire management is committed and convinced, the business activities and the enterprise will not be foul free or will not escape irregularities and deviation. Regardless of how strict and stringent fatawa and contracts are, this will not ensure sound practices if there is no one sufficiently sincere and committed to implement the principles. However, there is no harm in starting first with the executive senior management, which implement resolutions and subsequently trains the other members of the administrative team. The general manager himself should act as a springboard and set a good example for all in this respect.

d) Safeguarding Muslim Investors' Funds
It is an established principle in Islamic law that the mudarib does not guarantee the mudaraba capital for the capital provider. Hence, investment accounts in Islamic financial institutions are not guaranteed by the mudarib. However, this does not prevent the laying down of a stipulation requiring that the parent conventional financial institution (the original company) guarantee Muslim investors' funds against trespass, negligence, and fraud. Major financial institutions may sometimes shirk their responsibility in this connection by claiming that their Islamic windows, branches, or sections are privately incorporated, among other reasons and excuses. This is wholly unacceptable. Precautions should be taken to guard against this, and a similar policy should be expressly stated in the Articles of Association or the prospectus of the financial institution.

e) Compliance with AAOIFI Standards
The Accounting and Auditing Organization for Islamic Financial Institutions has issued and published a number of accounting and auditing standards that all Islamic financial institutions should comply with and implement. The AAOIFI's activities are considered a fundamental groundwork that underpins Islamic banking activities by keeping them away from individual, personal reasoning. The collective personal reasoning (ijtihad) of the AAOIFI is highly important in this vital aspect of Islamic economic life. Therefore, these standards deserve strict adherence. A number of government authorities and central banks in certain countries have circulated these standards and obliged other financial institutions to comply with them. That is why any party wishing to incorporate or set up an Islamic financial institution should be required to conform to these standards in order to avoid confusion, misunderstanding, and ambiguity, and to seek clarity and sound business activities.

Conclusion
Islamic investment, with its governing sharia rulings and provisions, is an open area for all those wishing to give it a try, provided that they approach it from its front door. They ought to comply with its provisions and honestly deal with people in their communications and transactions. For those who are intent on fraud, cheating, and misleading, all that can be said is that "he who cheats us is not one from us."

MIFUKO YA PENSHENI KATIKA MIZANI YA SHARIA YA KIISLAM.

UTANGULIZI.

Baada ya hayo, nchini Tanzania kuna mifuko sita ya pension kwa ajili ya watumishi wa mashirika ya serikali, wafanyakazi wa serikali pamoja na wafanyakazi wa mashirika ya watu binafsi. Mashirika haya yameundwa kwa sheria maalum zilizopitishwa na bunge. Sheria husika zinayapa nguvu mifuko hiyo katika shughuli zake za kila siku china ya wizara husika ambazo zinasimamia mifuko hii. Chini ya wizara ya fedha kuna mfuko wa PSPF, PPF, GEPF, na ZSSF, china ya wizara ya kazi, ajira na maendeleo ya vijana upo mfuko wa NSSF na chini ya wizara ya serikali za mitaa upo mfuko wa LAPF.

Makala hii inalenga kuangalia nadharia ya mifuko ya pension, jinsi mifuko hii inavyofanya shughuli zake, umuhimu wake katika jamii, na uhalali au uharamu wa mifuko hii katika mizani ya Sharia tukufu ya kiislamu.

NADHARIA YA MIFUKO YA PENSION.

Mifuko ya pension ya wafanyakazi ilianzishwa mnamo karne ya 20, kufuatia hali ya wasiwasi waliyokuwa nayo wafanyakazi juu ya maisha yao ya baadae na familia zao inayoweza kusababishwa na mabadiliko mbalimbali kama vile kifo, kustaafu, kupata ajali kazini n.k hali ambazo zikijitokeza huziweka familia za mfanyakazi katika wakati mgumu kifedha kumudu mahitaji yao ya kila siku. (Gross 2000).

Serikali mbalimbali katika nchi za kibepari zikaona njia bora ya kupunguza wasiwasi huu ni kuwa na mifuko maalum ambayo mfanyakazi ataweka fedha kutoka katika mshahara wake na serikali au mwajiri atamwongezea ili iweze kumfaa siku za mbele yeye binafsi na/au familia yake pamoja na faida atakayogawiwa kutoka katika vitega uchumi vya mfuko husika.

Kulipa nguvu jambo hili, serikali mbalimbali zimeweka sheria maalum ili kuhalalisha na kuhakikisha kuwa wafanyakazi wanakuwa wanachama wa mifuko hii na kukatwa sehemu ya mishahara yao (kati ya 5% au 10%) na kuwalazimisha waajiri kuwachangia wafanya kazi wao (kati ya 10% au 15% kulingana na sheria ya mfuko husika). Kadhalika, sheria hizo zinawahakikishia wanachama kupata mafao yao na huduma mbalimbali chini ya taratibu zilizowekwa. Kwa mfano, NSSF imeundwa chini ya sheria namba 30 mwaka 1997, PPF chini ya mswada wa PPF no 14 (1978) na sheria namba 25 (2001), PSPF chini ya Public Service Retirement Benefits Act No.2 of 1999 na kadhalika.

SHUGHULI ZA MIFUKO YA PENSION.

Mifuko yote ya pension inategemea sana michango ya wanachama na waajiri wao katika kukuza mitaji kwa shughuli za uwekezaji na kuwa na fedha za mara moja ili kuwalipa wanachama walio chini ya mifuko hii chini ya utaratibu wa kuchukua michango ya wale wanaojiunga sasa kulipia mafao ya wale waliojiunga zamani. Kwa ufupi, mstaafu analipwa kile alichoweka kama mchango wake na mwajiri wake pamoja na ‘faida’ iliyotokana na uwekezaji wa fedha hizo katika miradi ya mfuko husika ndani ya muda wote alipokuwa kazini. (Spiceland et al)

Pamoja na hayo, mifuko hii imekuwa ikibuni taratibu mbalimbali za kinga ya jamii kufuatana na mabadiliko yanayojitokeza na kukabiliana na ushindani ili kuweza kuwavutia watu kuweka fedha za akiba chini ya bidhaa mbalimbali za mifuko hii.

Ukiacha michango ya wanachama, mifuko hii inatumia njia mbalimbali za uwekezaji ili kupata faida ambayo itatumika kujiendesha na kuwalipa wanachama chini ya taratibu mbalimbali za pension ( pension plans). Mifuko yetu hapa Tanzania, yote ina sera zake za uwekezaji (Investment policies) ambazo zinafanana hususan katika maeneo ya uwekezaji au vitega uchumi (investment portfolio).

Maeneo makuu matatu ya uwekezaji yanayotumiwa sana na mifuko hii;

1. Miradi yenye kipato maalum (Fixed Income assets).
Mifuko hii hununua dhamana za serikali (T/Bills na T/Bonds), dhamana za makampuni (corporate bonds), kuweka katika mabenki mbalimbali katika akaunti za muda (Fixed deposit account or call account), kukopesha makampuni makubwa (Corporate loans), wafanyakazi wake nakadhalika. Sifa kubwa ya uwekezaji huu ni kuwa makubaliano huwa chini ya mikataba ya riba. Hali halisi inaonyesha kuwa zaidi ya asilimia 68 ya fedha zote za mifuko hii huwekezwa katika utaratibu huu. (PSPF 65%, ZSSF 85%, PPF 54%, LAPF haikowazi, NSSF haikowazi, GEPT haikowazi). Katika hiyo asilimia 68, Bw. Peter Mhando anasema asilimia 41% ya fedha zote huwekezwa katika mabenki na dhamana za serikali.

2. Miradi ya Ujenzi, (Properties), mifuko hii huwekeza katika ujenzi wa nyumba za kuishi na za biashara (Residential and commercial buildings). Uwekezaji katika sekta ya ujenzi au majengo inachukua hadi asilimia 25%.(inategemea aina ya mfuko husika, kwa mfano ZSSF ni 3.36%). Uhalali wa kipato kinachotokana na uwekezaji huu inategemea kampuni au biashara za wale waliopangishwa na muundo wa mitaji (Capital structure) wa kampuni hizo. Kwa mfano, baadhi ya ofisi za majengo ya PPF na NSSF wamepangishwa benki za riba, makampuni ya bima, na makampuni yanayoendeshwa kwa mikopo ya riba n.k

3. Kuwekeza katika hisa za makampuni ya umma yalioorodheshwa katika soko la hisa (DSE). Mifuko ya pension nchini yamejiwekea kima maalum cha kuwekeza katika hisa za makampuni imara na yenye kuleta faida ambayo yameorodheshwa katika siko la hisa la DSM. Hata hivyo, kiwango cha uwekezaji katika hisa ni kidogo sana ukilinganisha na maeneo mengine. ( Kila kampuni inayosera yake ya uwekezaji inayoelekeza kiwango cha kuwekeza katika eneo hili.) Kama ilivyo uwekezaji katika ujenzi wa majengo ya biashara, uhalali wa faida itokanayo na hisa za makampuni inategemea aina ya kampuni husika na muundo wa mtaji wake. Kwa mfano, mifuko hii hununua hisa katika mabenki ya riba, makampuni ya bia, makampuni ya bima, sigara, nakadhalika. Bahati mbaya, sehemu kubwa ya uwekezaji katika hisa huwa katika hisa za makampuni haya.

Kwa ujumla hizi ndio njia kuu za kupata mapato au faida ambayo hugawiwa kwa wanachama au mapato haya ndio yanayolipia gharama mbalimbali za huduma itolewayo. Kadhalika, mifuko hii imeruhusiwa kukopa katika taasisi za fedha ili kumudu mahitaji ya shughuli zake mbalimbali.

Wachunguzi na wachambuzi wa mifuko ya pension nchini wanaona kuwa mifuko hii imekabiliwa na upungufu mkubwa katika njia za uwekezaji inazozitumia na namna ya uendeshaji. Bw. Philip Mpango, mchumi wa benki ya dunia, katika mahojiano yake na gazeti la EastAfrican amesema kunahitajika mabadiliko makubwa katika sheria ya mifuko hii hasa katika eneo la uwekezaji na miradi inayokubaliwa na mifuko ya pension. Hatahivyo, upungufu mkubwa unaoonekana ni ile hali ya mifuko hii kuhatarisha amana za wafanyakazi kwa kuamua kuwekeza katika sekta ya ujenzi na majengo ya kibiashara, miradi ambayo matunda yake huchukua muda mrefu na kuifanya mifuko ikose fedha kulipa mafao(Liquidity problems). Kwa mfano, NSSF na PPF imewekeza mabilioni ya shilingi katika miradi ya ujenzi wa nyumba Dar es salaam, Arusha, Dodoma na Mwanza. Waziri wa fedha, Mr. Mkulo amenukuliwa akisema kuwa mifuko mikubwa ya pension ipo katika matatizo makubwa kifedha. Ameitaja mifuko hiyo kuwa ni PPF, PSPF na LAPF, jambo ambalo litailazimu “... serikali kufidia hasara inayotokana na matatizo ya kifedha.” Ameongeza kusema “hali hii inaenda kinyume na dhamira ya serikali. Lengo la serikali ni kuhakikisha mifuko hii inakuwa na uwezo wa kifedha endelevu.”

Kadhalika, mifuko hii inalaumiwa kwa kutoa mikopo kwa wafanya biashara fulani na wanasiasa au hata vyama vya siasa. Baya zaidi ni kukaa na Tsh 622 billioni za wanachama bila kuwekezwa katika miradi (idle funds) hali inayopelekea manung’uniko na wanachama kupata faida ndogo wakati wa kuchukua mafao yao.

Mwisho, mifuko hii inahitaji kufanya mabadiliko ili kuwawezesha wafanyakazi kutumia amana walizoweka kama dhamana katika kupata mikopo kutoka katika taasisi za fedha. Vilevile, kuunda utaratibu maalum ambapo utawawezesha wachangiaji kuwa na uchaguzi wa maeneo ambayo wangependa mifuko hii iwekeze fedha zao na wao kupata gawio ambalo linawiana na imani zao pamoja na kuwa na uwazi kwa wanachama juu ya mwenendo wa mifuko husika.

FAIDA ZAKE KATIKA NCHI.

Utafiti wa kina na kisayansi unahitajika katika kutathmni mchango wa mifuko ya pension katika maendeleo ya Tanzania. Kinadharia, inaweza kusemwa kuwa mifuko hii ina faida kubwa katika kujenga uchumi wa nchi kwa kuwa ni inafanya shughuli ya kukusanya fedha ambazo zinaweza kutumika kama mtaji (Formation of capital) kwa taasisi na miradi mbalimbali ya kimaendeleo. Mifuko hii inatoa ajira kwa watu mbalimbali wanofanya kazi katika mifuko hii kadhalika watu wanopata ajira kutokana na miradi inayowezeshwa na mifuko ya pension. Kwa mwanachama, zipo faida mbalimbali kulingana na mfuko husika, kwa mfano mafao ya kustaafu kazini, mafao ya kuumia kazini, msaada wa mazishi (funeral grant), msaada wa huduma za afya (medical benefits), mafao ya uzazi (maternity benefits), na kadhalika. Bila shaka, mafao haya yanainufaisha jamii na kupunguza makali ya maisha pindi wanapostahili mafao hayo.

Hata hivyo, ulazima uliowekwa katika kuhakikisha kila muajiriwa (formal sectors) anakuwa mwanachama wa mifuko hii kwa kuchangia kima maalum moja kwa moja kutoka katika mshahara wake kunamkosesha muajiriwa manufaa ya jasho lake katika muda husika, uhuru wa maamuzi na matumizi ya kipato chake, kunapunguza uwezo wa kuyamudu mahitaji ya kila siku (purchasing power), kupunguza mori wa wafanyakazi na mzunguko wa fedha katika uchumi wa nchi

MIZANI YA SHARIA YA KIISLAMU JUU YA MIFUKO YA PENSION.

Ili kujua mtazamo wa sharia ya kiislamu juu ya mifuko ya pension, hatuna budi kuanzia katika kuangalia nadharia ya mifuko hii na lengo la sharia ya kiislamu. Sharia ya kiislamu ina malengo (maqasid sharia) makuu mawili, moja kuleta manufaa na la pili, kuondosha madhara. Lengo kuu katika haya malengo mawili ni kuondosha madhara (Relieving hardship takes precedence over promoting benefit). Kwa kuwa nadharia ya mifuko yote ya pension ni kumnufaisha mwanachama wake na kumkinga na hali ya wasiwasi juu ya matatizo yanayoweza kujitokeza kwa kukosa kipato wakati akiwa hana nguvu ya kufanya kazi au akiwa hana kazi, au akipata ajali kazini, au akifiwa na watu wa karibú na kadhalika. Hivyo, sharia ya kiislamu haina kipingamizi katika nadharia ya mifuko ya pension.

Pamoja na kuwa sharia inaunga mkono dhamira njema ya mifuko hii, mambo yafuatayo ni vyema yakazingatiwa ili uhalali wa mapato au faida itokanayo na mifuko hii kwa wanachama wake upatikane.

1. Wasilazimishwe wafanyakazi kuwa wanachama wa mifuko hii. Mwenyezi Mungu, amekataza watu kuwalazimisha wenzao kufuata dini yake seuze kufuata utaratibu huu? Juhudi ifanyike kuwaelimisha wafanyakazi umuhimu wake na yule atakayeridhika ajiunge na mfuko husika kwa hiyari yake. Kumlazimisha mtu aache sehemu ya ujira halali utokanao na jasho lake (forsake his current needs for unforeseable future needs) bila ridhaa yake kwa kisingizio kuwa kipato hicho kinahifadhiwa kimfae baadaye ni dhulma kubwa.

2. Waajiri wasilazimishwe kuchangia kwa ajili ya wafanyakazi wao. Waelimishwe umuhimu na uzuri wa kufanya hivyo na atakayekuwa na uwezo awe anawapa wafanyakazi wake kiasi anachoweza kama motisha ya juhudi au kazi nzuri inayofanywa na wafanyakazi wake. Kuwalazimisha waajiri watoe kiasi fulani kwa ajili ya wafanyakazi zaidi ya kile walichokubaliana na muaajiriwa ni kuwadhulumu waajiri hawo na kuwakatisha tamaa kwa kuwa sheria iliyopo haitambui uwezo wa muajiri kufanya hivyo.

3. Wafanyakazi wawe ni wawekezaji au wanahisa (Shareholders)katika mfuko wa pension husika. Na kila mmoja anapochangia iwe ni sawa na mtu anayenunua hisa katika shirika la biashara chini ya mkataba wa mudharaba.

4. Njia za uwekezaji (investment avenues) ziwe zinakidhi mahitajio ya sharia ya kiislamu kwa wale wanaotaka kipato chao kitokane na vyanzo halali kwa mujibu wa Sharia.

5. Hiyo basi, kuhakikisha jambo hili, iundwe bodi au kamati ya wataalamu wa sharia ya kiislamu wenye dhima ya kuelekeza na kuidhinisha uwekezaji wa amana za wanachama katika vitega uchumi halali na kwa uwazi.

SWALI LA MSINGI JUU YA KIPATO CHA MIFUKO HII YA PENSION ILIYOPO.

Ni muhimu kujiuliza, je? kipato apatacho mwanachama wa mifuko hii kutokana na kulazimika kuchangia kutoka katika mshahara wake na kile anachopewa na mwajiri na riba itokanayo na fedha hizo ni halali kwa matumizi yake?

Wanazuoni wa india wamejibu swali hili ya kwamba, kipato hicho ni sehemu ya mshahara wake na anaweza kutumia kwa matumizi yake na matumizi ya neno riba si sahihi katika jambo hili . Hata hivyo, fatwa hii haina uzito ukitazama vitega uchumi vya mifuko ya pension ya Tanzania na hata sehemu nyingine ulimwenguni. Kwa sababu hiyo, wanazuoni mahiri, wamekataza kuchukua ile riba kwa matumizi binafsi na hii ndio fatwa yenye nguvu kisharia ukizingatia aina ya mikataba inayotumika na chanzo cha faida inayotolewa. Hivyo, riba inayotolewa na mifuko hii, itolewe katika shughuli za jamii (charitable social activities).

Mwisho, wanazuoni wote wanakubaliana juu ya wajibu alionao mwanachama atakayekuwa anachukua mafao yake kutoa zakat wakati anapopokea fao lake iwapo mafao yake yamefikia kima cha nisaab ya fedha taslimu (Value of 85gram of Gold) na kutimiza mwaka mmoja.Wajibu huu wakutoa zakah ni pale atakapokuwa anachukua mafao yake na si kwa muda ambao fedha yake imekaa katika mfuko husika.


CHANGAMOTO NA NINI KIFANYIKE.

Ni wazi ya kuwa sisi kama waislamu nchini Tanzania tunalazimishwa na sheria zilizopo kushiriki katika mifuko hii na ni wajibu wetu ushiriki wetu uishie hapo. (yaani kwa kulazimishwa). Lakini je nini wajibu wetu katika mazingira haya? Kuacha hali hii iendelee au kufanya juhudi kuepukana na mfumo huu au kuanzisha mifuko ya kiislamu?

Mafunzo ya kiislamu yanamtaka Muislamu popote asiwe katika upande wa kuacha jambo baya liendelee hali yakuwa ni muislamu mwenye kufahamu wajibu na mwenye uwezo wa kubadilisha hali hiyo. Mtume s.a.w ametueleza wazi ya kuwa “atakayeona mmoja wenu jambo baya, alizuie kwa mikono yake akishindwa, kwa ulimi wake, akishindwa achukie kwelikweli moyoni mwake na (jambo hili la kuchukia tu) ni dalili ya udhaifu wa imani.” Historia ya kiislamu na muda wote wa kuwepo Uislamu haijapata kukosa watu waliotekeleza kauli hii kivitendo. Mfano uliodhahiri katika zama zetu, ni juhudi ya kuepukana na riba katika taasisi za fedha. Wanazuoni wa kiislamu na wataalamu wa masuala ya fedha wa kiislamu, wameweza kuonesha njia mbadala ya kuendesha shughuli taasisi za fedha bila riba,kufuatana na muongozo wa Sharia. Hivyo, wito wa kisharia kwa waislamu ni kutambua wajibu huu na kuutekeleza kivitendo kwa kuwa na mkakati.

Kwanza, kuwa na wajuzi waislamu wa kusimamia mifuko hii kwa kufuata sharia ya kiislamu, baada ya utafiti makini (feasibility study) juu ya vyanzo endelevu ambavyo vitaupa nguvu mfuko wa jamii au pension wa kiislamu (Islamic social security or pension fund), kuulinda kisheria na ndani ya jamii ili uweze kudumu bidhnillah.

Wamepata kusema wanazuoni ya kuwa muislamu anaruhusiwa tu kuishi katika mazingira yasiyo ya kiislamu (yenye dhulma mbalimbali) iwapo anatafuta namna bora ya kuhamia nchi ya kiislamu au anapambana na mfumo dhalimu uliopo ili kubadilisha mazingira hayo na kumfanya atekeleze Uislamu wake bila kizuizi katika kila nyanja ya maisha. Asipofanya moja kati ya haya basi anastahili kupata adhabu ya mola wake, kwa kauli ya Mtume s.a.w “Yule atakayejifananisha na watu fulani naye ni miongoni mwao.”

Wajibu wa muislamu katika kupambana na uovu au dhulma ameueleza kwa ufupi mmoja wa wanafikra wetu, Prof. Hamza Njozi katika moja ya maandiko yake pale aliposema, “It is socially and morally wrong to acquiesce to injustice. Muslims have the moral and political responsibility to expose and to fight against all forms of social injustice and discrimination even if their efforts would always end in failure. Heroic failure in fighting injustice is far better than success in entrenching an unjust order.” Maana yake ni kwamba “ kwa hakika ni jambo baya kimaadili na kijamii kushikamana na dhuluma. Waislamu wana wajibu kimaadili na kisiasa kudhihirisha na kupambana na aina zote za dhuluma katika jamii na ubaguzi hata ikiwa juhudi zao hazitofanikiwa. Kushindwa kishujaa katika kupambana na dhuluma ni jambo lililo bora sana kuliko kufanikiwa kwa kuimarisha mfumo dhalimu.”

Mwisho, tutahadhari na haya yafuatayo katika harakati dhidi ya uovu na dhulma kama alivyosema Mtume s.a.w katika hadithi mbalimbali;
• kutafuta maslahi binafsi badala ya maslahi ya ummah kwa ujumla,
• kuacha malengo kwa kughafilika baada ya kuwa na ujuzi,
• kuwa na tamaa iliyopindukia katika yale ambayo hatuna uwezo nayo kwa sasa,
• kujiepusha na unafiki na wanafiki miongoni mwetu,
• kubweteka,
• kuwa katika usingizini mzito (kufikiri bila kutenda) na
• Udhaifu wa imani.

Adequacy of Disclosure in Islamic Financial Institutions.

By Muhammad Shabbir, Bank Analyst, Capital Intelligence, Cyprus

Introduction.

Public disclosure through the publication of financial statements has long been the source of information on business performance of financial institutions. In recent years, however, financial institutions, under pressure from market forces, have started focusing on the disclosure of a wide range of information, including management policies, risk exposures and risk management practices. Given that disclosure disciplines management of financial institutions and helps to enhance the efficiency and transparency of the markets, it has acquired great significance in promoting the stability of financial systems.

Moreover, its importance in enabling investors and parties to assess risks and returns of investing in, or dealing with, a particular institution has grown due to the increasing number of risks that financial institutions now take. The expansion in the role of disclosure also encouraged regulatory authorities in various jurisdictions to make it legally binding on financial institutions to follow a set of certain minimum disclosures in their annual reports.

Like conventional banks/financial institutions, Islamic Financial Institutions (IFIs) are engaged in the business of dealing in money (collection of deposits and lending and investing). However, the fact, which distinguishes them, is that their dealings with depositors are based on profit and loss sharing rather than a fixed pre-determined interest. This signifies an IFI's fiduciary role where it is considered to be dealing in trust money. Thus depositors' / investment account holders' trust in an IFI's ability to achieve investment goals (to record profit) and make a fair distribution of the revenues between itself and the investment account holders (according to the Mudaraba agreement) become paramount in the continuity of the IFIs business.

Given this importance, IFIs are obliged to be transparent by making adequate disclosures to their investment account holders, not only with regard to their own financial condition as is the case with conventional banks but also in respect of the management of trust money. This is the area, going beyond disclosure, where topics such as participation of stakeholders in the corporate governance of IFIs and developing effective control and accountability mechanisms to enhance fiduciary relationships in IFIs become relevant.

In order to discuss the adequacy of disclosure in IFI's financial statements we take a brief look at AAOIFI's1 standards, discuss the role played by these standards in improving the disclosure of information by Islamic financial institutions. We will then move on to review disclosure adequacy with regard to credit, investment and liquidity risks citing examples wherever appropriate.
Before elaborating on disclosure of information desirable in the IFIs financial statements, AAOIFI has set out Objectives and Concepts of Financial Accounting for Islamic Banks and Financial Institutions as a prelude to its financial accounting standards so that varying accounting policies can be harmonised. These statements are in addition to the 12 accounting, 3 auditing and 3 governance standards, which has been published till June 1999. The topics covered by the respective standards are as follows:

Financial Accounting Standards (FAS):

FAS 1 relates to general presentation and disclosure in the financial statements of IFIs. FAS 2-4 relate to different modes of financing (Murabaha, Mudaraba, and Musharaka). FAS 5 discusses disclosure of bases for profit allocation between owners' equity and investment account holders. FAS 6 covers equity of investment account holders and their equivalent. FAS 7 & 8 are about Salam and Ijarah (leasing) transactions, respectively. FAS 9 is about Zakah, FAS 10 relates to Istisna'a. FAS 11 is on provisions and reserves and FAS 12 relate to general presentation and disclosure in the financial statement of Islamic Insurance Companies. Auditing Standards for IFIs cover areas such as objective and principles of auditing, the auditor's report, and terms of audit engagement. AAOIFI's Governance Standards relate to Shari'a Supervisory Board (appointment, composition and Report), Shari'a Review, and Internal Shari'a Review.

A major achievement in the area of establishing concepts of financial accounting for Islamic banks & financial institutions, which improved disclosure, is the clarification of the position of investment account holders (depositors). Not a long ago, third party investment accounts were treated by IFIs either as deposits (similar to conventional bank deposits) or as funds under management, reported off balance sheet with no or little disclosure.

AAOIFI upholds that unrestricted investment accounts, the largest funding source for the IFIs, are part of the financial position (balance sheet) of an IFI to be classified between a liability and equity capital. It is maintained that these investment accounts are not a liability for an IFI because an IFI is not obligated in case of loss to return the original amount of funds received from the account holders unless the loss is due to negligence or breach of contract. This fact alone has a substantial impact on the risk profile of IFIs. As investment deposits are not treated equivalent to conventional bank deposits, where banks are obligated to return principal amount of the deposit to the deposit holders, the risk to the IFI, as an institution, is considerably reduced.

Consequently, shareholders' capital has now to absorb only that part of losses which arise as the share of IFI's own funds in lending and investing. At the same time, however, unrestricted investment accounts, despite being a partner in profit and loss sharing with the IFI, are not treated similarly to the shareholders of the IFI. This is because holders of investment accounts do not enjoy the same ownership rights (voting rights and entitlement to an IFI's profits in the form of dividends). The standards only recognise current accounts and other non-investment accounts as guaranteed by an IFI's owners' equity.

Funds provided by restricted investment accounts4 holders are not reflected as part of an IFI's financial position. The relevant information about such accounts is provided in the statement of changes in restricted investments and their equivalent or as a footnote to the statement of financial position (balance sheet), a treatment similar to that for funds under management.
AAOIFI has also clarified concepts and provided guidance for accounting policies to be followed with regard to different financing and investment modes (Murabaha and Murabaha to the Purchase Orderer, Mudaraba Financing, Musharaka Financing, Salam and Parallel Salam, Ijarah and Ijarah Muntahia Bittamleek, Istisna's and Parralel Istisna'a). While examining the standards related to these aspects, we confine ourselves to the assessment of disclosures with regard to credit, market and liquidity risks.

Disclosure of Credit Risk

With regard to credit risk, information on concentrations of financing assets by sectors/industries, geographical distribution, maturity and currency profile of the financing portfolio together with break up of financing facilities by collectability is considered important. General disclosure in the financial statements of IFIs, as required by AAOIFI standard FAS 1, cover concentration of assets risks (economic sectors, geographical areas), distribution of assets in accordance with their respective period to maturity or expected periods to cash conversion, disclosure of related party transactions.

However, the standard is ambiguous on the most critical information from collectability point of view, which helps the reader of financial statements to determine the extent of doubtful (non-performing) financing assets (sales receivables). The related disclosure that FAS 1 requires is that accounting policies adopted by the IFI's management for the recognition and determination of doubtful receivables and policies of writing off debts be disclosed. There is no definition of doubtful receivables given by AAOIFI.
In practice, however, some IFIs avoid making any mention of non-performing financing assets or the basis on which they make provision for doubtful receivables, particularly the specific provision. This is in contrast to the growing practice among conventional banks to give a break up of their overdue/non-performing loans so that to help the reader in analysing the relative level of credit risk.

To illustrate further, a large Islamic bank (Shamil Bank, former Faysal Islamic Bank) did not provide information on overdue or non-performing facilities in their 1999 financial statements (prepared according to AAOIFI standards) whereas the same has been provided in 1998 accounts (prepared in accordance with the IAS5). However, another IFI (Bahrain Islamic Bank) has provided information on non-performing financing facilities in its accounts for the years 2000 and 1999 as it follows both AAOIFI standards and IAS. Given that the information on non-performing/overdue facilities is a key indicator of the credit risk profile of a financial institution, CI believes that this disclosure inadequacy needs to be covered.

Under AAOIFI standards, disclosure regarding Murabaha sales receivables, the major type of financing conducted by IFIs, is largely focused on two factors. One, on the separation between financing jointly financed by the IFI's and unrestricted investment account holders' funds and financing exclusively financed by the IFI's own funds. The purpose of this disclosure requirement is to separate an IFI's own assets from the assets managed for others (investment account holders) and thereby helping in the assessment of fiduciary risk, to some extent. Second, on the maturity profile of assets and liabilities, to help in the estimation of liquidity risk taken by the IFI by identifying maturity mismatches.

Disclosure of Investment / Market Risk

The assessment of risk that arises from investments in equities or other investments (e.g., property) is as important as financing or credit risk due to the high proportion of such assets in the financial position of IFIs. This is because these investments are considered more Shari'a compliant than Murabaha financing which differs from conventional lending only in semantics. AAOIFI's standard on such items (FAS 1: general presentation and disclosure in the financial statements of IFIs) limit itself to the statement that 'disclosure should be made of the net realisable value of an asset if such value is less than the asset's recorded amount. However, all expected losses should be recognised when reasonably measurable'.

If we look at the financial statements of IFIs which have adopted AAOIFI standards, we observe that investment in shares/securities has been classified into marketable securities, related/associated companies investments, investment in funds portfolios and short term/long term Mudaraba investments. From a risk assessment point of view, the market value of marketable securities has been provided together with movement in provisions for securities. However, it is observed that IFIs do not disclose NAV of their investment in mutual funds (either their own or managed by third parties) or fair value information about their Mudaraba investments (a partnership in profit between the IFI and business owners where funds are provided by the IFI). Both these investments are substantial in the case of some IFIs and therefore limited disclosure in the financial statements force users of financial statements to make subjective assessments of the riskiness of such investments. IFIs should be encouraged to provide adequate disclosure in this regard.

In the case of Mudaraba, this disclosure may include an explanation of the reason for not giving fair value, principal characteristics of the investment, information about the market for such investment as is required under IAS 32. This can assist users to make their own judgements about the possible differences between the carrying amount of these investments and their estimated fair value. As regards investment in real estate, the current market value of real estate is disclosed in the notes to the financial statements of IFIs, a disclosure that appears adequate.

Disclosure with regard to Liquidity Risk

Liquidity of IFIs is generally good because of the concentration of their financing operations in self-liquidating short-term Murabaha financing and commodity backed placements with banks. However, there are serious concerns regarding their macro level liquidity - ability of these institutions to generate funds from other banks (including central banks) in the event of financial distress. The fears arise principally because of IFI's rejection of interest as a cost for the use of money. Although, by practice, majority IFIs does have arrangements to keep compensating balances6 with other financial institutions and even with central banks, to meet or provide for the urgent liquidity needs of the respective counterparties, these balances are not disclosed in the financial statements.
AAOIFI's disclosure requirements (FAS 1) demand that disclosure be made of any amount an IFI is obligated to deposit with others as compensating balances. However, we observed that financial statements of IFIs that follow AAOIFI standards never state anything to this regard. A good example of adequate disclosure in this regard is Kuwait Finance House which discloses such compensating balances as 'balances with banks and financial institutions - exchange of deposits, both on the assets and liabilities sides of the balance sheet. CI believes that such presentation of compensating balances alleviates the fears of other counterparties regarding the inability of IFI's in obtaining funds from the inter-bank market due to the non-payment of interest. This necessitates the need for making such disclosure mandatory by the regulators of IFIs in their respective jurisdictions.