ISLAMIC FINANCE AND INCLUSION.

(This article fully extracted from 'Global Financial Development Report 2014:Financial Inclusion'published by World Bank 2014 page 36. Some tables were omitted.)

Shari‘a-compliant financial products and instruments can play a significant role in enhancing financial inclusion among Muslim populations. About
700 million of the world’s poor live in predominantly Muslim-populated countries. In recent years, there has been growing interest in Islamic finance as a tool to increase financial inclusion among Muslim populations (Mohieldin and others 2011).

The main issue relates to the fact that many Muslim-headed households and micro, small, and medium enterprises may voluntarily exclude themselves from formal financial markets because of Shari‘a requirements. Islamic legal systems, among other characteristics, prohibit predefined interest bearing loans. They also require fi nancial providers to share in the risks of the business activities for which they provide financial services (profit and loss sharing). Given these requirements, most conventional financial services are not relevant for religiously minded Muslim individuals and firms in need of financing.

Based on a 2010 Gallup poll, about 90 percent of the adults residing in Organization of Islamic Cooperation (OIC) member countries consider religion an important part of their daily lives (Crabtree 2010). This may help explain why only about 25 percent of adults in OIC member countries have an account in formal financial institutions, which is below the global average of about 50 percent. Also, while 18 percent of non-Muslim adults in the world have formal saving accounts, only 9 percent of Muslim adults have these accounts (Demirgüç-Kunt, Klapper,
and Randall, forthcoming). Moreover, 4 percent of respondents without a formal account in non-OIC countries cite religious reasons for not having an account, compared with 7 percent in OIC countries (table B1.4.1) and 12 percent in the Middle East and North Africa.

Muslim countries are far from uniform in terms of financial inclusion. For example, 34 percent of the unbanked Afghan population cite religious reasons for not having an account in a formal financial institution, while only 0.1 percent of Malaysians do so, although both countries have similarly high Gallup religiosity indexes (97 percent and 96 percent, respectively; see the Statistical Appendix). This can be traced to the extent to which Islamic financial institutions are present in a given country. An analysis suggests that the size of Islamic assets per adult population is negatively correlated with the share of adults citing religious reasons for not having an account. This correlation is particularly strong if one focuses on the group of OIC countries and, even more, on those OIC countries that show a religiosity index exceeding 85 percent.

Based on the Global Findex, for religious reasons, some 51 million adults in the OIC countries do not have accounts in a formal financial institution. Given that a majority of the OIC population lives in poverty, Islamic microfinance could be particularly attractive. For example, 49 percent and 54 percent of adults in Algeria and Morocco, respectively, prefer to use Islamic loans even if these loans are more expensive than conventional loans (Demirgüç-Kunt, Klapper, and Randall, forthcoming).

Global surveys on Islamic microfinance completed by the Consultative Group to Assist the Poor (CGAP) in 2007 and 2012 provide some initial insights into the rapidly growing Islamic microfinance industry. The 2007 CGAP survey found fewer than 130 and 500,000 Islamic MFIs and customers, respectively (Karim, Tarazi, and Reille 2008). Within five years, these figures more than doubled, reaching 256 MFIs and 1.3 million active clients (El- Zoghbi and Tarazi 2013). These figures are on the conservative side because they are based on data for 16 of the 57 OIC member countries (excluding economies such as the Islamic Republic of Iran, Malaysia, and Turkey, which have active Islamic finance industries). In short, the estimated unmet demand for Shari‘a-compliant financial products, in conjunction with the rapid growth of Islamic MFIs, as well as the astonishing growth of the overall Islamic finance industry, all point to the growing attractiveness of Shari‘a-compliant financial products and the supply shortage of such products.

Religiosity also has an impact on the access of firms to finance in OIC countries. The number of Islamic banks per 100,000 adults is negatively correlated with the proportion of firms identifying access to finance as a major constraint. The negative correlation is greater if one focuses on OIC countries and greater still if one focuses on a subset of OIC countries with a religiosity index above 85 percent. These findings, which are mainly driven by small firms (fi gure B1.4.1), suggest that increasing the number of Shari‘a-compliant financial institutions can make a positive difference in the operations of small firms (0–20 employees) in Muslim populated countries by reducing the access barriers to formal financial services.

Efforts to increase financial inclusion in jurisdictions with Muslim populations thus require sustainable mechanisms to provide Shari‘a-compliant fi nancial services to all residents, especially the Muslim poor, estimated at around 700 million people who are living on less than $2 per day. One obstacle is the lack of transparency and the absence of a broadly accepted standardized process for assessing the compliance of financial institutions with Shari‘a guidelines, which makes it difficult for many individuals to distinguish between financial institutions that are operating based on Shari‘a specifications and institutions that are not.

Another difficulty has been the lack of information and training on Islamic finance. For example, only about 48 percent of adults in Algeria, Egypt, Morocco, Tunisia, and the Republic of Yemen have heard about Islamic banks (Demirgüç-Kunt, Klapper, and Randall, forthcoming). Finally, in their infancy and smaller in scale, Islamic financial products tend to be more expensive than their conventional counterparts, reducing their attractiveness.

THE 'FALL' OF DUBAI BANK AND IMPERIAL BANK IN KENYA: KEY LESSONS.

News are still unfolding on what really happened with the declared insolvent banks in Kenya, Dubai Bank and Imperial Bank. What happened? What are the commonalities and differences if any? What are the lessons learnt? Are our existing banks safe and sound?

DUBAI BANK.

On 14th August, 2015, Central bank of Kenya (CBK) announced it has appointed the Kenya Deposit Insurance Corporation (KDIC) as a receiver in the interest of (Dubai Bank’s) depositors, creditors and members of the public. “CBK has closely monitored Dubai Bank’s daily cash reserve ratio from July 14, 2015 when the bank began breaching its daily cash reserve ratio requirements,” CBK statement reveals. “(We have) also been in contact with Dubai Bank to attempt to redress the situation, but there has been no compliance by the bank.” The non-compliance has to date attracted a total penalty of Sh 5.4 million.


CBK cited a number of causes for the move such as deteriorating cash reserve ratio position and Dubai Bank’s failure to honour financial obligations, including Sh48 million due to Bank of Africa Kenya, violations of banking laws and regulations, including failure to maintain adequate capital and liquidity ratios as well as provisions for non-performing loans and weak corporate governance structures.

CBK tasked KDIC to review the lender and propose a way forward for its future,reported that "considering the magnitude of weaknesses of Dubai Bank Kenya Limited, liquidation is the only feasible option." CBK has also appointed KDIC as liquidator of Dubai Bank Kenya.

As a result, depositors with over Sh100,000 held in the collapsed Dubai Bank will have to wait for at least a year to get their money. According to the Kenya Deposit Insurance Corporation (KDIC), only insured deposits of the same amount will be paid forthwith upon verification of their details. “Balances of deposits above the insured threshold and other creditors’ claims will be paid equitably as and when the liquidator accumulates enough funds from the liquidation process which usually takes a year or so,” KDIC’s acting chief executive officer Aggrey Bett said. Debtors will, however, continue to service their loans with the bank and which will now be collected by the KDIC.

However, one of the largest depositor of the bank Richardson and David Limited had moved to court seeking to block the liquidation of the bank. They argued that a decision by the KDIC to advertise the assets of Dubai Bank confirmed the fears that its sole intention was to strip the bank of all its assets to the detriment of creditors and depositors. Dubai Bank founder and chairman Hassan Zubedi has also come out fighting against liquidating the bank, saying some of the allegations against him are false and malicious.

As a result, the dissolution of Dubai Bank has been stopped after the High Court ruled that the Central Bank move to wind up the lender was premature and accused the Central Bank of Kenya (CBK) over negligence.“The CBK has slept on the job and its supervisory powers have been abused. Dubai Bank’s problems are not recent. The CBK is trying to shield its lack of inspection and is attempting to escape scrutiny."

“The liquidation of Dubai Bank is suspended by order for 60 days. The CBK is to consider the proposal by Dubai Bank" the judge ruled.

IMPERIAL BANK.

In October 2015, the Central Bank of Kenya (CBK) put another Kenyan bank-Imperial Bank, under statutory management, barely months after after taking similar measures against Dubai Bank. The regulator revealed it had taken the drastic decision after learning that “unsafe and unsound business conditions to transact business” existed in the bank. “The board of the directors of Imperial Bank brought to the attention of the CBK inappropriate banking practices that warranted the immediate remedial action in order to safeguard the interest of both depositors and creditors,” said CBK governor Dr Patrick Njoroge as he announced he had appointed the Kenya Deposit Insurance Corporation (KDIC) as the manager for the lender for twelve months.

"Normal operations of the Bank are suspended except for collection of loan re-payments or any other payments into the bank. Debtors are therefore encouraged to continue servicing their obligations. For this reason, KDIC will in the meantime keep all the branches of the Bank open for such transactions,” said Njoroge.

KDIC started to pay depositors Ksh 100,000 as required by law while those with large amounts were to wait until further notice. But December 2, CBK announced that it will start paying bank's depositors up to Ksh 1 million through KCB and DTB. “We have been receiving claims up until the last two days. Our objective is to process all the claims by Christmas, but if some come late then there is only so much we can do,” Dr Njoroge said yesterday.

COMMONALITIES AND DIFFERENCES.

All above mentioned banks are accused of fraudulent, dubious and shady transactions. The point of difference is that while Dubai Bank main perpetrator is its founder and chairman of BOD Mr. Hassan Zubedi, at Imperial Bank the perpetrator is founder and chief executive officer Mr. Abdulmalick Janmohamed.

In both cases, there are allegations of complicity that involves former boss of CBK Prof. Njuguna Ndung'u. "Accusations against Prof Ndung’u were made by former Dubai Bank managing director Nereah Said’s lawyer in court papers indicating that the lender’s chairman and principal shareholder, Mr Hassan Zubeidi, had invoked his name and those of other senior officials at the bank and CID." However, the fate of the CBK boss is unknown.

In both cases, there has been low turnout of depositors to collect their cash. At Dubai Bank, only 561 out of the 7,700 depositors lodge claims on CBK’s offer to collect deposits below Sh100,000. At Imperial bank, out of 50,000 depositors only 10,600 have lodged claims through the Kenya Commercial Bank (KCB) and Diamond Trust Bank (DTB) to demand their cash. This has raised concerns about the true identity of the depositors. Out of 10600 customers, 6,600 have already been verified and validated as the CBK runs to beat the Christmas timeline in two days, within which he had promised to make the payments.

About 500 claims were rejected because they had been filed in duplicates and will have to be filed again while 1,900 had missing information and Dr Njoroge says the owners will have to furnish Kenya Depositors Insurance Corporation with fresh details. Only 1,500 claims were currently being processed and would likely get cleared before Christmas eve.

Notwithstanding, each of the two banks are doing all they can to save themselves from liquidation even if by playing'blame game'.

KEY LESSONS.

1. Don't put all eggs in one basket. Bank customers should take it seriously that placing your hard earned life time investments and savings in one bank can be detrimental and risky. At the time Imperial Bank taken over by KDIC the bank had about 53,000 customers. Their deposit estimated at Ksh 58 Billion at end of June 2015 are still tied up. Despite of CBK recent decision to pay out depositors of under 1 million through KCB and DTB, the wise advise not to place all finances in one institutions or investment instruments is self evident. Diversification is a must and useful to protect your money.

2. 'Ghost account holders' in the banking system? This sparks more questions than answers. Why they don't claim? Have they being engaged in illegal trade? Who are these guys? Important to recall that in 2014, Kenya Parliament’s Public Accounts Committee reported that top Internal Security ministry officials opened a secret NBK account where Sh2.8 billion was wired and spent on items marked as ‘confidential’.It points an accusing figure at former accounting officers in the security docket at the Office of the President. Could it be that these accounts are of government officers?

Furthermore, Cairo International Bank in Kampala sued by nine former East African Community workers for fraudulently paying out their Shs 63bn fund to ghosts. Prosecution alleges that the bank and General Manager Mr.Tarek conspired with public service ministry officials to steal more than Shs 165 billion by creating 2,605 ghost beneficiaries. The bank [Cairo] accused of opening up to 1,018 accounts using pictures with telephone numbers of the alleged account holders. Most of the telephone numbers either did not exist on the alleged network or were wrong numbers not matching with the names and pictures of the alleged account holders.

With this reports in mind, the public has a lot in stock waiting to come to light on these accounts whose owners are yet to claim their deposit.

3. Central Banks prone to sleeping on the job. The recent ruling by the High court judge stopping dissolution of Dubai bank sends shock waves to regulator which is not accused of sleeping on the job. The judge said " The banking regulator knew that Dubai Bank was ailing and should have stepped in to solve its problems before ordering its winding up... The decision to liquidate Dubai Bank after 10 days is unreasonable action by CBK. Its supervisory powers have been abused. CBK is obliged to consider proposals for injection of capital. Hassan Zubeidi has deposed to a proposal to inject capital."

The speed at which the CBK wanted Dubai Bank dissolved was wanting. They were even stopping those who wanted to save the bank. That contradicts the regulators role of protecting depositors. Therefore, depositors must be careful and trust regulators at their own peril. Prudent way is to take personal responsibility by evaluating banks they deal with and be satisfied that they are safe, robust and sound even if by incurring extra costs to professional banking consultants for advise.

4. Insiders pose substantial risk than outsiders. Swahili have a say 'Kikulacho kinguoni mwako!' These two banks are classical proof of the wisdom. While banks faces substantial risk of fraud from customer's, robbers and bandits such fraud never takes the banks to receivership compared to insider's fraud. The two banks suffered great deal under the fraudulent schemes of the top level management. Therefore, Central Banks must tighten their vetting process of the bank's top level management beyond examining criminal records but by monitoring and reviewing their lifestyles (lifestyle audit) and of those connected to them in collaboration with security agencies.

Ethics in financial sector has demonstrated to be the key ingredient for survival of the financial system. All we have to do is ensure ethical-minded people who undergo 'ethical tests' are at the helm of our financial institutions, otherwise the public is doomed and our financial markets are at high risk than ever before.

5. Go beyond 'return the money'. Rather than asking those who benefited from the fraud to return the money and go scot free, it is critical to close the loop and clam them. Experience has shown that one firm might be involved in fraud scheme for two or three collapsed banks and 'return the money' policy won't be the best policy. Time is now to go beyond by freezing assets of those firms and individuals implicated in the scam. CBK move to freeze the assets of all involved is commendable and must be supported if we are serious to get the rotten fish out before the whole system suffers.


SOUNDNESS OF THE BANKS.

The Central Bank of Kenya (CBK) has assured that the country’s banking sector remains safe and robust even after two banks were put under receivership. On Wednesday, October 14, 2015, CBK issued a statement dismissing reports that more banks were facing possible closure after failing to meet certain standards.

“It has, however, come to the attention of the CBK that there is erroneous information circulating in the social media purporting to identify banks that have failed to meet ‘certain thresholds’. CBK wishes to assure the financial markets and members of the public that this information and the allegations therein are false,” the statement reads.

The plan to raise the core capital form KSh 1 billion to KSh 5 billion, within three years, was proposed by National Treasury Cabinet Secretary Henry Rotich during his 2015/2016 Budget speech. However, CBK objected the idea and it was not approved by parliament.

Note:
The CBK press release can be obtained at https://www.centralbank.go.ke/images/docs/media/2015/DubaiBankpressrelease.pdf.

OVERVIEW OF ISLAMIC FINANCE EDUCATION IN TANZANIA

The current economic reality of tougher regulations, technological advances, demographic shifts, digital lifestyles and work style revolutions, is putting greater emphasis on establishing a larger pool of competent Islamic Finance professionals to meet the increasing market share of the Islamic Financial Services Industry (IFSI). According to Malaysian Islamic Finance Center report on Human Capital Development, Islamic Finance contributes 11% of total employment to the IFSI worldwide, with an estimation of one (1) million professionals required by 2020.

A report on Global Islamic Finance Education 2013 by Yurizk indicates that, whilst the Asian region hosts about 43% of the global Islamic Finance education and knowledge service providers, Malaysia ranks behind Pakistan as the second highest Islamic Finance education provider with over 86 institutions offering Islamic Finance education, of which 48 are academic institutions. Malaysia ranks highest amongst 38 providers for professional development programmes including certification, training, seminars and workshops. These notable institutions include Islamic Banking and Finance Institute Malaysia (IBFIM), International Islamic University Malaysia (IIUM) and the International Centre for Education in Islamic Finance (INCEIF). Besides academic programmes, a number of professional-based and certification programmes are offered to cater to the needs of the IFSI.

Malaysia is also recognised to be at the forefront of research with the setting up of the International Shariah Research Academy to promote applied research in the area of Shariah and Islamic Finance. The Academy acts as a repository of knowledge for Shariah views and undertakes studies on contemporary issues in the IFSI.

Experience has shown that involvement of various stakeholders such as Islamic Finance Service providers, regulators, academic institutions, professional associations, consulting firms among others are key ingredient to create synergy required to boast Islamic Finance education.

Currently in Tanzania, there are not less than six financial institutions that offer Islamic financial services as well as three academic institutions which offer Islamic Finance courses from certificate level to post-graduate level. Bank of Tanzania Training Institute has being offering short term training courses but it has not been very consistent in doing so every year. Professional associations like Tanzania Banker's Association (TBA) are yet to integrate Islamic Finance subject in their professional courses.

Zanzibar University (ZU).

This is the first University on the Isles. It is a private institution sponsored by Darul Iman Charitable Association (DICA).The main campus is situated at Tunguu area, in the Central District, some 19 kilometers from Zanzibar Town.

The university offers certificate, diploma, degree and MBA programmes in Islamic Banking and Finance. Related to Islamic Finance course, the University offer Bachelor's degree of Law and Shariah. It well known that Islamic Finance backbone is its strict adherence to ethics, rules and principles derived from Shari'ah.

Zanzibar Institute of Financial Administration (ZIFA).

ZIFA was established by Presidential order 2nd of July 1998 for the purpose of training as many middle cadre accounting and finance professionals to address the scarcity of manpower in those profession for the Government of Zanzibar and private sector. The Institute is located at Chwaka village, scenic fishing village in Central District 30 kilometers from Zanzibar town.

The institute uses an integrated approach where by Islamic Banking is part of the core module for Higher Diploma in Banking and Finance leading to a degree in Banking and Finance.

Muslim University of Morogoro (MUM).

The Muslim University of Morogoro was founded by the Muslim Development Foundation (MDF) on 23 rd October, 2004 by a Charter proclaimed by MDF, proprietors of the University. The University is located to the north of the magnificent Uluguru Mountains, some 4 km from the centre of Morogoro Municipality, about 100m off the Morogoro-Dodoma highway and just about 10-minutes walk from the main bus terminal.

The university offers certificate and diploma courses on Islamic Banking and Finance. Furthermore, the university offers certificate, diploma and degree of law with Shari'ah. Her Bachelor of Business Studies has optional specialized field of study on Islamic Banking and Finance.

Issues and Challenges in Developing Human Resources in Islamic Finance

Despite much effort spent on Islamic Finance education and training, there remains numerous challenges to be addressed, particularly in integrating education and training with the requirements of the Islamic Finance industry, as well as streamlining leaning standards between academic and training programmes.

The courses for Islamic Finance have been developed by the academia through either research or personal experience of the trainers with limited practical knowledge or understanding of the industry practices. This creates a gap in terms of fulfilling the competency requirements of the Islamic Finance industry in the country. This situation is not unique to Tanzania but exists even in countries where Islamic Finance has reached advanced level. The current scenario requires closer collaboration between the academia and Islamic Finance industry practitioners as well as adoption of reputable standardized curriculum such as Financial Accreditation Agency (FAA) learning standards in Islamic Banking, Islamic Insurance and Islamic Capital Markets.

The aforementioned challenges point to one conclusions that although some of the challenges are specific and local in nature, they are to a certain degree universally intertwined. For instance, education and training could be received by Islamic Finance professionals in Tanzania but such professional is not able to practice across jurisdictions with different interpretation of Shariah principles. Hence, a global approach presents a more practical solution in addressing the issues.

African countries struggle to repay bonds over openness issues.

Source: The East African Dec 12-13.

Three years ago, international investors were little concerned about the transparency of sovereign bonds, in favour of higher payouts. However, this is changing as countries find it difficult to issue bonds that are being considered risky due to transparency and accountability issues.

Some sub-Saharan African economies are struggling with rising interest repayments on their international bonds. Falling commodity and oil prices, as well as falling currencies, have led to higher repayments on their Eurobonds as investors demand transparency on their listings and spending of the proceeds.

Over the first nine months of this year, sub-Saharan African economies issued international bonds worth $2.9 billion, compared with $5.9 billion in the same period in 2014.

However, corporate sovereign bonds from sub-Saharan Africa stood at $2.5 billion as at September, compared with $250 million in the same period last year. The trend indicates that investors have more confidence in corporate organisations than government-floated notes.

Ghana, Zambia, Nigeria and Kenya are among the economies that are seeing a rise in their interest repayments.

Ghana is already looking at a new Eurobond in January worth $500 million, just a few months after floating a 15-year $1 billion bond at a higher yield. The bond was priced at 10.75 per cent higher than the 9 per cent, Ghana initially wanted, with about $400 million of it guaranteed by the International Development Association, a member of the World Bank Group.

Ghana’s Finance Minister Seth Terkper said the country has few options for financing the rolling over of other loans, adding that they had managed to raise money on reasonable terms in a rather difficult market.

The country said it will use $750 million for capital projects and counterpart funding, with the remaining $250 million as seed capital for the Ghana Infrastructure Investment Fund.

MISSPENT

Two years ago, Mozambique raised $850 million in an international bond to purchase tuna boats, but it later emerged that the proceeds were used to purchase naval boats and training gear.

The interest on the bonds, issued at 8.5 per cent, which are set to mature in 2020, rose by 6 per cent when the news of misspending broke. It also emerged that only $200 million was spent, with the Mozambique government refusing to disclose where the rest was.

In 2012, Tanzania and Angola issued unrated $600 million and $1 billion private debt respectively, without disclosing the details.

Both countries’ bonds were on a floating rate, which has left them exposed on their repayments.
Zambia and Rwanda have been transparent about the details of their bonds, how they were raised, the commissions earned, and the breakdown of how they were spent.

In 2013, Rwanda raised $400 million from its debut dollar bond at the lowest yield of 6.875 per cent. The country said it spent $200 million to repay loans for the Kigali Convention Centre, and fund a development plan for RwandAir. A further $150 million was spent on a hydropower plant.

In 2012, Zambia raised $750 million from its debut international bond at a rate of 5.375 per cent, and said it would use the money for energy and transportation infrastructure.

In July, the country raised a further $1.25 billion at a rate of 9.85 per cent, and said it would use $120 million to stem its currency volatility, with $400 million going towards its energy and roads projects.

It also allocated $268 million to debt swap, $21 million to agriculture, $40 million to maritime equipment, $20 million to water projects, $65.5 million to development of education and health, and $45.2 million to youth empowerment.

The latest bond has increased the country’s interest payments from about $125 million a year, to more than $240 million.

Islamic Finance In Turkey

By Cagdas Ozaltinkol

I. OVERVIEW

Islamic finance has emerged as a rapidly growing industry with an increasingly global presence. It continues to be the topic of choice at prestigious finance conferences in Europe, Asia Pacific and in the United States.

The Islamic financial services industry currently represents approximately 1% of global assets, however, it has been growing by more than 12% annually over the last 10 years.1 This makes Islamic finance the fastest growing sector in the global financial industry.

More significantly, it is estimated that by 2019, collective profits would reach US$37 billion as the industry continues its double digit annual growth.2 On this basis, it is now more common to read about Islamic finance on a daily basis and hear the announcements of financial centres in an attempt to gain some market share.

II. BACKGROUND

Islamic finance has emerged as one of the fastest growing components of the financial market over the last decade and has gained further momentum in the wake of the financial crisis.3 This has led investors to perceive Islamic finance as a safe haven during global economic downturns.

Islamic finance refers to the provision of financial services in accordance with Islamic law which is based on sharia rules (The Islamic Law) 4 The basic principle of conventional instruments such as bonds, commercial paper and medium term notes is that, they all have a fundamental interest. On the other hand, Sharia law dictates that money should not be viewed as commodities, but rather as means of exchange.

Within this context, the Islamic finance framework is based on certain prohibitions. For example, Sharia law does not permit "riba" interest, gambling "maysir" and short sales or financing activities.5 It aims to create a society where prosperity is more broadly and equally distributed, instead of becoming concentrated in the hands of a few. Furthermore, because it has, at its core, both parties to a transaction explicitly sharing the risk, the argument has been made that Islamic finance is, in fact, more sustainable than its western counterpart.6

III. RECENT DEVELOPMENTS IN TURKEY

The practice of Islamic finance in the banking sector first gained legitimacy in Turkey in 1983 when 'special finance houses' were introduced. Shifts in government's priorities allowed Islamic finance to gradually acquire legitimacy in Turkey.

Particularly in the last decade, Turkey reaffirmed its commitment by stepping up to play a pivotal role in the world of Islamic finance. Recent developments also reveal that the future looks promising in this field. For example, in 2013 The World Bank Global Islamic finance Development Centre was launched.

Last year, largest state-owned bank T.C. Ziraat Bankası A.Ş., also received approval to proceed in establishing a Turkish Islamic Bank.7 This was followed by another state-owned lender, Vakıfbank, to receive approval in establishing participation banking division.

More recently, one of Turkey's largest state-owned banks, Türkiye Halk Bankası A.Ş. (also known as Halkbank)8, announced that it has now received approval from the Turkish Banking Regulatory and Supervisory Authority to launch an Islamic bank division in Turkey with a share capital of TRY 1 billion.

Finally, investors will also recall that in July 2015, Turkish lender Kuveyt Turk said that it would launch Germany's first full-fledged Islamic bank, a first step intended at offering sharia-compliant retail banking services across the continent.9

IV. COMMON INSTRUMENTS OF ISLAMIC FINANCE

Islamic finance have developed different structures that aim to encourage investors to participate in the financial transactions in various methods, such as: leasing (ljarah), Islamic bonds (sukuk), trade with mark or cost-plus sale (murabahah), profit-sharing agreement (mudarabah), and equity participation (musharakah).
a.Leasing (Ijarah)

In Islamic jurisprudence, this method of financing involves leasing an asset and receiving rentals; so long as the asset is on lease, the lessor owns the asset and the risk and reward of its ownership.10 The rental payments can be either fixed or calculated with reference to a market rate. The subject of the lease must be valuable and identifiable, so aircraft, buildings, vessels and power station turbines are ideal subjects for Ijarah financings.
b.Islamic Bonds (Sukuk)

This innovative instrument of Islamic finance attracted wide applications outside the Muslim countries. Sukuk, also referred as an 'Islamic Bond', defined by the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) as: 'certificates of equal value representing undivided shares in the ownership of tangible assets, usufructs and services or (in the ownership of) the assets of particular projects or special investment activity'11

According to Islamic finance, the charging or receiving of interest (riba) is prohibited. An investor should realise no profit or gain and the return to an investor must be linked to the profits of an enterprise (subject to the usual commercial risks).

In addition, Sukuk must be backed by real underlying assets12 and assets must be Sharia compliant. The assets or businesses underlying the sukuk cannot be related, for instance, to gambling or to the production or sale of alcohol or pork and there must be full transparency as to the rights and obligations of all parties.

It is also important to note that there are different types of sukuk that aim to satisfy both lenders and entrepreneurs. The most significant and common among those are provided below:

i.Trade with mark or cost-plus sale (Murabahah Sukuk)

One of the more common instruments of Islamic finance is known as 'murabahah', is based on the traditional method of debt financing. The parties incorporate a mutually agreed contract (murabahah contract) for resale of the asset to the client and a mutually negotiated (murabahah) margin. Repayments for the asset may be in full or by instalments with a certain period of time.13
ii.Profit-sharing agreement (Mudarabah Sukuk)

This method of financing can be described as contractual relationship between two parties both of whom are governed by the principles of Sharia (the Islamic Law). Mudarabah is an Islamic contract in which one party supplies the money and the other provides management expertise to carry out a specific trade.14
iii.Equity participation (Musharakah Sukuk)

Another structure that gained popularity as an alternative financing principle is musharakah. It involves an investor and entrepreneur both contributing capital and sharing the risk and reward together. At first instance the arrangement appears to be identical to conventional joint venture. However, the difference between Musharakah arrangements and conventional banking is that, with Musharakah, you can set any kind of profit sharing ratio, but losses must be proportionate to the amount invested.15


V. SUPPORTING LEGISLATION

The scope of Turkey's Islamic finance market is widening and the growing presence of Islamic banking needs to be accompanied by the development of effective regulation and supervision.

Islamic finance products such as sukuk (Islamic bonds), and takaful (insurance) are offered by financial institutions (participation banks) whose activities are in compliance with the Islamic rules. These institutions are governed by the same legislation as conventional banks and their activities are overseen by the same authority (Banking Regulation & Supervision Agency and the Savings Deposit Insurance Fund).

In this context, Turkish Banking Law No. 5411 (the "Banking Law") is the main legislation. This legislation established the "Participation Banks Association of Turkey" (TKBB)16 and enabled participation banks to have the same privileges and status as conventional banks.17

Another substantial development on the regulatory front includes "Communiqué Serial III no: 43 on Principals regarding Lease Certificates and Asset Leasing Companies." This was the first regulation concerning the lease certificates which essentially aimed to introduce the principle of sukuk to the Turkish financial market.18

Government's more recent attempt came with the introduction of the "Communiqué Serial III-61.1 No. 28670 on lease certificates" which regulates the matters such as the guidelines for determining the lease certificate classes and allows companies to raise funds from the capital markets by issuing lease certificates.19

With that in mind, existing conventional banks are in the process of establishing their Islamic finance divisions in order to align many of their managerial and financial procedures to Sharia rules. Evidence for this can be found in the figures provided by the Participation Banks Association of Turkey (TKBB) which strongly indicate that in general, participation banks increased their asset growth, raised funds, allocated funds, shareholders equity, number of total branches and personnel as they did in previous years.20

VI. RECENT DEVELOPMENTS IN UK AND OTHER JURISDICTIONS

Islamic finance is making great strides from London to Hong Kong. The UK issued £200 million Islamic bond, or sukuk, making it the first non-Muslim country to step into Islamic financing. The UK government also reaffirmed its commitment to Islamic finance in March 2015 by announcing the issuance of Emirates sukuk. These announcements demonstrate the UK's desire to capture a share of the growing Islamic finance market.

Islamic finance also piqued the interest of other non-Muslim countries such as Hong Kong, South Africa and Luxemburg. For example, Hong Kong's 1 Billion issuing attracted $4.7 billion in orders. These investors did not sink their money into sukuk for religious purposes: they did it because Hong Kong's product was a five-year dollar-denominated asset at 2.005%21 or 23 basis points above five year US Treasuries.

Changing dynamics in world trade and capital flows also signify an important opportunity for Islamic banks that have global presence. For example, Société Générale and Bank of Tokyo-Mitsubishi UFJ, General Electric and Goldman Sachs issued sukuk to investors worldwide.22 These deals indicate that Islamic finance service and products are becoming more attractive globally.

That said, despite strong recent growth, there are potential pitfalls. Goldman Sachs' previous attempt foundered amid claims its proposed sukuk was not sharia-compliant. Government of Indonesia has also scaled back its issuance due to similar complaints. These notable experiments signal the need for a greater international standardisation of Islamic finance.

VII. CONCLUDING REMARKS

With a history dating back to 1983, Islamic finance has grown remarkably in Turkey and many different factors have been attributed to this growth. In particular, developments within the legal and regulatory framework, by and large, demonstrate Turkey's commitment to Islamic finance which will undoubtedly have a positive impact upon the upcoming transactions in this sector.

In that respect, to further enhance financial stability and promote sustainable growth in this area, there is a need for strengthening the sector with the appropriate legal and regulatory framework. Recent progress in this field clearly demonstrates that the government is taking major steps towards developing the instruments of Islamic finance.

Developments in other jurisdictions also indicate that the Islamic finance products have seen significant expansion throughout the world and thus they have become appalling not only to devout Muslims who are seeking sharia compliant products, but to all investors as a pure value proposition. It is, therefore, crucial for companies to be aware of what is new, how they should take action and by when in order to comply with the new and upcoming regulations.

Footnotes

[1] Wyman, O. (2009). The Next Chapter in Islamic Finance: Higher Rewards but Higher Risks. Zaher, T., & Hassan, M. K. (2001). A Comparative Literature Survey of Islamic Finance and Banking. Financial Markets, Institutions and Instruments, 10, 155-199 in Newaz, Farhana. Raman, Revti. Fam, Kim-Shyan, Aiken, Carolina. "Understanding the Nature and Market for Islamic Financial Products." Asian Journal of Business Research. DOI 10.14707/ajbr.150002 (2015): 21-22. Print

[2] EY (Ernst & Young). World Islamic Competitiveness Report 2014-15 Accessed 02 Sept. 2015. If it interests the reader the full text is accessible at: http://www.ey.com/Publication/vwLUAssets/EY-world-islamic-banking-competitiveness-report-2014-15/$FILE/EY-world-islamic-banking-competitiveness-report-2014-15.pdf

[3] Di Mauro, Filippo. Caristi, Pierluigi. Couderc, Stéphane. Di Maria, Angela. Ho, Lauren. Grewal, Baljeet, Kaur. Masciantonio, Sergio. Ongena, Steven and Zaher, Sajjad. (2013), "Islamic Finance in Europe," Occasional Paper Series, European Central Bank, June 2013, no 146 (Frankfurt am Main, Germany)

[4] Kammer, A., M. Norat, M. Pinon, A. Prasad, C. Towe, Z. Zeidane, and and IMF Staff Team (2015), "Islamic Finance: Opportunities, Challenges, and Policy Options," IMF Staff Discussion Note 15/05, (Washington: International Monetary Fund).

[5] Islamic Finance and the role of the IMF. March 2015, International Monetary Fund Forum. Retrieved from http://www.imf.org/external/themes/islamicfinance/index.htm

[6] Spangler, Timothy. (2013, October 18). Could principles of Islamic finance feed into a sustainable economic system? The Guardian. Retrieved from http://www.theguardian.com/sustainable-business/islamic-finance-sustainable-economic-system

[7] Vizcaino, Bernardo, and Shri Navaratnam. "UPDATE 1-Turkey's Ziraat Bank Gets Fast-track Approval for Islamic Unit." Reuters. Thomson Reuters, 15 Oct. 2014. Web. 4 Sept. 2015.

[8] Vizcaino, Bernardo. "Kuveyt Turk Preps July Launch of Germany's First Islamic Bank." Reuters. Ed. Eric Meijer. Thomson Reuters, 22 Mar. 2015. Web. 4 Sept. 2015.

[9] Vizcaino, Bernardo. "Kuveyt Turk Preps July Launch of Germany's First Islamic Bank." Reuters. Ed. Eric Meijer. Thomson Reuters, 22 Mar. 2015. Web. 4 Sept. 2015.

[10] Ayub, Muhammad. Understanding Islamic Finance. 2007. John Wiley & Sons Ltd, West Sussex, England. Google books. N. pag. Web. 07 Sept 2015.

[11] Definition in paragraph 2 of page 307 of Sharia Standards for Financial Institutions 2008, published by Accounting and Auditing Organisation for Islamic Financial Institutions.

[12] Umar, Abu. Umar. Ahmad, Faruq. Theory and Practice of Modern Islamic Finance: The Case Analysis from Australia. First Edition, 2010. Brown Walker Press, Florida, USA. p. 319

[13] Ismal, Rifki: Islamic Banking in Indonesia: New Perspectives on Monetary and Financial Issues. June 2013. Google books. N. pag. Web. 03 Sept 2015.

[14] Iqbal, Munawar, Llewelly T. David. Islamic Banking and Finance: New Perspectives on Profit Sharing and Risk. 29 Jan. 2002. Edward Elgar Publishing Limited, United Kingdom. p. 57-59.

[15] Kettell, Brian. The Islamic Banking and Finance Workbook. Step-by-Step Exercises on Fundamentals of Islamic Finance. First Edition, 2011. John Wiley & Sons Ltd, West Sussex, England. p. 75

[16] Hardy, Liam. "The Evolution of Participation Banking in Turkey." Online Journal of Southwest Asia and Islamic Civilisation. (Winter 2012): p. 4-5 Web. 02 September 2015.

[17] Ustaoglu, Murat. Incekara, Ahmet. Islamic Finance Alternatives for Emerging Economies: Emperiacal Evidence from Turkey. 2014. Palgrave Macmillan. New York. p. 80-81

[18] Buyukatak, Aytug. Gencoglu, Burak. Turkey: A bumper Year for Islamic Finance (2011). Islamic Finance News. . Accessed September 29, 2015.Retrieved from http://islamicfinancenews.com/authors/aytug-buyukatak-and-burak-gencoglu

[19] Borsa Istanbul. Lease Certificates. Accessed September 24, 2015.Retrived from http://borsaistanbul.com/data/kilavuzlar/Lease_Certificates.pdf

[20] Zawya Islamic. (2014). Turkey Islamic Finance Report 2014: Fundamentals and the Promise of Groth. Thomson Reuters. Istanbul: Islamic Finance Gateway. Accessed September 24, 2015. http://www.irti.org/English/Research/Documents/Report-5.pdf

[21] "HKSAR Government's inaugural sukuk offering." September 11, 2014. [Press Release] Retrieved from http://www.info.gov.hk/gia/general/201409/11/P201409110077.htm

[22] Islamic Finance: Big interest, No interest (2014, September 13). The Economist. Retrieved from http://www.economist.com/news/finance-and-economics/21617014-market-islamic-financial-products-growing-fast-big-interest-no-interest

Islamic Finance Ripe for Growth

Saudi Gazette report

JEDDAH — “For more than four decades now, Islamic finance has emerged as a nascent industry gaining traction around the world. It has gained footprint in mostly Muslim-dominated countries of Asia and Middle East; ripe for growth in traditionally non-Muslim countries mainly South America and Europe; and its future markets are in North America, Central Asia and Ausralia” said Khaled Al-Aboodi, CEO of Islamic Cooperation for the Development of the Private Sector (ICD), on Monday.

In his keynote address at the IFN forum Saudi Arabia 2015, Al-Aboodi said, “Today’s forum is a clear example of our collective efforts in the Muslim world to promote Islamic finance and to utilize it as an integrated element of our economic growth and development framework. Although MENA in general, and Saudi Arabia in particular, have very good lessons to share, but we are still in need of acquiring more knowledge and experience, which I hope it shall materialize after your deliberations in this forum. I see today’s forum as a good opportunity to help boost Islamic finance for reaching its full potential in a sound and sustainable manner.”

ICD is a subsidiary of the Islamic Development Bank Group and is one of the main drivers of Islamic finance. The forum, at Le Meridien in its fourth year, brought together leaders in the local and global markets to share expertise and discuss cross border opportunities in a thriving Saudi Arabian market.

Al-Aboodi, while reviewing the latest global economic situation in the world, said growth remains moderate and uneven. “Although the advanced economies are witnessing some dynamism, the post crisis legacies are still preventing them from acceleration and high growth. The growth trajectories in emerging and developing markets vary significantly across countries, and in general, the outlook shows more weakening due to low prices of oil and other commodities, as well as the slowdown in China. As far as the Middle East and North Africa (MENA) region is concerned, the economic growth prospects is further hampered by geopolitical tensions and security challenges in some countries,” he said.

While highlighting the emerging Islamic finance industry, Al-Aboodi said, “Today, the size of Shariah compatible assets stands above $2 trillion, practically a ten-fold increase from a decade ago, and highly outperforming the growth of conventional finance. Going forward, the assets of Islamic finance are projected to reach $3.5 trillion in 2020. Together with Malaysia, the countries such as Saudi Arabia, UAE, Kuwait and Qatar are leading jurisdictions in global Islamic finance sector.”

“Though Islamic banking currently accounts for the lion’s share of 80 percent of the total assets of the industry, the development of Islamic finance sector is also visible in the expanding range of services and products beyond the Islamic banking. One example is the burgeoning global market interest in Sukuks, many of which are increasingly being issued and bought outside the Islamic world. This key product of Islamic capital market, managed to breach the $100 billion mark in terms of new issuance. The Takaful market is yet another success. It has been going through solid and double-digit growth in recent years, “ he added.

“We all agree that a new paradigm has to be adopted in today’s global financial circumstances. One that is built on the principles of justice, risk sharing and direct linkages with real economy and avoidance of excessive speculation. Coincidently we know that, by default, these are all features that are embedded in the backbone of Islamic finance, which allows it to contribute to a greater stability and a more sustainable growth trajectory of the globe.

“It has been a long time that Islamic Development Bank (IDB) Group has already recognized this fact and has been applying it into its day-to-day operations in its 56 member countries. Nowadays, other IFIs has also realized the Islamic finance’s potential as an alternative and healthy source of financing for inclusive growth and sustainable development. Islamic finance bears a wide range of solutions to help achieve sustainable development goals in categories such as poverty, inequality, sustaining ecosystem and cities, health, education, shelter etc.,” he added.

“We in the IDB Group, realize that the shared nature of the global development challenges of today calls for collective action that involves governments, International Organizations, civic societies, private firms and people. Boosting private sector and building vibrant partnership is one of the vital prerequisites for the successful accomplishment of the development goals in the post-2015 era. A dynamic role of private sector as a driver of sustainable economic growth brings with it infinite opportunities in various value creations.,” Al-Aboodi said.

Kazakhstan studies lower capital requirements for Islamic banks

By: Reuters.

Dec 1 Kazakhstan's central bank is considering halving the capital requirement for Islamic banks to 5 billion tenge ($16.3 million) from 10 billion tenge, part of a series of initiatives to attract foreign capital to Central Asia's largest economy.

The majority Muslim state is keen to develop Islamic finance, a sector that currently holds less than 1 percent of total banking assets, according to a Thomson Reuters study released on Tuesday.

A proposed reduction in capital requirements for Islamic banks would apply for both local and foreign investors, deputy governor Nurlan Kussainov was quoted as saying in the study.

This could encourage new entrants in a market that now has one full-fledged Islamic bank, Al Hilal Islamic Bank, which holds less than 1 percent of total banking assets.

"Large banking groups such as Al Baraka and Maybank are showing interest in our market," Kussainov said, referring to Bahrain-based Al Baraka Banking Group and Malaysia's Maybank Islamic Berhad.

The central bank also plans to introduce insurance for Islamic deposits and allow conventional banks to establish Islamic windows, Kussainov said.

Legislative amendments have also been approved last month to allow the conversion of conventional banks into Islamic ones, which would come into force in January, he added.

Kussainov reiterated plans by the government to sell sovereign Islamic bonds, or sukuk, early next year, although he did not specify a size for the issuance.

Russia Progressing on Islamic Financial Legal Framework

By: Islamicfinance.com

The lower house of the Federal Assembly of Russia, the State Duma is reviewing a modification of existing laws on financial rent and leasing in order to remove obstacles to the commission of leasing transactions in accordance with Islamic finance.

Authored by Dmitry Savelyev, the Duma Committee Deputy Chairman on Financial Markets, the bill seeks to separate and recognise sale and lease arrangements. Current legislation whilst not prohibiting two agreements (lease and sale) does not recognize these transactions as a lease meaning “accelerated depreciation” (provided by the Tax Code) is not applicable to such products. As a result the existing tax structures do not provide tax neutrality and place Ijara structures at a tax disadvantage.

The need for Tax Neutrality

Tax neutrality between Islamic finance contract structures, such as those used in sukuk when compared with conventional bonds is a requirement as Sharia compliant instruments can face heavy taxation because they involve multiple transfers of the assets backing them. Such multiple transfers attract additional duties in most jurisdictions, making the transactions more costly than conventional structures.

Russia Favours non-Saudi path for Islamic Finance

Russia is wary of the links of Saudi Arabia to Islamic finance. In an article for the Russian International Affairs Council, Yuri Barmin Analyst on Russia and its Middle East policy stated “Russia has been trying to limit Saudi influence in the Muslim regions of the North Caucasus and the Volga Federal District since the early 2000s. Some Russian security officials have confirmed they believe the exposure of the Russian banking industry to Islamic finance would lead to an upsurge in covert Saudi influence in the country.” This fear is also underpinned by the role that the Jeddah-based Islamic Development Bank (IDB) plays in the expansion of this industry.

It is likely Russia whilst developing its Sharia compliant framework will seek closer cooperation within the Islamic financial market with Iran as it returns to the international capital markets, as well as Azerbaijan and other former Soviet republics.

Islamic Finance can promote stability: IMF chief

By: Yahoo News.

Kuwait City (AFP) - The fast growing, Sharia-compliant Islamic finance industry has the potential to promote financial stability because of its risk-sharing and asset-backed features, International Monetary Fund managing director Christine Lagarde said Wednesday.

"Islamic finance has, in principle, the potential to promote financial stability because its risk-sharing feature reduces leverage and its financing is asset-backed and thus fully collateralized," Lagarde told an Islamic finance conference in Kuwait

Islamic banks also offer profit-sharing and loss-bearing accounts that can help mitigate losses and contagion in the event of banking sector distress, she said.

"This leads... to higher total loss-absorbing capital, one of the key objectives of the new global regulatory reform," Lagarde told the one-day event organised by the IMF and Central Bank of Kuwait.

But she said that for the industry to unlock its full potential, it must expand its customer base, harmonise standards and improve regulatory frameworks. Lagarde later told a press conference the IMF will increase its involvement in the Islamic finance industry by providing more bilateral surveillance and analytical help.

The Islamic finance industry, which bans speculation and interest, still lacks effective regulatory and supervisory frameworks catering to its unique risks. It also bans dealing in products with excessive uncertainty, gambling, short sales and financing prohibited activities considered harmful to society.

Lagarde said Islamic assets have crossed the $2 trillion mark and has the potential to grow much larger. Around 40 million of the world's 1.6 billion Muslims are clients of the Islamic finance industry, which has surged in popularity since its niche market days of the early 1970s.

Kuwait's Central Bank governor Mohammad al-Hashel said Islamic finance can offer a system based on strong principles and social justice."A system, which if implemented in its true spirit, will bolster growth, create jobs, reduce poverty and address inequality," Hashel said.

He said the Islamic system channels credit into productive investments that are socially responsible and not in wasteful speculative activity.mThe objective is to create a system that is "ethically right, socially just, financially stable and economically productive", Hashel said.

Officials and experts, however, acknowledged that the industry still faces tough hurdles, mainly setting consistent regulations for all markets.

The Jeddah-based Islamic Development Bank president, Ahmad Mohamed Ali, said he believes the main obstacle is the failure to create a mega Islamic bank and the lack of sufficient tools to manage liquidity effectively.

BANK OF UGANDA OFFICIALS AND MEMBERS OF PARLIAMENTS GIVEN INSIGHTS ON ISLAMIC FINANCE.

On 2nd of December, Bank of Uganda officials and some of Uganda Members of Parliament visited Gulf African Bank to get some insights on Islamic banking and regulatory as well as legal issues facing the industry and Kenyan Expierience.

Uganda has for some time shown great interest towards reforming it is banking and financial laws and regulatory framework to create a level playing field for Islamic Banking in the country. If Uganda succeeds to reform its law will be the first country in East African Community to have done what other countries like Kenya and Tanzania, despite having Islamic Financial institutions,are yet to do.

The steps taken by Bank of Uganda to involve law makers of the country to understand Islamic banking and the need to reform its laws and regulatory approach is the very realistic and systematic approach towards preparing the country through consultative measures towards a common positive goal.

Welcoming the officials at the bank, Managing Director of Gulf African Bank applauded the steps taken by Uganda to learn from the neighbours but ensure Islamic banking gets the polical support and will to develop in a neutral and fair playing grounds. He also appreciated CBK accomodating approach to the needs of the small but very well growing industry in Kenya.

Gulf African Bank explained about Islamic banking, why our economies needs to open up for Islamic Finance and the needs to give Islamic Finance legal and regulatory framework that addresses its unique business and value proposition. Mps were advised that in their pursuits to reform banking laws they should never forget to look into insurance, tax and capital market legislations because Islamic finance needs the support of these other stakeholders to be able to operate efficiently and effictively.

The Ugandan officials were keen to learn and appreciated GAB for hosting them and exposing them to areas that they had not much thought about. Furthermore, they hinted that Uganda will take the insights and suggestions given to ensure the friendly legal and regulatory framework is put in place to attract local and foreign investors to invest in the financial services business.

I think this path taken by Uganda couples with sincere political will is best way forward towards making sure that the required reforms are not the talk but translates into action. I know for example Tanzania, has since 2013 through IMF consultation team they meet key stakeholders from the industry for the same objective of coming up with legal, regulatory and supervisory framework for Islamic banking in Tanzania, however, very little is know on what the IMF had suggested and what is the way forward.

Some reports shows that due to country's religious sensitivity between Muslim and Christians, governement and the rulling party is worrying the displease christians if it perceives governemt actions as a support to Islam and Muslims. To mitigate political and social negative reactions, it is good to start with law makers to expose them on the Islamic Finance industry globally and what needs to be done to keep the country into the Global Islamic Finance world as well as provide confidence and assurity required to Islamic Financial institutions in the country to operate without fear or limitations.

Kenya and Tanzania can learn this initiative from Uganda and move on faster. All the best Uganda and other countries willing to join the 'right path.'

SUKUK CONFERENCE PROVIDES NEW INSIGHTS TO STAKEHOLDERS

On 23rd November,i participated in a Sukuk Conference organised by reputable law firm, Coulson Harney Advocates here in Nairobi at Sankara Hotel. The conference attracted participants across wide spectrum of stakeholders such as Capital Market Authority, Nairobi Security Exchange, National Treasury, Nasdaq Dubai, Islamic Corporation for Development of Private Sector, Commercial Banks, Investment banks, Islamic Finance Counsulting firms, Financial and Tax Consulting firm, Legal firms among others.

Mr. Paul Muthaura, Acting CEO of Capital Markets Authority while delivering key note address titled "Where are the regulators heading?" informed participants that the CMA is positive towards creating enabling environment by designing regulatory, legal and supervisory framework that shall involve all stakeholders. In order to ensure work is done within the timeframe, CMA has established Project Management Office (PMO) which shall start its function 1st December 2015, to design the framework and advise CMA on required reforms in order for the government and corporate entities issue Sukuk in the next financial year 2016/2017.

The conference discussed important issues around Sukuk such as structuring Sukuk transactions, Tax implications of a Sukuk transactions, Process of issuing Sukuk and listing a Sukuk. Key questions were asked and responded by panelists. Some of these questions and answers are:

1. Are Sukuk qualify as Collective Investment Scheme or conventional bond? Ryona Byrne from Clifford Chance responded that what they have seen is that the issue is country specific not generic, in some jurisdictions like South Africa it was perceived to be so and exceptions were necessary to enable South Africa issue its USD 500 million Sukuk. However, in United Kingdom is of the view that provided Sukuk behaves and bear similar characteristics with a conventional bond, then it is not a collective investment scheme. Mr. Rogito Nyangeri of Nairobi Securities Exchanges was of the view that Kenya shares the same view with UK.

2. Are the underlying assets move from the obligor/issuer to Sukuk holders? The answer is no, however, sukuk holders have economic rights on the underlying assets and Sukuk documents are the one that creates such right to the assets. But at no time, the assets will be fully owned by the certificate holders since that is not the motive of parties, hence most of Sukuk we have seen are asset backed rather than asset based.

3. What is the timeline it takes to structure a Sukuk transaction? What has been observed is that it takes about 10 to 12 weeks to finalise Sukuk transaction. But the situations depend from one transaction to another.

4. What are the factors affecting Sukuk pricing? Numerous factors wer highlighted such as who is the obligor, credit rating of the obligor, collateral, currency, credit enhancement, jurisdiction, maturity and amount among others.

5. What are the additional costs in issuing Sukuk? Apart from normal costs associated with bond issuance at international market, Sukuk attracts additional costs for hiring Shari'ah scholars, specialist legal and tax advisors.

6. What are the parties involved in Sukuk Ijarah structure? Numerous parties are involved such as arrangers/managers, obligor, issuer SPV, delegate-to enforce payments on default, paying agents, transfer agents, registrar, stock exchanges/ financial regulator, clearing systems and Shari'ah advisors. However, parties may change depending on the specific situation.

7. What is the tax implication in a case of Sukuk Ijara if it were to be issued in Kenya today? Mick Murphy from Viva Africa Consulting, presented different scenarios on transfer of assets to SPV, if it involves legal transfer or transfer of interest only it will attract different tax on each scenario. On Income of the Sukuk, again there are several scenario to look at whether SPV is Kenyan or offshore, each case attract different taxes. On a final note, it was observed that Kenya tax legislation in particular VAT and Income tax are prohibitive for issuing Sukuk and needs to be reviewed to achieve tax neutrality. This requires treatment of Sukuk like conventional bond for tax purposed.

8. Is it worthy for a Kenya to issue Sukuk in the face of some challenges? Each panelist responded in positive, presenting arguments from social and moral perspective, economic perspective and political perspective. On economic perspective it was argued that Sukuk opens the country to a wide range of investors across the globe, complement financial inclusion, go hand in hand with ambitions of making Kenya 'Financial Service Center' as well as support existing Islamic financial institutions in the market to better manage liquidity. On the political side, it was argued that country like South Africa had no need to issue Sukuk as it could have raised the money via vonventional bond, but by issuing Sukuk the political message that goes with it is that South Africa is prepared for all business models or situations and focused to attract investors across the world without regional or religious bias.

That is the last and not the least. It was great half a day! Thank you Coulson Harney Advocates for organising it, keep the Sukuk ball rolling and for bringing new insights to stakeholders.

Ivory Coast launches sovereign Sukuk to capture Gulf Wealth

Ivory Coast – one of the most advanced economies of the West African region – is hoping to attract Gulf wealth with the launch of its inaugural sovereign Sukuk as the country positions itself to broaden its funding pool by joining its peers in the Islamic finance space.

Heavily dependent on agriculture, the Republic whose economy was significantly affected by decade-long civil unrest is seeing an emergence of its former glory days under the presidency of Alassane Ouattara, who was recently re-elected for a second term and has vowed to boost financial inclusion.

Launched yesterday by Nialé Kaba, Ivory Coast’s minister of economy and finance, the CFA150 billion (US$243.15 million) five-year Sukuk facility is part of a program arranged by the Islamic Corporation for the Development of the Private Sector and comprises two equal tranches which will be issued over the 2015-20 period. Proceeds will be channeled toward the country’s robust investment project pipeline.

Regional appeal was an apparent theme in the structuring of the deal which is to be issued in the West African CFA franc at a yearly 5.75% profit rate and has been marketed to Gulf investors. Kaba in her speech indicated that the latest upgrade of the Republic’s sovereign rating to ‘Ba3’ from ‘B1’ by Moody’s was a major selling point during the Sukuk roadshow in Saudi Arabia.

With deep infrastructure needs, Africa has been looking toward the Middle East for financing needs; likewise, Gulf and global investors are increasingly parking their investments in the resource-rich region. Nations such as Senegal, South Africa and Gambia have issued Sukuk in the hopes of making headway in the Islamic financing space and capturing the Shariah dollar.

Source: IFN Daily Alert.

The IFSB and IAIS Release Joint Paper on Issues in Regulation and Supervision of Microtakaful (Islamic Microinsurance) Sector.

The Islamic Financial Services Board (IFSB) and International Association of Insurance Supervisors (IAIS) today announced the issuance of a Joint Paper on Issues in Regulation and Supervision of Microtakaful (Islamic Microinsurance).

Microtakaful is an important mechanism that provides Shariah-compliant protection to low-income and under-privileged segments of society under the principles of Tabarru' (donation), Ta'awun (mutual assistance) and prohibition of Riba (interest). Due to its nascent stage, regulators and supervisors have relatively little experience or empirical data to support their role in creating an environment conducive to the promotion of affordable Takaful services to low income and under-privileged segments. Therefore, the main objective of this paper is to highlight and identify regulatory issues prevailing in the Microtakaful sector and outline the role this sector can play in enhancing financial inclusion. In particular, the issued Paper:

· Identifies current practices and models for offering Microtakaful products, and the challenges and potential issues in offering them to target customers.

· Reviews the current regulatory framework for the Microtakaful sector in various jurisdictions and suggest initiatives to strengthen it and thus enhance financial inclusion through the Takaful sector.

· Provides guidance to the regulatory and supervisory authorities in implementing an enabling environment for the development and growth of the Microtakaful sector.

The Issued Paper highlights distinguishing features of various models used for offering Microtakaful products which, despite having many common features with Takaful products, pose various unique supervisory challenges. Backed by a survey from Microtakaful operators as well as regulatory and supervisory authorities, the Issued Paper delineates the distinguishing features of Microtakaful such as types of participants, product features, participants' contribution and distribution channels.

The paper also sheds light on corporate governance aspects of the Microtakaful sector, including the role of boards of directors and Shariah Boards in providing policy direction and ensuring the effectiveness of the Shariah governance framework.

This Issued Paper also delves into critical issues that require the attention of regulatory and supervisory authorities of Microtakaful sector. These areas pertain to the requirement of the separation of funds, solvency and capital adequacy framework, investment policies and Shariah compliance requirements. Other key aspects covered include customer education and awareness, consumer protection, licensing requirements and supervisory review processes. Finally, the Issues Paper illustrates the relevance of the IAIS' Insurance Core Principles in the practice of Microtakaful.

The Secretary-General of the IFSB said, "Following the global financial crisis, the G20 and international standard-setters have stressed the importance of supporting initiatives to widen access to finance, as a means to promote greater financial and social stability". He further noted that, "This joint Issued Paper with the IAIS continues the IFSB's work in clarifying the appropriate regulatory issues that can, in appropriate manner, extend and widen the reach of Islamic finance to the poorest and least-served segments of society".

The Issues Paper is available for download from the IFSB and IAIS websites at www.ifsb.org and www.iaisweb.org.

KENYA'S EUROBOND 2014/2015 AND DEBUT SUKUK 2015/2016

June 2014, Kenya plans to sell USD 1.5 billion Eurobond to American and European investors to fund infrastructure projects including rail and roads as part of the program to transform the country into middle income country by 20130 became a reality.

The issuance of the Eurobond by International Finance Corporation (IFC) was initially expected to be in January 2014 or several years back as Mohammed Wahliye writes "The Eurobond issuance in Kenya had been in the pipeline for the last seven years. However, everything was just ink and paper until last week (June 2014) when the Government received $2 billion (Sh175.1 billion) in its account with the Central Bank of Kenya (CBK) after it completed the issuance of a 10-year $1.5 billion (Sh131.3 billion) and a five-year $500 million (Sh43.8 billion) Eurobonds on the Irish Stock Exchange market." (The Standard, July 1st 2014).

According to some media reports, Kenyan government received Shs 250 billion from Eurobond loan, a total of Shs 196.9 billion transferred to Exchequer account and Shs 53 billion used to repay syndicated loan.

The 10-year and five-year bonds, carried a coupon of 6.875 per cent and 5.875 per cent, respectively, recorded a large order book, with a total subscription exceeding $8 billion (Sh700.2 billion), much more over and above what Kenya sought to raise in the global capital markets.

What is Eurobond?

A Eurobond is a bond that is issued in a currency other than the currency of the country where it is issued. According to Mohammed Wahliye "The currency in which Eurobonds are issued also determines their name, like Eurodollar, which is issued in US dollars, or Euroyen, which is issued in Japanese yen. So Kenya's is a Eurodollar bond. Through these two bonds, the Government essentially asked investors to lend $2 billion on the promise that it will pay it back in five and 10 years with interest. The Government, through CBK, gave these private investors a piece of paper known as a bond, and in return CBK collected on the Government's behalf $2 billion cash in the form of a loan. The buyers or investors of these Eurobonds, who are generally large companies, banks or financial institutions and governments, will be paid interest on an annual basis and the principle amounts at maturity. Eurobonds are free of withholding tax and are traded electronically in the secondary markets across international financial centres."

Expectations versus reality.

1. Kenyan's expected Eurobond to go towards financing huge infrastructure projects such as roads, railways, ports, water and energy to ensure steady economic growth. Mohamed writes "So proceeds from the Eurobond will accelerate economic growth, poverty reduction and would be helpful for the country's economy if the borrowed funds are spent on infrastructure projects that offer a greater scope for augmenting revenue earnings and creating employment opportunities." However,accroding to Business Daily of 6th November 2015, it is unclear what happened to all that money. Media reports that Treasury Cabinet Secretary (CS) Henry Rotich 'has been at pains to explain which infrastructure projects were funded by the Shs 196.9 billion.'

Though Mr.Rotich gave a statement to media on how government shared billions among ministries to fund infrastructure projects, 'the CS has, however, been unable to list the specific projects the money was used to fund fuelling speculation that the funds could have been used to pay salaries and other recurrent projects or that they could have been stolen.' Mohamed Wahliye sadly states that "It is extremely disappointing that we can't put a finger on any meaningful asset the bond has helped finance."

2. Eurobond expected to ease interest rates.'The current high domestic borrowing by fiscal authorities to finance the Budget deficit increases the competition for funds and drives up interest rates.' Wahliye writes. He further said that 'With Treasury Cabinet Secretary Henry Rotich now planning to borrow less from domestic markets because of this new money from the bond proceeds, there will be pressure on banks to lend the excess liquidity elsewhere. The extra supply of cash will, therefore, hopefully help to bring down bank lending rates to the productive sectors of the economy.'

Contrary to expactions, June 9th 2015, CBK raised the benchmark interest rate to 10 per cent from 8.5 per cent, setting the stage for a rise in the cost of loans in the coming months. And on October 22, 91-days treasury bills peaked at 22.5 per cent while interbank lending rate reached 25.84 per cent. According to Business Daily of October 24th 2015, banks started to advise their customers on the interest rates changes which according to some banks have gone high up to 27% and likely to take effect before end of November.

However, according to media reports that CBK has intervened and directed banks to freeze all planned interest rates increases and instead reduce their market rates on loans in line with the current market conditions. Lenders were however quick to dig in with their lobby group (KBA) indicating that the industry might ignore the directive and the rates high. (Daily Nation, November 13). Currently, only Standard Chartered Bank and Barclays bank informed their customers that they had shelved their plans to increase rates. Equity Bank followed suit with the cancellation of notices sent out last month that had informed borrowers of the bank’s intention to increase rates by upto six %age points with effect from November 19. This move by banks triggered by a steep fall in Treasury Bill and bond yields from 22.5% on October 21 to 9.7% last week (Business Daily, November 17).

3. Eurobond expected to reduce domestic borrowing by the government as it were before. Wahliye writes that 'at the moment, the domestic markets have been the biggest source of Government borrowing...With Treasury Cabinet Secretary Henry Rotich now planning to borrow less from domestic markets because of this new money from the bond proceeds, there will be pressure on banks to lend the excess liquidity elsewhere.'

With the current cash crunch facing the government due to KRA below expected average collections, 'The government is seeking to borrow a staggering Sh78.8 billion in syndicated loans from local banks to plug a gaping Sh600 billion hole in the budget, which has been made worse by low tax collection and wastage.' (Daily Nation, October 14, 2015). Daily Nation October 14 reported that ' government has borrowed Shs 100 billion from the local market since july and all the money used to settle local and foreign debt."

By November 4, Treasury was looking for Shs 80 billion but managed to borrow Shs 60 billion commercial loan from Citi bank, Standard Bank and Standard Chartered Bank as the first tranche. The rest will be secured from 'other sources' according to Treasury Principal Secretary Mr. Kamau Thugge. Again, the treasury says the money will go to infrastructure projects!

“With respect to interest rates, the intended reduction in the borrowing rates has not been felt. The 91-day Treasury Bill rate reduced slightly in August 2014 after the bond was issued in June 2014 and stabilised until May 2015 when an upward trajectory was witnessed. This indicates that the sovereign bond did not have a huge impact on the domestic borrowing by the government,” the Budget Office said in a brief prepared for PAC.

Currently, the public debt stands at Shs 2.6 trillion, equivalent to 46.8% of GDP (Daily Nation, November 4). The opposition has become vocal and accussed the government of 'over-borrowing, over spending and over stealing.' (The standard Nov 2). The government says any debt below 50% of the GDP is sustainable and rejected the wrong doing.

4. The flotation of the bond expected to be a step in the right direction for easing pressure on foreign exchange reserves. It would enable the Government maintain a stable exchange rate. It is expected that the dollar proceeds from the bond, Kenyan shilling is expected to receive a cushion.

Despite proceeds being received, Kenya shilling against dollar reached an all time high of 106.15 in September of 2015. According to exchangerate.org.uk, by June 2014 Kenya shilling exchanged with dollar at 87.88. A year after the bond, the rate reached 102.30 and now after ups and downs it has reached at 102.35 per dollar. The Parliamentary Budget Office said the Eurobond had had no impact in stabilising the exchange rate.

Now Uhuru government is "facing criticism over the current economic uncertainty facing the country, which have been characterized by a serious cash crunch, sliding value of currency, high interest rates and sky rocketing public debt." Jeffrey Gettlemen writes on Business Daily of Nov 6, 'Kenya is going deeper and deeper into debt'

DEBUT SUKUK (ISLAMIC BOND).

Mr. Henry Rotich speaking after a successful debut $2 billion Eurobond in 2014 said that Kenya plans to issue another international bond in fiscal 2015/16 and may consider a Sukuk. The Star newspaper reported that "The National Treasury is also working on an Islamic bond, popularly known as Sukuk, to draw foreign investments from oil-rich Gulf and Middle East regions whose participation in the hugely successful $2 billion (Sh177.60 billion) debut Eurobond last June was religiously prohibitive."

With the current political climate, outcry on mismanagement of the Eurobond proceeds, mismatch between expectations and reality coupled wiht serious corruption allegations where it is reported that 'the publication of an official audit found just one percent of Kenya government spending and a quarter of the entire $16 billion (15 billion euro) budget was properly accounted for.' (Daily Nation, July 31st 2015), "...the money from the Eurobond was deposited in an offshore account over which she had no power,” " Agnes Odhiambo (controller of budget)also disclosed money from the Sh175.6 billion ($17billion) Eurobond has been received and approved for spending, but Treasury has not been clear on what the money has been used for,” (Daily Nation of October 22, 2015) makes one wonder if the country is ready and prepared to issue Sukuk.

Unless situation changes, Sukuk is likely to be shelved for more years due to political climate but more importantly, to prevent religious motivated investors from facing high Shari'ah non-compliance risk due to negative Eurobond precedent.

Normally, Sukuk proceeds are expected to be channelled to specific projects or specifically used in Shari'ah compliant manner. With many questions sorrounding Eurobond and its aftermaths, extra efforts will be required from the government, Shari'ah scholars (who will approve the structure) and other stakeholders to assure investors that the funds won't end up in servicing any existing government interest loans or invested in conventional banks to earn interest (Some reports shows that Eurobond earned Shs 14 million interest from offshore banks), or ending up in corruption scandals.

NEW BOOK REVIEW: Between Debt and the Devil: Money, Credit, and Fixing Global Finance.

By Brenda Jubin of Reading The Markets.

Adair Turner, the former chairman of Britain’s Financial Services Authority and described by The Economist as a man for all policy crises, upends financial orthodoxy in Between Debt and the Devil: Money, Credit, and Fixing Global Finance (Princeton University Press, 2015). He argues that nothing regulators have done thus far has addressed the fundamental underlying cause of financial instability: that “modern financial systems left to themselves inevitably create debt in excessive quantities and in particular debt that does not fund new capital investment but rather the purchase of already existing assets, above all real estate. It is that debt creation which drives booms and financial busts: and it is the debt overhang left over by the boom that explains why recovery from the 2007-2008 financial crisis has been so anemic.” (pp. 3-4)

For 50 years private-sector leverage increased as “credit grew faster than nominal GDP. In the two decades before 2008 the typical picture in most advanced economies was that credit grew at about 10-15% per year versus 5% annual growth in nominal national income. And it seemed at the time that such credit growth was required to ensure adequate economic growth.” (p. 7) If that theory is in fact correct, we’re condemned to financial instability and crisis. But, Turner argues, we can develop a less credit-intensive growth model if we address the three drivers of credit intensity: (1) the increasing importance of real estate in modern economies, (2) increasing inequality, and (3) global current-account imbalances unrelated to long-term investment flows and useful capital investment.

One policy initiative we should be willing to use in moderation, although Turner admits it will horrify central bankers, is fiat money creation, “using central bank-printed money either to finance increased public deficits or to write off existing public debt.” (p. 12) This action, though reminiscent of a cautionary tale in Goethe’s Faust in which Mephistopheles tempts the emperor to print and distribute paper money, is necessary to escape the debt overhang.

Demonstrating the increasing complexity in the financial system, Turner points to the shift in typical bank balance sheets. In the U.K. in 1964, more than 90% of aggregate bank balance sheets were made up of loans to the real economy plus government bonds and reserves at the Bank of England. By 2008 “much more than half the balance sheets of many of the biggest banks in the world … were accounted for by contractual links, whether in loan/deposit or in financial derivative form, between these and other banks, or between them and other financial institutions, such as money market funds, institutional investors, or hedge funds.” This shift, he notes, reflected in part the dramatic rise in trading activity. “The value of oil futures trading has gone from less than 10% of physical oil production and consumption in 1984 to more than 10 times that of production and consumption now. Global foreign exchange trading is now around 73 times global trade in goods and services. Trading in derivatives … now dwarfs the size of the real economy; … the total notional value of outstanding interest rate derivative contracts had soared by 2007 to more than $400 trillion, about nine times the value of global GDP.” (p. 25)

I could go on and on (and in fact I have pages of notes), but there is no space here. Turner’s book is tightly argued and is packed with insights about the financial markets as well as the real economy. For example, he lists five factors that explain why market bubbles and subsequent crashes are inevitable and five features of debt contracts that make them potentially dangerous. He explains why fixing the banks will not fix the economy. He argues that, if it is to succeed, the eurozone must become a complete currency union and hence a political union and that if this cannot be done, “eurozone breakup is likely to be inevitable and is preferable to sustained stagnation.” (p. 159) He explains in what sense less liquid and less complete markets can be good. And these examples represent but a tiny fraction of the issues Turner tackles in his book.

We know that we still have a long way to go to recover from the financial crisis and that we’re slipping back into some of the practices that gave rise to it in the first place. Turner’s book is both a critique of the status quo and a set of suggestions for getting out of the morass without precipitating yet another crisis. It will, and should, be controversial, but Turner is a worthy adversary.

SHARIA AUDIT IN ISLAMIC FINANCIAL INSTITUTIONS.

INTRODUCTION

Sharia compliance audit or Sharia Audit is an important function within the Sharia Governance Framework of Islamic Banks. The audit is carried out to assess adequacy and efficiency of internal Sharia controls as well as assessing Sharia compliance status of the activities conducted by the bank.

SHARIAH AUDIT

Shariah Audit is a periodic activity. It is designed as a formal, structured process based on standard operating procedures and programs. It involves review of documents which entails going over a checklist to see whether or not documents are genuine and their entries are correct. The aim of the Shariah Audit is not to penalize for mistakes but in fact to ensure mistakes are learned from and improvements made accordingly and timely.

The Shariah Audit includes an evaluation of the product offerings, process flows, bank’s branch and head office environment, customer reading materials, staff knowledge, bank's communication channels and staff dress-code to see if it all complies with the Shari'ah guidelines issued by the Sharia supervisory board or Sharia Department. It entails staff interviews, particularly the branch staffs and operation manager’s to determine their knowledge and understanding of Islamic banking.

It also include a check on the methods of profit distribution and assigning weightages. At a financing/credit department, the audit determines the degree of Shariah compliance of financing transactions mainly execution of various Sharia'h documentations related to financing. At branch level, the audit focus on customer stransactions executed at branches, branch environment, customer reading materials, customer complaints and resolutions, staff knowledge and awareness with regards to function related Sharia guidelines and Islamic banking in general. Where need arises, the audit team may visit clients to determine whether or not customer are made aware of proper procedures which are in place and relates to Sharia'h.

Errors or weaknesses spotted during the audit if any are presented in the Shariah Audit Report. Errors or weaknesses or failure to comply with relevant Sharia guidelines when spotted by staffs prior to audit must also be reported to the Product Development and Shariah Compliance team which will examine the cases and report accordingly and timely to relevant authority. If Staffs are not able to freely communicate to errors or weaknesses to Sharia Department, then it is likely that the problem never may get to be resolved and the bank may suffer strategic and reputation risk.

Once reported, the error or weaknesses serves as a precedent to help avoid similar mistakes in the future and whenever it is shared to other branches it informs other branches on measures to prevent them from repeating the same errors.

This is the synergy required between the different teams within the departments that enables the Islamic bank to function effectively as a whole — its perspective, objectives and activities directed to one goal — ensuring 100% Shariah compliance and ultimately 100% customer satisfaction.

As an industry best practice and as guideline given by top scholars in the field, it is strongly recommended that every year a Shariah Audit must be conducted for all the financing units, departments or branches in a bank. Transactions or activities within each unit must be checked via sampling. It is also recommended that a Shariah review is conducted at the time when the financing limits are renewed annually.

The Product Development and Shariah Compliance unit has responsibility to check on selected sample transactions for each client to determine their conformity to Shari'ah guidelines. This process of review exists to avoid mistakes that would otherwise show up in an audit.

Post Audit Corrective Measures

If the Shariah Audit report discloses a serious error or weakness that requires fixing, the transaction should be stopped or put on hold. The transaction may be allowed to continue but only after the correction of error or with a revised process flow as advised by Product Development and Sharia'h compliance Department.

The cause of the error or weakness must be investigated by respective staff/manager/ head of the department to determine the appropriate course of action — was it the bank officer’s mistake? Was the financing mode prescribed inappropriate? Was there inadequate descriptions on the process to be followed?

If the transaction is impermissible and confirmed to be so by the Sharia Supervisory Board (or Sharia Advisor with such a mandate), the corresponding income should be transferred to the charity account. Ideally, disciplinary measures must be prescribed if the mistake is intentional. In case the error is the client’s, it should be investigated whether it occurred out of a lack of awareness or the client’s indifference to Shariah prescriptions.

Disclosures & Annual Shariah Report

All the major activities of the bank’s audited by Shariah department and the results of the Shariah audit are disclosed to the management and in the Shariah Board’s or Shariah Advisor’s which later on issue Shariah report published within the bank’s Annual Report. The format of such report is provided by Auditing and Accounting Organization for Islamic Financial Intitutions (AAOIFI) Governance Standard No 1.

However, Sharia Supervisory Board or Sharia'h Advisor may construct this report in a different format as it deems fit or based on best practices. For example, the Shariah Report may state the number of Department and branches audited and the resultant findings. It may also mention the amounts transferred to the charity account owed to flawed transactions and where the charity is distributed. Major errors too may be disclosed along with the actions recommended to rectify them. The report may also disclose the research undertaken, the new products developed, the number of employee and client training sessions conducted. It may also disclose the scope of the audit; the transactions covered. It may include an overall branch assessment and a review of how profit was distributed and the employees’ level of Islamic banking knowledge.

All these disclosures offer transparency and keep the bank’s clients and shareholders informed of the bank’s activities and the measures it takes to ensure continued Shariah-compliance. The Sharia Department is responsible to follow up on his recommendations or agreed actions in the subsequent audit.

Rating

As part of the industry best practice an Islamic bank must have two rating processes Shariah Audit rating and employee rating.

Shariah Audit Rating

The bank’s branches/departments/functions must be rated after Shariah Audits using an efficient rating system, like a five tier rating system (e.g. Excellent, Above Average, Good, Below Average, Poor) and the result of the Shariah audits should be linked to the annual appraisal of the branch and concerned staff.

For instance if a unit is rated “Poor” it affects its appraisal, promotions and increments and if a unit is rated “Excellent” it earns some type of reward or other performance enhancement incentive. A unit rated “Poor” is also given extra support to bring it up-to-date with the latest training and performance improving activities.

Employee Rating

Starting from the CEO to the cashier at the front desk, ensuring Shariah-compliance is everyone’s job. And it is strongly suggested that in the employees’ annual appraisals due weightage must be given to the Shariah compliance mindset, knowledge and commitment to Shariah compliance. Institutionalizing a penalty and reward system is a must to ensure good performance at both the branch and employee level.

Note:
This article was written with inputs from Sharia Compliance Report published by Ethica Institute of Islamic Finance.

Tanzania featured in IRTI Islamic Social Finance Report 2015

Today, IRTI released the report during a conference on "Awqaf, Zakah and Ethical Microfinance as tools for Empowerment", organised by the South African National Zakah Fund (SANZAF) in Pretoria, South Africa.

This edition of the ISFR focuses on the Sub-Saharan Africa, outlining the regional trends and prospects as well as proposing policy recommendations for the Islamic social finance sector, which includes Zakat, Waqf and Islamic microfinance.

It analysed the regulatory environments and practices in six selected countries, namely Sudan, Nigeria, Kenya, Mauritius, South Africa and Tanzania.

Findings show that Sudan, Nigeria and South Africa can easily generate adequate resources for poverty alleviation through Zakat, while Islamic social finance also has great potential for curbing poverty in the three other countries studied.

The report estimates the annual Zakat potential in Sudan, Nigeria and South Africa at about $1,843.51 million, $8,776.45 million and $178.87 million respectively. However, the actual collection in 2013 was $220 million, $3 million and $100 million respectively.

Key recommendations include enhancing the legal frameworks for Islamic social finance; institutionalizing zakah collection and distribution; offering unique microfinance products for smallholder farmers; and allowing waqf creation by non-Muslims.

The report notes that collection of in-kind Zakat from locations like farms comes with high costs, and therefore recommends a review of the cap on operational costs, given the predominance of agriculture in the countries studied.

Findings further show that while compulsory Zakat remittances obviously boost collection levels, as in Sudan, such policy has not been successful in parts of Nigeria because of lack of enforcement mechanism. Incentives in the form of tax rebates for Zakat payments have also helped in Sudan.

In his comments on the report, IRTI Director General Prof. Mohamed Azmi Omar said, "By focusing on Sub-Saharan Africa, we hope that this issue of the ISFR will satisfy a long-felt need for adequate and relevant information that will help towards instituting an enabling environment for the Islamic social finance sector in the region."

IRTI instituted the ISFR series last year with the aim of providing relevant data and policy roadmaps that could assist the campaign to end poverty in all its forms globally.

The maiden edition focused on South Asian and South East Asian countries, including Indonesia, Malaysia, Singapore, Brunei Darussalam, India, Pakistan and Bangladesh. Subsequent editions will study other regions, the IRTI Director General said.

End.

In sha Allah, I shall bring to you specific details on Tanzania once i get the full report.