ROLE AND CONTRIBUTION OF ISLAMIC FINANCE

Islamic Finance refers to a form of finance that is consistence with Islamic teachings on commercial or business transactions. It links finance with the real economy and maintains link at each point in time in a fair and transparent manner.

Fundamental teachings of Islam on business encompass avoidance of Riba (Interest/Usury), Gharar (Excessive uncertainty in commercial contracts and Maisir (gambling or game of chances). The principles promote profit and loss sharing through trade, partnerships and leasing. Besides, ethical business practices are at the center of Islamic economics and finance hence avoidance of sectors considered to be non-permissible.

Currently, Islamic finance sub-sectors includes Islamic banks, Islamic insurance, Islamic capital markets, Islamic Microfinance Institutions, Islamic Credit Unions and Islamic pension funds, among others.
There are five major areas of contribution of Islamic finance towards improving lives of the people and achieving sustainable growth and stable economies.

First, financial stability. Islamic finance is an ethical financial system bridging the gap between financial sector with the real sector and potentially contributing towards global financial stability.One of the reason attributted by economists and financial experts who analyzed causes of 2008 financial crisis, is growing financialization of the economy.

Financialization according to Mike Collins, in his article titled 'Wall Street and Financialization of the economy', he quotes;
"financialization- defined as the “growing scale and profitability of the finance sector at the expense of the rest of the economy and the shrinking regulation of its rules and returns.” The emphasis is no longer on making things – it is making money from money."

Maurice Obstfeld and Kenneth Rogof in their paper titled "Global Imbalances and the Financial Crisis: Products of Common Causes" mentioned various factors prevalent in 2000s that led banks to innovate structured products such as Collateralized Debt Obligations (CDO) endowed with very high levels of systemic risk. This structured product is not in line with Shari'ah principles.
Shari’ah prohibits selling debts (CDO), prohibits derivative products such as Credit default swaps and prohibits short selling.

Second, financial inclusion and shared prosperity. It is well known fact that one of the malaises of capitalist economies is the wider gap between the rich and the poor. The seriousness of the problem is highlighted by one striking fact: Almost half of the world’s wealth is now owned by just 1 percent of the population.

Islamic Finance through its core ethical principles such as fairness, justice, equitable distribution of income, risk sharing instruments and asset based financing; it has a potential great to contribute to growth and shared prosperity. However, inclusion and shared prosperity can only be achieved once there are policy interventions or improvements in policy effectiveness.

Furthermore, Islamic banks should go beyond banking by embracing risk-sharing inter mediation and increase the allocation of credit to the micro, small, and medium enterprises sector.

Third, promoting the Non-bank Financial Institutions Sector (NBFI). Islamic finance through the concept of risk sharing and asset based instruments it fits well with NBFI sector. A good example is Islamic insurance (Takaful). Besides providing protection against risk and uncertainty, takāful could play a critical role in enhancing financial inclusion, reducing poverty, achieving inclusive economic growth, and boosting shared prosperity. Since majority of the poor lives in rural areas and depend on small scale farming, there is need to develop the micro-takāful industry to provide protection against uncertain events and loss of income.

Fourth alleviating Poverty and Sharing Prosperity through Islamic Social Finance. Islamic Finance is not naïve to the fact that some segment of our people requires sustainable financial support for their well being due to old age, disabilities and extreme environmental conditions. Bearing this fact in mind, the institutions and instruments of Islamic social finance can be put into use. Such instruments, involving qard hasan (benevolent loan), awqāf (Islamic endowments or trusts), zakat (mandatory alms giving) and ṣadaqāt (voluntary donation) can potentially address the basic needs of the extremely poor and the destitute and create a social safety net.

Last but not least, promote infrastructure development. Infrastructure deficit is a main challenge facing many countries. For developing countries, infrastructure gaps are estimated to be in the range of $1-1.5 trillion annually. Sukuk (Islamic capital market instrument) have successfully been used to finance large scale infrastructure all over the world and could be utilized to achieve various Sustainable Development Goals.

Sukuk funds when put in development projects can accelerate economic growth through creation of employment, increased revenue and providing opportunities for the poor to build assets.

It is imperative that all countries take up the challenge of introducing Islamic financial services to start, grow and prosper for the benefit of each and everyone.

KENYA LAUNCH KEY COMMITTEES AND ISLAMIC FINANCE PROJECT MANAGEMENT OFFICE.

Kenya through the technical and financial assistance of Financial Sector Deepening Africa (FSDA), under the mandate delegated to it by Kenya’s financial sector regulators, the Financial Sector Regulators Forum (FSRF) under the patronage and support of the National Treasury has made significant steps in an effort to develop a framework for Islamic Finance, aimed at positioning Kenya as the new Islamic Finance hub for the region.

The foregoing effort has seen the appointment of Islamic Finance Advisory and ASSURANCE Services (IFAAS), an international consultancy firm specialized in Islamic finance, in collaboration with Simmons & Simmons, an international law firm to lead the Kenya Islamic Finance Project Management Office domiciled at Capital Markets Authority offices. The PMO which started its work since Jan 2016 achieved several milestones on fact finding mission, documentary reviews and analysis, capacity building and promoting awareness.

Besides, there are two additional committees formed i.e. Islamic Finance Consultative Committee (IFCC)-an advisory committee and Islamic Finance Steering Committee (IFSC) –the top policy making committee, that are envisioned in the Islamic Finance implementation programme as being key to facilitating the successful establishment of a vibrant Islamic Finance market in Kenya. The PMO and the said two committees bring together participants from government, financial market regulators and stakeholders.

Speaking during the launch of PMO and Islamic Finance Committee on 14th October 2016 at Villa Rosa Kempinski, Chief Executive Officer of Capital Market Authority (CMA) said “PMO has made significant progress. With what they have done and going to do in few months, it is clear that Kenya is in the right hands and right track towards becoming the Islamic Finance hub for the region.”
The launch event was well represented drawing participants from government, financial market regulators and stakeholders.

The PMO has up to end of March 2017 to cover its scope of work which includes;

1.Development of a regulatory framework
o Helping financial sector regulators issue guidelines to market players and proposing amendments to legislation
o Drafting internal guidelines for financial sector regulator staff on how to manage Islamic finance
o Capital markets-specific frameworks, e.g. to support sukuk issuance.


2. Design and delivery of capacity building programmes for:
(i) financial sector regulators and (ii) market players

3. Establishing a Shari’ah governance framework for Islamic finance in Kenya
o Designing and setting up an NSSB (and SSBs within financial institutions)
o Ensuring skills of Islamic scholars are appropriate and up to date so that they can play an effective governance role in SSBs
o Establishing productive links with international Islamic finance professional bodies.

4.Support on communications and market awareness raising activities – domestic and international.

It is clear despite of challenges in the way, Kenya is committed towards providing necessary environment to build a dual financial system where Islamic finance can operate in fair and level playing field with their conventional counterpart for the benefit of the country and the region.

Unlocking the huge potential of Islamic banking and finance services in Kenya

By FARRUKH RAZA

Islamic banking has been a key topic of discussion in Kenya. Several recent banking sector incidents have been allegedly linked to Islamic banking by some, and denied by others.

Islamic banking is not understood by the majority of Kenyans. It is important to help people understand it, how and why is it different and its place it in the market.

Islamic finance refers to all types of financial activities that operate in accordance with the rules and principles of the Islamic law (Shariah) and particularly the prohibition of dealing in usury or interest, called Riba in Arabic.

This translates to focus on the ‘‘real economy’’ as the generation of income solely from money-lending is not allowed. The emphasis is therefore on trading and investments on a profit/loss sharing basis.

It is argued that a financial system built on these principles is likely to promote the creation and distribution of wealth in a fair and equitable manner.

In respect of financial transactions, Islamic principles aim to promote ethical transactions encouraging trade, labour, entrepreneurship, transparency, honesty, integrity and fairness, which also inspire kindness, charitable donations and social welfare.

Shariah principles prohibit the use of interest and gambling in the transactions e.g. short selling, misrepresentation, exploitation and unfairness in contracts.

All Islamic financial activities are conducted by financial institutions authorised by the financial sector regulators to operate in accordance with laws of the country. In addition, financial institutions offering Islamic products and services need to ensure that all their products, services and activities are compliant with Shariah.

Besides their general corporate governance framework, the institutions have an additional requirement of Shariah governance which is fulfilled by an independent body of Islamic scholars.

This body, usually called the Shariah Supervisory Board (SSB), is independent and its responsibility is limited to providing guidance to financial institutions to ensure compliance with Shariah.The SSB does not interfere with the day-to-day management of the business.

Due to the ban on paying and charging interest, financial institutions offering Islamic products operate in a distinctively different way.

They are not in a money-lending business, instead they engage in real economic activities including trading and investments in projects. Instead of lending money to customers and charging interest, they buy and sell assets, earning profit or lease their assets against rent.

Different projects

They also provide services and charge fees. Similarly, they do not pay interest to their depositors but instead invest their customers’ monies in different projects and investment portfolios and share profit and loss with them.

Instead of receiving interest depositors earn a return from the various sources of income of the financial institution, including profit generated by its investments, rent received on assets and fees paid for services.

With an operating model and products that are structurally different from the conventional financial system, the risks involved in Islamic banking and finance are different from conventional risks hence a different approach — with more hands-on risk management — is required.

Similarly, the balance sheet of such institutions is different from conventional institutions and requires a different type of accounting.

The size of Islamic banking and finance industry worldwide is estimated at $2 trillion (Sh200 trillion) with an average annual growth rate of 15 per cent over the last decade, outperforming the conventional finance industry.

Islamic banking and finance has attracted attention from around the world in the aftermath of the global financial crises. Regulators, researchers and practitioners have started looking at Islamic banking and finance as an ethical alternative.

An increasing number of countries are embracing Islamic banking and finance, including the United Kingdom, France, Luxembourg, the US, South Africa, Japan and China. Some of these countries have raised funds through issuing sovereign Islamic bonds.

Islamic banking and finance in Kenya is still in its infancy with two fully-fledged banks, five Islamic windows of conventional banks, one fund, one Takaful (Islamic insurance) firm, and one Re-takaful company operating in the country.

In addition two Islamic Saccos have been registered. However, these financial institutions are regulated under the same legal and regulatory framework as their conventional counterparts as a specific framework for Islamic banking remains yet to be developed.

The government also intents to enter the Islamic bond market to raise funds to be invested in infrastructure and economic development programmes.

In order to develop the market and unlock its potential, the government has established a Project Management Office (PMO) to develop an institutional, policy and regulatory framework for the Islamic finance industry in Kenya.

The PMO is guided by an international consultancy, IFAAS (Islamic Finance Advisory and Assurance Services), specialised in association with Simmons & Simmons, an international law firm with Islamic finance expertise.

The PMO has identified preliminary challenges in the market such as lack of awareness among all stakeholders; lack of human capital to manage the unique business; absence of specific policies, regulatory and Shariah governance frameworks; and lack of technical expertise and infrastructure including suitable systems and risk management.

Rising out of the challenges, the PMO has embarked on the development of adequate policies, regulatory and Shariah governance frameworks and capacity building for the market.

This includes engaging with stakeholders in order to develop the required frameworks and policies that respond to industry needs and support Kenya’s ambitions in its individual context.

Since Islamic finance has a significant opportunity in Kenya and great potential to put the country on the international scene, in order to unlock this potential and avail the opportunities, the PMO is out to deliver.

Firstly, making Islamic finance inclusive for all Kenyans and allowing them to benefit from the new opportunities regardless of their background and enabling Islamic finance to play an active role in Kenya’s economic development.

Secondly, by developing Islamic finance regulatory framework in line with Kenyan laws, with the aim of keeping the changes to the minimal required and least disruptive for the system.

Kenya Gov’t to support growth of Islamic finance

The government is keen to enhance the growth of Islamic finance in the country and will support moves to sustain and further develop the sector. Central Bank of Kenya chairman Muhammad Nyaoga lauded the development of Islamic finance saying the government recognizes its positive contribution to the economy.

“We are open to supporting Islamic products that deepen the market as they enhances financial inclusion in the society,” he said recently at an iftar dinner that brought together practitioners in the Islamic finance sector. Speaking at the same event, the chairman of the Insurance Regulatory Abdirahim Haithar Abdi said while there has been a steady growth in Islamic finance in the country, he called for more awareness programmes which will increase the uptake of Islamic banking and insurance. “There is still misunderstanding about Islamic banking and Insurance both among Muslims and nonMuslims and this need to be addressed,” he said.

In his comments, the head of Islamic Banking at Kenya Commercial Bank Jaafar Sheikh Abdikadir spoke on the need for Islamic financial institutions to come together to form a platform which can be used to further the growth of Islamic finance in the country. “This is the first time that players in the industry have come together and we should use this opportunity to explore ways of forming an association which will drive the Islamic agenda in the country,” he said.

On his part, the chairman of the Takaful Insurance Group Hassan Bashir commended the government for putting in place an enabling environment which has enabled the Islamic finance to flourish in the country. In his keynote address, Prof. Abdullatif Essajee, a director at First community Bank
said with a growing Muslim middle class population, there is great potential for the development of Islamic finance in the country.

“These developments have enabled the formerly unbanked Kenyans and specifically the Muslim communities in the country to have access to financial services adding to the wealth creation in the economy,” he said.

Source: Friday Bulletin.

Islamic Banking Soundness and Growth from 17 Countries

The Islamic Financial Services Board (IFSB) is pleased to announce the fourth dissemination of data on financial soundness and growth of the Islamic banking systems from 17 IFSB member jurisdictions, covering quarterly data from December 2013 to Q3 of 2015. The dissemination is part of the IFSB’s Prudential and Structural Islamic Financial Indicators (PSIFIs) project, which currently compiles data from 17 member countries including Afghanistan, Bahrain, Bangladesh, Brunei, Egypt, Indonesia, Iran, Jordan, Kuwait, Malaysia, Nigeria, Oman, Pakistan, Saudi Arabia, Sudan, Turkey, and United Arab Emirates.

The IFSB Task Force on PSIFIs includes representatives from all 17 participating jurisdictions as well as three international organisations – the International Monetary Fund (IMF), Islamic Development Bank (IDB) and the Asian Development Bank (ADB). The international collaboration between the IFSB, multilateral institutions and participating countries has greatly facilitated the collection of Islamic banks’ data and enhanced the clarity and consistency of indicators across jurisdictions. A summary on key PSIFI indicators are given below

Growth of Islamic Banking

Based on the available data, the total assets of the Islamic banking industry grew from USD 1,216 billion in 2014Q3 to USD 1,245 billion in 2015Q3 (calculated from country-wise aggregated data converted into USD terms using end-period exchange rates). Total funding/liabilities declined from USD 1,007 billion in 2014Q3 to USD 946 billion in 2015Q3. Financing by Islamic banks from the jurisdictions participating in the PSIFIs project reached USD 710 billion in 2015Q3 from USD 681 billion in 2014Q3. The data on “financing by type of Shariah-compliant contracts” reveals that five major financing contracts used by the Islamic banking industry as on 2015Q3 were: Murabahah (42.4%), commodity Murabahah/Tawwaruq (15.6%), Ijarah/Ijarah Muntahia Bittamlik (14.8%), Bay Bithaman Ajil (13.6%) and Salam (7.9%).

Capital Adequacy

Capital adequacy provides an important indication of the health and financial soundness of the banking industry in a jurisdiction. As of third quarter of 2015, the average capital adequacy ratio and average Tier 1 capital ratio from 16 jurisdictions were 18.9% and 17.1 % respectively, significantly higher than the regulatory requirements, though lower than the same period of the previous year (2014:Q3) when these ratios were 21.5% and 19.9% respectively.

Asset Quality

On asset quality indicators, gross non-performing financing ratio (gross non-performing financing to total financing) showed a slight deterioration with an increase from 5.4% in 2014:Q3 to 5.6% in 2015:Q3 on an average. A stronger trend is apparent in the net non-performing financing to capital ratio which increased from 10.0% in 2014:Q3 to 13.6% in 2015:Q3.

Earnings

Islamic banks and Islamic windows in the PSIFIs member countries maintained comparable rates of return on assets (ROA) and return on equity (ROE) during the periods under report. Overall, the ROA and ROE were 1.3% and 13.2% in 2015:Q3 as compared to 1.2% and 11.3% in 2014:Q3 respectively.

Liquidity

On the liquidity indicators, the liquid assets ratio (liquid assets to total assets) and liquid assets to short-term liabilities ratio improved over the period from 24.1% and 11.5% in 2014:Q3 to 39.6% and 15.1% in 2015:Q3 respectively. Three PSIFIs member countries reported the newly introduced Liquidity Coverage Ratio (LCR) which exceeded the 100 percent benchmark.

Size of Islamic Banking

The number of full-fledged Islamic banks and Islamic windows of conventional banks in 17 countries stood at 169 and 86 in 2015:Q3 as compared to 165 and 85 in 2014:Q3 respectively. At the end of 2015:Q3, a total of 388,976 staff members were working in 29,490 branches of full-fledged Islamic banks, an increase of 1,090 branches and 22,357 staff over the year from 2014:Q3.

The first set of PSIFIs data was released on 27 April 2015 covering the period of December 2013. The second and third sets of data released on 24 November 2015 and 14 March 2016, included indicators for the four quarters of 2014 and two quarters of 2015 respectively.

The PSIFIs Database (full set of data with metadata) is available on the PSIFIs portal at the IFSB website http://psifi.ifsb.org.

Accommodation of Islamic Banking in banking regulatory frameworks-Corporate Governance.

Board of Directors and Shariah Board

Regulatory frameworks typically do not prescribe distinct and separate corporate governance frameworks applicable only to Islamic banks. However, some regulatory frameworks deal with the additional responsibility and authority of the board of directors in relation to Shariah compliance, though, typically, the Shariah board has the ultimate responsibility and authority in advising on Shariah matters.

There is equal preference that the legal framework requires the setting up of a national/central Shariah board or setting up a Shariah board at the central bank (Afghanistan, Malaysia, Uganda, Pakistan, Palestine, Sudan, and Syria). Besides, a majority of jurisdictions require Islamic banks to have a Shariah board that has legal standing and its actions have legal implications (e.g., Iraq, Kuwait, Malaysia, and Sudan).

In most cases it seems that ultimate overall responsibility for an Islamic bank’s Shariah compliance lies with the Islamic bank’s board of directors, which typically delegates the responsibility for day-to-day Shariah compliance to senior management. Senior management is required to ensure Shariah compliance in line with Shariah board guidance, which implies that the relationship of an Islamic bank’s Shariah board vis-à-vis the Islamic bank is advisory.

Supervisory authorities should be aware of the risks when there is no requirement for an Islamic bank to have a Shariah board. In jurisdictions where there are no prescriptions relating to a Shariah board (e.g., Kenya, Tanzania, Tunisia, and Turkey), the supervisory authorities would consider it a possible case of mis-selling Islamic financial products if a purported Islamic bank did not have in place an appropriate function and internal controls to ensure Shariah compliance.

There appears to be heterogeneity regarding the bodies to which the Shariah board reports to. These may include: the board of directors of the bank , the general assembly of the bank, the top management of the Islamic bank and the executive committee of the Islamic bank. The best is to report to BOD or general assembly of the bank.

Shariah compliance function

The function and role of ensuring Shariah compliance within an Islamic bank is usually conducted by internal auditors or Shariah auditors. In specific jurisdictions where Shariah Law is the default source of all legislation (e.g., Iran, Pakistan, Saudi Arabia, and Sudan), including banking and financial legislation, an Islamic bank’s internal auditor has a statutory responsibility to ensure Shariah compliance by the Islamic bank. In other jurisdictions, an Islamic bank is required to have a dedicated Shariah auditor/Shariah compliance officer whose appointment is required to be approved by the bank supervisory authority.

The function and role of the external auditor in relation to Shariah compliance depends on legal frameworks. In jurisdictions where Shariah Law is the default source of all legislation, including banking and finance legislation, an Islamic bank’s external auditor has a statutory
responsibility to assess and verify Shariah compliance by the Islamic bank. However, in jurisdictions where Shariah Law is not the default source of banking legislation, the Islamic bank’s external auditor has no direct responsibility to assess and verify Shariah compliance by the Islamic bank. It is critical to have external auditor with statutory responsibility to assess shari'ah compliance even if after every three years to ensure robust Shari'ah controls are place and add wide range of experience on shari'ah compliance function.

Accommodation of Islamic Banking in banking regulatory frameworks-Licensing.

The effective prudential regulation of banks is as necessary and desirable in Islamic banking as it is in conventional banking. The risks of Islamic banking are those typical of financial intermediation. Accordingly, the objectives of applying prudential regulation and supervision to
Islamic financial activities are the same as the case of conventional banks: namely to pursue and maintain financial stability by ensuring the safety and soundness of banks, thereby preventing problems from having systemic repercussions.

There are various ways in which jurisdictions incorporate Islamic banking into their regulatory framework. A first approach is where the Basel Committee on Banking Supervision (BCBS) framework for bank regulation and supervision is considered the default regulatory and supervisory framework applicable to all banks (including Islamic banks) and, thus, no distinction is made regarding the regulatory framework between Islamic banks and conventional banks;

Under a second approach, the regulatory framework consists of a generic BCBS component, applied to all banks with references identifying provisions applying only to Islamic banks. In this case, the BCBS conceptual framework could be complemented by Islamic Financial Services Board (IFSB) prudential standards and guiding principles on Islamic banking, where considered appropriate, to give effect to Shariah law compliance;

Under a third approach, the separate regulatory framework accommodates Islamic banking. A wide range of approaches to regulatory framework for Islamic banking has evolved around those three approaches. Shariah compliance plays a role (explicitly or implicitly) in the supervision of Islamic banking. In the U.K., for example, the regulatory framework does not contain any prescriptions on Islamic banking or Shariah compliance.

Accordingly, the authorities do not explicitly recommend a Shariah board or the segregation of Islamic banking funds from conventional banking funds within a bank. Nonetheless, the authorities take the issue of Shariah compliance into account, albeit indirectly, when considering issues such as consumer protection, internal controls, governance, and reputation risk.

Licensing.

Jurisdictions impose different licensing requirements on applicants wishing to establish Islamic banks. In non Shariah Law jurisdictions,
where Islamic and conventional banks are present, licensing requirements do not address specifically and explicitly the issue of Shariah compliance. However, the issue of Shariah compliance does play an important indirect and implicit role in the approval process.

Where Shariah Law constitutes (or is part of) the fundamental law of the country, Shariah compliance is a key pre-condition to (and determinant of) whether a proposed request for approval of a Islamic bank would be considered favorably. Different jurisdictions issue different types of licenses to Islamic banks. Some issue a stand-alone Islamic bank will be issued with an Islamic banking license. Other jurisdictions a single (generic) banking license is issued to a bank, irrespective of whether the bank is an Islamic or a conventional bank (in some of these jurisdictions the authorities are empowered to issue only an Islamic banking license). Typically, the regulatory framework contains one set of fit and proper criteria applicable to all banks.

Accordingly, the regulatory framework does not prescribe a distinct and separate set of fit and proper criteria applicable only to Islamic banks.
In many jurisdiction, the issue of fit and proper in relation to individuals that play a key role in a bank’s Shariah compliance does not yet appear to have received sufficient attention. For example, it is not always clear whether the bank supervisory authority is empowered to make pronouncements on the fitness of individuals responsible for Shariah compliance (e.g., members of the Shariah board, the Shariah accountant, the Shariah internal auditor, the Shariah compliance officer, and the Shariah external auditor).

Few jurisdictions apply fit and proper requirements to Shariah board members and Islamic bank personnel involved in Shariah compliance. Though some jurisdictions impose requirements such as piety, standing in the community and/or recognition as a Shariah scholar, few jurisdictions (if any) impose (secular) fit and proper requirements on candidates for a Shariah board.

To continue..

Consumer Protection in Islamic Finance

Source: Zawya.com

The 13th Islamic Financial Stability Forum (IFSF) was successfully organised by the Islamic Financial Services Board (IFSB) on 12 April 2016 as part of its Annual Meetings and Side Events 2016, which were held in Cairo, Egypt on 10-12 April 2016, hosted by the Central Bank of Egypt.
The theme of Forum was Consumer Protection in Islamic Finance, and the main presentation was by Professor Volker Nienhaus, Former President, University of Marburg, Germany, and IFSB Consultant. Ms. Nariman Abdulla Kamber Al Awadhi, Chief Manager, Consumer Protection Unit, Central Bank of the United Arab Emirates and Mr. Khairul Nizam, Chief Operating Officer, Finance Accreditation Agency, Malaysia, acted as discussants to the presentation.

In his Opening Speech, H.E. Mr. Tarek Amer, Governor of the Central Bank of Egypt, stated that with the growth and globalisation of Islamic finance, the need for consumer protection has become more important and should be an integral part of Islamic finance regulation. He highlighted that one lesson learned in the aftermath of the Global Financial Crisis is that consumer protection is directly related to financial stability. He also added that transparency, impartiality and liability are important features of any consumer protection regime and therefore should be put into the agendas of international organisations and supervisory authorities. Similarly, financial literacy also supports the cause of consumer protection. He pointed out that while there are existing standards for consumer protection, adoption of these standards is uneven across countries.

Professor Nienhaus, in his presentation, which was based on IFSB Working Paper 03, Financial Consumer Protection in Islamic Finance, stated that while most of the issues in consumer protection - such as preventing systemic financial risks, selling of unsuitable financial products, unfair treatment by the financial institutions - cover both conventional and Islamic segments of the financial system, there are some issues and risks pertinent to Islamic finance sector, such as Shariah non-compliance risk. He stressed that regulators and supervisors in Islamic finance should focus on these unique risks in line with the progress taking place to address the common issues applicable to both sectors. He then expounded the main neo-classical and behavioural theories, as well as the precepts of Fiqh al-Muamalat, which justify policy interventions to protect the consumers. He stressed that regulation is necessary due to information asymmetries, limited information-processing capacities, cognitive biases and other behavioural factors. Apart from regulation, policies towards improving the financial capacity of consumers, setting up mechanisms to increase information dissemination and financial education are also important. He stressed that Shariah governance framework is of crucial importance to address unique issues and risks of consumer protection in Islamic finance.

Ms. Nariman Abdulla Kamber Al Awadhi of the Central Bank of the UAE, mentioned that the consumer protection issues have multiple facets and due to their complexity, are therefore not easy to put into a policy agenda. She added that the key challenge is integrating trust and faith into the financial system. She underlined that the Central Bank of the UAE covers consumer protection issues in conventional and Islamic finance under a single regulatory framework. She pointed out that for Islamic banks, the issues related to early settlement are the major area of customer complaints. She concluded her presentation by underlining that financial literacy should be an indispensable element of consumer protection policies.
Mr. Khairul Nizam of the Finance Accreditation Agency, Malaysia, touched the topic from the lens of Islamic finance consumers. He stated that one of the most important concerns in an Islamic banking from the point of the view of a consumer is Shariah compliance of the deposits and investment accounts. Here, perceptions of reputation and integrity of the Islamic banks come into play, and he underlined that convincing consumers on the banks Shariah compliance, as well as the fairness and equity on the rate of return depends on the perceptions, and competency, of the regulators. He also pointed out that the consumers can be very irrational and these cognitive biases should be taken into account by regulators.

The IFSF is a high-level platform open to regulatory and supervisory agencies, and international multilateral organisations, from among the IFSB members to discuss current and pertinent regulatory issues faced by the Islamic financial services industry. The Forum is held twice annually in conjunction with the meetings of the IFSB Council.

ISDA/IIFM launches Islamic FX forward standards.

By: Reuters.


The International Islamic Financial Market (IIFM) launched standard templates on Monday for sharia compliant foreign exchange forwards, the latest effort by the industry body to improve hedging practices in the sector.

Islamic finance is expanding beyond its core centres in the Gulf and Southeast Asia, prompting the need for more cost effective tools to manage foreign currency risks.

The Bahrain-based IIFM, a non-profit organisation which develops specifications for Islamic finance contracts, outlined two templates to accommodate the main industry practices, although it expects one of them to eventually gain more favour.

The standards involve use of either one or two unilateral promises, known as wa'ad, which are committed separately by each counterparty, with the latter providing greater credit security.

"Based on market requirement and feedback, our assessment is that the use of two unilateral wa'ad structure will increase," chief executive Ijlal Ahmed Alvi told Reuters.

"Certain other FX products can now be explored under two unilateral wa'ad concept, which IIFM may look into in the future."

There are several hedging tools used in Islamic finance, some based on a cost-plus-profit arrangement known as murabaha, but these tend to be cumbersome and expensive, said Alvi.

Islamic finance follows religious principles which ban the charging of interest and shun ambiguity in contracts.

This means Islamic banks are precluded from traditional forwards as these become legally binding at the outset, leaving counterparties exposed to an overtly uncertain outcome in the eyes of scholars.

In an Islamic forward, the exchange rate is fixed at the outset but remains a promise until offer and acceptance is completed at the forward date, which is when the transaction becomes a contract.

The choice of wa'ad also means Islamic banks don't have to employ their balance sheets for their hedging needs, compared to previous practices under murabaha.

"These standards using the wa'ad structure will overcome this constraint and lead the way to handling other off-balance sheet hedging structures," said Naveed Khan, vice chairman of IIFM.

The IIFM, which developed the standards together with the International Swaps and Derivatives Association (ISDA), has previously launched templates for cross currency and profit rate swaps and the Islamic equivalents to repurchase agreements.

The body started operations in 2002, founded by the Islamic Development Bank and the central banks and monetary authorities of Bahrain, Brunei, Indonesia, Malaysia and Sudan. (Reporting by Bernardo Vizcaino; Editing by Kim Coghill).

Get the standards at:http://www.iifm.net/published-standards

MURABAHA BASED PRODUCTS AND CONSUMER RIGHTS.

Islamic banking has benefited a lot from the knowledge and experience of individuals who have worked in conventional banks. However, it has never being a perfect experience since some are faster to unlearn conventional banking practices and learn Islamic banking contract rules while other are reluctant to embrace the fact that there is huge knowledge gap between what they knew of bank operations or products and what they need to learn and change when they are working in Islamic banks.
It must be known that Islamic banks operates within it own internal Shari'ah rules which are set by in -house Shari'ah scholars and global standard setting bodies. Learning these rules and applying them in banking operations is the cornerstone of Islamic banking.

Fundamentally, Shari'ah contracts provides rights, responsibilities and obligations between contracting parties which must be well known by those working in Islamic banks. Take for example, Murabaha contract which is widely used by Islamic banks. Under this contract, bank as seller has rights and obligations and so are the customers-a buyer. The bank is obliged to disclose the cost and profit in Murabaha transactions, right to change profit rate before conclusion of sale, sale what it has constructively or physically possessed, collect installments as per agreed payment plan. The customer has a right to refuse to buy or enter into a sale with bank , customer has right to pay full price earlier than the agreed plan without any pre-payment penalty, customer has a right to request for rebate in case of earlier repayment (the bank not obliged to honor it except in some jurisdiction like Malaysia where Shari'ah board at BNM requires rebate must be given), customer has a right to start paying the bank upon physical or constructive possession of the asset sold.

In comparison with on conventional loan, the customer start to be charged interest the moment bank is out of pocket. Can Islamic banks do the same? It will be fundamentally in breach of customer right under Shari'ah if Islamic bank under Murabaha based product, starts to collect profit and principal even before the customer has acquired constructive or physical possession of the asset. Individuals coming from conventional banking and not aware of Murabaha rules, must unlearn the conventional practice and appreciate that in Islamic banking money is not commodity, hence any profit paid by the customer must be directly linked to an asset that is sold. In other words, profit is derived from asset sold and not money being out of the bank pocket or by mere grant of access to customer.

What if, when the agency contract is used and customer given cash to buy an asset but due to unavoidable circumstances the customer could not utilize the funds given for a month or two and ultimately, customer expressed interest to discontinue with agency followed by instruction to the bank to take her money back? The Islamic bank is obliged to take only her money without imposing any penalty for out of pocket period of one or two months. Why? there was no asset sold, hence no profit to be earned.

Finally, both the bank and the customer must be aware of their rights, responsibilities and obligations provided under the contracts. Ideally, Individual working in Islamic banks should be protectors and educators of customers rights in every contract but if this does not happen customer must inquire for their rights, responsibilities and obligation under the contract before entering into one to prevent conflicts or injustice to any party.

M-AKIBA BOND AND SHARI'AH COMPLIANT ALTERNATIVE

INTRODUCTION.

The government of Kenya has recently demonstrated its commitment to financial products innovation and financial inclusion when it announces that it will issue the M-Akiba bond that targets ordinary Kenyans to raise funds for infrastructure development in the country. The government of Kenya shall seek to raise Ksh 5 billion or more from individuals — including those in remote areas — through the initiative. So what is M-Akiba bond? How is expected to operate? Is there a way to structure it in a manner that complies with Islamic finance principles? This article is the first attempt that aim to shed light on the subject in order to enable the government record massive buy out of the bond without excluding segments of its population who might self-excluded due to the prohibition of interest which underpin the current structure.

WHAT IS M-AKIBA BOND?.

In Short,it is retail bond issued by the Government of Kenya via the mobile phone platform. It is a product issued by the National Treasury through the Central Bank of Kenya in collaboration with Nairobi Securities Exchange (NSE), Central Depository Settlement Corporation (CDSC), Mobile Network Operators particularly Safaricom, and the Kenya Association of Stock Brokers & Investment Banks (KASIB). The money raised from the bond aimed to fund government infrastructural development projects, both new and on-going.

The M-Akiba bond is aimed at promoting a savings and investment culture by Kenyans while at the same time enhancing financial inclusion for economic development. Some unique characteristics of the bond are:

– Purpose – Government development expenditure / Budgetary support
– Mobile Traded Bond – Registration, trading, settlement using mobile money.
– Target Amount – Kshs 5 Billion
– Minimum investment amount per account – Kshs. 3,000
– Maximum Investment per account / per day – Kshs. 140,000
– Tenure of Bond - (to be communicated)
– Coupon Rate (to be communicated) after every 6 Months.
– Price traded at secondary market – at par (factoring in the accrued interest)
– Taxation – Tax-free as provided for under the Income Tax Act.

EXISTING STRUCTURE?

Kenyan who has registered with M-Pesa dial USSD code *XYZ# to register to create M-trading account by following the instruction until M-Trade account is confirmed. There after you are good to go by placing order to buy by following steps shown below:

The bond holder has an option to sell into secondary market by dialing USSD code*XYZ# and place order to sell by following steps shown below:

Who will be buying these bonds form the first buyers to get cash/liquidity? To tackle this, it is proposed to introduce a specialty fund to ensure complete liquidity in the market at all times in the secondary market by allowing a large enough number of participants to operate in the liquidity provision (Therefore ascertaining that there are enough assets to ensure liquidity). This fund will consist of Nairobi Securities Exchange trading participants –(Investment Banks, Stock Brokers and ASDs), Commercial Banks licensed by CBK and M-Akiba Partners.

Furthermore, the structure provides an avenue for M-Pesa account holder or prospective M-Akiba clients to get loans to purchase the M-Akiba bond, this facility is dubbed as “Okoa Akiba”. The loan will be competitively priced based on the market interest rates and will be conveniently presented to the customer under M-AKIBA mobile menu. Upon requesting the loan, the client will enter a borrowing agreement with the lending entity and the sum requested will be deposited to their Mobile Money Account and the M-Akiba Security of that value purchased for them. The Purchased securities will be put under Lien – meaning that the client cannot be able to dispose them before completing to pay off the loan and the interest. Then upon repayment they are able to have the M-Akiba bond transferred to them. It is envisioned to provide the necessary convenience for those who would be willing to buy the bond but don’t have the finances immediately.

The Second feature is the ability to borrow “Kopa Akiba” (Swahili for borrow) against the M-Akiba Bond (This feature will be available during the secondary trading of M-Akiba). This feature would enable the client to hold the bond in their name but the bond will be under lien as collateral to allow the client to access funds. During the period that the M-Akiba are under Lien, the interest payment would be given to the client; however, they may not be in a position to sell off the bond. Should the borrower not repay as per the agreed timelines (including a grace period), the securities under lien will be sold (foreclosed) and the lender is able to recover the loan amount. Upon completion of the loan repayment then the lien would be lifted to allow full ownership and autonomy of the security to the client. It is expected that the proceeds of M-Akiba bond will be ring fenced or earmarked for infrastructure development project-new and existing ones.

EVALUATION FROM SHARI’A PERSPECTIVE.

Apart from the purpose from which the bond proceeds are to be used which overtly meets Shari’ah principles- earmarked infrastructure development projects, the means used to raise the funds is based on conventional principles of how financial markets operate which included payment and receipt of interest under the loan contract which is not allowed in Shari’ah. The same applies to Okoa and Kopa Akiba, two added feature of the bond.

Shari’ah principles requires that a loan be given without any return or benefit to the giver/creditor. For return to be justified, the structure has to be based on trading (Sale or Lease) or investment partnership contracts (Musharaka or Mudharaba) where profit or loss is shared as per Shari’ah rules and principles.

SHARI’AH COMPLIANT ALTERNATIVES.

1.M-AKIBA BOND.

Alternative structure is to offer the bond based on Sale and Lease Back (SLB) Shari’ah principles with unilateral undertaking to sell/buy the underlying asset to the original seller. The mode operandi requires the government to identify an asset such as hydro power plant worthy more than Ksh 5billion and sell it to the public to raise required funds (Asset based Finance).

At this stage, the prospective M-Akiba clients buys undivided share of the specified assets. Second, the buyer leases his undivided share of the asset back to the government at an agreed profit rate which shall be paid at an agreed interval. The M-Akiba clients shall provide unilateral undertaking to sell back the asset to the government on maturity or where never certain market conditions prevails after one year of lease and before maturity at par plus accrued profit arising from the lease. The government shall also provide unilateral undertaking to buy the asset back from M-Akiba client in case of non-repayment of periodic profits.

M-Akiba clients has three options, hold the bond to maturity, sell the bond to specialty fund to get cash (at par plus accrued profit) at the secondary market or using Okoa Akiba option from M-Akiba menu to get finance from participating banks using the bond as collateral.

2. OKOA AKIBA.

Islamic banks such as Gulf African bank shall be in position to finance prospective M-Akiba clients subject to:
1. M-Akiba bond being structured in Shari’ah compliant manner as briefly presented above or suing other Shari’ah compliant modes.
2. Having similar to ‘M-Shwari facility’ structured in Shari’a compliant manner. Shari’ah compliant Mobile financing facility can be provided using Tawarruq structure. Where by the client interested to get cash to buy Shari’ah compliant M-akiba bond shall place an order to buy from for example GAB and accepts conditions, the bank will buy the palm oil from Bursa suq Malaysia trading agent then generate message to offer to sell the oil to customer at a profit rate, customer buys it and appoint the bank to sell oil to Bursa Suq Malaysia and the sale proceeds credited to his M-Pesa account which shall then be used to buy M-Akiba bond.

The Purchased securities will be put under Lien – meaning that the client cannot be able to dispose them before completing to pay off the facility to the bank.

3. KOPA AKIBA.

Islamic banks can provide finance using M-Akiba bond as security though Tawarruq structure. The holder of the security shall offer to buy palm oil from say GAB and accept conditions, the bank buys palm oil from trading agent at Bursa Suq Malaysia, sells the oil to customer at a profit and customer appoint the bank to sell the oil to Bursa Suq Malaysia. The sale proceeds generated credited to customer M-pesa account.

The security will be put under lien; the profit paid depending on the credit exposure, might be held by the bank or given to the customer.
Should the borrower not repay as per the agreed timelines (including a grace period), the securities under lien will be sold (foreclosed) and the financier is able to recover the debt amount.

CONCLUSION.

Apart from Sale and Lease Back structure, other Shari’ah compliant modes can be explored in terms of their strength and weakness as well as after taking into account associated operational requirements and Shari’ah non-compliance risks versus the desired objective of the bond.

Unless, M-Akiba bond is structured in a Shari’ah compliant manner, Islamic financial institutions such as GAB will find themselves excluded to participate as trading participant or market maker due to the conventional nature of the bond. Only possible venue will be to offer KOPA Akiba facility based on Tawarruq mode of finance by accepting the security at par value excluding interest portion.

This proposed structure does not represent the views of any Shari’ah supervisory board which has the mandate to approve or disapprove any products or financial transactions offered or dealt by the bank. Hence, their inputs shall ultimately be required for the Islamic bank to take part on M-Akiba bond.

Bank of England proposes four Shariah compliant liquidity facility models

After months of conducting a feasibility study and engaging with central banks across the world, the Bank of England (BOE) has finally issued a consultation paper on establishing Islamic liquidity instruments to ease mounting pressure on UK Shariah banks in meeting the liquid asset buffer requirements as outlined by Basel III regulations.

Allowing local Islamic banks access to its balance sheet has been the goal of the BOE since the UK government made its bid to become the western hub of Islamic finance – a commitment sealed by its inaugural sovereign Sukuk in 2014; however, the regulator has been presented with several significant challenges in doing so. These include identifying Shariah compliant collateral to support financing facilities and the challenge of engineering a deposit account in compliance with Shariah without compromising the economic properties of interest-paying reserve accounts.

“The bank recognizes that Islamic banks are currently unable to use the bank's existing liquidity facilities. In particular, the Sterling Monetary Framework is the mechanism by which the bank sets interest rates, and interest-based facilities are not deemed Shariah compliant,” said the BOE. Presently, only Sukuk issued by the IDB (and the UK government) are eligible as a liquid assets buffer for Islamic banks and the Prudential Regulation Authority has proposed to widen the range of permissible assets to include Islamic bonds by top-rated sovereigns and lower-rated Shariah sovereign papers (subject to haircuts) as a buffer in line with Basel III requirements.

Despite the challenges, the apex bank has nonetheless consistently reassured the industry of its commitment to close this chasm, and is now seeking feedback on four proposed potential models covering both deposit products and insurance: a Wakalah fund-based arrangement and commodity Murabahah for deposits as well as a collateralized commodity Murahabah and Shariah compliant repurchase agreement (sale and buy back) mechanism for liquidity insurance.

Placing greater priority on creating a deposit facility over liquidity insurance (which could follow subject to further analysis), the regulator however noted trade-offs in selecting a suitable mechanism.

“In order to assess different Shariah compliant facility models for the facility, the bank has established a set of key criteria. Inevitably, there are likely to be trade-offs; it is unlikely that one model will consistently be the most effective at meeting all criteria. Fundamentally, what the bank is seeking to determine through this feasibility work is whether one (or more) of these models will meet these criteria to a sufficient degree for implementation,” it elaborated in a statement.

Should the central bank be successful in rolling out an Islamic deposit product, this would significantly support the liquidity needs of over 20 institutions offering Shariah compliant financial products in the UK and lower concentration risks in its Islamic financial industry.

Accepting feedback until the 29th April, the BOE will announce its decision on a feasible model later in the year.

The consultation document can be found at:
http://www.bankofengland.co.uk/markets/Pages/sterlingoperations/shariah-compliant-facilities.aspx

Source: IFN Daily Alert.

Talent Development: The Bahrain Way

It is an acknowledged fact that Bahrain has over the years significantly contributed to the rapid growth of the global Islamic finance industry. Precedence has shown that numerous countries often look to Bahrain for direction in areas such as regulation, product development and capital markets. Playing host to the largest concentration of Islamic financial institutions in the world, the Kingdom has managed to over the years develop a competent pool of talent for the industry. NABILAH ANNUAR explores the methods and measures taken by Bahraini authorities in developing their human capital.

Evolution

Growing at an average of 10-15% year-on-year, the Bahraini Islamic finance sector is expected to maintain this momentum in 2016 with Sukuk, investment accounts and Takaful being the main driving factors. Apart from having the largest number of Islamic financial institutions worldwide, Bahrain also hosts a number of organizations committed to the development of Islamic finance, making it a content and knowledge hub for the industry. These institutions include: AAOIFI, the International Islamic Financial Market (IIFM), the General Council for Islamic Banks and Financial Institutions, the Islamic International Rating Agency and Deloitte’s Islamic Finance Knowledge Center.

Despite the sustained growth, the country is not excluded from facing human capital constraints, a predicament that is experienced in all prominent Islamic finance markets. This is reflective both of the rapid growth of Islamic finance as well as its continued evolution, as new products, structures, and services are developed. “Bahrain has adopted a proactive approach to tackling these issues, which it has been able to do thanks to an extensive infrastructure of training and standard-setting institutions. Many of these entities are engaged in providing further education and training, in order to ensure that already existing industry practitioners keep abreast of changes as well,” conveyed Dr Jarmo Kotilaine, the chief economist at Bahrain Economic Development Board, exclusively to IFN Education.

“Bahrain’s greatest strength in driving the development of talent for Islamic finance has been its nearly half-a-century-long history as a financial center, which has driven the growth of a local talent pool, as well as the infrastructure of educational and training solutions.” According to Kotilaine, currently over 60% of the employees in the Kingdom’s financial services sector are Bahraini nationals. Evidently, the country has managed to create a pool of talent for its financial services industry.

Challenges

It is an observed fact that the needs of Islamic finance have grown rapidly over the past decade from a relatively smaller base to a competitive landscape and shortages in many areas. This has been made more severe by the rapid evolution and global reach of the industry. “An important element of addressing the structural human capital challenges facing the industry has involved close collaboration between the Kingdom’s regulator, the Central Bank of Bahrain (CBB), as well as the industry’s leading training institute, the Bahrain Institute of Banking and Finance (BIBF), and other educational institutions such as the University of Bahrain. This interaction has allowed the training providers to better anticipate and respond to the needs of the industry, alongside the players in the sector, who have also been able to plan for their future needs in a more collaborative manner,” elaborated Kotilaine.

Collaborative efforts

One aspect that Bahrain’s Islamic finance industry thrives on is the frequent collaborative efforts formed between various banks, government agencies as well as educational institutions in its market. “Collaboration among relevant stakeholders has always been at the heart of the ‘Bahraini model’. This ensures awareness of the different needs and initiatives as well as ongoing coordination. Since the beginning, the development of Islamic finance has been viewed as a strategically significant project of national importance,” affirmed Kotilaine.

Among recent initiatives, the University of Bahrain now offers a Bachelor’s degree in Islamic finance. The BIBF signed a progression agreement to allow graduates of its advanced diploma in Islamic finance to continue their studies with the University of Bolton’s MBA in Islamic finance. Customarily, local banks also play an important role in training human capital, whereby collaborative efforts with education providers are made to offer training programs in Islamic finance, which operate in line with the local labor market’s requirements and needs.

Similarly, the Bahrain Institute of Banking and Finance last year signed an MoU with the International Shariah Research Academy aimed at cooperation in the development of academic and training programs mainly in finance and Islamic banking. Under the agreement, emphasis will be on boosting the educational quality of programs, the exchange of cadres, teachers and researchers, as well as research and administrative visits, workshops, lectures and conferences.

Another innovative joint effort was the partnership created between Al Salam Bank-Bahrain and BMI Bank, a subsidiary of Al Salam Bank-Bahrain, with the BIBF to support the BIBF Dealing Room, part of an initiative to enhance the quality of training in the banking and financial sector by providing technology-enabled experiential learning in a controlled environment.

The CBB has over the past years played a proactive role in helping devise a bespoke regulatory framework for different segments of the industry. It has also invested in the long-term development of the industry, by setting up the Waqf Fund, which has an endowment and a broad mandate to support growth of Islamic finance. In many instances, these Bahraini institutions play an important role in providing human capital solutions to other countries with emerging and growing Islamic finance sectors.

Always seen to be taking pre-emptive measures, the CBB has taken the lead in understanding human capital needs of the industry. One of the Central Bank’s main mechanisms in addressing this issue is the establishment of the BIBF, which is funded through an industry levy and supports the ongoing human capital needs of Bahrain-based financial institutions. The strong support from the Central Bank can also be seen through the role it plays in training and education efforts with various international and multilateral standard-setting bodies based in the Kingdom.

Looking ahead

Continuing with its standard operating procedure in building bridges between all stakeholders in the country, Bahrain also seeks to enhance its educational facilities across the Kingdom. Kotilaine told IFN Education: “At the heart of future development lies the ongoing dialogue and collaboration among the various stakeholders involved in Islamic finance. Bahrain is continuing to expand and add to the infrastructure of both training and research facilities in the countries.” Authorities plan to leverage on the numerous international research firms that are based in the Kingdom such as EY and Deloitte, in moving forward. Bahrain’s Al Baraka Banking Group has also recently announced a partnership with the World Bank to enhance research in the industry.

“Alongside existing bodies such as AAOIFI, IIFM and CIBAFI, we are confident that Bahrain will continue to help shape and support the development of the international Islamic finance sector through the expertise and experience based here,” said Kotilaine on a positive note. Additionally, industry observers have called upon Bahraini players to focus on talent acquisition in the back-end of the financial services sector as well as the preservation of a sound and friendly business infrastructure environment to maintain stability and growth in the Kingdom.

Portfolio Management in This World and The Hereafter

By Associate Prof Dr. Ahcene Lahsasna, Deputy Director, Centre of Research and Publication, INCEIF.

There is a beautiful saying formed from precious words which are very well known among Muslims and widely reported in many traditional books. The saying is: Work for your life in this world (dunia) as if you are living eternally and work for your Hereafter as if you will die tomorrow. As one can see, there are two portfolios to deal with, where both of them should be handled properly through high level of skills in management.

For the first portfolio, the person should work for his dunia through building his assets by accumulating wealth such as money and a house, with endless time in mind to acquire these material wealth. The benefit of this mindset is that the person will keep working in managing his life and affairs in a gentle and easy manner without rush, because he has been given endless time to do so. So there is no need to hurry, and what he missed today will be obtained tomorrow and so on.

The second part of the saying should motivate a person to be very productive with innovative and creative thinking because the sky is the limit. Hence, many goals can be set, including short term goals, medium term goals and long term goals. The other benefit is that a person will be working for his life in the hereafter enthusiastically as if he is going to die tomorrow. This approach makes the person closer to Allah (s.w.t), where he will be actively doing good deeds with extraordinary quality performance such as prayers, recitation of Quran, seeking forgiveness from people, forgiveness from Allah (s.w.t), repent for his sins, be more decent and nice in dealing with everyone in the society. This course of action and behavior will have a positive spillover on society.

There are two portfolios managed by the same person, one related to this world and the second is related to the Hereafter.

The assessment of this world is done by looking at the assetsand liability, where normal overall assessment is conducted to obtain the net worth value according to the following equation: total asset – total liability = net worth. When the net worth is positive the person will be financially healthy, but in cases where the net worth is negative the person has some financial problems and he is in a deficit financial position. Due to this, he can get some advice or consultancy from financial advisors on how to manage his deficit and improve his financial assets in this world.

With regards to the Hereafter portfolio, there is a problem with its assessment due to the lack of human ability in accessing the data because no one has the details about his asset status. There is no information about the good deeds (hasanat), no statistics about the bad deeds (sayyia’t). Hence, there is no stand to take against the status of the Hereafter assets.

However, there is an indication that can be referred to in order to get an idea about the status of the assets. This indication is derived from the same saying we are discussing; the person should ask himself whether he is ready to die on the second day i.e. tomorrow or not? If the answer is yes, it means his assets in the Hereafter is in good status, and it is an indication that he is not in deficit. On the contrary, if the answer is no it means his assets is in deficit. Furthermore he also has to determine how long he needs to get the yes answer in order to improve his condition. The number of days needed represent the gap required to be closed. We have to note here that the answer with yes or no is self-exercise, self-assessment, meaning the person should ask and answer himself to check his status.

The challenge faced by everyone is the struggle in the management of the two portfolios whereby the same person is behaving daily in different ways according to the course of action of each portfolio. On the one hand he is working for this world full of energy realising the principle of khilafah in this universe which includes accumulation of wealth for his benefit, and for benefit of his family, neighbours, society, and for the humanity at large. In this portfolio he is acting in a way that he will never die; hence, his agenda is full of programmes with long-term vision. On the other hand, the same person is managing another portfolio related to the life in the Hereafter, where he is working as if tomorrow is his last day to live. Hence, one action is based on long-term action with endless time, and the other action is short-term based on one day to live.

By right according to Shariah the Hereafter portfolio is more important compared to this world portfolio whereby the first should serve an objective whereby the former is regarded as means. This is based on the provision of the Quran. (But seek the abode of the Hereafter in that which Allah hath given thee and neglect not thy portion of the world, and be thou kind even as Allah hath been kind to thee, and seek not corruption in the earth; lo! Allah loveth not corrupters) (al Qasas; 77).

However, due to our nature, we are always interested to cultivate the asset related to this world at the expense of the asset related to the Hereafter. In addition to that, the devil i.e. Shaitan is always trying to disturb the sequence of the priority by making the asset of this world as the objective and making the asset of the Hereafter as means, or even something negligible. In the case whereby the mixed-up happened, the person will be in chaos heading to a direction which ends with a total loss.

In order to smoothen the calibration of the two portfolios, there are compulsory stations made by Shariah where every person is obliged to make a stop and balance up his portfolio. These include the five daily prayers, where the person starts his day before the sunrise with Hereafter asset by offering Fajar prayer, and closes his day by Isha prayer. In between his daily journey, he crosses other stations where he must stop to do calibration. These are Zuhor, Asar and Maghreb. Because Shariah knows that these station may not be sufficient for calibration, other compulsory stations have been provided on a weekly basis that is the Friday prayer and the biggest station on yearly basis that is Ramadan where the entire month is regarded as precious time for building the Hereafter assets.

In addition to these, there is a larger station set through overseas trip to the Holy Land much related to the life after / life after death/ afterlife where more focus will be placed on enhancing the quality of asset of the Hereafter and making a full Shariah audit of one’s life. There are also other voluntary stations for the person who needs more time to do the calibration and balancing, such as prayer of duha, the prayer before and after the compulsory five prayers. Voluntary fasting is another important tool which is regarded as a good example of integration between this world and the Hereafter where the person is fasting during his day to get an asset in the Hereafter. It can be fasting on Mondays and Thursdays while at the same time he is productively active and engaged in the affairs of this world.

I have presented the problem statement of the two portfolios and its challenges in the context of daily management. Hence, everyone should skillfully manage these two portfolios to ensure success in both worlds. The possible results are whether the person will fail in managing both portfolios, or succeed in this world portfolio and fail in the Hereafter portfolio, or succeed in the Hereafter portfolio and fail in this world portfolio, or try his best by struggling to manage both portfolios within his ability and best effort. From a Shariah perspective, all of the previous scenarios are losses except the last one with the mercy and blessing of Allah.

2016 IS PROMISING YEAR FOR ISLAMIC FINANCE IN EAST AFRICAN COUNTRIES.

2016 is very promising year for Islamic Finance in East Africa following current developments that have taken place early in January. In Jan 11, news was all over the world that Uganda has taken the lead to amend her Financial Institution Act 2004 to allow Islamic banking and gave it legal framework to stand and grow.

Before the jubilation mood rests, Kenya has finalized setting up of Project Management Office (PMO) for the implementation of Islamic Finance in Kenya. IFAAS (consultancy firm specialized in Islamic Finance) and Simmons and Simmons (international Law firm) has been commissioned to lead the PMO to work closely with the financial sector regulators on the development of an institutional, Policy and Regulatory Framework for the Islamic Finance Industry in Kenya.

In Tanzania, ABRAR Solutions Limited-the first consulting firm specializing in Islamic Finance started operations with the noble goal of promoting Islamic Finance in the country. The company aims is to be catalyst for the development of the IF sector by bringing together regulators, industry players and academicians in order to bring in reforms required to create level playing field and spur growth for the sector and all stakeholders. More importantly, to promote awareness, supplement capacity building initiatives and support institutions to achieve their goals of having Islamic financial products on their menu.

Tanzania having three academic institutions offering Islamic finance courses have a competitive advantage to provide workforce required to the local sector and the neighbors.

However, much needs to be done on development of required knowledge and human capital to instill required competencies for the industry in the region.

Yes in deed, 'Opportunity favors prepared mind', let us wake up and be prepared, good things are coming.

How Islamic Finance Can Spur the Growth of Small and Medium Enterprises

By Jaafar S. Abdulkadir.

Just how can Islamic finance spurthe growth of Small and Medium Enterprises (SMEs)?

SMEs have been billed as the engine of social economic growth and poverty reduction through the creation of employment opportunities and generation of income particularly in developing countries. Statistics indicate that formal SMEs contribute up to 45 percent of total employment and up to 33 percent of national income (GDP) in emerging economies and 51 per cent in high income countries.

In the face of growing demands for social services, the dwindling tax revenue sources and the bulging levels of public debt that undermines governments’ capacity to meet its social obligations, SMEs if well facilitated could help ease these burdens. Although the sector has remained significantly underfunded, banks are increasingly looking at developing products and services to cater to these businesses. Additionally, the SME’s preference for Shariah-compliant banking services has also opened up significant opportunities for banks to invest in this segment.

The Potential of Islamic Banking

That Islamic finance has tremendous potential to serve as a tool for financial inclusion through leveraging the entrepreneurial potential of micro, small and medium enterprises (MSMEs) across sectors and bringing the financially underserved into the economic mainstream is not in doubt. Furthermore, the risk-sharing characteristics of Islamic financial products can facilitate access to finance by small and medium-sized enterprises (SMEs) whilst the asset-backed nature of Sukuk makes them suitable for infrastructure financing that can help spur economic development, including creating an enabling environment for private sector investment.

However, market conditions and regulatory environments are not always supportive of the growth of SMEs and access to formal finance is one of the main obstacles they face. The International Financial Corporation in its 2012 report indicated that medium and small enterprises have a huge financing deficit of USD 2.4 trillion in the developing countries. Given that financial institutions rely heavily on the use of collaterals and
sound credit history for their financing decisions, many SMEs in the developing countries fail to access the much needed and deserved credit facilities.

In order to reach out to SMEs demanding Islamic products, there is need to better understand the market from both the demand and supply sides in order to identify any gaps or niches where Islamic Finance could assist and add value. Research has shown that the un-served and under served SMEs do not borrow from conventional banks, only owing to religious reasons. This potential is a “new to bank” funding opportunity, which is still untapped, as banks and other financial institutions lack adequate strategic focus on this segment to offer Shariah-compliant products.

The risk sharing nature of Islamic-financial products and indeed the asset-backed nature of the financial transactions fosters entrepreneurship that can contribute immensely towards social-economic development. The Islamic principles of asset-backed financial transactions helps to promote real economic activities and minimizes the incidence of speculative transactions and excessive risk taking behaviours of economic agents. The model of profit and loss sharing works towards aligning the interests of financiers and entrepreneurs and promotes healthy partnership for their mutual benefits.

The strong emphasis on the application of participatory approaches of financing like the Mudarabah and Musharakah models helps promote active involvement in economic activities and limit the conventional practice of risk transfer to the borrowing party. Mudarabah is a partnership
between an entrepreneur who acts as a fund manager (Mudarib) and a capital provider (Rab-ul-Mal) to invest the capital in a project on condition that losses are borne by the capital provider unless there are incidences of negligence and fraud by the Mudarib.

Arrangements involving the provisions of advance payment for commodities to be delivered at a future defined date well known as Salam can be applied to provide working capital for the SMEs especially in the agricultural sectors. This financing approach may innovatively be utilized to cater for the financing needs for farm inputs like fertilizers, seeds, irrigation kits, machinery among others.

Way Forward of SME Financing

There is need to continuously improve the branding of Islamic finance as a sound alternative system owing to its inclusive approach that seeks to promote social and ethical practices in our economic and financial engagements. The showcasing of success stories involving the Islamic finance
equity-based financing model with the SMEs shall help inspire the financial sectors players and governments to support the equity financing model.

Governments have to proactively develop progressive policies and create enabling environment that supports the growth of SMEs by expand their innovative sources of funding like Islamic finance. Appropriate policies and resources have to be deliberately focused on developing human capital, enforcement of contracts, tax laws, research and quality data generation and management.

Ugandan parliament agrees to introduce Islamic banking, but central Shariah advisory board needs to be in place first

As the Ugandan government seeks to do away with laws prohibiting Islamic banking transactions, the onus has fallen onto its central bank to form a central Shariah advisory board in order for Shariah banking to be included into the East African Republic’s financial system.

In a landmark development, the Ugandan parliament has given its stamp of approval to the Financial Institutions (Amendment) Bill 2015 which will see key features of the country’s banking system dissolved and drastically altered in the name of greater financial inclusion for the landlocked nation of 39 million. These changes include lifting a ban on Islamic banking products and allowing, for the first time ever, for financial institutions to engage in insurance activities. Under the recommendations of the Committee on Finance, Planning and Economic Development, banks would also be granted licenses to offer Takaful solutions.

“The committee recommends that the proposal to introduce Islamic banking and its products be adopted subject to the establishment of a central Shariah advisory board in the central bank to regulate banks providing Islamic banking products,” it said in its report on the amendment bill. The committee also confirmed that it will introduce this particular amendment at the committee stage.

The government’s decision is in line with its ambitious 30-year plan – branded as Vision 2040 – to hoist itself out of the low-income bracket to become a competitive upper middle-income country. In a bid to boost its economic fundamentals and broaden its financial spectrum, Uganda is positioning itself to tap the burgeoning US$1.8 trillion Islamic finance industry as it aptly recognizes that “the provision of Islamic banking and financial products by banks is growing rapidly in many countries”. It is noted that half of the 22 licensed conventional and commercial banks in Uganda have voiced interest in providing Shariah banking products. Should the proposed regulation be implemented, this could usher in new opportunities for domestic banks and significantly give the much-needed boost for Uganda’s Islamic finance industry which has so far lagged behind its regional peers (such as South Africa, Senegal, Kenya and Nigeria) which have already dipped their toes into Shariah banking, Sukuk and Islamic insurance.

Source: IFN Alert.