Issue #1 summary

Singular solutions in a pluralist framework
Takaful, or Islamic insurance, is a relatively new industry. Although the origin of takaful can be traced back to Islamic practices 14 centuries ago, the development of takaful in modern times was initially undertaken in Sudan in 1979 and Malaysia in 1984. The culmination of this initial development was encapsulated within the 1985 Fiqh Academy ruling declaring that conventional commercial insurance was haram (“forbidden”) and insurance based on the application of cooperative principles, sharia compliance and charitable donations, was halal (“acceptable”).
    During the past 20 years we have seen takaful operations opening in Islamic countries as well as those having large Muslim communities. In the Far East, Malaysia has been at the forefront of takaful development. Bank Negara took the lead with the introduction of separate takaful regulations, allowing the takaful business to flourish. Singapore, Indonesia and Brunei have also developed takaful operations, and Bangladesh and Sri Lanka are also taking a more active role.
    In the Middle East, takaful has developed in Saudi Arabia, Bahrain, Iran, Qatar and Iran, with new operations recently opening in Egypt, UAE and Kuwait.
Steps have been taken in Europe and the USA but, as yet, development of takaful in the West has not met with any major degree of success. No doubt a tremendous opportunity exists to develop takaful in those western countries that have large Muslim communities, but significant investment is required to compete with the conventional insurance industry, and regulatory changes would be necessary, as seen in the Malaysian market, to allow takaful to compete on equal terms.


Consolidation is the solution
More than 200 Islamic financial institutions holding an estimated US$200 billion of assets operate in more than 50 countries with a market-growth of 15%. Although these institutions are collectively referred to as “Islamic banks”, this is a misnomer, because commercial, investment and development banks are all included.
    Some view the growing number of Islamic financial institutions as a positive development in market penetration, especially in the GCC. This reflects the success of the Islamic banking practice in the market-place. Globalization, however, will make it difficult for the smaller institutions to survive. International mergers between Citibank and Travellers Group, Bank of America and Nations, Deutsche Bank and Bankers Trust, UBS and SBC, Chase and JP Morgan set the scene for “big is beautiful”.
     Regional economic policy is moving towards relying on private capital both regionally and internationally to fund future development. To achieve this, countries are encouraging the development of their local capital markets and capital market instruments. To support this further they have lifted—or they are about to lift—foreign capital restrictions and are reviewing their taxation structures.
    M&As have already been seen in the Gulf. In Bahrain, Ahli United Bank acquired Bahrain Commercial Bank and is attempting to find a foothold in Kuwait through the Bank of Kuwait and the Middle East. In Saudi Arabia, the Saudi American Bank merger with United Saudi Bank makes it the second largest in the kingdom. But the M&A route is not always straightforward. The high-profile M&A considered by The International Investor and nine Al Baraka Group banks but later abandoned is evidence of that.


The way ahead for standardization
Partly because of inadequate documentation, there has often been inappropriate usage of Islamic financing facilities. Murabahah, in particular, has arguably been overused in the past and, in some cases, clearly abused. It is, of course, appropriate for the sale of a commodity for a deferred price, but this implies a trading transaction that takes some time to effect.
    The crucial condition is that the commodity must come into the possession of the financier, who assumes ownership responsibilities until the good is resold. Hence, the risks associated with ownership are borne by the financier, justifying the mark-up. If the buying and reselling are instantaneous, then there is no real risk for the financier and the transaction becomes a legal fiction, which is certainly in conflict with the spirit of Shariah law.
    The use of interest as a benchmark for the mark-up with murabahah is widely practised as an expedient so that users can make ready comparisons of the cost of Islamic and conventional financing. But this is undesirable if Islamic financing is to have any real impact on commerce, as it merely implies the mark-up is being driven by the factors determining interest.
    Central banks and ministries of finance largely determine the latter. Their stance on interest reflects macroeconomic policy priorities, such as the need to support an exchange rate, or contain inflation. Commendable as these objectives may be, they are unrelated to the financing needs of those involved in murabahah, as those being financed will suffer—although no fault of their own—when monetary policy is tight, and banks will enjoy windfall gains. This does not result in the economic justice that Islamic finance is supposed to promote.
    Murabahah is unsuitable for longer term financing, as it is designed for tradable goods, not for items of equipment to be used by a company over a period of years, or land or property. Equipment would be better financed through leasing or hire-purchase arrangements, as arguably would mortgages on property.