Issue #11 summary

Harnessing the full potential
Being a purely Islamic alternative to conventional insurance is insufficient to drive takaful forward. Omar Clark Fisher analyses the performance characteristics of takaful operators in the GCC
Although definitive data are unavailable, research indicates there are 72 dedicated takaful operators and takaful windows with conventional insurers worldwide. Demand for takaful cover is growing in many countries at a 30%-plus annual rate. Recognised multinational insurers, such as HSBC, AIG, Axa and Prudential, have embraced takaful and are entering the global primary industry, and giant conventional reinsurers—Hanover Re, Swiss RE, Millisea/Tokia Nokkia—are forming takaful risk pools in multi-markets.
While the takaful segment certainly is building momentum and exhibiting impressive growth globally, there are several fundamental hurdles standing in the way of realising full potential in the near term. Among the most important hurdles seem to be:
l only three OIC countries have enacted a specialised takaful regulatory framework; hence, a majority of takaful operators are being supervised and monitored in a manner wholly consonant with their conventional counterparts;
l approximately 6,000 insurance staff across the GCC region (compared with 84,000 agents in Malaysia) represents a significant shortfall in skilled workers required to propel the insurance industry forward;
l an absence of benchmarks for judging excellence in takaful operations and prudential rules for Islamic securities and investments;
l issues concerning governance have yet to be raised in a serious fashion as to the appropriate role for policyholders in operations of takaful business; no takaful operator has yet earned an “A” financial (or claims paying) rating; and  re-takaful capacity is constrained, representing some 14% of primary takaful gross contribution written annually.

Islamic versus western finance
Professor Rodney Wilson examines how much of an alternative Shariah-compliant trade finance is to conventional instruments
What are the implications of Shariah compliance for cross border factoring, forfaiting and countertrade? Islamic trade finance involving murabahah mark-up structures have been the most popular Shariah-compliant contract for more than three decades, but under what circumstances should clients be looking at alternative contracts based on arbun, non-refundable deposits, salam advances, ijara leasing contracts, istisna project finance or partnership arrangements involving musharakah?
Conventional letters of credit take many forms: irrevocable and revocable, confirmed and unconfirmed, revolving and non-revolving. There is no Shariah objection to a letter of credit being issued by a bank to guarantee a payment by an importer to an exporter; the only issue being to ensure the contract is clear to all the parties, and there is no element of gharar, contractual uncertainty. This is more likely to arise with revocable letters of credit, if the conditions regarding cancellation are insufficiently clear.
If, however, the expiry date for the letter of credit is stated, the documents triggering a payment are specified and the maximum amount of the payment is written into the letter, then there should be no objection. If the letter of credit is confirmed by the exporter’s bank there is even greater certainty, but this should not necessarily be a pre-condition for Shariah acceptability.
Most letters of credit are non-revolving, which is not a problem from a Shariah perspective, as it is recognised that one-off transactions between parties unfamiliar with each other are more risky than recurrent trade. Non-revolving letters of credit are an effective means of mitigating payments risks.

Globalisation of Islamic funds
Parallel with the GCC’s growth in private equity is a desire to invest the funds in Islamic enterprises. With investment capacity in the region limited, fund managers have eyed other Islamic countries. But different Shariah interpretations have led to fragmentation, writes Dr Malik Muhammad Mahmud Al-Awan
Surges in oil prices and production have created record liquidity in the oil-producing countries, particularly in the GCC region. According to Standard & Poor’s estimates, the investable Arab capital now exceeds $2.3 trillion. Boston Consulting Group has also conducted a study of the accumulated wealth of the Middle Eastern investment entities and individual ruling families. Its estimate is that these entities are sitting on a combined asset pool of $10.2 trillion.
Most of this wealth remains under the management of private banking departments of major western banks such as UBS, Citigroup, and HSBC. Even though several mega projects are being planned in the GCC countries, there simply are not enough viable projects for private investment. Moderately industrialised muslim countries such as Malaysia and Egypt offer the best potential for absorbing these surplus funds. The historic opportunity exists for Islamic finance to tap this phenomenal liquidity and channel it into profitable infrastructure and viable economic projects.
The Islamic finance industry has gone through a major transformation over the past 25 years, with the adoption of various Shariah standards by AAOIFI, IFSB, and multiple fiqh academies operating under the auspices if OIC, IDB, and other institutions. Most of this progress has been due to industry demand and reflects a growing consensus among the market participants.
This consensus has also been made possible by the regulatory pressure to stay within the confines of an international monetary system that promotes compliance with Basel I and Basel II guidelines. Thus, the twin objectives of Shariah compliance and adherence to Basel guidelines have moved together to keep Islamic finance as part of the conventional mainstream.

Taking a lesson from Grameen
The awarding of a Nobel Peace Prize to an economist for his work on micro-finance raised a few eyebrows. Rodney Shakespeare writes that this should be viewed as inspirational for Islamic finance
It is strange that Grameen micro-finance, which goes to the heart of proper economics (after all, successful micro-finance makes more people productive and gives the poor more genuine consuming power) was ignored by the Nobel Economics Committee and instead was awarded a Nobel Peace Prize.
Some might argue the Nobel Prize for Economics (actually the Bank of Sweden Prize for Economic Science in memory of Alfred Nobel) is not a proper Nobel Prize at all. Does the award of a Peace Prize to Yunus and Grameen indicate that there is an internal fight between the two Nobel committees, and if there is, what is the significance of the fight?
Firstly, a sound economics is most certainly essential if there is to be lasting peace, and it is time that those who really want peace stood up and demanded a good economics. If the economics is got right, there could be hope for a human race now rushing towards not only environmental disaster but also a collapse of its debt-ridden, usury-riddled global economy. So if there is an internal fight about a good economics, something very sensible is going on and we are getting the first signs of new thinking.
Therefore, hats should be taken off not only to Yunus and Grameen but also, in particular, to the Nobel Peace Committee, which, with great judgment, has gone straight to the heart of the matter and awarded a Prize for what is essentially good economics.
Secondly—and this is where the judgment becomes brilliant—the Peace Committee gave its award because there is not a hope in a thousand years that the Economics Committee will ever award a Prize for a good and proper economics. Indeed, it is certain that it will go on awarding prizes to anybody who, in some way, upholds the existing failing system with its rich-poor divisions, narrow ownership of capital and, in particular, its upholding of riba.

Capitalise on a promising future
Developments are showing a promising future for takaful in western Europe, writes Bassel Hanbali
Regional economic growth and an increasing understanding of takaful have been large contributors to its expansion. In Europe, strategic alliances bet-ween internationally recognised financial institutions to manufacture and distribute takaful products are a sign of the potential growth.
Conferences exemplify the growing importance of Islamic financial services, including takaful, in the West. Switzerland, the heart of Europe’s private banking sector, hosted the International Islamic Financial Forum to discuss the future of Islamic financial services. Such conferences, by way of developing international contacts, help create a bridge between East and West.
In a milestone event for Islamic banking, which widens the scope for takaful and other Islamic products in Europe, the Swiss Federal Banking Commission awarded Faisal Finance Switzerland a full banking license, making it the first private Islamic bank in Switzerland.
In terms of total assets worldwide, the Islamic finance sector is continually growing at an estimated annual rate of 15%.
At an Asian takaful conference, Sohail Jaffar, a partner at the FWU group, estimated US$1.7 billion is spent on takaful products. According to Mr Jaffar, the GCC states account for 63%, Malaysia 27%, Asia/Pacific 9%, Europe and USA 1%.
The forecast for sustained growth is good. By 2015, Mr Jaffar predicts a US$7.4 billion market in which Europe and the US will account for 31%, the GCC states 27% and Asia/Pacific 42%.

Creating a secondary market
Initiatives are under way to develop secondary Islamic capital markets. But the road ahead has a number of obstacles that will need to be cleared before progress is made. Michael McMillen reports
Viable secondary markets involve a balance between two sets of issuers: the government and the private sector, as well as a mixture of bond and securitisation instruments. Market involvement by governments and government-sponsored entities (GSEs) allows satisfaction of financing needs and the effectuation of economic policy, including influencing private sector behaviour. Their market influence is pervasive, given the many roles played by these institutions: regulators, enablers, issuers and purchasers of securitised instruments and related securities. Their participation helps to develop the relevant legal and regulatory framework, to foster, oversee and guide the development of standards and standardised documentation, and to generate market volume and depth.
Private sector securitisation allows the opportunity for the originator of the transferred assets to manage its balance sheet, capital structure and risk exposure. The asset originator can currently transfer assets in exchange for immediate compensation that can be used to generate more assets and obtain further diversification as well as continuously renewed purchasing capability at the lead end of technology initiatives. Asset generators achieve access to a broader and deeper financing base and innovative and flexible financing structures.
Private sector securitisation affords asset originators regulatory and conduit funding arbitrage opportunities. It also enhances market depth and breadth. Investors, issuers and the general economic model reap the benefits of broad diversifications of assets and risks and greater liquidity.

Riba and a theory of interest
What appears to be riba is not always the case when you look beyond the surface. ALM Abdul Gafoor examines bank interests and isolates riba from other factors with the Shariah
The prohibition of riba is clear from well-known statements in the original sources. However, the Koran did not define it—the same way it had not defined gambling, theft or adultery. What was meant was assumed understood. Any additional amounts demanded and/or received by the lender is riba and is prohibited in Islam. For the purpose of this article we will accept this definition and proceed. Does borrowing involve any other costs besides riba? If so, who is to pay these costs, and is it riba? We propose to answer both the questions by analogy, using a scene that is played out all over the world, every day—one equally true today as in the time of the Prophet (pbuh).
Suppose a man (or woman) asked a friend of his (or hers) to lend him (her) some money. The friend agreed. But the friend (now the lender) lived in a distant place. So our man (now the borrower) has to travel (say, by train) to the lender’s place. It is necessary to pay the train fare and it is the traveller who must pay it. The traveller, in this case, is the borrower, and it is neither customary nor fair to ask the lender to lend money as well as to pay for the train; nor would one ask him to bring the money to the borrower. In fact, the borrower has to travel again to return the loan.
It is obvious that the borrower had to spend some money to obtain the loan, but that was not riba by any stretch of imagination, because the lender did not ask for or receive any amount besides his principal. The borrower did spend some extra money to obtain the loan, but that was paid to the train operator, not to the lender. It is clear, then, that borrowers sometimes do incur expenses in obtaining loans and they are not necessarily riba. On the other hand, if the borrower and the lender lived in the same city or village and met each other in the course of their daily activities, such as in the market, the mosque, the work-place, the bath-house, the eating house, etc., the question of travel and extra expense would not arise. Similarly, if they lived close by and the borrower could reach the lender by foot or by using his own transport, such as a horse, camel, donkey, bicycle, or car, the travel cost would be nil or negligible and hence goes unmentioned. This is a person-to-person transaction in a small geographical area. This occurs everyday in numerous locations all over the world, and will continue to take place for all time to come.