Newsletter english version (2nd edition)
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This newsletter issue provides updates on Islamic finance developments around the world. It includes news on Islamic finance regulations and products in various countries and regions, such as the launch of an Islamic life insurance product in France, plans for Islamic student loans in the UK, and the establishment of a participatory bank in Luxembourg. It also reports on global Islamic finance conferences and the creation of indices to measure Islamic finance development.
![Mauritius, Africa
and Islamic Finance
By Muniruddeen Lallmahamood
31
Islamic Finance is one of the most exciting
areas of the global financial sector at the
dawn of the 21st century, and today, be-side
the Gulf Cooperation Council (GCC)
and Malaysia, other financial centers like
London, Luxembourg and Hong Kong are
positioning themselves to play a vital part
in the industry’s development in the new
century.
According to Ernst and Young’s latest
World Islamic Banking Competitive-ness
Report 2013-2014, Global Islamic
Banking assets with commercial banks
reached US$1.54t in 2012 and are set to
cross US$1.7t in 2013 (representing an an-nual
growth of 17.6% over last four years).
Furthermore, six RGMs (Rapid-Growth
Markets), QISMUT (Qatar, Indonesia,
Saudi Arabia, Malaysia, UAE and Turkey),
together, made up 78% of the internatio-nal
Islamic Banking assets in 2012.
The question is: Would the Islamic finan-cial
system expand beyond the current
GCC and Malaysia to other continents,
and in particular to the African countries?
To many, Islamic Banking has a big untap-ped
niche in Africa.
Islamic Finance in Africa is probably the
next logical or strategic decision for any
financial institution and asset manage-ment
companies to extend their products
and services, owing to the fact that Afri-ca
has the highest percentage of Muslims
(52%) in the world. According to reports
and surveys, the growth of assets of Is-lamic
banks today in the world is partly
attributed to fulfilling clients’ needs both
financially and spiritually. The fact that
Muslims in Northern African countries
comprise of 99% of the total population,
the market segment of Islamic Banking in-dustry
would therefore first attract those
of Muslim faith. This former hypothesis
was proven by a recent survey.
Africa has its history of Islamic Finance.
The notion of interest (Riba) charged, a
major principle on which an Islamic fi-nance
system is not based upon, was cri-ticized
by Islamic scholars when Barclays
Bank opened its Cairo branch to process
the financial transactions relating to the
construction of the Suez Canal in 1890.
The former bank was understood to be
the first commercial bank established in
the Muslim world according to the Islamic
Development Bank’s report. Egypt or Mit
Ghamr Savings Bank was also once the
centre for the first modern financial ins-titution
offering Sharia compliant deposit
and financing facilities.
An assessment of the African opportuni-ties
for potential market are characterized
by faster and higher economic growth
than advanced economies. Countries that
are currently doing well include Botswana,
Nigeria, Kenya, Mauritius and South Afri-ca.
South Africa has joined the “BRICS”
countries and is the African continent’s
only G20 member. Africa has a huge
potential labor capacity; the young and
growing population is one of the conti-nent’s
biggest competitive advantages.
World Bank statistics reveal that US$93
billion a year is needed for only Sub-Saha-ran
Africa’s investment in infrastructure
(new assets and maintenance of existing
ones) of which around only 48% is being
mobilised. A gap of US$48 billion is to be
funded.
The Islamic Development Bank has been
a key provider of Islamic project finance
in Africa. The Special Programme for the
Development of Africa (SPDA), formal-ly
ended in 2012, had an average level of
funding of US$12 billion for the 5-years
period (2008-2012), which again shows
the gap and opportunities available for in-vestment.
On the retail side, Islamic Finance acts as
a tool for development on the basis that
there are consumers whose demand for
Sharia compliant products were not being
met. Out of the 600+ Islamic financial ins-titutions
(IFIs) in the world, there are only
about 40-50 operating in Africa.
Having said that, the Islamic Banking in-dustry
in Africa remains embryonic and
although the recent Arab spring where
Northern African countries made pro-mises
to develop its Islamic financial ser-vices
industry, they face major hurdles.
Overall, Africa has an underdeveloped
state of financial markets. Most of its po-pulation
is largely underserved and only
three African banks rank in the Top 200
banks according to the Banker. [M1] Spe-cific
challenges pertaining to Islamic Fi-nance
would include dearth of knowledge,
skills and technical capacity as well as
absence of a robust regulatory and legal
framework. The three pillars of growth
in Africa would be to focus on the 52%
Muslim population, Non-Muslim popu-lation
and the growth and development
agenda of Africa.
Who would lead or become the Islamic fi-nancial
hub in Africa remains unknown.
Mauritius’s regulatory framework has
been fully amended to accommodate Is-lamic
Finance industry development, but](https://image.slidesharecdn.com/newsletterenglish-141124160606-conversion-gate01/85/Newsletter-english-version-2nd-edition-31-320.jpg)
![32
as of today, the facilities under the Islamic
Finance industry are still underutilized.
In South Africa, the Income Tax Act 1968
has already been amended to cater for Isla-mic
financial services. Both Mauritius and
South Africa could issue the first African
sovereign Sukuk and would be considered
as the leading players offering Islamic pro-ducts
and services in the next decade.
Mauritius would be an attractive plat-form
for the issue of Sukuk: introduction
of innovative vehicles, structuring and
financing products; network of Double
Taxation Agreements (DTAs); cumulating
memberships in African preferential trade
networks (such as COMESA and SADC);
growing Investment Promotion Protec-tion
Agreements (IPPAs); International
Recognition & OECD White Listed Ju-risdiction;
and several regulatory amend-ments
to cater for Islamic Financial ser-vices
[namely, amendments made to the
Banking Act 2004, publication of Guide-lines
for Institutions Conducting Islamic
Banking Business and issue of Statement
of Standard Practice SP5/10 by the Mau-ritius
Revenue Authority on VAT (Value
Added Tax) on Murabahah transactions]
are some of the elements that fosters the
island’s attractiveness. To date, a number
of Shari’ah-compliant funds have been do-miciled
in Mauritius due to the attractive
tax regime, appropriate legal framework
and the country’s strategic location and
time zone.
Islamic Finance should, nevertheless, not
be misconceived as being limited to only
high-net worth individuals, business per-sonnel
or the middle class. Its benefits
could potentially be extended to the lower
class through Islamic Microfinance, a
missing component of Islamic Finance in
many countries. Islamic Finance, overall,
has high scope for poverty reduction and
ultimate socio-economic prosperity and a
bright and promising future in Africa. Munirudeen LalMahmood](https://image.slidesharecdn.com/newsletterenglish-141124160606-conversion-gate01/85/Newsletter-english-version-2nd-edition-32-320.jpg)
Newsletter english version (2nd edition)
- 1. PRINCIPLES & PRACTICES OF ISLAMIC FINANCE 5 exclusive interviews of professionals working in the Islamic Finance Industry Worldwide Islamic Finance News Executive Master’s News 2 special reports on «Waqf» and «Islamic Life-Insurance» Various articles on Islamic Finance NEWSLETTER ISSUE N°2 NOVEMBER 2014
- 2. ISLAMIC FINANCE NEWS ·············································· p.3 EXECUTIVE MASTER’S NEWS ········································· p.7 WAQF ········································································· p.13 ISLAMIC LIFE-INSURANCE ··········································· p. 22 ARTICLES AND INTERVIEWS ON ISLAMIC FINANCE ······ p. 26 2 SUM-MARY ISSUE N°2 NOVEMBER 2014 EDITORIAL by Arnaud Raynouard - Law Professor (Vice-President of University Paris-Dauphine) Ethical and solidarity-based finance seems promised to a good future in France. Encouraging the idea of a control, even a limitation, of speculation and risk, it meets the approval of the public opinion and is put forward in the political speeches. The economic crisis will have imposed on the actors of the finance to rethink the economy, bringing to the foreground alternative and innovative solutions which rest on principles such as responsibility and solidarity. The French regulatory and legal framework is favorable to such a development as advances regarding solidarity-based financing and crowdfunding prove. Therefore, the evolution of the legal framework of crowdfunding was the object of a public consultation on the basis of a text presented by Fleur Pellerin, when she was vice-minister in SME, innovation and digital economy. Islamic finance, which aims to be complementar to the conventional finance is not outdone. It is making its path in France as products and offers which comply with the principles of Islamic financing are more and more numerous. It has to be noted that these principles are not specifically «Islamic» but join an ethics known by the French tradition, even though it is not practised. The sharing of the risks and the profits, the prohibition of interest, the will to create a solidarity-based and responsible economy are not the monopoly of the Islamic finance! These ideas allow the concrete development of concepts of sustainable development within finance. This new edition of the Newsletter of the students of the University Paris-Dau-phine will be the opportunity to make an inventory of the of the advances(o-verhangs) of this alternative finance in France and abroad. Two parts were dedicated to the «waqf» and to the « Islamic life insurance » to familiarize the readers with solutions of Islamic financing.
- 3. 3 ISLAMIC FINANCE NEWS EUROPE France : Vitis Life has launched a high-end life insurance contract (Amane Exclusive Life) that provides French citizens with a Sha-ria- Compliant multi-support investment instrument. The said contract takes the form of a « Wakala » (Agency contract) in which the Insurer (Wakil) is mandated by the underwriters to invest their contributions (premiums) in Sharia-compliant investment accounts. The contract gives policyholders several investment vehicle options and was certified by the CIFIE (The European Independant Com-mitee of Islamic Finance) on October 2013. This Sharia Compliant life insurance is expected to have a significant contribution in the medium to long term on the growth of Islamic Finance in France. United Kingdom The 9th edition of the World Islamic Economy Forum (WIEF) was held in October 2013 in London. For the first time since its establishment, the event took place in a non muslim country with an unprecedented record of participants that reached 27 000. This event was the perfect opportunity for the British Prime minis-ter David Cameron to re-emphasize his commitment to the vision of making London one of the top global Islamic Financial cen-ters. To achieve this objective, the British government issued debt in the form of Sukuk with a value of £200 million. In addition, a Global Islamic Financial Market Index will list and follow the companies with Sharia-Compliant activities and financial criteria. Luxemburg The first Retail Islamic bank in the Euro-zone is very close to settling in Luxemburg. The equity comes from three sharehol-ders among which a Saudi Islamic bank and a prominent member of Abu-Dhabi Royal family. The establishement will go through three stages : the authorization of the French Financial Sector Supervisory Comittee (Comité Consultatif du secteur Financier) is expected by the end of 2014. In year 1, Eurisbank will pur-sue a classical logic of Luxembourg private banking and attrac-tion of High Net Worth Individuals (HNWI) by leveraging the shareholders’ networks. In year 2, the bank should start a corpo-rate banking activity before making the leap in the retail banking world. In year 3, the bank will focus on the French market and on attracting a maximum number of customers.
- 4. 4 Islamic student loans are coming soon in England Academic fees being very important in the UK, the British go-vernment has put in place a student loan system in order to help the students pay for these costs. Until 2012, these loans were set up without interest. But since 2012, the system has changed and a rate of 3% is required for students. This new system excludes Muslim students from the new loan system managed by the Briti-sh government since the introduction of interest rates is contrary to Islamic law that prohibits usury. Following this, a study was conducted by the Government to confirm whether or not the change of system affected access of young Muslims at the university. The study confirmed that 93% of the 20,000 players who say they have consulted industry and seen a decline in enrolment due to the change of the system, as well as a «clear demand» for sharia-compliant alternatives. From this observation, the government decided to remedy this by creating a system of alternative sharia-compliant student loan. The aim is to boost enrolment of Muslim students at the university. A new fund is in creation with the collaboration of many experts in Islamic finance, this fund will attract grants or interest-free loans used to finance Muslim students’ loans. No timetable has been set up regarding its implementation. WEST AFRICA The monetary policy committee of the BECEAO, that was held on the 5th of March 2014 in the headquarters of the Dakar ins-titution, approved the eligibility, at the refinancing counters of BECEAO, of government debt (Sukuk). This is a regulatory framework set out by the Central Bank to exa-mine the admissibility of Sukuk and the possibility of their inte-gration in the portfolio at a time when governments are getting more eager to this mode of financing. According to the Central Bank : « A convention was signed with the Islamic Development Bank to allow the increase of Sharia Compliant financing instruments in the region ». Thus, Senegal will be able to realize the first expected Sukuk issuance with no obstacle, given the current government works seriously on the project before 2017, the year of the next presidential elections. The first Sukuk issuance project in Senegal was initiated by the « Wade » government and was aborted after the 2012 presidential elections. SOUTH AFRICA The South African minister of Finance announced the issuance of Government Sukuk in 2014. According to the Global Islamic Finance report, the use of Islamic bonds has reached a value of $144 billion in 2012, which shows how fast Sukuk are spreading. The exact dates of the issuance are still unknown because such an announcement would have a direct impact and distortions on credit costs and the volatility in financial markets. Kenya The British Bank « Standard Chartered » opened its subsidiary dedicated to Islamic Finance « Saadiq ». Kenya, where the muslim population makes up 15% of the population (or 40 million inha-bitants), has just adopted a new specific legal framework for Is-lamic Finance which represents 2% of the country’s total banking activity. The British bank is already active in Kenya with a network of 28 branches and intends to seize the opportunity to offer Isla-mic banking services. The bank’s objective is to expand its range of products and services across the entire African continent after testing them in Kenya as the Retail banking manager Mr. Wassim Saifi pointed out « Our experience in Kenya and an eventual suc-cess in this market will surely determine our future strategy for Islamic Finance in the rest of Africa ». Senegal For the very first time in Dakar, a certificate delivered by the in-ternational university of Rabat, Optima, Sherbrooke academy and the Dakar campus, was launched. This certificate targets banking and insurance professionals, chief financial officers, regulators and lawyers and plans to give them a course of 2 months on the principles of Islamic Finance along with the Sharia precepts on which the Islamic contracts and products are based. AFRICA Morocco : The legislation project for credit institutions which devotes a significant part to Islamic banks, called « participatory banks » was adopted in January 2014. This project specifies the status of « participatory banks », the products, supervisory bodies and sets out a guarantee fund for customer protection. The high council of Oulemas will be responsible for validating the compliance of participatory products to the Sharia which has been qualified in the legislation as « Ara ». Thanks to this amendment to the country’s banking act, the number of participatory banks should start growing considerably starting the second semester of 2014. A vital energy project for the Moroccan state funded by an Islamic way : The expertise of the international law firm Clifford Chance has served to the financing of the energy project near the port of Safi in Morocco. An international team of lawyers from Clifford Chance has advised GDF Suez, Nareva and Mitsui sponsors on a funding of 18 years of an independent power project with a capacity of 1,386 MW (gross) effect, requiring a funding of $ 2.6 billion near the port of Safi. Funding was partially provided by a structure including an Islamic part provided by the Islamic Development Bank (IDB). An innovative structure that combines an «arrangement of istisna with wakala arrangement” has been developed and implemented. The Islamic part represents the first phase of a cross-border Islamic financing in Morocco, and the first international Islamic finance project structured in this way. Tunisia : Zitouna Bank was awarded the prize of Good Administration at the World Islamic Economy summit last November in Dubai. The award highlights the bank’s efforts and initiatives in enhancing the economic environment and promoting Islamic Finance.
- 5. ASIE India : In January 2014, the prime minister of the Republic of India, Manmohan Singh, inaugurated the « National Waqf Development Corporation ». The purpose of this initiative is to improve the efficency in « awqaf » management by enhacing transparency. Henceforth, there is an explicit recognition by the Indian Government of its will to support the development of « Awqaf ». This step could be the pre-requisite of the development of the Islamic finance sector in India where Sharia Compliant banking activities are still not allowed. Malaysia Creation of a Futures contract for refined, bleached and deodorized palm oil. The refinement margins, that are directly linked to storage and warehousing costs as well as to factors relating to raw mate-rials and sales prices, have become highly volatile. Malaysia is looking to expand its range of financial products to cover even the international hedging activities of ex-porters and importers of refined palm oil. The International Islamic Liquidity Ma-nagement (IILM), an institution head-quartered in Malaysia, issued the equiva-lent of $400 million short-term Sukuk in February 2014. This issuance was rated A-1 by Standard & Poor’s and was not the only short-term issuance in 2014, a simi-lar issuance of 3-month paper with a value $860 million was made a month earlier and whose purpose was to offset the shor-tage of financial instruments with high liquidity that Islamic banks can purchase for their short-term management of finan-cing needs. Bahreïn Kuwait Finance House received the award « Institution Exellence » on the 20th anniversary of the World Islamic Banking conference held in Bahrain last December 2013. Kuwait Finance House was selected for the excellent international advisory performance and qua-lity exhibited in important mergers and acquisitions deals and the efficiency of leadership in conducting strategic management activities. United States The race to Islamic financing and unused funds has become apparent in the United States and some investment bankers have started capitalizing on the opportunity as we can see with the recent securitization deal of Continental rail: a transportation company from the East Coast. The trend of increasing Sharia compliant deals in non-muslim countries is not specific to the U.S and attempts at developing the Islamic finance industry have been made in various other states such as the U.K and South Africa. Continental Rail, an American business that runs freight trains along the East Coast has recently been subject to a thorough exami-nation by the famous law scholar Yusuf De Lorenzo. The idea is to package the leases of the acquired rail cars into a security by Ame-rican investment bankers from Taylor Delongh looking to attract new sources of funding from the Islamic financial system. «It’s a new territory for all of us,» said John H. Marino Jr., chief executive of Continental Rail. «There is a gap between all the money coming in to Islamic banks and the deployment of that money into real economic assets,» said Sayd Farook, the global head of Islamic finance at Thomson Reuters. U.S. Banks will most probably be adopting a “Wait and See” strategy before attempting to reproduce Goldman & Sachs Sukuk issue The three year period it took Goldman & Sachs to sell its debut Sukuk didn’t help the perceptions around Islamic Finance in the U.S where the industry is still at best at the infancy stage and surrounded by misconceptions and lack of awareness. George Thomas Conboy estimates that there are great chances Goldman & Sachs will be the sole player in the American Islamic Finance market in the near term. A study conducted by the Washington based Pew Research Center and published in July showed that Islam is the most negatively per-ceived religion in the U.S. followed by Atheism. Unlike Hong Kong or the U.K, the U.S hasn’t made any regulatory changes to enhance the framework and address specific legal and tax issues such as the stamp duties that may be incurred when buying and selling the un-derlined assets (Profits and capital gains incur taxes while interest is tax deductible). 5 Middle-East Dubai : In 2020, Dubai will host the World Exhibition. In addition to infrastructure developments, the exhibition should have a signi-ficant positive effect on Dubai’s financial market. The government should fund exposure through a mix of Sukuk, bank loans and money raised from the sale of assets and profits gene-rated by companies. Borrowing needs will be expected to mobilize the growth of the banking sector and generate important commis-sions on transactions conducted with Investment banks.
- 6. The World Bank is working on what could be a $500 million Sukuk issue for immunisation purposes Michael Bennett, head of derivatives and structured finance at the World Bank’s treasury department declared that the world bank will be assuming the mantle of treasurer and helping the International Finance Facility for Immunization (IFFI) raise up to $ 500 million for one of its programs that had been previously funded through instruments such as Kangaroo Bonds in Australia but never with Sukuk. This initiative is not in any way an ad hoc operation as the World Bank has been considering increasing its use of Sukuk and using them in a variety of ways that would be fully compatible with the foundations of Islamic Finance such as Green Sukuk for renewable energy financing. It is expected that the multilateral institution will be coming up with a partial guarantee instrument for Sukuk to strengthen investor’s confidence towards countries that have been struggling with attracting financing. The only Sukuk Sovereign insurance product so far in the market is the one developed and offered by the Islamic Development Bank. 6 Creation of the Islamic Finance Development indicator The Official launch of the Islamic Finance Development indicator (IFDI) took place at the world summit of Islamic Economics on November 25th and 26th 2013. IFDI is the result of collaboration between the Islamic Corporation for the development of the Pri-vate sector, a subsidiary of the Islamic Development Bank, and Thomson Reuters, the Global leader in economic Information. The IFDI developed by Reuters-Zawya is based on the analysis of 5 different indicators, when taken together, give an assessment of the scale and depth of the Islamic Finance Industry by country. These 5 indicators are : quantitative developments, knowledge, governance, corporate governance, education (awareness). World’s top 15 Malaysia, Bahrain and the United Arab Emirates come at the top of our list for the top contender countries in the field of Islamic Finance. This position is due to the development across all sectors through Sharia-Compliant funds. Oman, a new entrant in the industry, was ranked fourth thanks to the quality of Know-How and education as shown by the exa-mined indicators and that are as we know essential pillars in any governmental strategy. We also find the six countries of the GCC in the top-15 which reflects the extent and importance of Islamic finance in the Gulf region. Brunei appears in the seventh position despite the low score in Quantitative developments thanks to a good score in all other aspects and a successful development of the Islamic finance do-mestic sector. Singapore is the only country with a population that is not predo-minantly Muslim that we find in the Top-15 due to an outstanding performance in governance, takaful, sukuk and investment funds.
- 7. Executive Master’s News 4th promotion Graduation ceremony 7 The Graduation ceremony of the 4th promotion of the Executive Master took place at Dauphine University on December 15th 2013 with the presence of the ambassador of Bahrain in France, the president of the university and numerous students and family members. The class delegate gave a speech to thank all those in charge of the program for their commitment and devotion to the success of the degree and the well-being of the students. The am-bassador of Bahrain highlighted the involvement of the univer-sity in promoting Islamic Finance through the executive master initiative. The university’s president expressed the pride he feels when he sees the development and evolution of the degree year after year. During the ceremony, a presentation was made by a CNRS researcher on “Waqf ”, which is an important tool in the de-velopment of Islamic Finance. The Ceremony ended by a cocktail offered to all guests. Graduation at Université Paris Dauphine on the 5th of december 2013.
- 8. OECD launches new initiative to boost private infrastructure investment in the Middle East and North Africa (MENA) region 9 december 2013, Paris : Representatives from OECD and Middle East and North Africa (MENA) governments and leaders from key international organisations launched a new initiative to attract private investment to infrastructure projects in the region, the ME-NA- OECD Working Group on Investment Security in the Mediterranean (ISMED). Imtiyaz in the World Islamic Economy Forum 8 “MENA countries urgently need more and better infrastructure such as roads and seaports to ship our products to the world and renewable energy plants to power industry and households,” said Mohamed Louafa, Moroccan Minister Delegate to the Head of Government in charge of General Affairs and Governance, at the conference on Fostering Infrastructure Investment in the MENA Region: Mitigating Risk in Uncertain Times. The conference was organised in cooperation with the Inter-Mi-nisterial Delegation for the Mediterranean, France, and IPEMED, an Euro-Mediterranean think tank. Demand for infrastructure is growing in MENA due to demo-graphic pressures, rapid urbanisation and increasing expectations for improved public services and employment opportunities. However, the mounting infrastructure needs of the region cannot be met solely by public resources given the challenging fiscal cir-cumstances of many governments. Leveraging private capital and knowledge in delivering public infrastructure has also become increasingly challenging. “The OECD has a long history of engagement with MENA and is pleased to continue working with countries from the region to The 9th Edition of the WIE forum took place for the first time in an European capital London from the 29th to the 31st of Octo-ber 2013. Kader Merbouh, the director of the Executive Master attended the event along with two of the students, Souad Bouskra and Halima Youssouf, to promote the master on an international level and look for new partnerships and sponsors. A partnership aiming essentially at promoting Islamic Finance was concluded with the association: “Bee Just”. The first joint event organized by Dauphine and Bee Just will took place on the 4th May in Dubai. strengthen their infrastructure frameworks and build innovative public-private partnerships,” said OECD Deputy Secretary-Gene-ral Rintaro Tamaki. The MENA-OECD ISMED Working Group will bring together experts from international financial institutions, development agencies, the financial services sector, and MENA policymakers to deliver recommendations on how governments can mitigate risks for private infrastructure investment. The group will focus on is-sues ranging from arbitration and public-private partnerships, to Islamic financial instruments and cost- and risk-sharing instru-ments.
- 9. Imtiyaz at the Swisslife Conference in Marseille Swisslife invited investors and brokers in Marseille on February 10th 2013 for a conference on Islamic Finance. Kader Merbouh, the director of the Executive Master attended the conference at the KEDGE Business School in Marseille with the student Maxime Laurent. The sales director of Swiss Life France, Vincent Liégeon, announced that the insurance company will launch in 2014: “a securities ac-count that will make the investment in Sharia Compliant UCIT possible”. Last year, the company launched the first Sharia Compliant life insurance contract in France. These Halal savings and investment products “SALAAM Epargne & Placement” are certified by the CIFIE and are subject to a special tax treatment. Isn’t the Insurance company concerned about its brand image and the risk related to losing a part of its clients after having launched Sharia Compliant products? Mr. Liégeon brought an honest answer affirming: “If our existing clients stop their relationship with us for the sole reason that we are offering Islamic products, they are racist clients that we don’t want anything to do with”. Imtiyaz and the study trip to the Gulf 9 Every year, the Executive Master plans a study trip to a destina-tion where the Islamic Finance industry plays an important part and where the students are able to meet and interact with the most influential people of the industry. This year, for the second time, the fifth class “Imtiyaz” traveled to the Gulf from April 26th to May 11th, 2014 with the support and assistance of personalities such as the ambassador of Bahrain in France Mr. Naser Al Belooshi, the ambassador of UAE in France Mr. Mohamed Meer Abdallah Al Raeesi and institutions such as Paris Europlace, Chaabi Bank in Paris and the Bahrain Institute of Banking and Finance (BIBF). This trip was the opportunity for the 20 participating students to promote the degree and create long lasting relationships with the professionals of the sector and look for job opportunities in the Gulf. Three countries were included in the trip : The kingdom of Bahrain, UAE (Dubai and Abu-Dhabi) and the Kingdom of Qatar. These countries represent the largest and most important finan-cial markets in the Arab world and play an essential role in the development of Islamic Finance around the world. Master’s students traveling to the Gulf.
- 10. Imtiyaz at the Charity soccer tournament of Elite 5 Event 10 The Executive Master students participated at the event “Charity Football Tournament” organized by Elite 5 soccer whose manager and founder, Larbi El Bahraoui, is a student in Imtiyaz Class. This tournament took place on Saturday May 10th 2014 at the Doha Sports Complex in Qatar and was the opportunity to gather 16 teams trained and constituted by institutions of the Middle East, 8 international players and « Robert Pires » as special guest. Master’s studients participating to the soccer tournament organised by the Elite 5 Event in Doha, Qatar. Annual Conference of the Executive master Principles and practices of Islamic Finance (May 17th 2014) Despite the impulsion shown by public authorities back in 2008 and 2009, Islamic Finance in France is still embryonic and discreet. According to the first report on the state of the industry released by Thomson Reuters on November 25th 2013 in Dubai, Islamic finance continues to grow in an aggressive way with a considerable market in France, Europe and let’s not forget the emerging markets. However, European markets and particularly those near our borders, namely Luxembourg and London, are racing to position themselves in the industry and thus sending extremely strong signals to the Middle-East. Efforts are conti-nuing in France with new entrants and a growing interest of the existing actors for this type of Finance. Since its launch back in 2009, the executive master Principles and Practices of Islamic finance of Paris Dauphine University has become a major player in the French Islamic Finance industry. The Executive master has undertaken, as every year, the initiative of bringing together all major players of the industry in France to interact and exchange on the trends, challenges, developments and more importantly review the main developments in France as well as future prospects. The conference “Islamic Finance: what future in France?” revol-ved around three roundtables (life insurance, Real Estate and Banking) and was followed by a briefing on the Executive master Principles and Practices of Islamic Finance. Alain Pithon (General Secretary of Europlace) Amine el Alami (Chaabi Bank, France) Jean Philippe Besse (Parisian Advisory) Lilian Le Fahler (Executive Manager Treasury & Capital Markets KFH, Bahreïn) Marc Mariani et Eva Leygonie, (Baker &Mc Kenzie) Nicolas Limbourg (VitisLife) Ouassim Bendiab (Andalus Advisory) Valentine Baudouin (Associate, KramerLevin) Vincent Liégeon (Directeur Commercial, SwissLife France)
- 11. Nordine Sadki Interview of the Alumni Nordine Sadki is a fresh graduate of the Executive master (Averroes Class). He began his high education in “L’Ecole Internationale des Sciences du Traitement de l’Information” where he got his engineering degree in quantitative finance. He pursued his education at the university of Pierre & Marie Curie where he completed the prestigious master of probabilities. After having worked in trading and asset management for prestigious conventional banks such as HSBC, Société Générale, Nordine Sadki is now a structurer at Abu Dhabi Islamic Bank (ADIB). He shares his perception, vision and opinions as a practitioner for the positions he has filled. 11 After your education, why choose Islamic Finance ? I have always had a passion for market finance in general and its quantitative and mathematical aspects given that I come from an engineering school. During my studies at the engineering school, the executive master in Paris Dauphine was being launched. At the time Islamic Finance was just kicking off in France and was just at its very beginnings, I took an interest in the field by reading the interviews of Anouar Hassoune who became one of my pro-fessors later on. I wanted to take part to this general excitement and started to see myself in the Islamic finance world in which I would exploit my knowledge and experience of the conventional sector. Unveiling the secrets of the Islamic Finance world inte-rested me for its ethical and social justice principles that are rarely present in the conventional world. As a practitioner, do you believe Islamic Finance keeps its promises ? As a practitioner, I always do my best to make Islamic Finance deliver its promises and I strongly believe that other actors of the industry try to do the same by focusing on ethical and social jus-tice principles that I mentioned earlier. Due to its young age, the Islamic finance industry hasn’t reached yet the necessary maturity to deliver its promises and keep them, I believe it’s only a matter of time. I always try to bring together theoretical principles and Islamic finance values to the practice. Let’s not forget that there is a balance to find since Islamic Finance is used for economic pur-poses and economic gain but beware of the drifts. Was the reality disappointing compared to what you were taught in school ? I can’t say I was disappointed. First, it is very important to say that to be a good practitioner, one needs to understand the theory. The theories that are taught in school help me understand the reality of the field on a daily basis. There are theoretical aspects that will remain only in books like contracts that are never implemented in the real world for their complexity. Don’t you think that Islamic Finance faces limitations with the strict framework within which it has been defined or to the contrary, do you believe it’s rather a strength that can help it expand significantly ? I think that Islamic Finance is evolving in an unique framework that needs to be dynamic and in constant evolution. An isolated Islamic Finance can’t and won’t bring the necessary strength for this sector to grow and expand. Why is this sector so attractive to the UAE and the Gulf in general : Fashion trend or true belief ? Other than the fact that the population in the region is largely Muslim, Islamic banks have been successful in competing with conventional banks. In terms of prices and service, they’re equal, sometimes even better. From an economic standpoint, Islamic banks are comparable to conventional banks and clearly competi-tive. In a country where religious beliefs are essential, the concepts of Islam conveyed by the banks appeal to the clients. Riba and Sharia compliance are fundamental notions to the average citizen of the UAE. The Murabaha which is the most used product in the in-dustry is often criticized as being a Riba in disguise. Where do you stand on this debate ? I believe that a Murabaha used and executed in the rules and spirit of the Murabaha isn’t a Riba disguised. Then again, we need to make sure of the respect and good execution of the different steps Nordine Sadki
- 12. 12 of a Murabaha contract. The Sharia Boards who are the guaran-tors of the Murabaha need to make sure that no abuse is com-mitted. This contract is often criticized because it is sadly often badly executed and understood by the banks. This tends to distort the contract. Are conventional banks still attractive to the Gulf ? Clearly yes but Islamic banks are true competitors and contenders in this market, it is no longer a conventional banks’ monopoly. Do you think that one day Islamic banks will totally re-place Conventional banks ? No. Today, Islamic banks cannot fully operate without the help and cooperation of conventional banks. The global economic sys-tem is anchored and highly linked to the conventional world. To say that Islamic banks will one day replace conventional banks is economically impossible since the world economy is based on debt. In addition, Islamic banks are still too weak in terms of propor-tion to imagine an economy purely based on Islamic banks that need to conclude transactions with International banks to sur-vive. What is missing today and what do Islamic banks lack to enforce and strengthen their presence and increase their market shares ? Several parameters have to be taken into account to answer this question but I will mention only two that I deem to be the most important : First, Islamic Finance today lacks a well-defined legal framework and an unified governance within Islamic banks. Islamic Finance should have a “regulatory framework” : a concept of rules and laws unique to the sector. A need of standardization is necessary to make sure all banks will be subject to the same set of rules. Standards and legal framework are pre-requisites to market de-velopment. Institutions such as IIFM, work together and closely with Islamic banks who have a market expertise and knowledge to come up with standards such as ISDA/IIFM Tahawwut Master Agreement and unify the documentation that will be used across different banks. There is also a need for more evolved products for risk manage-ment that cannot be designed without research and development efforts. R&D sections in Islamic banks are not as developed as Conventional banks’. There is a gap between market actors like myself who know the real world and have frictions with it on a daily basis and sharia scholars who most often have a theoretical vision. This gap needs to be reduced and the two worlds need to join their efforts together to improve research at the level of Isla-mic Banks.
- 13. REPORT ON WAQF Wajdi Lahmar - Yasmine Abdouch Randi De Guilhem - Boubacar Faye dividuals and defined as being « The contracts concluded between individuals and society in an effort to promote the general well-being ». The waqf belongs to this latter category and has played a central role in social, economic, scientific and cultural develop-ment throughout history. The famous universities of Al-Azhar in Cairo, Ez-Zitouna in Tu-nisia, Al Qaraouiyune in Fes-Morocco and the Merton college in Oxford have all been funded through Waqf. Section 1 : Genesis and Evolution of Waqf it from a sale or an inheritance in order to give out the proceeds generated by its use (rents) to a charitable purpose. Some lawyers state that the Waqf is immobilized in the hands of God. Legal : From a legal standpoint, setting up a Waqf « is removing the property from the domain of private property and preventing 13 What is a waqf ? By Wajdi LAHMAR According to a report released by the PNUD in 2009, around 40% of the population in Arab countries live below poverty line. The search for new ways of socio-economic empowerement of Muslim societies brings us to the question : what solidarity and mutual aid mechanism would help reduce social disparities wit-hin these communities ? The study of Islamic Finance contracts reveals a distinction between three categories : Sales contracts تاضواعملا , Equity fun-ding and charitable instruments based on the volunteering of in- Linguistic : Literally, the word Waqf (plural : Awqaf) is derived from Waqafa which means to stop or to stop mobilizing. The individual who constitutes a waqf is called « Waqif » and the object of the Waqf is denominated the « Mawqouf » Terminology : In Islamic law, the Waqf is the act of locking a property and secure it from falling in it again while intending its usufruct to a specific charity or public good. The English language has opted for the word « endowments » or « bequest » to denominate the Waqf, while the North Africans have chosen the word « Habous » and the Turcs « Vaqf ». The purposes behind Waqf The purpose behind its institution is to find sources of stable and permanent funding to support religious, educational, nutritional, eco-nomic, health and safety needs of the community. The waqf also aims at consolidating solidarity values between different social classes in order to gain the blessing of God and ultimately a place in paradise (Jannah). The first Waqf in Islam The first Waqf in Islam was the mosquee of Quba in Medina that was built by the Prophet after the Hegire. Six months later, the Prophet’s Mosque (Al Masjid An-Nabawi) was built thanks to a Waqf constituted by the Prophet himself once again. Major phases in the history of Waqf Non-muslims and the Waqf The undeniable proof of the existence of Waqf prior to Islam is the place to which all Muslims turn to for their daily prayers : Al Ka’baa that was built by Ibrahim in accordance with divine orders. Similar practices were observed in some non muslim communities, but despite the numerous similarities, the Islamic Waqf has sufficient unique and original features to qualify as a sui generis institution. Major phases of the development of Waqf in Islam The Waqf has been through ups and downs along the phases of its evolution. We have identified four important phases :
- 14. First phase : Birth and development Since the time of the Prophet and his Caliphs, each Waqf was administered by its founder. However, the increasing number of Awqaf and the death of the founders created problems that au-thorities had to solve. Thus, under the reign of the Umayyads, an independant Diwan was created specifically for the registration of Awqaf. The Diwan was the first form of organization and cen-tralization of Awqaf. Second phase : Colonization & Decline The pious foundations in colonies were completely abandoned and left to fall into ruin during colonization. The settlers deli-berately opted for a direct intervention in Awqaf to reduce their positive role in supporting national resistance movements. Even after their departure, the settlers left behind them corrupt go-vernments and leaders. Section 2 : Awqaf and the sources of Fiqh Le Coran : Even if the Quran repeatedly required muslims to give away alms, there is no direct indication or mention of the Waqf and so it cannot be considered to be as mandatory as prayer or fasting. However, the sunna brings an interesting addition to the matter. The hadiths : The Prophet ensures that good deeds continue to exist after death, but the practice of the Waqf as we know it today, was born after the Prophet answered Omar’s Question : « I have a land in Khaybar and I have never had a property this valuable, what should I do with it ? » the Prophet replied « if you want, you can immobilize the property and give away its produce as alms ». Following this recommen-dation, Abou Talha donated a garden, Othman a well, Khalid Ibn Al Walid his shields and weapons and some companions went to the extent of giving their own homes. Regulation by lawyers hasn’t been developed by lawyers until the second Hegire century. 14 The main foundation of Fiqh Awqaf Characteristics of waqf : The waqf is characterized by three main elements, it needs to be : irrevocable, perpetual and inalienable. - Irrevocability : Neither the Waqif nor his heirs can revoke a Waqf. - Perpetuity : Ensures the benefits will pass from a generation to the next. - Inalienability: The ownership of the immobilized asset is consi-dered returned to God and may not be sold, borrowed against, offered or inherited. Waqf Pillars (Arkan al waqf) : - The donor (Waqif ou habis) - The text or contract (sîghah) of which the terms may either be explicit or implicit - The object (mawqûf) - The recipient or beneficiary (mawqûf ’alayhi) Any Muslim institution having these four characteristics must be considered a Waqf. However, a waqf may be contested when Third phase : State Interventionism At the end of the colonial era, the state has replaced civil society in overseeing a large number of public services. This intense re-gulation was the root cause behind the contraction in the social development role of Waqf. This latter was limited to the custody of mosques, religious and cultural activities. Fourth Phase : A new Hope… This phase began in the 80’s with the launch of new policies ai-ming at rehabilitating and promoting civil society and the role it plays. The « Magic » Waqf solution was brought to the table once again and several conferences and round tables were organized to draw attention to this mechanism. the intent of the founder is questionable, an example would be the case in which the founder is looking to deprive women from their shares in an inheritence. Basic Foundations : The Fiqh of waqf is built around three main pillars that provide legal protection for the inherited assets, namely : - Respect to the condition of Waqif and his will that may not, no matter the circumstance, be modified or broken. - Jurisdiction of magistrates (the qadis) on waqf, given the fact that the legal authority has always been the one to be considered as the most independent and the most capable when it comes to preventing injustice and violation of legitimate interests.. - The waqf is a legal person: From the moment a Waqf is made, it becomes an independant entity of the Waqif. In addition to Fiqh books, AAOIFI dedicated norm n° 33 to the Waqf.
- 15. New forms of Waqf have emerged along the years and the classification can be based on several criteria : Classification according to civil law : - Awqaf Mazboutah (properties directly administered by the ministry of Awqaf). - Awqaf Mulhaka (administered by special Mutawalis designated by the founders) Classification by purpose : Depending on the purpose sought by the founder, a Waqf is either khayri or ahliou or a combination of both. Classification by Object of Waqf : - Real Estate, property and agricultural land Waqf - Movable Objects Waqf - Cash Waqf - Waqf in terms of time : doctors, engineers, teachers and professors may devote their time to a charitable cause. It’s a modern Fiqh innovation to widen the spectrum of mutual aid and the Waqf recepients. 15 Section 3 : Types of Awqaf Multiplication and diversification in the areas of Waqf The Awqaf in the service of religion and worship Construction and maintenance of mosques and specific Awqaf pilgrimage (hajj). Science and Education Waqf Permitted the funding of scientific work of the epic names of the Golden-Age, as Ibn Sina (Avicenne, 980 – 1037) and Ibn Rochd (Averroès, 1126 – 1198). Waqf and Social causes The Waqf was designed to fight poverty, provide housing, food and care for the elderly. The Waqf also took charge of diverse areas ranging from health to construction and equipment of hospitals and clinics, water and sanitation. There was even Awqaf for weddings that still exist today in Egypt. The examination of the genesis and historical foundations of Waqf reveals the importance of documentary work around this institution. Fiqh has played an important role in the im-plementation of Waqf within Muslim societies, the work of many lawyers helped establish the beginnings of a simplified legal framework, making this practice accessible to people and anchoring its customs in Arabo-Muslim civilizations.
- 16. 16 Waqf : legal aspects By Yasmine Abdouch The classical theory on the unity of patri-mony, developed by Strasbourg professors Charles Aubry and Charles Rau back in the nineteenth century has definitely evol-ved in the XXIth century with the intro-duction of mechanisms for allocation of assets such as the EIRL or the « Fiducie » in France. The Anglo-Saxon system has known, since the XIVth century, the trust system, which allows a founder to give to a third party (through allocation of assets) the res-ponsibility of managing the patrimony on behalf of one or more beneficiaries. Just like those mentioned legal systems, Isla-mic law provides a similar institution to the Anglo-Saxon Trust. Indeed, The Waqf is a legal mechanism for allocation of assets, irrevocable and ina-lienable and managed by a person or an entity to the benefit of a charity or specific beneficiaries in accordance and respect to the will of the grantor. Although this institution is not governed by French Law, it is necessary to examine under what forms and mechanisms such a system can be considered. The Formation of a Waqf The establishment of a Waqf is a tripartite transaction whereby the founder (1) transfers his assets to a manager who, in fulfillment of this purpose (2), will be in charge of administering the benefit of specific and determined beneficiaries (3). The founder of the Waqf The allocation of assets in Waqf is an act of provision that assumes the founder has full legal capacity, that is to say he must be an adult, not under guardianship and able to manage financial mat-ters. This criterion joins the distinction of legal acts by category that defines French law and allows us to identify the individuals legally able to enter into a particular act with significant legal consequences. The object of Waqf The purpose/object is of particular importance as it will deter-mine the legal status of the Waqf institution. Indeed, it is com-monly accepted that a Waqf can be formed only with the existence of a charitable purpose or if it is made for the benefit of family members. The allocated assets in Waqf need to respect the prescriptions of Islamic law as well as the prescriptions of the legal system in which they exist. Thus, these assets that are placed in Waqf cannot be excluded from trade by law, their use needs to be authorized and must be eligible for the formation of a valid contract. Mo-reover, only material assets existing at the time of the formation of the Waqf that the owner holds or is entitled to their usage or control, may be assigned to a Waqf. In a second phase, the properties that are the object of Waqf need to be allocated in an irrevocable manner and in a way their aliena-tion, mortgage, donation or inheritance is no longer possible. This state is justified by the etymological definition of Waqf that means « Blocking », « Immobilizing ». However, different schools of ju-risprudence have different views when it comes to the perpetuity of the immobilization. While the Malikis consider that the pro-perty may be allocated only for a specified period, the Hanbalis’ on the other hand, believe that assets are allocated on a perpetual basis. This difference raises the problem of the legal nature of the allo-cation of patrimony. Does this allocation represent a donation, a transfer of property or simply a dismemberment of ownership through which the grantor keeps the Abusus and the beneficia-ries hold the Fructus. Finally, the majority of schools exclude consumer goods from the Waqf except for movable assets that are deteriorated through use. Conversely, according to the Hanafi, only property and immovable assets can be a Waqf subject to three exceptions : - Personal property attached to real property such as animals and agricultural tools belonging to a rural area, - Movable property designated by some Hadiths as horses and weapons for Jihad (Opinion of Abu Yusuf), - Personal property that is assigned to the Waqf such as shovels and pickaxes for cemeteries…
- 17. 17 The Beneficiaries The beneficiaries of a Waqf can be both individuals or legal per-sons managing a public service. Then, a distinction needs to be made between two types of Awqaf : Charitable Waqf dedicated to mutual aid purposes and the family Waqf to the benefit of close re-latives and the descendants. Nevertheless, the founder of the Waqf has the ability to select multiple categories of beneficiaries. We can then imagine that a certain share of the income from Waqf will benefit a certain community (the poor for instance) and the rest will go to the family. Nonetheless, the designation of beneficiaries must meet certain criteria impacting the validity of Waqf : - Recipients must exist at the time of the formation of Waqf and they must be identified or identifiable. Except for the Maliki school which states that reinvesting the income until birth is possible, the majority of schools consider the appointment of an unborn child prohibited, - Recipients must be able and allowed to acquire property - The objective of the Waqf needs to be lawful. The Characteristics of the Waqf The act of foundation The Foundation act of Waqf is a legal act which is divided into different decisions that do not necessarily have the same defi-nition when taken separately : an irrevocable commitment to transfer ownership, transferred assets clearly representing an en-dowment, a task to be accomplished for a non lucrative purpo-se. A Waqf is based on a statement provided by the founder and although the law does not require it and stipulates that merely a verbal statement is admitted, the common usage requires that it’d be in writing to ensure the legal security of the institution. It is only appropriate that such an act expresses the sole intent of the founder to allocate the assets in Waqf. As for the validity of this legal act, most Islamic jurisprudence schools consider that certain provisions would render the act null and void since suspensive conditions make the realization of the Waqf foundation dependent on the occurrence of a future event. Islamic law expressly prohibits uncertainty in transactions with the only unanimous exception to this principle being the forma-tion of a testamentary Waqf that starts taking effect on the death of the founder. Contrary to the Maliki doctrine’s view, other provisions such as determining a limited duration for the Waqf, the option for the founder to freely revoke or sell the committed property would be prohibited because they go against the principle of sustaining the institution. A Waqf can be qualified as such only if it meets certain specifications and operates through procedures prescribed by Islamic Law. The irrevocability of waqf The nature of the statement of formation raises certain legal problems. Is the statement contractual in nature and therefore requires the consent of the beneficiaries and their acceptance or is it simply an unilateral act emanating from a will ? The issue is of such importance that it determines the time the irrevocability of the Waqf enters into effect, different schools have adopted differing views on the matter. Similarly, the nature of the transfer of pro-perty remains unresolved as schools differ on the determination of the owner of the property once a Waqf is established. A thesis supports that the Waqf reflects the same characteristics as a donation and therefore it is at the time when the effec-tive transfer of assets is realized that the possession by the beneficiaries is conside-red effective and the Waqf irrevocable. Others consider that once the statement of formation is made, the property of the assets is transferred to God but such a conception would be very difficult to transpose in the French Legal system. The perpetuity of Waqf The perpetuity principle of the Waqf as-sets assumes maintenance of those assets through the income they will be genera-ting or by the beneficiaries who will be entitled to use them. In case of damage or willful destruction, the administrator or the beneficiaries may claim compensation that will go to the Waqf and be used for the restoration or replacement of the assets. However, a divergence emerges when the destruction is not voluntary and is the re-sult of normal use. Waqf Administration A Waqf is administered by one or more persons designated by the founder. Given the perpetual nature of Waqf, the founder may decide that the person appointed to administer the Waqf during his lifetime and specify the terms and modalities of the appointment of his successor(s). The administrator shall accept appointment and must have full capacity. According to most schools, except the Hanafi, the administrator must be trustworthy, have the necessary skills, be Muslim and of male sex. As we can see, the appointment is made on a very intuitu personae basis. The administration of the Waqf consists in a maintenance and repair duty of the allo-cated assets and the distribution of income generated by the asset to the designated beneficiaries. The administrator has the right to be paid for his work. The disappearence of waqf The Waqf heavily relies on the principle of perpetuity, however, different schools have identified situations in which the Waqf can end : - In Case the asset is lost or disappears - When the founder commits apostasy to Islam - When the Waqf operates in a manner contrary to its essence - For the Malekites, in the case of death of the recipients or when the Waqf expires (as provided by the founder) as men-tioned earlier.
- 18. The Integration of Waqf in The French Legal system The thorough study of Waqf allows us to highlight the religious dimension that is extremely present and represents an essential part of the process from establishment to extinction. In addition, the different schools of Islamic jurisprudence are not unanimous and diverge on key points such as the element of perpetuity and the nature of the assets. Given these data and the principle of secularism and non-dis-crimination of the French system, it is difficult to imagine that such an institution can fully and easily integrate the French legal system. In contrast, the Waqf could be similar in its general principles to the « foundation » established by the law of july 23rd 1987. This law states that « a foundation is the act by which one or more natural or legal persons shall allocate irrevocable assets, rights or resources to carry out a task of general interest and with a non-profit purpose ». Thus, as for the Waqf, any asset assigned or given to the benefit of a foundation is irrevocable and perpetual in nature. 18 Nevertheless, the foundation has legal capacity only as of the date of entry into force of the decree of the council of state granting recognition of public utility. The public utility foundation must include in its supervisory board a representative of the state administration. The institution is then formed and managed by a binding state supervision which results in submission of the acts to state supervision. Although the Waqf is similar to the foundation as provided by French Law, its formation under this form is legally too binding and complicated. Moreover, due to the lack of a proper legal defi-nition, the recognition of public utility for the foundation is sub-ject to the discretion of the administrative authorities. Thus, according to the jurisprudence of the state council, the ob-ject of a foundation cannot be too general, too imprecise, vague or narrow. It may not contravene the republican values of secula-rism and neutrality, as well as being distinct from the interests of its members. Therefore, could a Waqf of which the deed excludes beneficiaries on the basis of their religion be considered under French law as a public utility foundation ?
- 19. Waqf & food security in the Middle East By Boubacar FAYE 19 The Middle-East may face problems of food security, the region currently lacks the means to produce an adequate food supply because of water scarcity, lack of arable land, inadequate investments in agriculture, poor inventory management and distribution networks under-opti-mized. According to the World Bank, the Middle East used to import 50% of its food needs back in 2008. With food prices hitting the roof and an increased volatility in interna-tional markets, the domestic agriculture is of strategic importance in all food produ-cing countries in the region. Non-produ-cing countries such as states of the Gulf Cooperation Council (GGC) have pur-sued a research strategy to look for new and innovative ways to secure lands in other countries to produce part of their food needs. The Muslim population in the Middle Eastern countries is estimated today at 321 million people. Projections for 2030 say the figure would grow to as much as 439 million, a 36.5% jump in a timeframe of 20 years that would have a significant impact on food security that is very easy to foresee. The acquisition of rights for using lands abroad by Arab countries from the Middle-East was not without controversy. These transactions can create important political and legal risks arising out from the inhospitable treatment they receive both inside and outside the host country. They have been pointed out as forms of land grabbing comparable to the 19th century colonization. The terms of these acquisitions and their details are often unknown to the public. This opacity feeds suspicion on the fact that these transac-tions are opportunistic theft of scarce re-sources. The Waqf is a sort of trust through which assets are allocated and maintained for a specified period or in perpetuity for spe-cified recipients and for one or several goals (security or social well-being, cha-rity, public utility infrastructure…), it has the potential to respond to and overcome the issues of food security. The objective is to combine multilateralism with food security objectives and to do so, the waqf as a structure can be considered but it will have to be adapted to suit the participants. These need to agree on the scope of the objectives, the composition of the assets to be included in the Waqf… More importantly, the structure of the proposed Waqf requires freedom of action vis-à-vis the direct administration, freedom of manage-ment vis-à-vis any general Awqaf authority in order to promote effective management and reduce the political and legal risks associated with host governments. The considered Waqf structure consists of appointing a Nazir (Waqf Nazir) or (Waqf Nuzur, group, entity) to administer the Waqf and maximize the assets of the Waqf to be compared to benchmarks of international assets, of the same class, and also follow standards of governance. This approach offers more guarantees for the designation of the holder(s) of the required experience to administer the Waqf in an effective and profitable manner without any undue (government) interference. Thus, the objectives of reducing the political risk would be achieved paving the way for the pursuit of the food security objectives effectively and in an innovative way. The religious origins of the Waqf and its historical treatment make it a safe vehicle for the investment in assets, particularly in the context of multi-party agricultural investment with a significant involvement from government entities who conclude alliances instead of pursuing their objectives separately. Compared to other forms (corporations, partnerships…), the waqf is less likely to meet a political or other interference that may thwart its original purpose or decrease its value through abuse or mismanagement. Middle-Eastern countries, institutions and private parties are able to serve the needs of food security and with an expertise in Islamic finance and a developed practice of the Waqf. The Waqf structure is a well established and proven structure that deserves the attention of political and economic institutions.
- 20. ISLAMIC Finance & waqf : perpetuating a societal strategy By Randi Deguilhem - CNRS 20 A powerful tool that finances in a sus-tainable and recurring way a personal investment strategy in favor of beneficia-ries selected in advance by the founder or foundress (no difference by sex is made as to the establishment of the Waqf), the Waqf foundation (often called Habous in North and Subsaharian Africa) is very well known and widely used at all socio-econo-mic levels everywhere in the Islamic world since the beginnings of Islam (Carballeira Debasa 2002 ; Cizakça 2000, 2011 ; De-guilhem 1995, 2008 ; Henia 1999 ; Saidou-ni 2007). The Waqf is also a strategic mobilization tool by men and women belonging to other religious communities (Christian, jews…) in the Middle-East and in Eastern Europe, which formerly belonged to the Ottoman empire (de Rapper 2009). Insofar, the Waqf has no direct coranic references-in the use and in the fiqh, it is often associated with sadaqa jâriyya : namely a charitable or societal recurring gift-however, many hadiths mention it like the one in which ‘Umar ibn al-Khattâb seeks the advice of the prophet on the best way to make the income from his garden at Khaybar available to the Muslim com-munity, the answer of the prophet was that Umar created a Habous. Thus, the fact that the waqf has links with hadiths but is not mentioned in the Coran gives it the opportunity to evolve and adapt freely according to the needs of different individuals and groups (trade groups, neighbor groups…) in society which results in a diversity of the struc-tures that have developed and appeared in response to specific needs in different parts of the Islamic world. To give a clear definition of the concept : although the waqf is becoming a complex tool as it is developing and adapting to the evolutions in society, its infrastructure, which is a self-sufficient system, it can be summarized as follows : to set up a « traditional » Waqf, an indivi-dual (free, debt-free and pubescent) allocates a specific part of the revenues generated by the assets (buildings, agricultural land, a sum of money) that fully belongs to him/her (milk) to beneficiaries he/she appoints. The beneficiaries, either family members or any other person (waqf dhurrî/ahlî), institutions such as places of worship, education, health-care, etc. (waqf khayrî) or a combination of both (waqf mushtarak), receive their share of generated revenues (in cash or in kind) on a regular basis by the manager (mutawallî ou nâzir) of the Waqf also appointed by the founder. As for the bare property (buildings, agricultural land, cash), it belongs fully and exclusively to the Waqf and grows in the vast majority of cases, through a lease overseen by the manager of the Waqf. According to Fiqh Jurisprudence, the asset committed to a Waqf cannot be sold, mortgaged, bequeathed or otherwise modified (the manager may however exchange the property against ano-ther by an istibdâl contract but in reality, the documents from the Ottoman era is living proof that removes any doubt on the fact that those assets met and were conform to all market laws. In other words, despite the prohibition of fiqh to remove them from the category of « Waqf », the status of assets under Waqf used to change hands quite often (for example : Sroor 2010). As a matter of fact, archival research in the Middle East and other centers around the world shows great adaptability of the Waqf that has met, across the centuries, the different situations in lands of Islam and the evolving needs of the individuals living there. We notice therefore a large variety in Waqf linked to a historical periodization that we think differs from a region to another. In summary : 1- The period from the first centuries of Islam to colonial times-during which novelties occur, as for the use of cash as Waqf property that generates income for foundations starting the medieval times in Egypt and especially during the Ottoman period in the Balkans ; 2- The colonial era that has witnessed great dismemberments of Waqf systems in colonies ; 3- Independence era with states formerly colonized where dismemberments per-sist or the system evolves towards direct management by the state (This process had already started in the Ottoman era, Deguilhem 2003) and 4- a resurgence and a redefinition of Awqaf for the last fifteen to twenty years and a positioning as to Islamic finance that is spreading and developing fast not only in Islamic regions but also in Europe and America (Cizakça 1998).
- 21. These questions are at the heart of current economic issues and several institutions and international bodies were created in the last fifteen years to study the waqf in all its aspects. To illustrate, let’s mention three of these bodies headquartered abroad starting with the « Kuwait Awqaf Public Foundation » (KAPF) created in 2000 in Kuwait as a research organization, dis-semination of studies on the Waqf through its biannual review, Awqaf, and its activities aiming to support international meetings and programs on Waqf. The second organization we will mention is the International Center for education in Islamic Finance (ICEIF) Kuala Lampur, Malaysia, which performs academic studies on the Waqf and as the KAPF, organizes training courses in the current management of Waqf. Last but not least, the Institute for Islamic World Studies (IIWS) of the Zayed university Abu-Dhabi/Dubai that mobilizes social and human sciences for the study of Islamic civilizations, including islamic finance and Waqf. Finally, in France as well as in other places in Europe, the Islamic Relief uses, since the 1990s, the tool of waqf, in the order of seven cate-gories of waqf. This authority is not a research body like the authorities quoted above but an association of action with the civil society which intervenes by means of waqf. As for the academic research, let us quote the GDRI program of the CNRS (NATIONAL CENTER FOR SCIENTIFIC RESEARCH) which, with the partnership of nine authorities located in France as well as abroad, has the objective to study the socioeconomic and political history of the waqf since its origins in our days. In the end, for the individual, to create a waqf or to participate in a waqf foundation established beforehand by others would mean : « leave one’s footprint in the society while alive and after one’s death «. 21 Finally, let’s not forget that this long Waqf history differs from a region to another but develops in a tripartite global framework defined by religious jurisprudence (fiqh) sunni and shia’ (that evolves according to madhahib but also the local history), political civil law and the relationships to the use of customary law (‘urf). We are talking then about a powerful instrument of society, a de-cision- making body at the level of the individual from the founder who has a very modest patrimony (in history, most waqf were only small holdings) to the founders with an extremely large estate. A power of founder regarding his/her decisions on the investment of its assets in Waqf (the founder of the Waqf has the right to spe-cify in its founding statement/charter, ways to grow the Waqf as-sets through certain leases…the founder can also prohibit others, for instance, the prohibition of exchange of property istibdâl to avoid the dispersion of estate) as well as the choice of beneficiaries of the foundation (strategy of supporting financially for example a mosque or a religious school in a given place) but also in relation to the Waqf manager (ultimately, it’s the mutawallî or the nâzir who make decisions on the management of any matter relating to the Waqf). BIBLIOGRAPHY : CARBALLEIRA DEBASA Ana Maria, 2002, Legados pios y fundaciones familiares en al-Andalus (siglos IV/X-VI/XII), Madrid, Consejo Superior de Investigaciones Cientificas CIZAKCA Murat, 1998 (nov.), « Awqaf in History and its Implications for Modern Islamic Economies », Islamic Economic Studies, v. 6/1, pp. 43-70, 2000, A History of Philanthropic Foundations. The Islamic World from the Seventh Century to the Present, Istanbul, Bogazici University Press, 2011, Islamic Capitalism and Finance : Origins, Evolution and the Future, Cheltenham (Royaume-Uni), Edward Elgar Publishers de RAPPER Gilles, 2009, « Vakëf : lieux partagé du religieux en Albanie », in Dionigi Albera et Maria Couroucli (éd.), Religions traversées. Lieux saints partagés entre chrétiens, musulmans et juifs en Méditerranée, Arles, Actes Sud, pp. 53-83 DEGUILHEM Randi (dir.), 1995, Le waqf dans l’espace islamique. Outil de pouvoir socio-politique, Damas, Institut Français d’Etudes Arabes de Damas (IFEAD), 2003 (mai), « Sur la nature de waqf. Les fondations pieuses en Syrie contemporaine : une rupture dans la tradition », Awqaf, Fondation Publique des Awqafs de Koweït, v., 4, pp. 5-43 , 2008, « The Waqf in the City », in Salma K. Jayyusi (dir. with Renata Holod, Attilio Petruccioli and André Raymond), The City in the Islamic World, Leyde, Brill, pp. 923-950 HENIA Abdelhamid, 1999, Propriété et stratégies sociales à Tunis (XVIe-XIXe siècles), Tunis, Presses de l’Université Tunis I SAIDOUNI Nacereddine, 2007, Le waqf en Algérie à l’époque ottomane XI-XIIIe siècle de Hégire / XVIIe-XIXe siècles. Recueil de recherches sur le waqf, Koweït, Fondation Publique des Awqaf de Koweït SALIBA Sabine, 2004, « Waqf et gérance familiale au Mont Liban à travers l’historie du couvent maronite de Mar Challita Mouqbès (XVIIe–XIXe siècles) », in Randi Deguilhem et Abdelhamid Hénia (dir.), Fondations pieuses (waqf) en Méditerranée : enjeux de société, enjeux de pouvoir, Fondation Publique des Awqaf du Koweït (KAPF), Koweït, pp. 99-129 SROOR Musa, 2010, Fondations pieuses en mouvement. De la transformation du statut de propriété des biens waqfs à Jérusalem (1858-1917), Beyrouth-Damas, Institut Français du Proche-Orient (IFPO) TOUKABRI Hmida, 2011, Satisfaire le ciel et la terre : les fondations pieuses dans le Judaïsme et dans l’Islam au Moyen Âge, Paris, Honoré Champion Presentation of the author : Randi Deguilhem, Director of Research at the CNRS(NATIONAL CENTER FOR SCIENTIFIC RESEARCH), is a member of TELEMME-MMSH, Aix-en-Provence. Responsible for the GDRI « Waqf « ( 2012-16 ) to which belong nine European international partners and of the Islamic world, she manages since 2010 the doctoral seminary to IISMM-EHESS Paris which analyzes the waqf as social phenomenon. Randi Deguilhem randi.deguilhem@gmail.com deguilhem@ mmsh.univ-aix.fr
- 22. LIFE INSURANCE Islamic vs. Conventional life insurance : what differences, what similarities ? By Fatima ABDUL KASIM A commonly used wealth management tool, the life insurance contract is the favorite savings and placement product of French people. The launch in France of the life insurance contracts Salaam by Swisslife and Amane Exclusive life by VitisLife shows the interest of European actors for Islamic insurance. This foreshadows an interesting development of this market. 22 Life-Insurance : An important tool for wealth management Life Insurance is an envelope that allows individuals to invest their money and manage it in the most flexible way while enjoying a very attractive taxation regime. Life Insurance (Savings type) is often confused with the Insurance upon death (the welfare/pre-vention type). However, they are very different in nature and do neither concern the same needs nor aim for the same objectives. On the one hand, the idea behind death insurance is not to save but rather to guarantee a capital consisting of regular premium payments that will be distributed to the selected beneficiaries when the insured person dies. On the other hand, Life Insurance products are mainly savings and investment instruments that al-low to build-up a capital and through investment to take advan-tage of tax benefits. For instance, they can help ensure additional income to compensate for the future loss of earnings as for the case of retirement. There are mainly two types of contracts: in euros and in units of account. The contract in euros (First category) guarantees capital with a low yield while the unit of account contract provides a hi-gher return for a higher level of risk. Contracts in euros The managing institution is required to repay a sum equal to the net premiums as well as capitalized net gains at maturity. Finan-cial income generated by the investments will increase savings and become, subsequently, interest bearing. These contracts may be invested only in funds called « Euros » that meet the criteria of capital guarantee and compensation. Contracts in units of account Unlike Contracts in euros, these contracts have as a reference an unit of account instead of the Euro. The capital invested evolves according to the value of the unit of account which may be a Euro denominated fund or units or shares of mutual funds, unit trusts, REIT’s, OPCI’s The insurer guarantees the number of units of account which re-sults in the transfer of the risk to the client who bares it entirely on his own. The Benefits of Life Insurance There are various benefits that motivate French people to invest their money in life insurance contracts. Firstly, life insurance allows individuals to secure their savings and investments: the euro life insurance contract offers a certain level of investment security and protection. Therefore, French in-vestors, that are seeking guarantee before performance, are more drawn to the capital guarantee of the funds denominated in Euros. Secondly, life insurance has a very interesting tax regime: the life insurance policy can benefit from tax advantages because it offers tax exemptions on income after a period of 8 years; and tax reliefs on inheritance rights. lam dans le cadre ses investissements de le faire, tout en profitant des avantages juridiques et fiscaux qu’offre ce produit. In case of redemption before eight years, except for some exemp-tion cases (dismissal, disability or early retirement), the benefits are subject to Income tax. If it is more interesting, the beneficia-ry would avoid the progressive tax by opting for withholding tax rates up to: - 35 % when the duration of the contract is less than 4 years; - 15 % when the duration is equal or greater than 4 years; - 7.5 % when the duration is greater than or equal to 8 years after a deduction of 4,600 euros for single people and 9,200 for couples. Capital gains are also subject to social contributions at the rate of a total of 15.50 %. Moreover, Life insurance contracts fall within the scope of the French wealth tax. Therefore, their value at the 1st of January should be declared and subject to wealth tax when the insured is a French tax resident.
- 23. 23 Concerning inheritance taxes, the amount of acquired or reco-gnized products at the date of the insured’s death are subject to social security contributions at the rate of 15.50%. Furthermore, the selected beneficiary of the Life Insurance contract would be taxed, depending on the insured’s age at the payments date, as follows : Payments made until the 70th anniversary of the insured : -20 % for the portion lower or equal to 902,838 euros after a tax allowance up to 152,500 euros if applicable; - 25 % for the portion greater to 902,838 euros. Payments made after the 70th anniversary of the insured : Inheritance taxes are paid by the designated beneficiary according to the degree of kinship between the beneficiary and the insured. Finally, conventional life insurance is valued for its flexibility. Indeed, the investor may arbitrate and decide to reconcile secu-rity and performance, choose to focus on security by investing exclusively in the Euro fund (capital guarantee) or rely exclusively on performance by investing in the units of account (shares and bonds). While the return on Euro contracts is limited to 3%, it is possible to reach 7-8% return on the units of account at a higher level of risk. The specificities of Sharia-Compliant Life Insurance Several life insurance contracts that comply with Islamic ethics are marketed in France, including « Salam Epargne et Placement » by Swisslife which is affordable to all and « Amâne Exclusive Life » by Vitis Life which targets a wealthier clientele. These Islamic life insurance contracts provide the same legal and tax advantages as the conventional contracts. However, differences in several as-pects exist. Financial filters/screening First, respecting islamic ethics means that life insurance contracts cannot pay interest on investments. The contracts to promote are the ones in units of account and not the ones denominated in eu-ros. As a matter of fact, the manager of the Euro funds is required to repay at maturity an amount equal to the net premiums to which we add capital gains. Thus, these contracts generate inte-rest and include safe supports and as a result cannot be considered for Islamic finance. To receive a return, subscribers must invest the money in one or more « units of account » (SICAV or mutual funds). Risk taking is then greater for investors, the yield on Ha-lal life insurance is much higher than the conventionals’ one and could reach 7% over the long term. In addition, a check is made at the level of the funds in which the money is invested to make sure they don’t contact any debt to in-crease their performance and don’t use any technique prohibited by Islamic finance, such as derivatives. Finally, the companies in which the funds invest need to produce industrial earnings and not financial earnings. The Extra Financial screening The extra financial screening ensures that funds do not invest in areas prohibited by Islamic finance such as the gambling industry, pornography, alcohol or weaponry. The Beneficiary clause Regarding this clause that allows the transfer of assets, the owner is free to designate the beneficiaries of his choice. However, the owner needs to make sure that the clause respects the religious constraints in terms of equality between the heirs and all sorts of other restrictions. Compliance controls by a religious authority Compliance with Islamic principles of the Islamic life insurance is subject to a control by a sharia board that gives its approval after auditing the contracts and funds. To conclude, we can say that Islamic life insurance is nothing but a contractual adaptation of the conventional life insurance. It allows investors wishing to respect the ethical principles derived from Is-lam to do so while enjoying the tax benefits of this product. Characteristics of the « Salam-Pax » : Ethical Fund of Funds Valentine Beaudouin, Member of the SICAV’s management board Could you describe your SICAV’s activities to us ? It’s a Luxembourg SICAV governed by the UCITS IV directive that aims at creating the safety and liquidity conditions for pri-vate investors in the funds. The UCITS IV Directive determines and gives a clear de-finition of the criteria for the composition of assets, liquidity, and establishes univer-sal rules for the structuring, management and administration of funds, including the protection of investor’s assets. The SICAV « Salam Pax » Ethical fund of funds is a multi-compartment SICAV but we still have only a single compartment : Ethical fund of funds whose strategy is to invest in other Islamic funds. The funds that are eligible for Islamic Finance and UCITS IV standards are highly correlated to equity strategies and so the composi-tion of the fund of funds is mainly made of equity with some Sukuk funds, among which we find Templeton fund.. What made you opt for the fund of funds strategy ? The purpose behind the choice of fund of funds is to diversify and have a global exposure to different management strate-gies. Do you encounter any constraints ? One constraint is that the final investors use the Euro currency for their savings and investments. There are many funds
- 24. that are not Euro or dollar denominated and so require hedging in compliance with Islamic Finance. We have around 30% dollar expo-sure VitisLife - Amâne Exclusive Life : Interview of Bastien Perrine Responsable (VitisLife) 24 As you already know, Islamic Finance has existed for many years now, what are to you the elements that made Vitis Life launch an Islamic life insurance contract ? why the sudden infatuation ? Vitis Life operates in the French market since 2007 and in order to differentiate ourselves from our competitors located in France and in Luxembourg, we had to find a solution that our compe-titors have not yet looked at and this is where it hit us and we thought that Islamic Finance is a very interesting topic and holds enormous potential due to its ethical component. Was the product at its launch presented as an ethical pro-duct or as Sharia-Compliant ? Did you choose to sell it as an Islamic product or did you choose a different positio-ning ? The product was presented as one that respects Islamic Finance principles, but above all, we have worked with our marketing and communication team to make the product more attractive espe-cially since we are on the French market. In my opinion, we should not be ashamed to speak of an Islamic product since it is not really the product that has an ethical virtue but it is Islamic Finance that does. An Islamic Finance professio-nal once told me : « Finance should be at the service of the eco-nomy and not the other way around » and this is the idea we want to carry out. Why France ? We made an arbitration to decide on which territory we would launch our product, let’s take the example of Belgium for the sake of illustration, this country was not selected because the number of the Muslim population is not that important even if we already market products over there. Spain was not selected for regulatory constraints since a death guarantee is required in a Life-Insurance contract which is prohibited by Islamic Finance. This is why France as a choice came naturally, we already have a good knowledge of this market that has the largest Muslim po-pulation in Europe and we already market a conventional invest-ment management product so it was easier for us to start from this existing product and clone it in some sort. What is your target and the potential for collection in france ? Our target is rather wealthy individuals, for instance, the average premium last year was €400 000. We kept the same logic as for our conventional business. Is there a difference between a conventional contract and yours ? Our contract is a management contract, the operation behind is simple, we create an envelope in which the manager gets plugged to accomplish his mandate. For the time being, our contract is an OPCVM free management contract that has no differences with a conventional contract. Could you describe your distribution model ? The historical partners of Vitis Life are independent managers and we continually develop our relationship with them, we also em-phasize on institutional clients : private banks, asset management companies with whom we have I believe crossing over interests and to be able to continue promoting our offer and live in an open architecture, institutions would potentially need Sharia-Com-pliant life insurance to shelter their management mandate. Do you wish to diversify your Sharia-Compliant product offerings ? For now, we keep on doing what we do best, that is management products for wealthy clients. Evolution and diversification might come in capitalization for individuals and legal persons. and is managed using sharia compliant instruments. What are your prospects for future development ? We are planning to launch two additional compartments. The second compartment will be created very soon and will aim to invest in Sukuk, as for the third compartment, it will be a compartment in direct action, rather than through equity funds. The objective would be to invest in European stocks that have an appropriate/acceptable capital structure that would make them eligible given the criteria specified by Islamic finance. As for the fund, the first objective is to become a multi-compartment SICAV that allows investors to pick their strategy and allows us to attract different investor profiles.
- 25. Launch of NoorAssur.com, independent platform for islamic savings solutions - exclusive interview of founder Sonia Mariji Aware of the growth of the Islamic finance market, and of islamic life insurance in particular, Sonia Mariji, strong of a robust expe-rience of more than 10 years in the finance - brokerage, creates NoorAssur.com, first web platform of intermediation specialized in halal Could you describe NoorAssur.com? NoorAssur.com is an independent platform of orientation which is going to allow the people interested by products of halal savings and investment to be redirected towards a qualified broker near their place of residence, and it is possible through a system of geo-localization. The people will have to fill up a questionnaire on the website for that purpose. This way, NoorAssur.com allows the Internet users-prospects to reach the offers of halal savings and investment in France. Besides, Noorassur.com offers to partner brokers to enter in contact with new targeted pros-pects who reside in their zone of activity. Our specificity being that this getting in touch will be free. We plan to organize training sessions to familiarize the brokers with the products which we reference on NoorAssur.com. The idea is to bring an additional training to pro-fessional 25 brokers. savings solutions. Why have you decided to launch Noorassur.com ? Since I distribute the product Salaam, I visited a number of islamic fairs such as the Annual Meeting of the western Muslims ( RAMO) of Nantes, the cultural days organized in Lyon, to meet potential Muslim customers. I noticed that there was a very high demand from them, and a cruel lack of information. The objective of NoorAssur.com is to answer this need, by informing about products, by commu-nicating with the future prospects but also with the professionals of the insurance industry, who are not yet formed in these products. These products exist, there is a high demand, but channels of information, communication and connection between the supply and demand were clearly missing ; the objective of Noorassur.com is to create this bridge to connect all the actors. What are your future axes of development ? We would like to list every halal insurance products that exist and that will come to the market in our database. For the moment, we are on the life insurance, but if insurance products such as takaful had to appear, we shall also add them.
- 26. CROWDFUNDING & islamic Finance By Maxime Dossa, Consultant, Crowdfunding The Crowdfunding is a technique used to finance projects using internet technologies to collect the necessary funds to the realization of projects initially referenced on a computer platform. Crowdfunding platforms bring together carriers of projects and investors. Pro-jects with a social purpose can also take advantage of this technique and seek financing in the form of grants. Crowdfunding has an Anglo-Saxon Origin and it has attracted public interest last year in Europe in general and France in particular as a result of the global financial crisis. In the face of the financing difficulties in the French economy and especially for the Small and medium size businesses, this technique has witnessed a keen interest from internet users who have quickly realized that they could finance all sorts of projects thanks to disintermediation techniques. The FinPart association is one of the actors who were active in a lobbying campaign to overcome the regulating authorities’ reluctance. The evolution of the legal framework of crowdfunding has been the subject of a public consultation on the basis of a text submitted by Fleur Pellerin, minister in charge of the digital economy. However, prior to this evolution, many platforms had to operate in an uncer-tain 26 environment, others had to close for regulatory reasons. Note that the different modes of financing using crowdfunding platforms are : - Donation with nothing in return- Donation against donation - Free loan - Paid Loan - Capital Investment Since February 14th 2014, the minister in charge of the digital economy Fleur Pellerin gave the confirmation for the adoption of a law regulating crowdfunding. The end of banking monopoly With crowdfunding, it’s the end of the monopoly of banks on in-terest loans because every individual will now have the option to lend at interest up to €1000 per project. This is a clear step forward compared to the previous text sub-mitted to consultation where the cap was €250 per person. Let’s not forget that every project will be able to raise up to €1 million. Loan’s platforms Now with the new law regulating crowdfunding, the status of in-termediary in crowdfunding will be required, thus, making the remuneration of the loan possible. Platforms for capital funding The second status created by the law is the status of Crowdfun-ding advisor (Conseiller en investissement participatif). This way, individuals will be able to invest in the form of equity in compa-nies via the platforms. The remuneration of the investor will be made in the form of dividends. let’s note that the new law exempts crowdfunding platforms from making a savings’ public offering. The activities won’t and can’t be considered as saving’s public offerings and the platforms won’t be bound by the obligation to produce a prospectus as is the case for companies providing in-vestment services and banking establishments. What role for Islamic Finance ? Crowdfunding platforms can mobilize donations (zakat/charity) to the parties responsible for this « tax » to finance solidarity ac-tions in France and the whole wide world. As for the free loan, it is well known that the priinciples of Islamic Finance (Qard Has-san) allow it. The solidarity lender would make available a capital that would go in financing a company that needs to use the funds with respect to the ethical principles unique to Islamic finance. The revenues generated by the company can be invested in other projects. Some lenders can impose a remuneration : once again, thanks to the Mudaraba, the lender can perceive a remuneration out of the performance realized by the entrepreneur who becomes a paid manager, a payment for growing the lender’s savings. For an investor profile, he can make a contribution in a company’s equity (Mousharaka) by agreeing to take the risk of sharing pro-fits and losses generated by the investment. These mechanisms are now possible from a technical stand point and legally compatible with the recently adopted legislation on crowd funding. Even for Takaful insurance products, crowdfunding mechanisms can be
- 27. used to create pools of insured people who would gather their savings in a solidarity fund and thus cover losses of the insured with respect to Islamic finance principles. Through the tools mentioned above, we understand that it is possible thanks to crowdfunding to participate in financing the companies eligible for Islamic Finance investments. Thus daring to break the banking monopoly, the public authorities provide incentives for inno-vation exclusive Interview : M. Kacem Ibn Abdeljalil, Directeur Adjoint Marke-ting & Communication at Chaabi Bank Paris Interview by Mlle Zineb OUALADI & M. Karim KARA, 25 March 2014 27 and stimulate the growth of SME’s in France. England wishes to make London one of the world’s Islamic finance most important destinations, do you think that France will pursue the same ob-jective ? To this day, not one French bank has ex-hibited the will to explore this market ex-cept for Chaabi Bank. No banking license was issued to new foreign entrants (Isla-mic institutions). The legal framework is rather more favorable to a joint-venture with an Islamic bank and even trying to encourage French banks to open an Isla-mic window. The City remains today the leading euro-pean place for this activity. Nearly three years have passed since the launch of the Chaabi Harmonis line, what is the feedback Chaabi Bank can give from this experience ? In 2011, Chaabi chose to market a depo-sit account consistent with the principles and precepts of Islamic Finance. In 2012, the bank has expanded its product line by offering its customers a murabaha finan-cing. All of this was in accordance with August 2010 fiscal instructions. These products have enabled Chaabi Bank to diversify its clientele that was mainly made of artisans and middle managers but has become more diverse lately, we can find young clients with an average age of 36 years from higher social categories (Se-nior Executives, doctors, lawyers, business people…) and having a sizable personal contribution-about 36% of the investment program, which is very rare in conven-tional finance. We can say that these cus-tomers with high savings capacity had re-frained from investing as they did not find products matching their ethics. The bank finances old and new properties for primary residence or rental investment (purchase for rental) and finances the pur-chase of land to build. Mr. Ibn Abdejalil has confirmed that the bank does not plan for now to launch other forms of Islamic financing, given that the tax smoothing that would make the decreasing Musharaka possible hasn’t taken place yet. For Ijara, a mode of fi-nancing that resembles leasing, the bank would have to resort to outsourcing of the acquired properties’ management which would obviously engender additional costs. In addition, Chaabi Bank is considering expanding its product range with the launch of new Balance sheet savings pro-duct « Savings account » for which the fea-sibility studies are still undergoing. Why was there not consumer com-munication around these products in France ? The introduction of Islamic Finance in France by Chaabi Bank was made without advertising and without any voluntary public communication. Given the size of its network, Chaabi Bank chose a gradual increase in capacity and costs, relying only on « Word of mouth », the associa-tive fabric and the regular participation in conferences on the topic of Islamic Fi-nance. Then, the first entry channel of the bank was the call center for customer re-lationships. What are your projects on the euro-pean territory for the future ? M. Ibn Abdeljalil Kacem has confirmed that Chaabi is preparing for 2014 the launch of certain Harmonis products in Belgium. The offer will include first « De-posit account and savings account ». The project was recently presented to the Na-tional Bank of Belgium. Thereafter, for more sophisticated pro-ducts including real estate financing, Chaabi Bank will wait for the Belgian au-thorities to establish some fiscal reforms so that the products are cost competitive compared to the ones proposed by the conventional industry. As for other European subsidiaries, Ger-many and Holland will follow.
- 28. The shariah compliant investment By Erragraguy Elias INTRODUCTION The fund manager manages on behalf of investors who hold shares or stocks depending on the legal form of the investment vehicle. Al-though the principle of investment is entirely consistent with the Islamic ethics, the issue of Sharia Compliance is central to the constraints that Fund managers face. These managers need to ensure not only the legal compliance of the contracts between the fund and the investors but also the compliance of the securities selected by the portfolio manager. As explained by Khatkhatay et Nisar (Khatkhatay et Nisar, 2007, p. 221), a stock certificate holder who is considered to be similar to a shareholder is legally responsible for the compliance of the business activities to the Sharia’. However, the authors explain that as a minority shareholder, he has no or little influence on the conduct of business. Thus, the changing nature of the business activity requires regular monitoring from the investor to ensure the company’s activities comply with the Sharia. Portfolios of equity funds are highly diversified and clients find themselves committed to a large number of companies which are them-selves often involved in several activities. As a result, small investors’ reach remains limited and they can not fully ensure the companies’ 28 Islamic funds apply a set of filters that reduce the investment universe for their portfolios, similar to the screening ap-proach used in Socially Responsible In-vestment (SRI) funds. The SRI filters are strictly extra-financial, Islamic investment on the other hand imposes extra finan-cial or qualitative factors and financial or quantitative factors. In addition to the filtering process, the management of Isla-mic assets requires the establishment of a « purification » process to extract revenues from activities deemed unlawful/prohi-bited. Qualitative filters The qualitative criterion consists of the Sharia Compliance of the activities of the company targeted for investment. Sharia categorizes certain business activities as unlawful or haram, it prohibits any invest-ment in companies whose primary acti-vity is considered haram. In addition to the sectors clearly illegal under the Sharia, other sectors whose main activity is sharia compliant may be excluded due to a significant exposure to illicit activities. This is the case of the hospitality industry, food distribution and airlines. Nonetheless, cases where companies with lawful primary activities are engaged in illicit secondary activities exist. It is the case for publicly traded big firms and conglomerates that own a significant number of subsidiaries and other com-panies operating in various sectors. The most conservative Islamic jurists prohi-bit investment in such companies, they consider them to be non-compliant to the sharia’ from the moment they derive a proportion of their revenues, no matter how marginal, from an illicit activity. Ne-vertheless, the majority of jurists tolerate that a marginal part of revenues comes from a Haram activity, invoking the prin-ciple of utility. They explain that a strict exclusion would reduce dramatically the eligibility and significantly increase the risk exposure of Islamic funds. The tole-rance level should not, however exceed the limits set by Sharia boards of each fund or index. Quantitative filters When the company passes the qualitative filters, she goes through a quantitative screening that targets the financial struc-ture of the company. The quantitative fil- activities compliance. The criteria of sharia compliance of the Islamic funds
- 29. ters aim to assess the exposure level on the basis of the two prohibitions related to sources of funding : - the prohibition of payment and receipt of interest ; - the prohibition of marketing of cash or monetary or liquid assets (debt, cash and receivables) Given the wide availability and use of bank debt and marketing of monetary assets in today’s modern economic landscape, it is very dif-ficult to imagine the systematic exclusion of any company using those practices. Thus, funds exclude exclusively companies that exceed the tolerance limits set by Islamic jurists. Wilson (2004) notes that the true reason behind such tolerance is that the strict exclusion of any company exposed to an illicit practice would lead to the exclusion of almsot all listed companies. Companies that are fully sharia-com-pliant are almost non-existent in the current financial landscape (Khatkhatay et Nisar, 2007; Derigs et Marzban, 2008). The Accounting and Auditing organization for Islamic Financial Institutions (AAOIFI), which is the organization responsible for setting the accounting and financial standards of Islamic financial institutions, has identified several accounting indicators (AAOIFI, 2004). Despite the diversity in practices, there is a consensus among the most influential sharia boards around three types of indicators : 29 The debt level of the company Bank loan financing has become a common practice today by all types of companies, no matter their size. Fluctuatuions in net working capital requirements, financing needs of physical assets and arbitrage of financing costs may push the company towards bank financing which is more flexible and available, to complement equity financing. Economic imperatives and the marginal share of Islamic financing available to businesses make the conventional bank financing unavoidable for the majority of listed companies. Therefore, Sharia boards tolerate, in accor-dance with the principle of necessity (dharura), a certain level of debt in the liabilities of targeted companies for Islamic invest-ment. The indicators usually used by the Sharia boards are : Debt to Equity Ratio; Debt to Assets Ratio; Debt to Market Capitalization Ratio The Level of receivables This criterion is derived from the prohibition of the sale of money market products (sarf) and the equivalence constraint surroun-ding the transfer of receivables or hawala (Khatkhatay et Nisar, 2007). In Islamic Law, the transfer of debt/receivables is accep-table only if based on the actual value of the sum. A debt having an intrinsic monetary value that is inalienable can not be trans-ferred unless it is against an equivalent monetary value. However, as noted by Khatkhatay et Nisar (2007), if we consider that the market value of a company represents the price paid for its acqui-sition, the investor who owns the shares becomes the owner of a part of the assets as well as the liabilities. In the case where the non-current assets of a company represent a marginal part in the market value of a company (as is the case for trading companies), the curent assets would represent the largest part of the market value. Since the market value may be different from the book va-lue, if we deduct the inventory (expressed in market value terms) from the assets, the residual market value assigned to receivables and cash may differ from its actual book value, thereby violating the equivalence principle in the transfer of receivables (Khatkha-tay et Nisar, 2007). In order to reduce the possibility of occurrence of a similar si-tuation deemed to be non-compliant to Islamic law, the AAOIFI recommends excluding companies of which the majority of assets are of a liquid nature (cash, receivables). The shariah boards use different accounting data to assess the level of a company’s liqui-dity. The accounting ratios used are : - Receivables/ total assets (or market capitalization) - Receivables+Cash/ total Assets (or market capitalization) - Receivables+Cash+monetary products/ total assets (or market capitalization) - The cap of tolerance that is fixed freely by Sharia’ boards varies generally between 33% and 50%. - The level of monetary assets (cash, money market products, etc.) This ratio targets the level of liquid assets because they are sub-ject to the payment of interest. There is no consensus on the ratio used to measure the acceptable level of liquid assets. Some Sharia boards therefore use the sum of money market products (Certifi-cates of deposit, treasury bills, etc.) and the company’s cash. It appears that the absence of a consensus exists among the diffe-rent Islamic jurists on the type of indicator and the tolerance cap allowed in the selection of sharia compliant firms. Malaysians appear as the most liberal since they don’t look at the financial structure of the company, while this practice is generally accepted around the world. There are two types of splitters used in the accounting ratios : market capitalization on one hand and the total assets on the other hand. Proponents of the accounting indicator (total assets) argue that the accounting indicator represents the objective value of the company while the market capitalization tends to be in-fluenced by the fluctuations in market prices. On the other hand, proponents of market capitalization estimate that the fair value of a company is reflected by its market price because it captures the real and true value estimated by investors as well as the value of intangible assets that are not taken into account in the companies’ balance sheets.
- 30. Purification of revenues When a portion of the revenues generated come from illicit acti-vities, they must be purified by donating a certain share to charity (Elgari, 2002). There is no consensus in the doctrine on the origin of this obligation. For some, only the remuneration in the form of dividends is subject to purification (Delorenzo, 2000), for others, the capital gains on securities must be added because any price increase is assumed to take into account the overall increase in the value of a company. In the latter case, the share of the capital appreciation that comes from illicit activities is very difficult to estimate. For Elfakhani et Hassan (2005), the purification can be carried out by the fund manager before the distribution of inco-me. Some authors have highlighted the « arbitrary » and sometimes « subjective » definition of quantitative criteria recommended by Islamic jurists (Obaidullah, 2005). Accordingly, as noted by Derigs et Marzban (2008), the same company may be declared sharia compliant by a sharia expert and rejected by another. The arguments of Islamic jurists portray the sharia compliant criteria as being « transient » and subject to contextual adaptation. Thus, the complexity of structural and financial constraints that impose themselves in a variable manner to companies, depending on the size and nature of their activities, should result in an increased heterogeneity and a greater adaptability of Islamic finance criteria based on the economic characteristics specific and unique to each company. Despite the rapid growth of Islamic finance on a global level, some criticism on the lack of consideration of the social issues is becoming more frequent. That’s how Ahmad al Naggar, pioneer in islamic banking in Egypt, has recently declared : « Islamic financial institutions have not yet started their true work, having failed so far in their social and educational mission ». This position agrees with the criticism according to which the current islamic investment practices are becoming more and more guided by a search of compliance and legal conformity rather than by social considerations, highly present in the Islamic ethic (Choudhury, 2008). 30 CONCLUSION BIBLIOGRAPHIE AAOIFI (2004). «Shari’a Standards, Accounting and Auditing Organization for Islamic Financial Institutions.» Choudhury, M. A. (2008). «Islamic Eco-nomics and Finance--A Fiasco.» Middle East Business and Economic Review 20(1): 38-51. Delorenzo, Y. (2000). Shariah Supervision of Islamic Mutual Funds. The Fourth Harvard University Forum on Islamic Finance, Harvard University, Cambridge, MA. These can alternatively simply declare and communicate to investors the amount that must be purified, so that they can do so on their own. They state that this second method makes Islamic funds more comparable to Conventional funds. The AAOIFI recommends that the responsibility of the purifica-tion is primarily the managers’ responsibility. Derigs, U. et S. Marzban (2008). «Review and analysis of current Shariah-compliant equity screening practices.» International Journal of Islamic and Middle Eastern Finance and Management 1(4): 285–303. Elfakhani, S. et M. K. Hassan (2005). Performance of Islamic mutual funds. Economic Research Forum, 12th Annual Conference. Elgari, M. A. (2002). Purification of Islamic Equity Funds: Methodology and Shariah Foundations. Fourth Harvard University Forum on Islamic Finance. Khatkhatay, M. H. et S. Nisar (2007). «Shariah Compliant Equity Investments: An Assessment of Current Screening Norms.» Islamic Economic Studies 15(1): 47-76. Obaidullah, M. (2005). «Islamic financial services.» Wilson, R. (2004). Screening criteria for islamic equity funds. Islamic Asset Management: Forming the Future for Shariah-Compliant Investment Strategies. S. Jaffer. London, UK, Euromoney Books.
- 31. Mauritius, Africa and Islamic Finance By Muniruddeen Lallmahamood 31 Islamic Finance is one of the most exciting areas of the global financial sector at the dawn of the 21st century, and today, be-side the Gulf Cooperation Council (GCC) and Malaysia, other financial centers like London, Luxembourg and Hong Kong are positioning themselves to play a vital part in the industry’s development in the new century. According to Ernst and Young’s latest World Islamic Banking Competitive-ness Report 2013-2014, Global Islamic Banking assets with commercial banks reached US$1.54t in 2012 and are set to cross US$1.7t in 2013 (representing an an-nual growth of 17.6% over last four years). Furthermore, six RGMs (Rapid-Growth Markets), QISMUT (Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey), together, made up 78% of the internatio-nal Islamic Banking assets in 2012. The question is: Would the Islamic finan-cial system expand beyond the current GCC and Malaysia to other continents, and in particular to the African countries? To many, Islamic Banking has a big untap-ped niche in Africa. Islamic Finance in Africa is probably the next logical or strategic decision for any financial institution and asset manage-ment companies to extend their products and services, owing to the fact that Afri-ca has the highest percentage of Muslims (52%) in the world. According to reports and surveys, the growth of assets of Is-lamic banks today in the world is partly attributed to fulfilling clients’ needs both financially and spiritually. The fact that Muslims in Northern African countries comprise of 99% of the total population, the market segment of Islamic Banking in-dustry would therefore first attract those of Muslim faith. This former hypothesis was proven by a recent survey. Africa has its history of Islamic Finance. The notion of interest (Riba) charged, a major principle on which an Islamic fi-nance system is not based upon, was cri-ticized by Islamic scholars when Barclays Bank opened its Cairo branch to process the financial transactions relating to the construction of the Suez Canal in 1890. The former bank was understood to be the first commercial bank established in the Muslim world according to the Islamic Development Bank’s report. Egypt or Mit Ghamr Savings Bank was also once the centre for the first modern financial ins-titution offering Sharia compliant deposit and financing facilities. An assessment of the African opportuni-ties for potential market are characterized by faster and higher economic growth than advanced economies. Countries that are currently doing well include Botswana, Nigeria, Kenya, Mauritius and South Afri-ca. South Africa has joined the “BRICS” countries and is the African continent’s only G20 member. Africa has a huge potential labor capacity; the young and growing population is one of the conti-nent’s biggest competitive advantages. World Bank statistics reveal that US$93 billion a year is needed for only Sub-Saha-ran Africa’s investment in infrastructure (new assets and maintenance of existing ones) of which around only 48% is being mobilised. A gap of US$48 billion is to be funded. The Islamic Development Bank has been a key provider of Islamic project finance in Africa. The Special Programme for the Development of Africa (SPDA), formal-ly ended in 2012, had an average level of funding of US$12 billion for the 5-years period (2008-2012), which again shows the gap and opportunities available for in-vestment. On the retail side, Islamic Finance acts as a tool for development on the basis that there are consumers whose demand for Sharia compliant products were not being met. Out of the 600+ Islamic financial ins-titutions (IFIs) in the world, there are only about 40-50 operating in Africa. Having said that, the Islamic Banking in-dustry in Africa remains embryonic and although the recent Arab spring where Northern African countries made pro-mises to develop its Islamic financial ser-vices industry, they face major hurdles. Overall, Africa has an underdeveloped state of financial markets. Most of its po-pulation is largely underserved and only three African banks rank in the Top 200 banks according to the Banker. [M1] Spe-cific challenges pertaining to Islamic Fi-nance would include dearth of knowledge, skills and technical capacity as well as absence of a robust regulatory and legal framework. The three pillars of growth in Africa would be to focus on the 52% Muslim population, Non-Muslim popu-lation and the growth and development agenda of Africa. Who would lead or become the Islamic fi-nancial hub in Africa remains unknown. Mauritius’s regulatory framework has been fully amended to accommodate Is-lamic Finance industry development, but
- 32. 32 as of today, the facilities under the Islamic Finance industry are still underutilized. In South Africa, the Income Tax Act 1968 has already been amended to cater for Isla-mic financial services. Both Mauritius and South Africa could issue the first African sovereign Sukuk and would be considered as the leading players offering Islamic pro-ducts and services in the next decade. Mauritius would be an attractive plat-form for the issue of Sukuk: introduction of innovative vehicles, structuring and financing products; network of Double Taxation Agreements (DTAs); cumulating memberships in African preferential trade networks (such as COMESA and SADC); growing Investment Promotion Protec-tion Agreements (IPPAs); International Recognition & OECD White Listed Ju-risdiction; and several regulatory amend-ments to cater for Islamic Financial ser-vices [namely, amendments made to the Banking Act 2004, publication of Guide-lines for Institutions Conducting Islamic Banking Business and issue of Statement of Standard Practice SP5/10 by the Mau-ritius Revenue Authority on VAT (Value Added Tax) on Murabahah transactions] are some of the elements that fosters the island’s attractiveness. To date, a number of Shari’ah-compliant funds have been do-miciled in Mauritius due to the attractive tax regime, appropriate legal framework and the country’s strategic location and time zone. Islamic Finance should, nevertheless, not be misconceived as being limited to only high-net worth individuals, business per-sonnel or the middle class. Its benefits could potentially be extended to the lower class through Islamic Microfinance, a missing component of Islamic Finance in many countries. Islamic Finance, overall, has high scope for poverty reduction and ultimate socio-economic prosperity and a bright and promising future in Africa. Munirudeen LalMahmood
- 33. Promoting sovereign Sukuk Insurance for infrastructure development in lower-rated countries By Amadou Dem Sukuk is one of the financial instruments in Islamic finance that are used to raise financing for infrastructure projects. Based on the risk sharing principle, they give the holders a share in the ownership of underlying assets. Their returns depend on the profits generated by the asset or investment financed by the proceeds of the sukuk issuance. They have grown rapidly from 25 US$ billion in 2006 to reach US$130 billion in 2012 according to the 2013 Global Sukuk report of the Malaysia International Islamic Financial Center. This is a re-markable performance. However, only a very limited number of low income countries have been able to issue sukuk due to their weak credit worthiness and capacity to attract foreign investors. New sovereign sukuk insurance policies that are now available could contribute to improving access to capital markets for this group of countries. Sovereign sukuk Insurance for credit enhancement 33 One of the reasons why developing countries rated at low or be-low investment grade have not been able to issue sukuk for in-frastructure development is the high default risk associated with their relatively weak creditworthiness. Sukuk insurance policies that could contribute to credit enhancement for the issuances are now offered by the Islamic Development Bank (IDB), through its Insurance of Export Credit and Investment (ICIEC) agency which, with its a Aa3 rating, has a very low risk of defaulting. The Board of the Bank has approved this new credit enhancement instrument since April 2013 and the insurance policies became available to its client countries since late 2013. No policy has been issued by the ICIEC so far. At this stage, the insurance is only available for the issuance of ijarah-based sukuk. This is a major step forward to facilitate ac-cess to international capital market for low investment grade IDB client countries. However, ICIEC currently has limited capacity and can only guarantee up to $125 million of an issuance to ma-nage its own risk exposure. This is a significant limitation for infrastructure projects. For that reason, partnerships with other global insurers and reinsurers are critical to provide further insu-rance capacity. This will require dealing with the challenges that are expected to arise with technical, legal and regulatory aspects related to the application of sharia principles including mutual responsibility, ownership of the insurance fund by the policyhol-ders, and transparency of all terms of the contract with no hidden fees.
- 34. The role of development institutions Commitment to respond to the sharia compliant insurance needs of low investment grade or unrated countries is expected to be rela-tively strong from development institutions such as the Multilateral Investment Guarantee Agency (MIGA) of the World Bank. The Bank did stress during its October 2013 annual meetings its interest to further promote Islamic finance in response to the growing demand from its member and client countries from Asia, Middle East and Africa. Such commitment would likely be difficult to firm up from profit oriented and risk adverse global insurers with more conventional business models. The development institutions have therefore a daunting challenging to promote this much need sovereign sukuk insurance coverage themselves in line with their commitment to mo-bilize new sources of infrastructure finance for developing countries and to respond to those seeking to use sharia compliant financing instruments. They should be encouraged to foster partnerships and explore opportunities to leverage the capacity of conventional global insurance institutions through partial credit guarantees mechanisms. Institutional capacity for sukuk based infrastructure projects development Developing the sovereign sukuk insurance market alone would not be sufficient for low investment grade or unrated countries. Indeed, these countries generally lack the institutional capacity to promote infrastructure projects that could be financed by sukuk issuances. This requires expertise from a dedicated team that is able to identify infrastructure projects opportunities which could be financed by proceeds from sukuk issuances. The team should be able to identify all the critical project related risks and propose mitigation measures that should guide project design. It should be established within a strong investment promotion agency and work closely with the Mi-nistry of Finance to ensure that all the relevant government entities are involved and all fiduciary aspects are properly addressed to meet the good practice requirements and, hence, improve the risk perception of potential investors. These countries also lack the capacity to monitor and evaluate project implementation which is critical to ensure sound management and reporting of profits generated. The special purpose vehicule usually set up to implement the project can contribute to bridging this capacity gap by bringing the required expertise and management systems. By strengthening their capacity, these countries will improve their enabling environment which is a key condition to ease access to so-vereign 34 sukuk insurance programs.
- 35. Predictable scandal for the Islamic finance industry By Laurent Marliere Poor risk-management could dramatically hit the new-born Islamic economy The Enron scandal, exposed in October 2001, eventually led to the bankruptcy of one of the largest American energy companies and the dissolution of accounting giant Arthur Andersen. Many executives at Enron were indicted for a variety of charges and sentenced to prison. The company and its advisors lost the majority of their customers and closed. Employees and shareholders received limited returns in lawsuits, despite losing billions in pensions and stock prices. Could a similar scenario take place in the heavenly haven of Sharia-compliant finance? The Islamic finance industry prides itself of its healthy and ethical governance. Over the years and after the turmoil of the 2008 financial crisis, it has become a welcome landmark and an alternative to the ill conventional banking system. Nevertheless, the crystal-clear water of Islamic finance may be troubled by internal and external winds. In fact, the stormy issue involves the entire Islamic economy, not just the Islamic finance or banking microcosm. Lack of maturity and conflicts of interest 35 Islamic economy is a new industry. Its standards, the control and the certification of Sharia-compliant products are not evolved on an international scale. The certification process has reached a le-vel of maturity in a minority of countries at a time when Islamic finance or the «halalization» of products is becoming popular throughout the world. The Sharia-scholar who plays a key role in the Islamic economy belongs to a profession that is not regulated on a global scale. In some countries, a dog with a hat can grow a beard and claim to be a «Sharia-scholar»… Naturally, there are skilled and highly-respected Sharia-scholars acclaimed by the industry. But there again, acknowledged experts are found only in very limited numbers. This situation is criti-cal as it leads to an unhealthy concentration of expertise, which raises anti-trust issues and potential conflicts of interest among Islamic banks. This, in turn, opens the door to many incidents, and one can pre-dict that a time will come when «halal» scandals will start hitting the news.
- 36. The absence of standards is not an issue. There are plenty of standards, which are highly sophisticated and regulative for the industry. Well-respected bodies such as the IFSB or the AAOIFI produce them. In fact, there may already be too many guidelines issued by too many organisations! The real issue is the export and legitimacy of these rules in non-Muslim countries, which are de facto partie pre-nante » to the Islamic markets as they export heavily in those countries. An appealing retail market of 1.6 billion Muslim consumers is attractive to global industry. Many corporations are currently in a phase of rebranding their products or creating a halal capacity. The efforts of regional hubs willing to set a row of international standards to run the industry must be saluted. Malaysia has been suc-cessful at it and benefits from incommensurable experience. Regretfully, the country has not been able to export this model beyond its national boundaries. Will Dubai, which offers a larger window to the world, be in a position to take up the challenge and export a standardisation model that offers a solid base to regulate a multi-billion dollar industry? This smart and visionary effort was started by the Ruler of Dubai, but he will require relays in other parts of the world to propagate the industry’s set of rules. Indeed, the effort is not limited to the consumption markets of the Islamic countries: most Halal production occurs in the West, in non-Muslim countries… The standards and controls have to be initiated within the production hubs ! Same guys, new suits Getting a bad reputation is a package deal: not all conventional banks were acting im-properly, but after the Lehman Brothers scandal, the entire conventional banking system was harmed and condemned. The same actors who originated one of the greatest scandals in the capitalist era are now playing in the Islamic league. They have put on a new suit and are working on Sharia-compliant transactions: global banks, global law firms, accounting firms, auditors… some of which have their own Sharia-scholars. There is a warning out there: industry lea-ders should be very selective when they hire professional and advisory services. One of the key criteria in retaining advice should be the independence of the profes-sional they hire. The Enron case was mainly caused by a major conflict of interest. Arthur An-dersen, the Big Five of the now reduced «Big Four», was the counsellor and the auditor of the Texas-based giant. This is a conflict scheme often found in the Isla-mic industry : the advisor happens to be the certificatory body as well. There are certainly benefits in organising a one-stop shop, and indeed a need from the market, but it may be a very short-sighted perspec-tive for the whole industry. Such a conflict of interest scheme would be impossible in another type of certification such as the ISO 9000 system. The quality advisor can-not The malodorous practices listed above can be depicted as Haram* Islamic finance. Evil should not been seen and sought everywhere. If the involvement of the conventional players in the ethical Islamic industry can lead towards a better governance and better service to clients, it should be acclaimed. However, the fact that Islamic markets are a new Eldo-rado for many economic actors could lead to a dilution of the benefits of that particular Islamic industry. A balance needs to be struck and it will be difficult to achieve a safe path on the new «silk road» which has been created between East and West. Islamic banking is an industry based on trust. The fact that some suppliers are not completely trustworthy will impact the reputation and the trust of the industry. We have seen famous western brands like Nike or Adidas shaken by the fact that their suppliers were exploiting poor people in Bangladesh in shameful sweatshops. Neither the brand nor the flag of the industry can hide their weaknesses. There is a sufficient amount of opponents to the propagation of Islamic finance in the world who could make use of these substantial threats to * Haram means forbidden, immoral or sinful and the opposite of Halal, which means authorised by the Sharia. 36 Standardisation mess Halal Eldorado and Halal tsunami be the issuer of the certificate. This is sound and healthy. The temptation for many conventional banks to open an «Islamic window» is questionable as well. Questionable not on the marketing side, where it is understan-dable, but on the ethical side. Could we have a Lehman Brothers bank with an Is-lamic window ? Words are important: why a window? Do Muslim consumers have to enter these banks by a window and not by the door? Is there something to hide? Could a scandal occurring in a conventional bank, having an Islamic window, harm the Isla-mic finance industry ? Of course it could !
- 37. discredit an industry of good will composed by many great professionals who are trying to bring about an ethical solution to financial markets. Decision-makers in the Islamic industry are urged to brainstorm and have an in-depth analysis of their risk-management. When the real «Halal» scandal happens, it will not be a tumult, but a tsunami on an industry that is not ready to handle a communication crisis. Most Islamic businesses are actually good in their production process but weak in their marketing and communications. Most of them cannot handle properly a sound marketing communication with their clients in peacetime… How will they cope with a war on their products ? If the industry cannot react in due course, then at least the Enron scandal had a positive consequence: new regulations and legislation with global reach were enacted to expand the accuracy of financial reporting for companies. The act also increased the accountabi-lity of auditing firms to remain unbiased and independent of their clients… What have we learned? duction, mais faibles dans leur marketing et communications. 37 Prof Laurent Marliere is a London-based expert on the Islamic Economy. He lectures on «marketing for Islamic markets». He is the CEO of ISFIN, a global consultancy active in 65 countries. LM@isfin.net»LM@isfin.net Director of Publication : M.Merbouh Kader contact : kader.merbouh@dauphine.fr