Administrator on August 3rd, 2009
Makkah Masjid has been involved in raising awareness of the ever growing area of Islamic Finance for a number of years.
Imam of Makkah Masjid, Qari Asim, provides training and attends seminars and conferences pertaining to Islamic Finance and Islamic banking. As part of his legal practice at DLA Piper UK LLP, he also deals with Islamic Finance. DLA Piper’s lawyers have experience of working on ground breaking and award winning transactions across the region and internationally. They have worked on devising novel structures in ijara, murabaha, mudaraba, takaful, musharaka, istisna’a, wakala and sukuk transactional structures in financing petrochemical and power projects, telecommunications, real estate acquisition and development, infrastructure and construction and funds. For further details, please visit: http://www.dlapiper.com/uk/islamic_finance/Global
Interest in Islamic Finance
Despite the recession, one area of banking still booming is Islamic Finance. Islamic finance has come a long way since its active re-introduction about 30 years ago. Presently, it is estimated that Islamic banks and financial institutions manage some US$200 billion of funds all over the world. Although small in terms of the total global assets managed by financial intermediaries, the growth rate is impressive by any measure.
In 2008 an IMF report estimated that there were now more than 300 Islamic financial institutions operating in more than 75 countries at the end of 2007. With the industry sector maintaining a growth rate of 15% per annum over the last 10 years, it is predicted that this growth will continue or speed up in the coming years, dependant on different regulatory practices. Banks such as HSBC, Lloyds TSB, are two notable global banks offering Islamic Finance products to retail, commercial and financial market clients.
UK Government and Islamic Finance
A number of major cities are competing to be the hub for global Islamic Finance. In Europe, France and Germany has also expressed its interest in capitalising the Islamic Finance markets. To further promote London as a centre for global Islamic finance and to level the playing field between conventional and Islamic products the UK Budget 2009 made the following three statements:
- Provision of relief from stamp duty land tax (SDLT) in respect of transactions undertaken as part of the issue of alternative finance property investment bonds;
- provision of relief from tax on capital gains in respect of transfers of land to and from sukuk issuance vehicles; and
- ensuring that the person obtaining the financing will continue to be entitled to claim capital allowances while the land is held by the sukuk issuance vehicle.
Last December, the UK government published a paper setting out the government’s aim for London to be “Europe’s gateway to international Islamic finance”.
What is Islamic Finance?
- It is an alternative way to conventional banking.
- It is banking/financing with a conscience.
- It is a spiritual choice to take part in more risk, sometimes less gain for the greater good.
- It generally engages the Islamic financier as a CO-OWNER of the underlying assets thereby assuming certain risks, sharing in losses and likewise in profits.
Shairah principles prohibit certain transactions.
- Riba (transactions involving return on risk free basis), e.g. conventional loan, bond etc.
- Gharar (excessively speculative transaction), e.g. future sales, swaps etc.
- Transactions involving haram (forbidden) goods, e.g. drugs, alcohol, pork etc.
- Uncertain transactions, e.g. contracting on receivables or items not in possession or not specified, or agreeing to a contract material terms of which are not agreed.
The main instruments of Islamic Finance are:
- Musharaka (an Equitable partnership)
- Mudarba (Partnership Financing)
- Murabaha (Cost-Plus Financing)
- Ijara (Islamic leasing)
- Sukuk (bonds)
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank buys the property itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in instalments. Since the Bank owns the property, the bank can sell it to the buyer at a price that they agree between themselves.
Notable examples of Islamic Finance transactions include:
In the Middle East, US$9.8 billion refinery and petrochemical project at Rabigh is an example of a loan based on novel Islamicaly compliant structures fitting within a larger conventional financing structure.
A recent example of Islamic Finance was the funding of the Dubai Ports World takeover of P&O which, at USD3.5bn was the largest Sukuk in the world and the largest Islamic finance transaction to date.
Difference between Islamic Finance and Conventional Finance
There are many similarities between the Islamic Finance and Conventional Finance.In brief, the difference is in the approach and not necessarily on the financial impact. The key difference is that the rate of return on a loan is based on the asset transaction and not based on interest on money loaned. Some people note that there is hardly any difference because the borrower pays a “return” on the loan. However, to Muslims there is an inherent difference in the way the transaction is carried out. If Riba (money loaned at exorbitant rates) is involved, then the transaction is seen as prohibited in Islam. Islamic Finance is a system and it must be promoted and implemented as such.
Non-Muslims using Islamic Finance
Due to their increasing competitiveness and ethical focus, Islamic products are attracting both Muslims and non- Muslims. A growing number of non-Muslims are taking up Islamic Finance. The UK’s first Takaful (insurance) company, Salaam Insurance, has a significant part of its customer base made up from non-Muslims. This is essentially due to the conventional pricing of the product range but also due to the ethical nature of Islamic Finance itself. If products are developed using Islamic principles along with the conventional approach, Islamic Finance could become an even more significant market over the coming years. triggers of the financial crisis.
Islamic Finance & Credit Crunch
As a result of globalization, the Islamic finance markets have also not been immune to the financial crisis, but because of the ethical Islamic principles, the Islamic banks are not as highly leveraged as conventional banks and tended to stay away from the main
Due to the fact that Islamic banking has not been affected by credit crunch, the public, governments, financial institutions and bankers want to know about Islamic Finance and how it is that many Islamic institutions have escaped the worst effects of the recession.
Despite of the fact that the Islamic finance market is not large enough to solve the present credit crisis on its own, it can add an interesting dimension to a solution even for the non-Muslim community.
For Glossary of terms in Islamic Finance, please click on: http://www.islamic-banking.com/glossary_of_key_terms.aspx
Future of Islamic Finance
Future of Islamic Finance is becoming more and more viable in the UK and wider Europe. However, at present the response from the Muslim community in the UK has been slow. Shariah advisors agree that all products in the market are not perfect and there is a room for improvement. There are a number of challenges that have to be overcome before principles of Islamic economy are implemented in their entirety. Scholars from across the world need to explore the products that are currently available and provide their opinions on them and suggest possible alternatives before the Islamic finance products in the market can truly be said to be perfect. However, those products that are currently available in the do offer an alternative finance arrangement and Shariah principles are underpinning them.
In sum, future of Islamic finance is becoming more and more viable in the UK and wider Europe and therefore it is important for those that are part of the financial market, learn more about the principles governing Islamic Finance and the products that are available.
If you would like to find out more about the training/seminar that Imam Qari Asim of Makkah Mosque provides on Islamic Finance, please e-mail us on email@example.com