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7/27/2019 IFP May 2013
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Islamic FinancePakistanIslamic Finance IndustryNewsletter
Volume 4, Issue 4, May 2013
7/27/2019 IFP May 2013
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2
EditorialIslamic finance and its laws are being derived from Shariah laws where its
regulations are being deduced from Quran and Hadith. When the word
Islamic finance appears to our mind, we are somehow confused with manyproducts such as Modaraba, Musharaka, and Ijarah etc.
Understanding these products is way out of the league for a common man
to comprehend because the diversification of the products at high level is
too much complicated, and people may not be able to understand even a
word.
Since last decade what we have simply comprehended is that Islamic
finance has come on mainstream from niche market to the main profit
business.
According to AT Kearney reports on Islamic finance, which has somehow
elaborated that Islamic finance today is on its rise with around 21% of
growth. However, unfortunately, the employees within an organization
who are related to Islamic finance industry has a weak or very little
knowledge of Islamic finance and its products.
Similarly, this is more prominent in Islamic Banking on occasions where a
customer needs more explanation on the Shariah compliant product's
structure and functionality. The problem still exists due to fact that
employers of the Islamic finance industry don't polish and enhance the
required skills of their staff regularly.
So from this we can easily elaborate and conclude that Islamic finance is
basically a puzzle of profits, which only requires ample of time to
understand its product structure with a dedicated team in place.
Happy Reading!
Advisory Board
Mufti Irshad Ahmed Aijaz
Mufti Najeeb Khan
Anwar Ahmed Meenai
Mohammad Aslam
Mujeeb Baig
Faizan Memon
Syed Abdul Rafay Ather
Associate Editors
Shakil Khan
Muhammad Shahzad Hussain
Arshad Hussain Zubairi
Rima Farooq
Editor-in-Chief
Nusrat Ullah Khan
Ayat of Month:
And among men there is one whoworships Allah (standing) on the verge: so
if some good thing happens to him, he is
satisfied with it, and if a trial befalls him,
he turns his face back. He loses both this
world and the Hereafter. That is the
manifest loss.
[AlHajj: 11]
Hadith of Month:Narrated 'Umar bin Al-Khattab: Allah's
Apostle said, "The bartering of gold for
silver is Riba (usury), except if it is from
hand to hand and equal in amount, and
wheat grain for wheat grain is usury
except if it is form hand to hand and equal
in amount, and dates for dates is usury
except if it is from hand to hand and equal
in amount, and barley for barley is usury
except if it is from hand to hand and equal
in amount."
[Sahih al-Bukhari, Volume 3, Book 34,
Number 344:]
IFP is an initiative of IFP Forum and Hidaya Islamic Business Support Services (IBSS)
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News Story
Shariah Standard on Shirkat-ul-Milk and Diminishing Musharaka
State Bank of Pakistan is actively promoting and developing Islamic Banking industry in Pakistan as a parallel system and
this sector has so far witnessed remarkable growth and increased recognition amongst the stakeholders. In order to
guarantee effective Shariah compliance in the Islamic Banking industry and maintain trust of the stakeholders, a proper
Shariah compliance mechanism has been put in place by SBP.
Recently compliance with certain paragraphs of Shariah Standard No. 12 of Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) on Shirkat-ul-Milk and Diminishing Musharaka were made mandatory by State
Bank of Pakistan with effect from June 2013 issued in their circular no. 2 of 2013. It should be noted that the compliance
with Shariah Standard is in addition to the prudential regulations and guidelines issued by the Islamic Banking Division of
State Bank of Pakistan. The idea behind this is the harmonization of Shariah practices across the board. Moreover, from
June onwards the non-compliance with any of these requirements may result in a penalty to Islamic Financial
Institutions (IFI).
Diminishing Musharaka is amongst those products which is frequently offered by Islamic Banks and have a high market
share, requiring a framework to enhance its acceptability and uniformity. Diminishing Musharaka is a form of co-
ownership in which two or more persons share the ownership of a tangible asset in an agreed proportion and one of the
co-owners undertakes to buy in periodic installments the proportionate share of the other co-owner until the title to
such tangible asset is completely transferred to the purchasing co-owner. The purchasing co-owner also pays monthly
rentals to the other co-owner against his proportionate share in the asset. Diminishing Musharaka can be created only
in tangible assets. Diminishing Musharaka shall be limited to the specified asset (s) and not to the whole enterprise or
business.
Joint owners in diminishing Musharaka may agree on a premature withdrawal of their share by way of gift or sale to a
third party. The disposal may be at either the face value, market value or agreed value. A withdrawal by one of the joint
owners may not lead to the termination of diminishing Musharaka between the remaining joint owners.
Basic Structure of Diminishing Musharaka
Process flow or basic structure of DM may be as follows:
The customer approaches the Bank with the request for financing of an asset;
The Bank enters into a Musharaka (Joint Ownership) agreement with the customer and both of them pay
their respective shares to the seller of the asset;
Client pays rentals to the Bank for Banks share as per ratio of ownership;
Client promises to purchase Banks share (units) over the tenure of transaction with the help of
Undertaking to Purchase; and
Ownership of the asset is gradually transferred to the customer upon payment of asset price (with the help
of a sale transaction between Bank and customer at the end of each period).
As a Mode of Fixed Asset Financing
Diminishing Musharaka is commonly used by various Islamic banks for the purpose of financing of following:
House financing;
Car Financing;
Plant and machinery financing; and
All other fixed assets.
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Significance of Musharaka in Islamic financeCompiled by Muhammad Usman Uppal
The history of Musharaka dates back to 1500 AD where Arabs use to practice this financial structure. The meaning ofMusharaka is a joint ownership of two or more persons in a particular asset or property with or without common
intention to engage in business with respect to such asset or property. The term Musharaka used in our contemporary
books was derived from Shirkat, found in old literature.
Musharaka means relationship established under a contract by the mutual consent of the parities for sharing of profits
and losses arising from a joint enterprise or venture. Profits shall be distributed in the proportion mutually agreed in
the contract, but loss will always be borne according to the ratio of investment. Musharaka with commercial intent is
known as Shirkat-ul-Aqd while without this intent is called Shirkat-ul-Milk.
Key Principles Underlying Profit Determination of Musharaka
Rules for Profit Determination
Profit will be agreed according to percentage and not in lump sum.
Agreed percentage must be a percentage of profit and not of capital.
The profit can be distributed at any ratio agreed with mutual consent.
Ratio of profit may differ from ratio of capital / investment.
The ratio of profit of the sleeping partner should never be more than the ratio of his investment.
Loss will be suffered according to the ratio of investment.
No guarantee can be given by the partners for the payment of profit or capital.
Third party can guarantee the profit or capital subject to:
Third party has no relation with the business;
This guarantee will not be the part of Shirkat contract; and
Third party will not charge any fee for the guarantee.
Different partners may be given different weightages according to amount and period of their investment.
Both partners can agree that their profit sharing ratio will be different for different periods. Partners may also agree
that any profit above the expected profit will be distributed at some other ratio.
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Significance of Musharaka in Islamic finance
(Contd.)
Musharaka has its own significance, especially in those economies where the distribution of wealth is unequal and
there is a huge disparity between the income level of individuals. The poorer gets poorer where as the wealth gets
concentrated in the hands of elite class. Musharaka arrangement provides an opportunity for the small enterprises toobtain finance and in return sharing their profits or losses with the financier. While it is equally important for the large
enterprises to get large funding in the capacity of partner rather than borrower. It allows both the parties to get
equally benefited from their share of investment. From previous experiments it is witnessed that Musharaka has
resulted in profitable ventures.
The working mechanism of Musharaka simply concludes that every person included in the partnership has its right to
take part in the management of the enterprise. But, one condition that can be implemented is, that all of the partners
may mutually agree upon a fact that one of them will carry out the administration of whole assignment. Shariah has
clearly indicated all the rights and responsibilities of the partners along with the rules of administration and
management for the engagement of the assignment. Moreover, if there is a silent partner, he should also be taken into
account, but his share of profit should not exceed his share of investment.
Profits can easily be generated through trading activities where partners can earn the profits made on actual amount
in which risks were also undertaken on the transaction. But one thing has to be clearly understood that if no risks were
involved then the profits generated represents Riba instead of Halal income.
One of the most important factors that is vital for the working mechanism related to the profit sharing is that, it is
necessary for the legitimacy of Musharaka that each and every partner gets the profit exactly in the percentage of
profit as per mutual agreement between them.
So from this we can elaborate that Musharaka is a product in which the probability of earning profit increases for both
of the financers by availability of excess liquidity for tapping profitable opportunities. This product by large have been
used and practiced in Middle East and many business financial transactions have been made so far for this purpose.
A brief comparison...
Musharaka and its comparison with its interest based alternatives
Interest based alternatives Musharaka
In interest based financing arrangements, the lender
lends its money to the borrower and feels free, as he
demand for the risk free return on his investment.
In Shirkat both parties remain conscious and alert
regarding risks and returns of the business.
Interest based lending system is such that in this system
the lender never considers the fact that the borrower
may fail to generate the profits. Borrower is totally
bound to return principal along with interest, even if he
has suffered losses. And in case if borrower earns huge
profits, they are only liable to pay the fixed return to
the lender while the remaining profit can be wholly
enjoyed by them.
The Shirkah is based on justice, where both the partners
enjoys the earned profits and also the losses suffered.
In interest based financing system the money circulates
in few hands, thats why poor gets poorer and vice
versa (rich become richer).
While in Shirkah money disperse / circulates in the
society.
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Kenyas sole Shariah compliant
insurer to expand in region
Dubai supremacy challenged as
global banks move to rivals
Saudi Arabia was not initially my
first choice, but I found Dubai had
contracted, said the, a director of
project finance at Riyadh Bank
(RIBL), the nations third-biggest
lender. Saudi Arabia and Qatar are
where the deals are, he said.
Riyadh climbed 32 places to 33rd in
the Global Financial Centers Index
published by London basedconsulting firm Z/Yen that made
the Saudi capital the biggest gainer
on an index led by London and New
York list.
U.S. backed bonds planned by
Tunisia amid IMF talks
Tunisia will seek a U.S. guarantee
for its bonds for the second
consecutive year and will sell
Islamic debt in June as the North
African nation mobilizes funds to
shield the economy from Europes
crisis and domestic turmoil.
The government may sell $500
million of U.S. backed notes in the
second half, Finance Minister ElyesFakh said in an interview. The yield
on $485 million of similarly
guaranteed debt due July 2019 fell
21 basis points this year to 1.48
percent.
Albaraka Turk early price talk
7.75-8.00 percent for Sukuk
Albaraka Turk has revised pricethoughts to 7.75-8.00 percent from
an initial 8 percent area on its 10-
year non-call 5 Sukuk.
BNP Paribas is global coordinator
and is joined on the book by Al Hilal
Bank, Barwa Bank, Emirates NBD
Capital and Nomura.
Al Hilal Islamic Bank introduces
chip based Visa debit card
Ahli Bank's Al Hilal Islamic BankingServices has become one of the first
Islamic Banks in Oman to
introduce a chip-based debit card
for its customers.
The new Shariah-compliant debit
card can be used worldwide for
withdrawing cash as well as at
merchant outlets based on
International Banking standards,
the Al Hilal debit card is tailored to
meet the needs of Islamic Bankingcustomers.
Qatar set to become key global
hub for Shariah-compliant
products
Qatar is set to become a "keyinternational distribution hub" for
Shariah-compliant products as the
Islamic finance market continues to
emerge, a new report has shown.
While infrastructure projects will
feed new alternative fund
structures and boost public-private
partnerships, Qatar also has a long-
term interest in developing as a
centre for Islamic finance.
Takaful Insurance of Africa Ltd.,
Kenyas only Shariah-compliant
insurer, plans to expand its
operations into five East African
nations, Chief Executive Officer
Hassan Bashir said.
Under Takafuls five-year plan
spanning 2013-2017, it will expand
into Ethiopia, Tanzania, Uganda,
Somalia and the autonomouslygoverned enclave of Somaliland,
where it was granted a license this
year, he said.
Global News
Dubai Islamic Bank (DIB) repays Ministry of Finance AED 3.752 billion deposit in full
DIB announced that having received the necessary regulatory and Government approvals, the bank has repaid the
AED 3.752 billion deposit, in full and well ahead of contractual maturity, which it received from the Ministry of
Finance in 2008 citing robust financial position and strong liquidity as the key drivers for the decision.
Disclaimer:The news included here is on the basis of information obtained from local and international print and
electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
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Barwa Bank first quarter 2013
profits at QAR 156 million, 53%
up on first quarter 2012
Islamic finance a catalyst for
driving an integrated Islamic
economy
The 3rd Annual Middle East Islamic
Finance and Investment Conference
which was held at the Dusit Thani,
Dubai, saw more than 250 leaders
in the international and regional
Islamic banking and finance
industry engage in critical
discussions that focused on building
the Islamic economy and
strengthening Islamic finances links
to the real economy.
Co-located with the 8th Annual
Takaful Conference , the event was
opened with a special inauguration.
Islamic Bank of Britain beats the
big banks with best-buy ethical
savings deals
Islamic Bank of Britain plc (IBB), has
extended its reign over the long
term savings Best Buy tables,
compiled by Moneyfacts.co.uk.
The Bank has been topping the Best
Buy tables since December 2012
with its 24 month Fixed Term
Deposit (FTD) account. Now its
entire range of Shariah compliant
long-term savings accounts,consisting of 12, 18 and 24 month
FTDs, are offering market-leading
profit rates. Its 2 year FTD is even
beating the returns on offer from
the three year fixed term bonds .
United Arab Bank hires Minhaj
Advisory for Islamic banking arm
The Islamic Banking Division ofUnited Arab Bank has signed a
memorandum of understanding
with Minhaj Advisory. The services
extended by Minhaj Advisory will
include introduction of Shariah
compliant products, contracts,
supervision, auditing and training.
Minhaj will form a Shariah
Supervisory Board (SSB) with three
Islamic scholars at the helm to
extend their guidance regarding
principles of Shariah relatedproducts and services.
UAE Banks lead surge in share
value revival
Dubai Islamic Bank has kicked offearnings season for commercial
lenders with a sharp increase in net
profits for the quarter, as investors
bet on bumper profits for Banks.
Bank shares have surged as Banks
repay government life support
extended to cover the financial
damage from the Dubai property
crash of 2009. Money set aside by
banks to cover bad loans is widely
expected to have peaked.
Sukuk issuance to hit USD 275
billion by 2013 - end
The volume of Sukuk (Islamicbonds) issued by end of the first
quarter of 2013 reached USD 34.2
billion, increasing on a quarterly
basis rate at 21.5 percent, after an
abundant year that witnessed a 54
percent increase in issuance,
Kuwait Finance House (KFH) -
Research said Sunday.
Sovereign issuances continue to
dominate Sukuk issuance, followed
by issuances of corporate, then subsovereign authorities.
Disclaimer:The news included here is on the basis of information obtained from local and international print and
electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
Barwa Bank has announced its
financial results for the period
ended March 31, 2013.
Total assets increased by 12.8% to
QAR 28.5 billion (QAR 25.3 billion as
at 31st December 2012), a growth
in the customer financing portfolio
to QAR 16 billion vs QAR 15.3 billion
as at the of 2012. Total income
increased to QAR 364 million, up by36% compared with the first
quarter of 2012 Net profits
increased by 53% compared with
the first quarter of 2012 to reach
QAR 156.7 million.
Global News
Dubai Islamic Bank (DIB) eyes double digit profit growth, acquisitions
Dubai Islamic Bank (DIB) has dealt with much of its balance sheet weakness and should see profits for 2013 grow in
the high double digits, allowing it to eye acquisitions in new markets in Asia, officials said on Wednesday.
Leaders at the world's oldest Shariah-compliant lender told Reuters it had put aside around AED 5 billion (USD 1.36
billion) against the sort of soured property loans and transactions which drew into question Dubai's future as a
financial hub in 2009.
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Meezan Bank Limited holds its
17th Annual General Meeting of
the Shareholders
The 17th Annual General Meeting
(AGM) of Meezan Bank Limited was
held on March 28, 2013 at its Head
Office Meezan House, Karachi.
Mr. Irfan Siddiqui informed the
shareholders that Meezan Banks
performance remained outstanding
in all areas of its business activities.
The Bank recorded a Profit-after-tax
of Rs. 3.5 billion in 2012 (2011: Rs.3.4 billion), earnings per share (EPS)
for the year increased to Rs. 3.88
(2011: Rs. 3.75) and deposits grew
by 35% to Rs. 230 billion as at
December 2012 (2011: Rs 170
billion).
Agreement to standardize FX and
interbank Musharaka
agreements amongst Banks
Meezan Bank, Pakistans first and
largest Islamic bank, took the
initiative of inviting senior Shariah
scholars to a meeting to discuss the
challenges in Islamic Treasury
Operations. The meeting was held
on 18th April 2013 at Meezan
House, Meezan Banks Head Office,
and was attended by several
prominent Shariah scholars.
The participants held detailed
discussion over recent issues in FX
trading and interbank products and
agreed to standardize the FX and
interbank Musharaka agreements
amongst Islamic banks and Islamic
banking windows.
Recognizing every employee as a
powerful agent of positive change,
Burj Bank has launched an
employee driven CSR initiative -
"Giving beyond the Workplace
Campaign". As part of the program,
Burj Bank Employees along with the
Senior Management team visited
the TCF (The Citizens Foundation)
Qayyumabad campus.
The campus itself like all other TCF
initiatives is a state of the art facility
designed to deliver world class
education to the underprivileged
children of the society.
Dubai Islamic Bank (Pakistan)
reports Rs. 501 million profit
Dubai Islamic Bank Pakistan Limited
has reported a year end profit before
tax of Rs. 501 million. Furthermore, a
38 percent deposit growth was
achieved in comparison to 2011,
taking total deposits to Rs. 53.11
billion in 2012.
The BoD of Bank held a meeting to
approve its financial statements for
the year ended Dec 31, 2012. A press
release said that on the asset side,
DIBPLs asset base rose by 32% incontrast to 2011 increasing the asset
base to Rs 63.5 billion in 2012. The
Banks investments grew substantially
by 65% over the year, taking total
investments to Rs 21.33 billion.
DIBPL opened 25 new branches in
2012, increasing the total branch
network to 100 in 35 cities.
Local News
Burj Bank conducts Earth Day CSR
Activity at TCF Qayyumabad
An important day in the Al Baraka
global fraternity, as Al Baraka Bank
Pakistan formally unveiled its Head
Office, Al Baraka House in the city
of Karachi, Pakistan.
Inaugurated by Chairman Al Baraka
Bank Pakistan, Mr. Adnan Ahmed
Yousuf, who is also the President
and Chief Executive of Al Baraka
Banking Group, (ABG) on Saturday,April 20, 2013 marks a new
beginning in a spirit of hope and
optimism for future growth and
progress in the current economic
mayhem.
Inauguration of Al Baraka House
Disclaimer:The news included here is on the basis of information obtained from local and international print and
electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.
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Bookin the Spotlight
As the global demand for Islamic insurance product increases, a thorough understanding of Takaful principles is vital
for accountants, auditors, and leaders of companies offering these products. This book covers the basic accounting
principles and practices of Takaful operations, including the segregation of assets, liabilities, income, and expenditures
between the Takaful operator and participants; the setting aside of cash reserves for meeting outstanding claims and
future claims; and the management of revenue and expenditure.
The book features extensive case studies from real-world situations, this book is the perfect premier for
Islamic finance students and practitioners unfamiliar with Islamic finance and Takaful operations.
Written by experts from the International Islamic University Malaysia, the leading organization in
research in Islamic finance.
Covers all the major accounting principles and practices.
Based on real-world experience and packed with illustrative case studies.
For practicing accountants and business leaders, this book offers a thorough edification in Takaful operations whilealso serving as an excellent guide for undergraduate students and researchers.
The book consist of six chapters encompassing all the major areas regarding accounting, auditing and governance
issues related to Takaful operations.
About the Authors
Dr. Sheila Nu Nu Htay - PHD: Is PhD Program Coordinator at the
Institute of Islamic Banking and Finance, International Islamic
University Malaysia (IIUM).
Mohammad Arif: Was CEO of Takaful Indonesia from 2001 to
2004. From 1985 to 2000, he was General Manager Finance and
Administration/Company Secretary of Takaful Malaysia.
Assoc. Prof. Dr. Younes Soualhi - PHD: Is an Associate Professor at
the International Islamic University Malaysia (IIUM), Chairman of
the Shariah Board of HSBC Amanah Malaysia and Chairman of the
Shariah board of Munich Re Takaful. He is also a founding member
of the French Council of Islamic Finance (COFFIS), Paris.
Hanna Rabittah Zaharain: Is an audit assistant with AFTAAS
Corporate Advisory.
Ibrahim Shaugee: Is a consultant in Islamic Finance accounting
system and taxation, based in the Republic of Maldives.
Accounting, Auditing and Governance for Takaful Operations
By Dr. Sheila Nu Nu Htay, Mohammad Arif, Dr. Younes SoualhiHanna Rabittah Zaharain, Ibrahim Shaugee
Publisher:
Wiley Finance
7/27/2019 IFP May 2013
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10
Ask Us
Questions / Answers
Feed Back Corner
Please provide us with your feedback on the following
email addresses
Question
We came to know that combining more than one contract is not permitted in Shariah rules of financial contracts. On the
other hand it is observed that when an Islamic financial product is executed, different contracts are presented to the
client in one set of documents. Is it not the violation of above said Shariah principle?
Answer
It is permissible in Shariah to combine more than one contract in one set of document, without imposing one contract
as a condition in the other, and provided that each contract is permissible on its own. Combining contracts in this
manner is acceptable unless it encounters a Shariah restriction that entails its prohibition on exceptional basis.
Question
What are Shariah instructions about issuance of bonds?
Answer
The issuance of all kinds of bonds is prohibited when these bonds include stipulations for the return of the amount of
loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan,
is paid in monthly or yearly installments or in another manner and whether this excess represents a percentage of the
value of the bond, as in the case with most types of bonds, or a part of it, as is the case with zero-coupon bonds.
Likewise, prize bonds are also prohibited. This applies irrespective of the bonds being private, public or governmental.
7/27/2019 IFP May 2013
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Upcoming EventsIFN EVENTS DAIRY (IFN ROAD SHOWS)
Islamic Finance News Road show continue to educate and update the developing Islamic financial markets by organizing
key Islamic finance events with the focus heavily on education and development.
Australia
7th May 2013
Japan
12th June 2013
Pakistan
27th August 2013
Hong Kong
25th June 2013
Turkey
3rd September 2013
Sri Lanka
29th August 2013
Egypt
5th September 2013
IFN Europe Forum 2013
Interest in Islamic finance amongst the European countries has increased tremendously. The 2013 IFN Europe Issuers &
Investors Forum will take you around the continent and explore the growth opportunities, potential and challenges of
Islamic Finance. IFN Europe forum 2013 will be held from 28th-29th May 2013 in London.
In a bid to diversify its economy, seek more transparent forms of financing, and increase trade and investments with the
Middle East, Europe is fast opening up to the global phenomenon which is Islamic finance.
Morocco
28th April 2013
World Islamic Finance Conferences / Workshops and seminars
Key Islamic finance events with the focus on education and development.
4th Global Islamic Marketing Conference
Conference 29th to 30th May 2013 Istanbul, Turkey
Workshop on Islamic Asset Management
3rd June 2013
Muscat, Oman
4th Global Islamic Marketing Conference
30th May 2013 Istanbul, Turkey
Bangladesh
5th February 2013
Singapore
22nd March 2013
7/27/2019 IFP May 2013
12/12
12
Article:
Usman Uppal
Ask Us:
Mufti Ibrahim Essa and
Mufti Javed AhmedBook in the Spotlight:
Accounting, Auditing and
Governance for Takaful
Operations
News:
Local and Global news
Let us know, if you know friends or colleagues who, in your
view, may benefit from this newsletter. Send us their emailaddresses at