ISFIRE | Volume 2 | Issue 1 | Feb 2012

ISFIREEpistemology of Finance: AnIdeal IslamicFinancial System

Learning fromour Heritage

The Wisdom of Oliver Agha

Interview withAbdulrazzak M.Elkhraijy

IslamicInvestmentFunds: Where we are today

Efficiency andPerformance of Islamic BanksIn the GCC

Solving the SystemsConundrum

Haitham Abdou

Volume 2 • Issue 1 • February 2012 • £20

Islamic Finance Review

ISFIRE-Spring 2012 riz muckup_Layout 1 09/02/2012 15:39 Page 1




Interview withHaitham Abdoupage 32

Indexation of Loansand Shari’aProfessor Humayon Darpage 36

Recipco and theglobal Islamiccommunity James Fierr opage 39

Islamic InvestmentFunds: Performanceand where we aretodayRizwan Malikpage 42

Measuringefficiency of Islamic banksZaki Khateebpage 44

ContentsEpistemology of finance: An ideal Islamicfinance systemDr. Abbas Mirakhorpage 9

Learning from ourheritageRizwan Rahmanpage 17

The wisdom ofOliver Aghapage 20

Interview withAbdulrazzak M.Elkhraijy page 25

Oman Islamic Economic Forum: A watershedmoment for theSultanatepage 28


K ••• ISFIRE

Editor-in-Chief

Professor Wumayon Dar

PhD, Tambridge Bniversity

Associate Editors

Asim Hamal

Rizwan Rahman

Contributors

Dr. Abbas Mirakhor

Rizwan Rahman

Oaki Hhateeb

Rizwan Malik

Uliver Agha

Lames Fierro

International Editorial Board

Dr. Sofiza Azmi

Asian Institute of Finance

Dr. Mehmet Asutay

Durham Bniversity

Dr. Asyraf 7 a di Dusuki

International Shariqah Research Academy

Dr. Mian Faroo: Wa:

State 8ank of Pakistan

Datuk 5 oripah Hamso

TIM8j Principal Islamic Asset Management

Designer

Fareena Alam

Executive Staff

5 aveed I: bal

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Islamic Finance Review • ; olume 2 • Issue 1 • February 2012 • ISS5 204Cj 1C09


7elcome to the second issue of theIslamic Finance Review. I hopereaders were impressed, in-

trigued and inspired by the published arti-cles. Efforts behind the publication of themagazine are driven by the desire to show-case the multifaceted nature of Islamic fi-nance and its principled stance. As aframework of rules and regulations it actsas a doctor to cure the ills of the capriciouscapitalist system; as a branch of Islamic ju-risprudence, it represents the richness ofthe Shari’a; and as an Islamic qua Islamiccreation, it confers the potential for Mus-lims, so often maligned, to contribute ben-eficially to the global society.

From the ashes of destruction,stems of hope always shoot out. Providethe water and the food and they could blos-som into something magnificent. Follow-ing the horrors of the World Wars, nationstates entered the modern age with creativ-ity, invention, self determindation and am-bition with wealth spreading amongst allsegments of society. It was undoubtedly along and arduous process, with peaks andtroughs, successes and failures, but withthe right foundations, a new and better so-ciety emanated.

Thus, while we sit aghast at the ter-rible events that have occurred in Libya,Egypt and Syria, we hope that these soci-eties will move past the bloodshed and intothe realm of peace; where civilians can ex-perience the freedom they aspire to and begranted the choice they desire. From theturmoil, we expect Islamic finance to playa key role in strengthening the economicand financial situation. Already, Egypt and

Libya have expressed interest in creating asystem whose modality is that of Islamic fi-nance. It is a tall order but the interestshows the strides Islamic finance has made.Detractors may argue this is falling intoidentity politics, and while there may be el-ements, Islamic finance certainly has thetools to be as efficient, if not more efficientthen their conventional counterpart.

My optimism sometimes gets aheadof me but I make no apologies for seeing Is-lamic finance as a worthy alternative. Itcombines the best of capitalism and thebest of socialism and firmly bases it on thefoundation of ethical practices thus seekingthe best for all market agents. Dr. AbbasMirakhor would concur, and he continueshis discussion on the epistemology of fi-nance by looking at the creation of an idealIslamic finance system. Showcasing the im-portance of property rights, contracts andmarket regulations, Dr. Mirakhor articu-lates a system which institutionalised anethical mode of behaviour.

Learning our past contextualisesthe present. Just as learning the physicalsciences – biology, chemistry, physics-makes us appreciate the immensity of theworld, the social sciences allow us to ap-preciate the wonders of human nature, andhistory plays an integral part. Rizwan Rah-man argues we need to know our eco-nomic history, about the pre-modernmarkets and of the economic thinking ofMuslim scholars. It would be a mistake toignore them, just as it would be a mistaketo ignore innovative producs developed byvisionary companies such as Recipco. Inthis edition they explain to us the pioneer-

ing potential of their Universal TradingUnit.

This edition continues to showcasethe talents of practitioners in the industry.We were fortunate to speak to a banker, anIT specialist and a lawyer: different seg-ments, same purpose. Saudi based Na-tional Commercial Bank’s Abdulrazzak MElkhraijy, Head of the Islamic Banking De-velopment Group, talks to us about work-ing at a leading Islamic finance bank, onethat is constantly evolving. We had thepleasure of interviewing Haitham Abdouof ITS. He spoke to us about the impor-tance of Islamic finance IT systems in en-suring authenticity and efficiency in theIslamic financial markets. Finally, OliverAgha, founder of the only fully fledgedShari’a compliant law firm in the world,shares his insightful views on Islamic fi-nance. His focus, tenacity, and spiritualcore are an inspiration to us all.

Our final two articles investigatesthe different industry segments in the Is-lamic finance industry. Rizwan Malik ex-plores the growing phenomenon of Islamicinvestments funds, comparing them toconventional and SRI funds. He finds thatnot only are they ethical but they are ascompetitive as conventional funds. Finally,Zaki Khateeb shares the results of his studyof the performance and efficiency of Is-lamic banks in the GCC. One will be pleas-antly surprised with his findings.

Professor Humayon Dar

Editor-in-Chief

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-he ideal Islamic finance points to is afull-spectrum of instruments servinga financial sector embedded in an Is-

lamic economy in which the institutional“scaffolding” (rules of behaviour as pre-scribed by Allah (swt) and operationalizedby the Noble Messenger, including rules ofmarket behaviour prescribed by Islam) isfully operational. The essential function ofthat spectrum would be spreading and al-locating risk among market participantsrather than allowing it to concentrateamong the borrowing class. Islam pro-poses three sets of risk-sharing instru-ments:

(i) mu’amalat risk-sharing instru-ments in the financial sector;

(ii) redistributive risk-sharing in-struments through which the economicallymore able segment of the society utilize inorder to share the risks facing the less ablesegment of the population; and

(iii) the inheritance rules specifiedin the Qur’an through which the wealth ofa person at the time of passing is distrib-uted among present and future generationsof inheritors.

As will be argued here, the second

set of instruments is used to redeem therights of the less able by enabling them toparticipate in the income and wealth of themore able. These are not instruments ofcharity, altruism or beneficence. They areinstruments of redemption of rights and re-payment of obligations.

The spectrum of ideal Islamic fi-nance instruments would run the gamutbetween short-term liquid, low-risk financ-ing of trade contracts to long-term financ-ing of real sector investment. The essenceof the spectrum is risk sharing. At one end,the spectrum provides financing for pur-chase and sale of what has already beenproduced in order to allow further produc-tion. At the other end, it provides financingfor what is intended or planned to be pro-duced. In this spectrum, there does notseem to be room provided for makingmoney out of pure finance where instru-ments are developed that use real sector ac-tivity only as virtual license toaccommodate what amounts to pure finan-cial transactions. There are duyun andqardh hassan that are non-interest baseddebt but used only to facilitate real sectortransactions in terms of consumption

smoothing for those who have experiencedliquidity shocks. This is a case when a fin-ancier shares liquidity risk with the firmsor consumers for whom the risk has mate-rialised or who use non-interest borrowingas an insurance against liquidity shocks.

It may be argued plausibly that in amodern complex economy, there is needfor a variety of ready-to-use means of liq-uidity, and so long as instruments beingdeveloped are, in the judgement of Shari’ascholars, permissible where is the harm?Usually, this argument starts with the rea-soning that financial instruments that serveshort-term, trade-oriented transaction con-tracts, such as murabaha, are permissible.From there, the argument goes that any in-strument with connection, no matter howtenuous, to the real sector is also permissi-ble. It is worth noting that transaction con-tracts permissible in Islam and the financialinstruments intended to facilitate them arenot the same thing. Islamic real sectortransactions contracts (uqud) that havereached us are all permissible. However, itis possible that a financial instrument de-signed to facilitate a given permissible con-tract may itself be judged non-permissible.

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After exploring the Smithian conception of an idealeconomic system, Dr. Abbas Mirakhor continues hisinvestigation by looking at the principles of an idealIslamic financial system, which, as the article shows,differs from the contemporary financial system and,to some extent, the current Islamic financial system.

Epistemology of finance:

An ideal Islamicfinance system


As the proliferation of derivative instru-ments in the period leading up to theglobal financial crisis demonstrated, thenumber of financial instruments that havesome relation, even if only nominal, to areal sector transaction is limited only by theimagination of financial engineers. This isthe essence of the theory of spanning de-veloped in finance in the late 1960s andearly 1970s which led to the design and de-velopment of derivatives It is possible thata financial instrument may have weakerrisk-sharing characteristics than the Islamictransaction contract it intends to serve.

Since Islamic finance is all aboutrisk sharing, then the risk characteristics ofa given instrument needs to become para-mount in decisions. One reason, inter alia,for non-permissibility of the contract of Al-Riba is surely due to the fact that this con-tract transfers all, or at least a majorportion, of risk to the borrower. It is possi-ble to imagine instruments that on theirface are compatible with the no-riba re-quirement, but are instruments of risktransfer and, ultimately, of shifting risk totax payers. An example would be a sover-eign ijarah sukuk based on the assets sub-ject to ijarah but credit-enhanced by othermeans, say collateral. All costs taken intoaccount, such a sukuk may well be moreexpensive and involve a stronger risktransfer characteristic than a direct sover-eign bond. Clearly, a judgement call needsto be made by financiers and financial en-gineers when they design and develop aninstrument in considering its risk-sharingcharacteristic. This is a call with which fiqhalone should not be overburdened. Finan-ciers and financial engineers should assurethe risk-sharing characteristics of instru-ments they present to fuquha for approval.Fiqh will need to catch up with modern fi-nance as well as with the intricacies of riskand uncertainty.

It appears that at present, the ener-gies of financiers and financial engineersare focussed on the design and develop-ment of instruments to accommodate thelow-end of time and risk-return, liquidtransactions. Without effort at developinglong-term investment instruments with ap-propriate risk-return characteristics, thereis a danger of an emergence of path-depen-dency where the market will continue tosee more – albeit in greater variety – of thesame. That is more short-term, liquid andsafe instruments. This possibility shouldnot be taken lightly. After all, as men-tioned earlier, since the early 1970s, financehas been quite familiar with the ‘theory ofspanning’. According to this idea, an infi-

nite number of instruments can be“spanned” out of a basic instrument. Thisis what led to the explosion of derivativeswhich played an influential role in the re-cent global financial disaster. At one pointit was estimated that in 2007, the total fi-nancial instruments, mostly derivatives, inthe world was 12.5 times larger than thetotal global GDP. Similar developmentcould be awaiting Islamic finance if the in-genuity of financial engineers and the cre-ative imagination of Shari’a scholarscontinue to serve the demand-driven ap-petite for liquid, low risk, and short-terminstruments. In that case, the configurationof Islamic finance would have failed toachieve the hopes and aspirations evokedby the potential of the ideal Islamic finan-cial system.

Epistemology of An IdealIslamic Finance System

The fountainhead of all Islamicthought is the Qur’an. Whatever the theoryof Islamic knowledge may be, any episte-mology, including that of finance, mustfind its roots in the Qur’an.

The starting point of this discussionis therefore Verse 275 of Chapter 2 of theQur’an, particularly the part of the Versethat declares the contract of Al-Bay’ per-missible and that of Al-Riba non-permissi-ble. Arguably, these few words can beconsidered as constituting the organisingprinciple – the fundamental theorem as itwere – of the Islamic economy. Most trans-lations of the Qur’an render Al-Bay’ as“commerce” or “trade”. They also trans-late “Al-Tijarah” as “commerce” or “trade”.Consulting major lexicons of Arabic (suchas Lisan Al-Arab, Mufradat Alfaz Al-Qur’an, Lane’s Arabic Lexicon, Al-Tahquiqfi Kalamat Al-Qur’an Karim, among others)reveals that there is substantive differencebetween Al-Bay’ and Al-Tijarah. Relyingon various verses of the Qur’an (e.g. verse

254: chapter 2; 111:2; 29-30:35; 10-13:61)these sources suggest that trade contracts(Al-Tijarah) are entered into in the expec-tation of profit (ribh). On the other hand,Al-Bay’ contracts are defined as “Mubadi-lah Al-Maal Bi Al-Maal”an exchange ofproperty with property. In contemporaryeconomics, it would be rendered as ex-change of property rights claim. Thesesources also suggest a further difference inthat those who enter into a contract of ex-change expect gains but are cognizant ofprobability of loss (Khisarah).

It is worth noting also that all Is-lamic contractual forms, except spot ex-change, involve time. From an economicpoint of view, time transactions involve acommitment to do something today in ex-change for a promise of a commitment todo something in the future. All transac-tions involving time are subject to uncer-tainty and uncertainty involves risk. Riskexists whenever more than one outcome ispossible. Consider for example a contractin which a seller commits to deliver a prod-uct in the future against payments today.There are a number of risks involved.There is a price risk for both sides of the ex-change; the price may be higher or lowerin the future. In that case the two sides areat risk which they share once they enterinto the contract agreement. If the price inthe future is higher, the buyer would bebetter off and the price risk has been shedto the seller. The converse is true if theprice is lower. Under uncertainty, thebuyer and seller have, through the contract,shared the price risk. There are other risksthat the buyer takes including the risks ofnon-delivery and quality risk. The seller,on the other hand, also faces additionalrisks including the risk that the price of rawmaterials may be higher in the future, andtransportation and delivery cost risk. Thisrisk may also be lower. Again, these riskshave been shared through the contract.The same argument applies to deferredpayment contracts.

In this spectrum, there does not seem tobe room provided for making money outof pure finance where instruments aredeveloped that use real sector activity onlyas virtual license to accommodate whatamounts to pure financial transactions.

10 ••• ISFIRE


Second, it may appear that spot ex-change or cash sale involves no risk. Butprice changes post-completion of spot ex-change are unknown. The two sides of aspot exchange share this risk. Moreover,from the time of the classical economists, itis known that specialisation through com-parative advantage provides the basis forgains from trade. But in specialising, a pro-ducer takes a risk of becoming dependenton other producers specialised in produc-tion of what he needs. Again, through ex-change the two sides to a transaction sharethe risk of specialisation. Additionally,there are pre-exchange risks of productionand transportation that are shared throughthe exchange. It is clear that the other con-tracts at the other end of the spectrum of Is-lamic contracts, i.e. mudharabah andmusharakah, are risk sharing transactions.Therefore, it can be inferred that by man-dating Al-Bay’, Allah (swt) ordained risk-sharing in all exchange activities.

Third, it appears that the reason forthe prohibition of the contract of Al-Riba isthe fact that opportunities for risk sharingare non-existent in this contract. It may beargued that the creditor does take risk – therisk of default. But it is not risk taking perse that makes a transaction permissible. Agambler takes risk as well but gambling isharam. Instead, what seems to matter isproviding the opportunity for risk sharing.Al-Riba is a contract of risk transfer. AsKeynes emphasised in his writing, if inter-est rates did not exist, the financier wouldhave to share in all the risks that the entre-preneur faces in producing, marketing andselling a product. But by decoupling hisfuture gains, by loaning money today formore money in the future, the financiertransfers all risks to the entrepreneur.Fourth, it is clear that by declaring the con-tract of Al-Riba non-permissible, theQur’an intends for humans to shift theirfocus to risk sharing contracts of exchange.

It appears – and Allah knows best –that it can be inferred from the above dis-cussion that there are two types of con-tracts involving time:

(i) contracts over time (or on spot)involving trade in which there is expecta-tion of gain (ribh); and

(ii) contracts over time involving ex-change in which there is expectation ofgain or loss (Khisarah).

The latter must refer also to con-tracts of investment with an uncertain out-come in terms of gain or loss. This, ofcourse, does not mean that mudharabahand musharakah could not be used for


12 ••• ISFIRE

haviour to ensure an orderly and efficientoperation. Seventh, the contract of ex-change requires trust among the parties asto commitments to perform according tothe terms and conditions of exchange.Eighth, there must be rules governing thedistribution of proceeds. Ninth, there mustbe redistributive rules and mechanisms tocorrect for the pattern of distributionemerging out of market performance.These are rules that govern the redemptionof the rights of those who are not parties tothe contract directly but who have ac-quired rights in the proceeds because, oneway or another, they or their propertieshave contributed to the production of whatis the subject of exchange. These implica-tions are discussed below.

Property Rights

Briefly, the principles of propertyrights in Islam include:

(i) Allah (swt) has created all prop-erty and He is the ultimate owner;

(ii) resources created by Allah (swt)are at the disposal of all humans to em-power them to perform duties prescribedby the Creator;

(iii) while the ultimate ownership ispreserved for the Creator, humans are al-lowed to combine their physical and intel-lectual abilities with the created resourcesto produce means of sustenance for them-selves and others;

(iv) the right of access to resourcesbelongs to all of mankind;

(v) humans can claim propertyrights over what is produced through theirown labour or transfers through gift giv-ing, exchange, contracts, inheritance or re-demption of rights in the produced

longer-term trade in expectations of profitsto be shared and for long-term investmentas was the case for centuries in the Muslimworld as well as in Europe in the MiddleAges. Borrowed from Muslims and knownas commenda in Western Europe, mud-harabah became quite popular as means offinancing long-term trade and investmentIt has been suggested that the commendawas of the highest importance and con-tributed greatly to the fast growth of tradeand investment which led to economicchange and growth in Europe. The com-menda’s contribution to industrial devel-opment of Ruhr Valley in Germany and inbuilding railroads in Europe was particu-larly impressive. Therefore, what needsemphasis is that Al-Bay’ covers long-terminvestment contracts that allow the growthof employment and income and expansionof the economy. The focus of Al-Tijarahand all its financing instruments is trade ofcommodities already produced. In effect,Islam meets the financing needs of trade aswell as the requirements of resource allo-cation, investment, production, employ-ment, income creation, and riskmanagement.

Given the above, major economicimplications follow. First, as the definitionof Al-Bay’ indicates, it is a contract of ex-change of property. This means that theparties to exchange must have propertyrights over the subject of the contract priorto the exchange. Second, parties must havethe freedom not only to produce what theywish but be able to contract with whomthey wish to exchange. Third, parties musthave freedom to contract. Fourth, theremust be means of enforcing contracts.Fifth, exchange requires a place for the par-ties to complete their transactions, meaninga market. Sixth, markets need rules of be-

It is worth noting that transactioncontracts permissible in Islam and the

financial instruments intended to facilitatethem are not the same thing. Islamic real

sector transactions contracts )u: udZ thathave reached us are all permissible.

Wowever, it is possible that a financialinstrument designed to facilitate a given

permissible contract may itself be udgednonj permissible.

property;(vi) since created resources belong

to all humans, the inability of a person(physical, mental or circumstances) to ac-cess these resources does not negate the in-dividual’s right to these resources;

(vii) these rights have to be re-deemed – this establishes the rule of shar-ing with the less able;

(viii) sharing is implementedthrough redistributive mechanisms, suchas zakat, which are redemption of rightsand not charity;

(ix) since work and transfers are theonly sources of property rights claims, allsources of instantaneous property rightscreation, such as theft, bribery, gamblingand riba are prohibited;

(x) unlike, the conventional systemof property rights, Islam imposes strict lim-its on the freedom of disposing of property;there is no absolute freedom for the ownerto dispose of property as there are rulesagainst extravagance, waste, destruction ofproperty or its use in prohibited transac-tions;

(xi) property rights must not lead toaccumulation of wealth as the latter is con-sidered the life blood of the society whichmust constantly circulate to create invest-ment, employment, income and economicgrowth opportunities; and

(xii) once the principles governingproperty rights are observed, particularlythe rule of sharing, the owner’s right to theremaining property, cleansed of others’rights, is inviolate.

It is through its rules of propertyrights that Islam envisions economicgrowth and poverty alleviation in humansocieties. The latter is accomplishedthrough the discharge of the obligation ofsharing, derived from the property rightsprinciples which envision the economicallyless able as the silent partners of the moreable. In effect, the more able are trustee-agents in using resources created by Allah(swt) on behalf of themselves and the lessable. In contrast to property right princi-ples of the conventional system, in Islamproperty rights are not means of exclusionbut of inclusion of the less able in the in-come and wealth of the more able as a mat-ter of rights that must be redeemed. In theconventional system, the rich help the pooras a demonstration of sympathy, benevo-lence and charity. In Islam, the more ableare required to share the consequences ofthe materialisation of idiosyncratic risks –illness, bankruptcy, disability, accidentsand adverse socio-economic conditions –



for those who are unable to provide forthemselves. Those who are more able di-versify away a good portion of their ownidiosyncratic risks using risk-sharing in-struments of Islamic finance. The econom-ically well off are commanded to sharerisks of those who are economically unableto use the instruments of Islamic finance. Itcan be argued plausibly that unemploy-ment, misery, poverty and destitution inany society are prima facie evidence of vi-olation of property right rules of Islamand/or non-implementation of Islamic in-struments of risk sharing. In Islam, therisks that would face the future generationsare shared by the present generationthrough the rules of inheritance. Theserules break up the accumulated wealth asit passes from one generation to another toenable sharing risks of a larger number ofpeople.

Contracts and Trust

Basically, a contract is an enforce-able agreement. Its essence is commitment.Islam anchors all socio-political-economicrelations on contracts. The fabric of theShari’a itself is contractual in its conceptu-alisation, content and application. Its veryfoundation is the primordial covenant be-tween the Creator and humans (see verses172-173: 7). In an unambiguous verse(152:6), the Qur’an urges the believers tofulfil the covenant of Allah. This is ex-tended to the terms and conditions of allcontracts through another clear verse (1:5)in which believers are ordered to be faith-ful to their contracts. They are ordered toprotect faithfulness to their covenants andwhat has been placed in trust with them asa shepherd protects sheep (8:32; also 34:17;172:2; 91-92:16). Thus, believers do nottreat obligations of contracts lightly; theywill take on contractual obligations only ifthey intend fully to fulfil them. Hence,their commitments are credible.

Contracts are means of coming toterms with future risks and uncertainty.They allocate risks by providing for futurecontingencies and set obligations for eachparty and each state in the future as well asremedies for breach of contracts. Gener-ally, there are four motives for enteringinto a contract: sharing of risk, transfer ofrisk, alignment of incentives, or to min-imise transaction costs. Mudharabah,musharakah, and the purchase of equityshares are examples of risk sharing. Enter-ing into an insurance contract is an exam-ple of transferring risks for a fee to thosewho can better bear them. Risk shifting oc-

14 ••• ISFIRE

curs when the risks of a transaction or acontract between two parties are shifted toa third party. This concept was discussedby economists Michael Jensen and WilliamMeckling in 1976 in the context of corpo-rate managers resorting to debt finance in-stead of issuing additional equity, thusshifting the risk of debt burden to otherstakeholders. To align incentives, oneparty (usually the principle) enters into acontract with another (an agent) throughwhich incentives are created for the latterto take actions that serve their joint-surplusmaximisation objective. Contracts that aredesigned to reduce transaction costs areusually aimed at establishing stable, long-term relationships between parties in orderto avoid ex ante information, search andsorting costs as well as ex post bargainingcosts.

There is an organic relationship be-tween contract and trust. Without the lat-ter, contracts become difficult to negotiateand conclude and costly to monitor and en-force. When and where trust is weak, com-plicated and costly, administrative devicesare needed to enforce contracts. Problemsare exacerbated when, in addition to a lackof trust, property rights are poorly definedand protected. Under these circumstances,it becomes difficult to specify clearly theterms of a contract since transaction costs –that is search and information costs, bar-gaining and decision costs, contract nego-

tiations and enforcement costs – are high.Consequently, there is less trade, fewermarket participants, less long-term invest-ment, lower productivity and slower eco-nomic growth. Weakness of trust createsthe problem of lack of credible commit-ment which arises when parties to an ex-change cannot commit themselves or donot trust that others can commit them-selves to performing contractual obliga-tions. Empirical research has shown thatwhere the problem of lack of commitmentexists and is significant, it leads to disrup-tion in economic, political and social inter-action among people. Long-termcontracting will not be possible and partiesto exchange opt for spot market or veryshort-term transactions. Considering theseissues, one can appreciate the strong em-phasis that the Qur’an [as well as the Mes-senger (saw)] has placed on trust, (see 27:8 and 57:4) and on the need to fulfil termsand conditions of contracts, covenants, andpromises one makes. These rules solve theproblem of credible commitment and trust,thus facilitating long-term contracts. To il-lustrate the importance of trust, considerthe role of complete contracts in the neo-classical theory of competitive equilibrium.A complete contract fully specifies all fu-ture contingencies relevant to the ex-change. In the real world a vast majorityof contracts are incomplete. This require-ment, therefore, is considered too stringent


and unrealistic. Not only ignorance aboutall future contingencies make writing com-plete contracts impossible, even if all futurecontingencies are known, it would benearly impossible to write a contract thatcan accommodate them all. However, ifthe parties to a contract trust each other,they can agree to enter into a simple con-tract and commit to revising its terms andconditions as contingencies arise.

Markets

A major reason for contracts of ex-change is that the parties to the contractwish to improve upon their own pre-con-tract welfare. For this to happen, partiesmust have the freedom to contract. This, inturn implies freedom to produce whichcalls for clear and well-protected propertyrights to permit production and sale. Tofreely and conveniently exchange, the par-ties need a place to do so, i.e., a market. Tooperate efficiently, markets need rules ofbehaviour and clear unambiguous rule-en-forcement mechanisms to reduce uncer-tainty in transaction. Markets also needfree flow of information. To reinforce theefficiency of market operations, trust has tobe established among participants, transac-tion costs needs to be minimised, and rulesestablished to internalise externalities oftwo-party transactions. Andrew Sheng, inhis 2009 publication, “From Asian to

Global Financial Crisis”, suggests that:“Successful markets all share three key at-tributes: the protection of property rights,the lowering of transaction costs and thehigh transparency”. To achieve these at-tributes, preconditions and infrastructuresare needed including:

(i) freedom of market participants to enterand exit the market, to set their own objec-tives within the prescribed rules, to employways and means of their own choosing toachieve their goals, and to choosewhomever they wish as their exchangepartner; (ii) an infrastructure for participants to ac-cess, organise and use information;(iii) institutions that permit coordination ofmarket activities;(iv) institutions to regulate and supervisethe behaviour of market participants; and(v)legal and administrative institutions toenforce contracts at reasonable costs.

Both the Qur’an and Sunnah placeconsiderable emphasis on the rules of be-haviour. Once instated in Medinah, as thespiritual and temporal authority, the Mes-senger (saw) exerted considerable energyin operationalising and implementing theproperty rights rules, the institutions of themarket, the rules of exchange and contractsas well as rules governing production, con-sumption, distribution and redistribution.He also implemented rules regarding thefiscal operations of the newly formed stateas well as governance rules. Specifically re-garding markets, before the advent ofIslam, trade had been the most importanteconomic activity in the Arabian Peninsula.A number of dynamic and thriving mar-kets had developed throughout the area.Upon arrival in Medinah, the Messenger ofAllah organised a market for Muslimsstructured and governed by rules pre-scribed by the Qur’an, and implemented anumber of policies to encourage the expan-sion of trade and strengthen the market.Unlike the already existing market in Med-inah, and elsewhere in Arabia, the Prophetprohibited imposition of taxes on individ-ual merchants as well as on transactions.He also implemented policies to encouragetrade among Muslims and non-Muslimsby creating incentives for non-Muslim mer-chants in and out of Medinah. For exam-ple, travelling non-Muslim merchants wereconsidered guests of the Muslims and theirmerchandise were guaranteed by theProphet against (non-market) losses. Themarket was the only authorised place oftrade. Its construction and maintenance

was made a duty of the State. As long asspace was available in the existing one, noother markets were constructed. TheProphet designated a protective areaaround the market. No other constructionor facility was allowed in the protectivearea. While trade was permitted in the areasurrounding the market in case of over-crowding, the location of each merchantwas assigned on a first-come, first-servedbasis but only for the duration of the trad-ing.

After the conquest of Mecca, rulesgoverning the market and the behaviour ofparticipants were institutionalised andgeneralised to all markets in Arabia. Theserules included, inter alia, no restriction oninter-regional or international trade, in-cluding no taxation on entering into or ex-isting out of markets and on imports andexports; free movement of inputs and out-puts between markets and regions; no bar-rier to entry to or exit from the market;information regarding prices, quantitiesand qualities were to be known with fulltransparency; every contract had to fullyspecify the property being exchanged, therights and obligations of each party to thecontract and all other terms and conditions;the state and its legal apparatus guaranteedcontract enforcement; hoarding of com-modities were prohibited as were pricecontrols; no seller or buyer was permittedto harm the interests of other market par-ticipants; for example, no third party couldinterrupt negotiations between two partiesin order to influence the outcome in favourof one or the other party; short changing,i.e. not giving full weights and measure,was prohibited; sellers and buyers weregiven the right of annulment depending oncircumstances. These rights protected con-sumers against the moral hazard of incom-plete, faulty or fraudulent information.Interference with supply before market en-trance was prohibited as they would harmthe interests of the original seller and thefinal buyer. These and other rules – suchas trust and trustworthiness as well asfaithfulness to the terms and conditions ofcontracts – reduced substantially transac-tion costs and protected market partici-pants against risks of transactions.

Part III in the next edition of ISFIRE will

seek to apply the principles into the

contemporary financial markets.

ISFIRE ••• 19



-he academic ivory towers that guardthe Islamic sciences are impenetrableto the average person. Within the in-

tellectual halls of university, debates rageon a range of issues that affect humanity ingeneral, and communities and individuals,in specific. We, the average person, are notprivy to their debates, often times abstractand encroached in a language and method-ology slightly too arcane and complicatedfor our less educated minds.

With wreathes of paper containingimportant research, is it acceptable, that we,the average person, are not aware ofgroundbreaking work? That we, the aver-age person, are not granted access tounique perspectives and theories and his-torical findings that could palpably alter theway we look at the world? One only has togo onto journal sites such as ingentaconnectand jstor to recognise the high costs of evenaccessing one article on our Islamic her-itage; to realise that this work is not meantto be consumed by us, the average person.

We are limited rather to the shelvesof books that are stocked in book stores and

the virtual world of amazon, and are pricedat a less prohibitive price. In terms of Islam,we are even more constrained as most goodbook stores will contain only a few bookson Islam. Even Islamic bookstores are notrenowned for containing rigorous academicwork, instead proffering, often times, sim-plistic literature, opinionated and denudedof intellectual rigour that one could see inthe arabic and persian literature of classicalscholars.

This is not to say that the prolifera-tion of this type of literature has not beenbeneficial. Undoubtedly, the literature wesee in the typical Islamic bookstore hasdone much to instil and inspire a sense of‘Islam’ within us, the average person.Moreover, most of the literature is basedupon the notion that knowledge is the cor-nerstone of the faith.

But the world of academic researchand analysis offers profound insight that isgenerally closed to the average person; un-less one has the desire to seek out theknowledge available through either attend-ing university or finding purpose built in-

stitutions such as the British Library to sa-tiate their thirst for knowledge. The prob-lem, however, may not lie with the lack ofopportunities to find knowledge but ratherwith the desire and willingness of the indi-vidual to gather it. In the hustle and bustleof the modern world, searching for knowl-edge outside of one’s chosen profession canoften be tiring, cumbersome and toilsome.After a hard day’s work, who really wantsto read the intricacies of usul al fiqh?

Thus we content ourselves withbitesize chunks of knowledge found withinnewspapers, the internet and the occasionalbook. This seems only appropriate giventhe rigours of working life. Hence, it wouldappear that the responsibility to convey theknowledge derived in universities fallsupon the academicians who walk the corri-dors of erudition. But it would be the re-sponsibility of us, the average person, tohave the desire to seek out the knowledge.

Islamic economicsIslamic heritage in all fields of study

Learning from our

heritage

ISFIRE ••• 1N

It is important to learn our history as it instils asense of pride. However, often the knowledge isguarded away behind institutional walls. Rizwan Rahman believes we should reclaim it,understand it, and be motivated by it.


is rich, not least in economic affairs. A con-stant criticism by many Muslims and non-Muslims alike is that the traditional Muslimworld has not sufficiently contributed to thepractical fields of public and personal fi-nance, and has little to say with regards toeconomic or legal theory, that is applicableto the population at large. Yet, this ignoressignificant literature that has hit upon top-ics and promulgated principles which arejust as applicable to the modern age as theywere to the times in which they were for-mulated.

Modern day Islamic economics andfinance has done much to resurrect thethoughts of scholars from the past who caneffectively contribute to the present age. Inthis regard, many western academics haveendeavoured to push the thinking of thesescholars to the fore, arguing that while theirwritings may not be encroached in the lan-guage of economics as we know today (it isunlikely you will find a classical scholarwho speaks about marginal utility and thetheory of the firm), they certainly articu-lated principles which we would regard asemanating from an economist mindset.

Reading the contemporaryfor knowledge of the past

An important contribution in bring-ing out the economic thinking of classicalscholars has been by University of Idahoprofessor, S.M Ghazanfar. His book, “Me-dieval Islamic Economic Thought: Fillingthe Great Gap in European Economics” is acollection of essays which looks into theeconomic thinking of scholars such as ibnTaymiyyah and Al Ghazali. The book is im-portant in that it contests the theory of therenowned Austrian economist, JosephSchumpter, who believed that there was a‘great gap’ in economic thought betweenthe Greeks and the appearance of ThomasAquinas in the 13th century. Ghazanfar re-buts this thesis by showing classical schol-ars had an acute sense of economic issues.More importantly, what the book managesto achieve is granting its reader an appreci-ation of the flow of ideas and Islam’s con-tribution to the contemporary intellectualmilieu so aggressively appropriated by thewest. Pierce Butler, in support, states:

“No historical student of the cultureof Western Europe can ever reconstruct forhimself the intellectual values of the laterMiddle Ages unless he possesses a vividawareness of Islam looming in the back-ground.”

Certainly, western scholars ac-knowledge the philosophical contributions

through its regulatory arms such as themuhtasib, can ensure this prevails. If aparty is known to be charging exorbitantprices then according to Ibn Taymiyya, heshould be punished and not be allowed toenter the market.

A host of other classical scholarssuch as ibn Qayyim, Al Ghazali, the Hanafijurist Abu Yusuf have contributed to eco-nomic thinking but perhaps the mostrenowned in western scholarly circles is IbnKhaldun. His seminal work, the Muqad-dima, has been praised for its wealth andbreadth of knowledge. In the book, re-garded as a masterpiece, Ibn Khaldun tack-les a host of subjects including thephilosophy of history, the rise and fall ofempires, Islamic theology, sociology, eco-nomics, anthropology, political theory andphysical sciences. His main concern wasanalysing the social organisation of civilisa-tions.

Consequently, economics played asignificant role in his analysis. He looks atthe economic development of societies andthe evident rise and fall of previous civili-sations. Ibn Khaldun describes how de-mand and supply increases as the dynastygrows in age. However, the increase ingrowth leads to luxurious living, whicheventually weakens the economy, leadingto deteriorating economic conditions andthe eventual collapse of the dynasty. Byanalysing historical events, Ibn Khaldunhypothesises that the rise and fall of a dy-nasty occurs in four or five stages. The latterstages can be characterised by high taxationrates on the population and wastefulspending. People will become overbur-dened leading to a decrease in public fi-nances and the eventual collapse. Onecould certainly argue that his theory res-onates with the current economic turmoil.

Ibn Khaldun’s analysis rests uponthe idea of man forming communities to fa-cilitate personal, commercial and politicalrelationships. By forming social organisa-tions, there are opportunities to increase thewealth of a nation. He recognised that a di-vision of labour and specialisation in a par-ticular craft would lead to increased outputand the production over and above elemen-tal wants creating a market economy. Con-sequently, a price system and exchangerates are employed where prices for goodswill differ between big cities and smallcities due to resource quantity. Ibn Khaldunalso alludes to elasticity of both demandand supply of goods.

The Muqaddima is not an economictextbook but it shows an understanding ofconcepts which were tackled by later econ-

of Ibn Rushd (known in medieval educa-tional institutions as Averroes) and Ibn Sina(Avicenna) but there is scarce mention ofthe flow of economic thought. However,when delving deeper into the works ofscholars, we see an impressive grip of eco-nomic ideas though they were unlikely tocategorise the study of economic behaviouras an independent and separate social sci-ence.

Dimashqi, Ibn Taymiyya andIbn Khaldun

A perusal through the books ofthinkers from the past will reveal their per-spicacity. Kitab al-Ishara ila Mahasin writ-ten by Jafer Al Dimashqi, a 12th centurymerchant from Damascus, has been de-scribed by scholars as being economic intone and content. In the book, he speaks oftrade and generating wealth through mer-chantile activities. He praises trade and ex-plores price theory commenting on howscarcity and transport costs can affectprices. The Belgian economist Louis Baeckcomments that Dimashqi ‘makes a distinc-tion between normal periods in which mar-ket prices are based on cost of production,as opposed to periods of scarcity or over-supply, in which speculators’ drive mani-fests itself’. Dimashqi recognised that it wasup to the merchant to investigate price dif-ferentials in the market, thereby recognis-ing the importance of informationdissemination in the functioning of an effi-cient economy. Moreover, Dimashqi com-mented upon the importance of division oflabour and cooperation along with a suit-able means of exchange to strengthen trade.He also wrote about wealth protection andsaving.

As a merchant, Dimashqi had theexperience of the markets and thereforewas able to appropriately analyse and as-sess. But even Islamic legal scholars haveshown a comprehension of market forces.As an example, Ibn Taymiyya, the conser-vative 14th century jurist, is remarkable forhis contributions to economic thought. Hewrites upon a range of topics includingmoney, property rights, wealth andpoverty, distribution of income, monopo-lies amongst other economic topics.

With regards to market forces, IbnTaymiyya believed in the free markets andwas against price controls except in timesof emergency and occasionally in a monop-olistic market. For him, sellers had to offera fair price and not take advantage of insuf-ficient information flowing through themarket. In this regards, only the state,

1J ••• ISFIRE


omists. Joseph Spengler, in concluding hiswork on Ibn Khaldun’s economic thoughtcomments that Ibn Khaldun’s knowledgeof man’s economic behaviour:

“… extended far beyond the house-hold, embracing market, price, monetary,supply, and demand phenomena, and hint-ing at some of the macro-economic rela-tions stressed by Lord Keynes… one iscompelled to infer from a comparison ofIbn Khaldun's economic ideas with thoseset down in Muslim moral-philosophicalliterature that the knowledge of economicbehaviour in some circles was very great in-deed, having been acquired through con-tact with cumulating experience, and thatone must turn to the writings of those withaccess to this knowledge and experience ifone would know the actual state of Muslimeconomic knowledge.”

The final point intimates that Mus-lim economic thought ran far deeper thanhas often been credited. Ibn Khaldun didnot live in a vacuum and his analysis musthave been influenced by his peers andteachers. It would thereby lead to the con-clusion that there were many other thinkerswho have broached this topic. One cannotassume that Ibn Khaldun’s work was aflash in the pan and must accept that the Is-lamic intellectual heritage contained a spacefor economic thought.

The real worldThere can be no denying that Is-

lamic legal and philosophical thought isrich, intricate and complex. The literature isvast and tackles issues which modernscholars in these respective fields would beimpressed by. There are however manypeople who refuse to grant the respect that

is due to the Islamic intellectual heritage ei-ther reducing its impact on the modernworld or relying on anachronistic view-points of classical scholars which may bemisogynistic or militant. Yet, western aca-demics like Wael Hallaq, Bernard Weiss,George Makidsi, amongst a long list of oth-ers have shown that Islamic law and philos-ophy is a treasure trove of knowledge.

We have to look beyond the intellec-tual realm, and look at day to day activityin Muslim societies, realising that the Is-lamic world was dynamic and fruitful. Itcertainly had to be, with an empire, whichat one point spanned from Portugal in theeast to Indonesia to the west. Subsequently,the trade network that the Islamic worlddevelopment was remarkable. MaximeRodinson, in his book ‘ Islam and Capital-ism’, argues that capitalism is not inimicalto Islamic dictates. Stress is laid on the in-tense commercialisation of the economy, itsmonetisation and specialisation in the agri-cultural and manufacturing sectors. Giventhe perilous economic and political state ofthe Ottoman Empire, leading up to the rev-olution of 1924 – the British labelled the Ot-toman Empire as ‘the sick man of Europe –the fact that capitalism did not take root inthe Muslim lands, until today, is surprising.

Notwithstanding the post colonialcondition of the Muslim world, the capital-ist thesis promulgated by Rodinson is sup-ported by plenty of historical evidence.Maya Shatzmiller, a professor at the Uni-versity of Western Ontario, has conductedextensive work on Islamic economic his-tory. Her current research work is upon theeconomic history of the Islamic world from700 – 1000 AD, which will be both a quanti-tative and qualitative study of the period.

(For further information on the project,readers are advised to refer tohttps://sites.google.com/site/islamicecono-myuwo/)

Her previous work has brought outinteresting evidence about the mercantileeconomy of the Islamic world. She success-fully shows that there was nothing intrinsicabout Islamic institutions (legal, regulatory,and state) which prevented capitalistic en-terprise and development. Networks werecreated consisting of merchants, agents andcustomers, which stretched across theglobe. Markets were created and places likeFez, Cairo, Damascus, Samarqand, Javaamongst others were thriving marketplaces. The vibrant business arena was suchthat numismatic evidence is far greater thanthat of the Roman Empire. Piecing the evi-dence together, one sees a gradual but ro-bust increase in money production andsupply until the 11th century in the Islamicregions.

Looking at the labour markets, onecan see a division of sectors into primary,manufacturing and tertiary, and a greatdeal of literacy within the labour force. Formore sophisticated occupations such as po-litical scribes, physicians, jurists, manualswere created to aid trainees. It leads to thetheory, that with the increase in literacy,this will lead to an increase in productivity;and coupled with the trading networks thatspanned across the globe, the theory holdssignificant weight in the Islamic world.

ConclusionA dynamic economy naturally

begets analysis and undoubtedly scholarsliving in major cities such as Cairo andDamascus were aware of the changes in thesocial, economic, and political spheres. Itwould result in refined analysis, and whilenot technical from a modern viewpoint,was certainly perceptive and erudite.

Time is progressive, and not regres-sive; and we are continually going forward,and not going backward. Therefore, manywould regard the study of Islamic historyas without utility for the development of Is-lamic finance and economics but there ismuch to be learned from historical eco-nomic thought and activity. Moreover,delving deep into the literature will revealmore about the elaborate thinking of thescholars which could benefit contemporaryeconomy. Most of this literature is beingscrutinized behind the hallowed walls ofthe university. It needs to be analysed effec-tively, efficiently, and disseminated.

-he problem, however, may not lie withthe lack of opportunities to find

knowledge but rather with the desire andwillingness of the individual to gather it. In

the hustle and bustle of the modernworld, searching for knowledge outside of

oneqs chosen profession can often betiring, cumbersome and toilsome.

ISFIRE ••• 1C


20 ••• ISFIRE

How do you see the Islamicfinance industry developingin the next ten years?

Generally, along positive lines. Ipredict that there will be a concerted movetowards an examination of the core spiri-tual principles that underlie the practiceand a move towards making structuresmore congruous with a spiritual mandateinherent in the Judaeo/Christian/Islamicethical ethos. There will be more concen-tration placed on developing the correctstructures, displacing those built on erro-neous foundations and developing andstrengthening the regulatory framework,which is in need of significant develop-ment. There will also be an exponential in-crease in Islamic scholarship. On balance, Iview the next decade as an intellectual andspiritual renaissance resulting in re-exam-ination with development of genuine prod-ucts direly needed by the hungry populace.

Islamic banking will also serve as astabilising force in the global economicorder. The financial crisis of the past fewyears has led to an increased awareness ofthe problems with conventional banking.The crisis has led to enhanced regulatoryattention and plans to control ‘risk’ in theconventional banks. The ‘risk’ in these sys-tems is multiplied by the very nature offractional reserve banking, which givesconventional banks the discretion andpower to simply create or eliminate credit,albeit subject to apparently stringent rules.For example, when asset prices increase ata fast pace, conventional banks seize theopportunity by granting more credit

backed by inflated assets, which is prob-lematic. Deposits in Islamic banks (whichare not loans but true investment depositson a mudaraba basis), however, are re-in-vested in the real economy to create newflows of goods and services without anyartificial money expansion. The ‘choking’of credit and its devastation on the eco-nomic system has highlighted the fragilityand inherent weakness in the interest bear-ing debt-based financial system. These fac-tors should result in a closer look at theequity based constructs that are a mainstayin the Islamic system and one more reasonthat should spur the development of Is-lamic finance.

Are there enough lawyers inthe Islamic finance industrywho have a thorough under-standing of both Islamic lawand western law, be it com-mon or civil?

No. Most lawyers that are practi-tioners do not appear to have grounding inIslamic jurisprudence. This lack of ground-ing in the field of law in which they prac-tice is unique to Islamic finance as apractice area. If I were a tax lawyer in theUS or a securities lawyer, I would need tobe well-versed in the Tax Code or the Secu-rities Acts, respectively. However, no suchcompetence is made requisite in firms forIslamic finance practitioners.

What are the challenges fac-

ing the Islamic finance in-dustry and what needs to bedone to overcome them?

There are serious challenges facingthe Islamic finance industry. Islamic fi-nance is beset with credibility problems.Many cannot differentiate between con-ventional and Islamic products; some ofthis is unfair and due to a lack of under-standing of the actual risk profile (e.g., inan ijara finance the financer assumes risk ofloss which is markedly different than thatin a conventional mortgage situationwhere the mortgagee (bank) does not);however, in other products such criticismis well-founded. In some cases, certainShari’a structures have been approved thatmake little legal or commercial sense – thisposits serious enforceability issues. Legaland Regulatory frameworks in countriesare severely deficient and do not provide aframework for the fluidity required for effi-cacious transactions; nor does the systemenvisage a requisite Islamic dispute resolu-tion system with concomitant proceduresand laws – Islamic finance is not under-stood and in some instances (and in Islamicjurisdictions) is not treated even on parwith conventional finance. For example,there are mortgage laws that protect con-ventional mortgagors but no mechanismfor Islamic ijara financiers to quickly exer-cise their rights against a defaulting ijaralessee – this exercise gets stuck in a systemthat does not know what to make of the lit-igants. This sort of regulatory vacuum –gap in understanding of Islamic financestructures at the judicial and regulatory

Agha & Co/Agha & Shamsi are currently the only fully fledged Shari’acompliant law firms in the world, headed by the impassioned OliverAgha. A man of principles and with a higher purpose, Oliver Agha istrailblazing a path within Islamic finance. In this exclusive interview, hetakes out time from his busy schedule to discuss his world and Islamicfinance.



levels - threatens the proper developmentof Islamic finance risking some Islamic fin-anciers getting fed-up and moving on orreverting to the tried and tested conven-tional system. At the governmental levels,similar problems exist as there is confusionacross the board on how to record the legalinterests of Islamic obligors e.g., the Islamicfinancier/owner vis-a-vis the customer/lesseeand designated eventual owner. There is adearth of human capital – many of the non-Muslim practitioners in the field have littleunderstanding of Islam or Islamic law. Forexample, Islamic finance is the only field oflaw where lawyers that have no training inIslamic theology and jurisprudence holdthemselves out to be “Islamic financelawyers.” Conventional bankers largelyseem enthused about the market opportu-nity which exists but, again, and under-standably so, without a due appreciationfor the spiritual principles that underlie Is-lamic finance. When you go through theactual state of the Islamic finance market,it is a wonder that it has survived at all; infact, it continues to grow despite the en-demic and extraneous pressures. In sum,Islamic finance has grown despite the mis-takes and imperfections of the practition-ers.

What is your opinion on theform vs. substance debate?

As noted above, Islamic finance isin a struggle for its soul. It must break freeof the temptation to take the path of repli-cating conventional products. Success onthe material plane by sacrificing its spiri-tual mandate is an actual failure from an Is-lamic perspective. The goal of Islamicfinance is not to achieve market success byreplicating conventional products in Is-lamic garb but by the development of an al-ternate, and co-existing system, based onequity and quasi-equity variants that envis-age conducting business tempered by spir-itual considerations.

Do the multiple opinions inIslamic law act as a hin-drance to the global growthof the industry? Is there aneed for standardisation orcan Islamic finance succeedwith having differences ofopinion?

Generally, it is difficult to ‘impose’one view on disparate adherents across theglobe. However, there can be a general con-sensus on certain core commercial mattersand the standards promulgated byAAOIFI, while neither perfect nor neces-sarily adequate, are a good start. Islamic fi-

nance has been growing despite all theproblems noted above so any conformityin relation to core principles for productswould be only helpful.

Regulation is important insupporting and promotingIslamic finance. For the on-going success of Islamic fi-nance, is it necessary toislamicise a regulatory sys-tem – like Iran - or adopt adual model – such asMalaysia? Which model doyou think is best?

Islamic finance exists in a worldwhere the norms are conventional systems.Countries that are open to developing Is-lamic finance need to establish dual modelsenabling Islamic finance to co-exist withthe conventional systems. Let there bechoice and let the market decide whetherto invest/partake in interest based or risk-sharing approaches.

Tell us a bit about Agha &Co/Agha & Shamsi.

The firms are law firms establishedwith the mandate of representing clients onpermissible transactions. Our Shari’aboard, like the board of other Islamic enti-ties, delineates our mandate in respect ofacceptable clients and representations.Generally, we cannot represent conven-tional banks in their conventional transac-tions, enforcement of interest bearing debtmatters, or clients for gaming projects (casi-nos), alcohol or tobacco manufacturers. Wecannot avail of debt facilities to pay ourpartners or employees. There are currently17 persons working with the firms.

The most novel transaction that wehave worked on to date involved a varia-tion of a diminishing musharaka andmurabaha structure that best approachedthe commercial requirements withouttreading on Shari’a concerns. We have alsostructured with Shari’a scholars and docu-mented intricate Shari’a structures effectingportfolio sales of leased assets and devel-oped commercially viable and Shari’a com-pliant structures for takaful operators. Wealso work regularly with leading Islamicfinanciers in litigating Islamic ijara dis-putes and defending or asserting Shari’a ar-guments in such cases. I also serve as anindependent expert witness in Islamic fi-

nance disputes.

Please explain the differencebetween Agha & Co andAgha & Shamsi and the rela-tionship between the two?

The two law firms are affiliatedlegal entities. Each has been set up to com-ply with the regulatory requirements ofeach Emirate.

Where are most of yourclients based?

Our clients are based in the UAE,Saudi Arabia and the United States. US andWestern clients find it culturally familiar towork with us since many of our lawyershave had large US/International law firmbackgrounds and top tier credentials, andthe firm follows the ethos of a NY or Lon-don firm with a same day response time,where possible.

What transactions and kindof work do you commonlywork upon?

Since we represent, among otherclients, three of the leading Islamic mort-gage financiers, DGF (Deutsche Bank’sSaudi mortgage finance entity), Tamweel(UAE’s largest Islamic mortgage financier)and Amlak, our practice in Ijara financingand dispute resolution practices are ourflagships. In addition, we work with lead-ing corporates on cross-border M&A deals,joint ventures or on cross-border projectswith complex EPC and project contracts.

How do you define success –working on the largest Is-lamic finance transactions orthe most genuine ones?

Of course we would be enthused towork with large Islamic finance transac-tions. However, these deals usually go tosome of the largest, global firms. We arequite capable of handling these (and havethe back-up of a large and quality firm,Pillsbury, in any case). However, to the ex-tent these deals replicate conventional pro-files or raise the ire of our Shari’a board wewould not be comfortable in working withsuch deals. Therefore, we satisfy ourselvesin working with smaller deals that have amore genuine spiritual underpinning.

Who are your competitors?How does Agha & Co/Agha& Shamsi differ from themajor players in Islamic fi-

22 ••• ISFIRE


nance such as CliffordChance, Norton Rose andother large commercial lawfirms?

Our competitors are the large lawfirms. As alluded to before, we differ fromthese firms in that we cannot represent con-ventional clients generally or clients in-volved in impermissible transactions.Additionally, we have a Shari’a board. Weare unique, as being established as a Shari’acompliant firm, and being able to issuelegal opinions on Islamic law. This is animportant niche as we see there being a realgap in the market in this area that we canfill in while working co-operatively withother firms.

What are your plans forAgha & Co/Agha & Shamsiand where do you wish totake it the firm? Do you wishto expand the firm outsidethe UAE?

The vision for the firms is to deliverexcellence in the practice of law while stayingtrue to its ethical mandate and circumscribedpractice areas. Growth is considered, to theextent there is a business case. We currentlyare working with clients in Saudi Arabia,Qatar and Oman.

What influenced you to startup a Shari’a compliant firm?

I started up a Shari’a compliant firmin order to reflect spiritual goals in theworkplace. While there are Islamic bankstakaful companies, there were no Islamiclaw firms. Naturally, I knew that beginninga Shari’a compliant firm would entail giv-ing up the lion’s share of my clients thatwere conventional financiers and there wasfear that there would not be enough busi-ness to survive. However, we have man-aged to get by, one day at a time, and arecommencing our fourth year, by the graceof the higher power.

How would you compareworking within a large com-mercial law with working ina niche law firm which fo-cuses on Islamic finance?

These are very different experi-ences. Working in a large law firm is akinto being on a large cruise ship. It is very

comfortable, generally. However, you haveto be comfortable with the destination to-wards which the ship is headed. A smallfirm is a smaller vessel – more adept atmaking quick turns and with more free-dom of choosing its destination.

Take us through an averageday in the working life ofOliver Agha.

An average day involves going towork, client matter attention, work on firmand client development matters, atten-dance at weekly firm education seminars,work with AAOIFI (I sit on their board)and WIFI (recently established EuropeanIslamic body to aid in the development ofthe Islamic finance industry) and if I amlucky, getting to the gym.

What do you do when youare not working?

My interest is the study of compar-ative theology; so I spend time reading dif-ferent religions’ approaches. I have foundthe Talmud and the Torah to be particu-larly interesting and rewarding. One of thepearls of wisdom from the Torah I have ac-quired notes “Fools believe that the moneywhich they have lying in their coffers istheirs, while the money they give away tocharity is theirs no longer. Actually, quitethe reverse is true. Only those possessionswhich are given away for sacred purposesremain one’s property (“each shall retainhis sacred donation,” Num. 5:10). But thepossessions which a man greedily amassesfor himself are not his at all. Such gains will

not remain with him for longer than a fleet-ing moment.” CHASIDIC [27]. The Unionof American Hebrew Congregations, TheTorah: A Modern Commentary, 1056 (W.Gunther Plaut ed., Jewish Publication Soci-ety 1981) (1962).

Tell us a bit about OliverAgha. Where did you study?Where have you worked?

I went to high school in the US (inScarsdale, New York), then went to NewYork University and after having workedin the corporate world for a few years,went back to law school (New York LawSchool). I worked, among others, at Ful-bright & Jaworski LLP in the US, India,Hong Kong and Beijing (for about eightyears) and then moved to CliffordChance’s Saudi affiliate where I headed theProjects department and co-headed the Is-lamic practice. At that time, I became in-volved in some of the large Islamic deals inthe region. Subsequently, I joined DLAPiper in Dubai before launching Agha &Shamsi in Abu Dhabi and Agha & Co inDubai.

What is it about Islamic fi-nance that impresses you?

The spiritual message in Islamic fi-nance is most rewarding. For the idealist inme, it posits a society where partnershipsand partnership structures are common-place and commerce and transactions areinfused with an ethical perspective.

ISFIRE ••• 23



ISFIRE ••• 29

conventional bank have certain limitationssuch as the following:

(1) Possibility of co-mingling of funds atthe treasury level for managing the liquid-ity requirements of the bank as a whole.This can be overcome by having separatefunding pools, one for the conventionaland the other for the Islamic, but the prob-lems may still persist in terms of achievingoperational efficiency, economies of scaleetc, due to possible asset-liabilities mis-match between Islamic liabilities & Islamicasset and conventional liabilities & conven-tional assets.

(2) Constraint of maintaining dual systemsand processes affecting the accountingframework.

What plans do you have forthe NCB’s Islamic bankingoperations in the nexttwelve to eighteen months?

We are focusing on several areas togrow Islamic banking at NCB. Specifically,

we are focusing on the following:

1. Product development in all areas of busi-ness especially in the Consumer, Corporateand Treasury fields. These are our imme-

What is the importance ofhaving a fully fledged Is-lamic bank as compared toan Islamic window within aconventional bank?

A fully fledged Islamic bank wouldbe the most ideal situation that can happenat any place provided there is wider ac-ceptance of this model by the bank’s tar-geted customers as well as by the policymakers and central monetary institutions.

From a control and operational per-spective, a fully fledged Islamic bank canoffer a wide range of Shari’a compliantproducts and services. It can achieve bettereconomies of scale, have IT systems whichsuits an Islamic bank’s operational needsand availability of knowledge and expert-ise in all areas. Needless to say, fullyfledged Islamic banks can create a bettercustomer perception of a bank’s Islamicimage.

As against this, Islamic windowsprovide a fair number of Islamic bankingproducts and ensure customers peace ofmind. However, such windows within a

National Commercial Bank is the biggest bank in the Kingdomof Saudia Arabia and a leading financial institution in the GCC.The Head of the Islamic Banking Group, Mr. Abdulrazzak M.Elkhraijy, sits with us to discuss the approach of NCB to Islamicbanking.


diate focus areas. We are working aggres-sively to meet the gaps in products andservices in these sectors to meet the grow-ing expectations of our customers.

First, we are offering the instantapproval of Shari’a-compliant financing,helping us to grow our personal financebusiness by 20 percent in a flat market. Weare also developing a complete suite of Is-lamic home finance products to meet everytype of customer need to ensure consistentleadership in the consumer finance market.

Second, while expanding theproduct range, NCB is also committed toimproving customer service and ensurefaster turn around time in product deliverywithout compromising on the stringent re-quirements of Shari’a. One such example isthe introduction of customer ownership ofthe commodity in a tawarruq transactionand then instructing to sell the commoditythrough telephone banking/IVR process.

Third, we are developing riskmanagement policies for the Islamic con-sumer and corporate financing activities.

Fourth, we ensure high qualitycustomer experience across the channelswith friendly and trained staff.

Finally, we participate in CSR ac-tivities to improve social bonding which isan essential value of the religion of Islam

You have recently won theGlobal Islamic Finance Award(GIFA) in the category of“Best Islamic Bank”. Tell usthe journey towards thisachievement.

NCB launched its first pilot branchoffering Islamic-only services in 1990. Sinceits modest beginning, Islamic banking hasemerged from being a niche offering to be-come part of NCB’s mainstream business.NCB has a proud history of leadership inIslamic banking and finance, having pio-neered the innovation of various tools andproducts that are now widely adopted bythe industry worldwide.

In 2005, NCB made a commitmentto convert its entire retail branch networkto Islamic banking. NCB’s leadership in Is-lamic banking and finance, particularlysince the time of this commitment, hasbeen rewarded by a rapid growth in theBank’s customer base and higher levels ofcustomer loyalty.

In December 2006, after the success-ful conversion of the retail network to Shar-i’a compliant banking, NCB established theIslamic Banking Development Group(IBDG). This was intended to become thecentre of excellence for all of NCB’s Shar-

i’a-compliant offerings, and to supportbusiness units in achieving the Bank’s Is-lamic banking strategy by ensuring fullShari’a compliance of their Islamic offer-ings.

NCB was the first bank in the regionto develop:• A Shari’a standard for investing in equi-ties• A Shari’a-compliant equity fund• The tawarruq process to facilitate cash fi-nance needs• A Shari’a-compliant credit card• An Islamic capital protected fund• The first Islamic investment certificate

listed on an international exchange (in as-sociation with Deutsche Bank)• Different types of musharaka based in-struments• Islamic securitization• A murabaha fund to finance automobiles• Creation of a donation fund

The journey continues unabatedand the Bank is not only accelerating its ef-forts in product development but alsoworking in other areas such as establishingappropriate risk policies for the islamicportfolio and strengthening its controlmechanisms through Shari’a audit.

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What are the challengesfaced by the Islamic bankingand finance Industry?

The main challenge for the industryis to achieve the size and scale, both interms of geography and depth of the mar-ket. We believe for the progress of Islamicbanking, our products should be attractiveto non-Muslims as well.

Other obstacles which need to beovercome include:1. Lack of an entire range of products asavailable in conventional banking.2. Lack of regulations and prudentialnorms.3. A shortage of Shari’a scholars qualifiedenough to understand complex bankingproducts especially treasury and corporatetransactions including structured finance.4. Disagreements across the variousschools of thought.5. Creating an adequate legal and account-ing framework.6. Technology constraints. 7. Lack of standardization.

In your opinion, what hasbeen the impact of the on-going financial crisis on Is-lamic banking & finance?

It would be naïve to say that the on-going financial crisis did not have any im-pact on the growth of Islamic banking andfinance. Firstly, we have seen the examplesof UAE and other markets where due toconcentration of assets on real estate proj-ects, there have been default and delin-quency issues, court cases, etc.

Secondly, the ongoing financial cri-sis has had a negative impact on customertrust in the banking industry in general.Today, customers do not view the bankersin the same light as they viewed them be-fore and they have become extremely cau-tious while dealing with the banks,especially when buying investment prod-ucts.

Thirdly, due to reduction in busi-ness activities, banks are facing problemsboth in mobilizing deposits as well as inproviding financing.

Despite these generic issues im-pacting the global financial market, rela-tively speaking, Islamic banking hasperformed well and has grown to be a $1trillion dollar industry. The most importantobservation is that the Islamic finance in-dustry caught the attention of global finan-cial institutions, planners and policymakers, even of the detractors, as a possibleand viable alternative which can support

and strengthen the global financial system.

What factors are needed forthe further development andgrowth of the Islamic bank-ing and finance industry?

The main driving factors for furthergrowth of the Islamic banking and financeindustry would be:

1. Improving customer service especiallythrough customer friendly staff and adop-tion of latest technology. 2. Expanding product offerings especiallyfor treasury and corporate customers whohave more sophisticated needs. 3. Developing products for the lower endof market, such as SMEs and remittancecustomers.4. Regulations to govern the industry espe-cially involvement of central banks.5. Issuing risk management policies espe-cially in mitigating Shari’a risk.6. Developing instruments for liquiditymanagement.7. Strengthening Islamic banking imple-mentation areas (accounting, processes,technology, and legal documentation). 8. Talent enrichment programme.9. Customer education.

What is your opinion on theform versus substance de-bate? Do you think Islamicfinance will suffer fromreplicating the economicsubstance of conventionalproducts? What does the in-dustry have to do to movepast this debate?

This is a very challenging questionwhich has surfaced with the rise of is-suance of sukuk and subsequent asset-backed vs. asset based controversy.

In my personal view, Islamic fi-nance needs to stand on its own legs andreduce its dependence on conventionalproducts for ideas. The industry should in-vest time and effort in product researchand idea generation and move towards de-velopment of unique Islamic products inconformity with the requirements ofShari’a.

Ambition, timing or talent:which matters more to suc-

cess? What has contributedmost to the success of yourbusiness at NCB?

It is a combination of all three ele-ments though ambition to be the globalleader in Islamic banking has contributedmost to the success of NCB Islamic Busi-ness.

From the geographical point,what are the countries thatare on your radar?

We are a Saudi bank with a regionalfocus. We already have retail branches inBahrain and Beirut. In addition, we haverepresentative offices in other places. NCBCapital has presence in London and Dubai.

Turkey is a rising power sitting onthe edge of Europe and Asia. Islamic bank-ing is fast growing in this country thoughsubsumed under the category “participa-tory banking”. We are already present inthis market through our subsidiary,“Turkiye Finans”.

In addition to Turkey, we are look-ing at other centers for possible opportuni-ties.

What are the aims of NCB inthis tough market climateand how would you achieveit?

To hold market leadership in everycustomer segment of the Saudi market,maintain profitability and ensure growthand shareholders’ value. This will beachieved through developing efficientproducts, rendering excellent customerservice, adoption of latest technology andtalent management.

What distinguishes NCBfrom its competitors?

Its heritage, nation-wide distribu-tion network supplemented by a state ofthe art call centre and electronic bankingnetwork, wide variety of products & serv-ices to meet the differentiated needs of var-ious customer segments, consistent policyof providing the best customer service and,above all, availability of an expert humantalent pool, are the factors which makeNCB stand apart from its competitors.


-he Oman Islamic Economic Forum(OIEF) held on the 17th and 18th ofDecember 2011 in Muscat was the

first international Islamic finance confer-ence held in the Sultanate of Oman. EdbizConsulting, in collaboration with AmjaadInvestments, were proud to organise suchan event, an event which marked the be-ginning of the story of Islamic banking andfinance in Oman.

At the resplendent Al BustanPalace-A Ritz Carlton hotel, which over-looks a translucent, private beach, leadingfigures in the global Islamic finance marketconvened to discuss pertinent issues affect-ing the industry. Adding to the illustriousroster of speakers, 400 participants fromOman and beyond attended to listen, dis-cuss, network and contribute to this dy-namic conference.

The conference was opened by HH.Sayyid Shihab bin Tariq and featured akeynote speech by the former Prime Min-ister of Malaysia Tun Abdullah bin Haji

Ahmad Badawi. The ex-Prime Ministeraddressed the importance of Islamic fi-nance for Oman in strengthening the econ-omy and highlighted the success stories ofother countries, focusing mainly onMalaysia. HE Yaseen Anwar, Governor ofState Bank of Pakistan offered a uniqueperspective on Islamic banking and financein Pakistan. Vice President of Islamic De-velopment Bank, the preeminent Islamic fi-nance multilateral organization, HE DrAbdul Aziz bin Hinai, emphasized the ben-efits of intra-national cooperation in ad-vancing the Islamic finance industry andexpressed enthusiasm regarding Oman’sentry into the sector.

To provide in-depth exposure andfocused analysis on Islamic finance, thetwo- day conference was divided into a se-ries of panel discussions and speeches.Panels comprised of leading practitionersin the Islamic banking and finance industrycoming from organizations that have ad-vanced Islamic finance in the fields of law,

accountancy, asset management, bankingand academia. Further, the conferencewelcomed prominent Shari’a Scholars in-cluding Sheikh Nizam Yaqubi, Sheikh DrAli Al Quradaghi, Sheikh Dr Kahlan AlKharusi, Sheikh Dr Abdul Rahim Sultan AlOlama, Mufti Zubair Butt and Mufti TalhaAhmad Azami to offer their insights andadvice to an attentive audience.

Topics tackled at the conference in-cluded regulatory models, banking mod-els, Islamic insurance (takaful), capitalmarkets, corporate governance, economicreform, and Shari’a issues. In addition, anduniquely for a conference of this magni-tude, the Forum addressed the potential ofbuilding up social responsibility and phi-lanthropy in Islamic finance, taking a fo-cused look at Waqf and Zakat, two pillarsof the traditional Islamic economic system.

Edbiz Consulting CEO, ProfessorHumayon Dar, is of the view that the con-ference will be seen as a pivotal momentfor Islamic finance in Oman in the future.

Oman Islamic Economic Forum:A watershed momentfor the SultanateThe Oman Islamic Economic Forum (OIEF) held on the 17th and18th of December 2011 in Muscat was the first internationalIslamic finance conference held in the Sultanate of Oman. EdbizConsulting, in collaboration with Amjaad Investments, wereproud to organise such an event, an event which marked thebeginning of the story of Islamic banking and finance in Oman.

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“Best Islamic Bank” because of their suc-cessful conversion of retail banking oper-ations into Islamic, where they adopted adynamic and innovative approach to thetransition. Professor Humayon Dar com-mented that "The Best Islamic Bank for2011 by Global Islamic Finance Awards isrecognition of the NCB's appreciation ofthe glittering potential of Islamic financeand its provision of a wide range of Is-lamic retail banking services. The bank isremarkable for taking the challenge ofconverting its retail banking operationsinto Islamic - a model that has been repli-cated by other conventional banks in theworld." The award was received by the VPIslamic Banking Group Mr Adnan binHimd.

Abu Dhabi Commercial Bank(ADCB) won the award in the category ofthe “Most Improved Islamic Bank of 2011”.The “Islamic Banker of the Year 2011”award was won by the youthful CEO ofCIMB Islamic, Malaysia, Badlisyah AbdulGhani, and received by Datuk NoripahKamso- CEO of CIMB Principal IslamicAsset Management in his absence. The“Best Takaful Company of 2011” went toFWU Global Takaful Solutions and was re-ceived by the Partner and Head of BusinessDevelopment, Mr Sohail Jaffer.

Other awards included “Best Is-lamic Finance Consultancy of 2011” whichwent to KPMG and was received by theHead of Islamic Finance- Mr Neil Miller.“Best Islamic Finance Structured Products”went to Societe Generale for creating inno-vative and effective structures whileachieving impressive sales given the tougheconomic conditions. The award was re-ceived by Mohamed Virani- Head of Is-lamic Structured Products. The “BestIslamic Finance Education Provider 2011”went to INCEIF for their leading role in Is-lamic finance education. The award was re-ceived by the CEO & President- Mr DaudAbdullah Vicary who was pleased to re-ceive the award. “INCEIF is very proud toreceive this prestigious award in recogni-tion of it's leadership in the developmentof human capital for Islamic finance. Wewill continue to strive to develop evenhigher standards of content and deliveryfor all our stakeholders."

In addition, the GIFA recognizedthe efforts of the Islamic finance technologyproviders and the “Best TechnologyProvider of 2011” was given to Path Solu-tions and the “Best Technology Product of2011” was given to ITS.

He states “Our aim for hosting this confer-ence was to provide the domestic financialmarket with the tools to understand howIslamic finance could bolster the Omanieconomy. We wanted to expose the suc-cesses of this industry and the values itconfers to indigenous decision makers whohave a cursory knowledge of Islamic fi-nance. The interest generated and the at-tendance was unparalleled and highlightsthe potential for Islamic finance in Oman”.Khaled Alyahmadi, the Founder of theOIEF, was delighted at the success of theconference and the content covered. “I sin-cerely believe that the conference hassparked widespread interest in Islamic fi-nance within Oman. We have vauntedaims and wish to truly compete on theglobal stage. Truly developing Islamic fi-nance can only push Oman forward in theworld economy. The conference marks thefirst step. We hope to continue going for-ward and push Islamic finance in Omanand beyond”

The Global Islamic Finance Awards(GIFA) were part of the OIEF and were of-fered to recognize the outstanding workundertaken by institutions and individualswithin the Islamic finance sector for 2011.They followed the close of the first day ofthe OIEF, on the 17th December 2011.

The gala dinner/the awards cere-mony held at the scenic Al Bustan Palace,was attended by leading figures in Islamicbanking and finance industry including ex-Prime Minister of Malaysia HE Tun Ab-dullah bin Haji Ahmad Badawi, HE YaseenAnwar- Governor State Bank of Pakistan,Dr Abdul Aziz Hinai- Vice President Is-lamic Development Bank and other peo-ple from different parts of the world.

The event commenced with Profes-sor Humayon Dar-Chairman & CEO ofEdbiz Consulting, a Shari’a advisory andStructuring firm based in London- provid-ing an introduction to the GIFA and high-lighting the importance of awards in theIslamic banking and finance industry ingranting exposure of the current and po-tential luminaries in the industry. Therewere 18 categories, taking account of themultiple facets of Islamic finance. Theprestigious Leadership in Islamic FinanceAward was given to Tun Abdullah Badawi,recognizing his committed support of Is-lamic finance and the praiseworthy workcarried out in the sector during his time asthe Prime Minister of Malaysia.

The National Commercial Bank(NCB) won the award in the category of



seeing interest everywhere. For the Islamicbanking industry, it is about maturityrather than lack of interest. Many coun-tries, for example in Europe, are express-ing interest and are studying it but are stillnot at the stage of adoption. In Europe andprobably North America, the Islamic bank-ing seeds are there but just needs time togrow.

Which markets do you wishto tap into?

We are starting to tap into theAfrican and Western European markets.We are already working in Africa. In NorthAfrica, ITS covers countries such as Egypt,Tunisa and Libya. We have customers inZambia, Namibia and Nigeria. In fact, oneof the largest banks in Nigeria, ZenithBank, runs our solutions. From these loca-tions, we are planning to expand intoneighbouring countries.

What we are especially looking intowithin these regions is the Islamic windowconcept. We feel that there is more scopefor coexistence with conventional bankingsystems. Additionally, we are starting toadopt a new type of focus and model basedon the different financial sectors in the dif-ferent African countries. For some territo-ries, we have partners on the ground that

offer our solutions. Overall this means forsome countries, ITS is going to directlyoffer its solutions, and for others we will beusing partners. Specifically, in central andsouthern Africa we are looking at the part-nership model and alliances with other sys-tem integrators who would be willing tooffer our Ethix Financial Solutions.

Describe the ETHIX FinanceSolution.

The Ethix Financial Solution is twodifferent products: one is for conventionalbanking and one is for Islamic. For Islamicbanking, the product was designed fromthe ground up paying close attention to theneeds of Islamic banks. We did not amendand adapt conventional banking systems inorder to make it work with Islamic bankingsystems. This we feel is typical of our com-petitors and we end up seeing the limita-tions they have with their customers. Ittakes a long time for a conventional systemto be customised to fit the needs of Islamicbanking, tested and then delivered to thecustomers for it to be deployed. What wedid was to look at the business elements ofthe Islamic banking industry and build aproduct that caters specifically to thebank’s needs. We feel that that is our majordistinction from our competitors.

What is the focus of ITS?

Our focus is primarily on the Is-lamic banking sector, from core banking toall the delivery channels both retail andcorporate. We have launched a number ofproducts this quarter and are hoping tolaunch a new suite of products in the nextquarter. This will include new Islamic in-vestments, and Islamic treasury solutions.It will complement our existing product of-ferings, bringing a suite of products to-gether which falls under our productbrand, Ethix Financial Solution.

What is your assessment ofthe market for ITS Islamicbanking systems?

Currently, the largest markets forITS is the GCC and the Middle East atlarge. Many of our customers are fromKuwait, Bahrain and UAE. While the areahas been our prime focus over the last fewyears , we have started to expand into dif-ferent geographies and currently conduct-ing research and analysis of other globalmarkets. One thing to note is that the out-reach of ITS parallels that of the growth ofIslamic banking in general. Thankfully,when it comes to Islamic banking, we are

Haitham Abdou is a busy man. Playing such a central role atInformation Turnkey Solutions (ITS), the pioneering integrated systemsand service provider, Mr. Abdou is at the forefront of innovativedevelopments in Islamic finance, thereby ensuring his time is taken upwith paving the way forward in this nascent industry. Fortunately forus, he kindly took the time out to discuss ITS, Islamic banking and whyhe believes Islamic banking is becoming a viable alternative model.

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every single Shari’a board.

Leading on from this, pleasedescribe the ITS product of-fering to Islamic banks ingreater detail.

What we have done in ITS is comeup with a suite of what we call IslamicBanking Engines. There are four: IslamicDefinition Engine, Islamic Product Engine,Islamic Workflow Engine, and the IslamicAccounts Generation Engine. These fourengines allow a bank to define from theground up the Shari’a compliance rulesand regulations dictated by the Shari’aboard. It allows banks to design accord-ingly as the borders of Shari’a compliancebecomes a definition within the hands ofthe banks. That is the only way we canguarantee our product is Shari’a compliantas we allow the customer to define theirown Shari’a compliance rather than try todictate to them. They can tailor make theirproducts. It is truly the only productwhich allows independent customisation.The product is flexible for the Shari’aboards to dictate the Islamic banking prod-ucts they want to launch and how to struc-ture them, from a workflow point of view,from a contracts management point of

view and from an accounting point ofview. It is a suite of products that when puttogether, it will create their own Shari’acompliance. They don’t have to come backto the vendor for customisation.

We are proud that Tier one bankssuch as Kuwait Finance House, Bahrain Is-lamic Bank, Arab Finance House and AbuDhabi Islamic bank are users. These arebanks that are at the forefront of innovationin the Islamic banking industry around theworld. And that’s what differentiates usfrom our competitors as these banks areoperating our systems because they realisethe benefits of such flexibility.

Is it only the product thatdifferentiates you from yourcompetitors?

Aside from our product, we are alsoa service and systems integrator. We offerend to end solutions that our competitorscannot offer. We can offer our customers afull service including the hardware plat-form, the services they need, the networksecurity, storage as well as 24/7 support. Soon top of being a product vendor - whichis where our competitors stop - ITS offersan entire range of IT solutions that comple-ment the software. Our customers do notneed to be with multiple vendors. We offer

What are the key differencesbetween ETHIX and its con-ventional counterpart?

In terms of differences between theconventional and the Islamic system, itboils down to the mindset of the productand the design of the product. That is whyif a product is not designed for Islamicbanking from the beginning, it is very diffi-cult for the product to keep up with thecontinuous growth of the industry.

One of the main differences is thatin the Islamic banking industry there aremany different viewpoints as to what isconsidered Shari’a compliant for products.It could differ between banks in the samecountry and also between different coun-tries. The way Shari’a compliance is lookedat in the GCC is different to the way it islooked at in the Asia Pacific areas. Thesedifferences I feel will continue because ofthe simple fact that Shari’a compliance isdictated by the Shari’a board of individualbanks. They decide what is a Shari’a com-pliant product, how to structure it, how itis defined, etc. They also define how thecontract between the bank and the cus-tomer is drafted. They define the account-ing policies for every step of thetransaction. Therefore, it is very difficult fora software vendor to pre-empt the mind of

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What are the IT-related chal-lenges faced by the Islamicfinancial services industry?

Islamic banks are similar to conven-tional banks in what they need from IT.They are banks like any other bank. Thedifference is Shari’a compliance. This raisesdifficulties due to differences of opinionwhen it comes to Shari’a compliance. Thechallenge is to create the right software so-lution. Hardware and networking is thesame as conventional but it is in softwarewhere Shari’a compliance presents issues.Furthermore, the lack of a global standardfor Shari’a compliance compounds thechallenge further. That being said, I per-sonally do not believe that we will see, anytime soon at least, a global standard forShari’a compliance that will govern Islamicbanks. We see organisations like AAOIFI -which ITS is a member of and has been cer-tified by- but there are other standardsagencies such as IFSB and I expect more tofollow, adding further layers to the diver-sity of opinions in Islamic finance. Ulti-mately, however, the end decision forShari’a compliance really lies with theShari’a board and that is why there will al-ways be differences in the interpretation ofShari’a compliance. Subsequently, soft-ware needs to be tailored keeping that chal-lenge in mind. ITS is the only company thathas looked at developing systems from thisangle and has created a suite of Islamicsoftware engines that allows that challengeto be mitigated.

Have you been effected bythe Arab spring?

We have been affected by the ArabSpring but in a very positive way. Cer-tainly, in the short term, it has been nega-tive. Following the financial crisis, and thenthe Arab spring, spending in general wentdown because there was uncertainty.However, in the long term, what has re-sulted from the Arab Spring is the rise ofpolitical parties who are more inclined toan Islamic based society in general, andutilising Islamic banking as the main bank-ing model. The events in Tunisia, Egypt,and Libya appear to be heading towardsthat direction. Therefore, we see a huge po-tential for the growth of Islamic bankingand Islamic windows in these countries.The result is a growth of Islamic bankingin the medium and long term after the re-sultant slowdown due to political instabil-ity. So there is a growth opportunity for

Islamic banking and the development of astrong IT infrastructure.

Would you be able to high-light the performance of ITSover the last few years?

What I can tell you is what has al-ready been publicised by objective entitiesin the world. We have been ranked byGartner in a report published in 2011, as atier one global organisation when it comesto Islamic banking. We are one of the toptwo or three companies when it comes tomarket share, size and research and devel-opment and having a tier one customerbase. We have been ranked by the IBS salesleague last year, as the number one com-pany in terms of sales for Islamic banking.We are also very honoured to win a GIFAaward for “Best Islamic Finance Product”.Last year we received from the CPI, theBest Technology Provider for 2011. So over-all I think we can consider ourselves as oneof the top Islamic banking vendor in theworld but we do not rest on our laurels andconstantly looking for new opportunities.

What is your focus in the FarEast?

Islamic banking is relatively maturein the Asia Pacific area, especiallyMalaysia. Other countries like Hong Kong,Singapore, South Korea and China have allexpressed interest in Islamic finance. In thecase of Singapore, they have done much tokick start the industry within the nation.Indonesia has a lot of potential to growsince it has the largest Muslim populationin the world. I believe that the Asia Pacificregion will be ranked second after the Mid-dle East in Islamic banking. We have a cus-tomer base in Malaysia and Philippinesand we are looking to partner with compa-nies in that area and expand in the region.

Tell us about a typical work-ing day of Haitham Abdou?

The only thing that I can tell aboutmy work routine is that there is very littleroutine in the ICT industry! My multipleroles within ITS ensures that I am con-stantly on my toes. I am the Group Directorof Marketing for ITS, which involves look-ing into many industries such as banking,education, enterprise solutions, etc. I amalso the Director for the Banking BusinessSolutions department which is heading the

them a single point which is a valuable andconvenient proposition for our client. Atthe same time we don’t force them to takeall services from ITS. But most of ourclients have found it beneficial to use ITSas a product vendor and total IT systemand service integrator.

ITS is what we call as pure play. Weare the largest company in the world thatspends research money and developmentonly on Islamic banking. Other competitorsin the conventional banking space arelarger than ITS but do not spend much onIslamic banking. I believe we are the onlycompany in the world that can cater to allthe models of Islamic banking, from thosethat are at a conceptualisation stage all theway up to large, multi-service banks. Wecan offer our solutions for start up Islamicbanks where we can assist in the establish-ment of an Islamic bank in two months. Wehave done this on a number of occasions.We are the only company that is able toconvert conventional banks into fullyfledged Islamic banks, not only from an ITpoint of view but also from a business con-sultancy perspective. We also have solu-tions that cater for Islamic windows and Ibelieve we are the first vendor to imple-ment an Islamic window in the GCC- theCommercial Bank of Dubai. Moreover, wecater for the smaller entities and for the In-vestment houses in Islamic finance. So weserve all the variations of organisations inthe Islamic financial industry.

What are your plans for ITSin the short, medium andlong term?

Short term: We are launching a re-vamped product line to complement ourIslamic full offering. The suite will coverdirect portfolio management, fund man-agement, sukuk, direct investments andserve front, middle and back office.

Medium term: We are implement-ing a roadmap, a new concept of businessprocess management that will be incorpo-rated within our total banking solutionsand transition into a complete service ori-entated architecture. We are looking at ex-panding into Europe and North America inthe medium to long term.

Long term: We wish to expandglobally. While we have presence on mostcontinents, the growth of Islamic bankingwill help induce our growth further. In thelong term, we hope to make a significantimpact in Africa, the Asia Pacific, Europeand North America.

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project management development of ourEthix Financial Solutions as well as the im-plementation, the presales and the support.Additionally, I am responsible for theGlobal Operations unit, which looks intothe expansion of our product industry toother parts of the world through channelswhere we do not have direct sales office. Asyou can imagine, these three things keepme extremely busy. But all with the samestrategic intent which is to position ITS asa regional leader, as a service integratorand IT systems integrator for tier one or-ganisations in general thus making ITS aglobal leader when it comes to Islamicbanking solutions on a global scale.

What is your educationaland professional back-ground?

I graduated as a software engineerfrom California State University, USA. Istarted my career as a software developerand then worked my way up in the bank-ing industry, working in a number of rolesincluding system analyst, designer, archi-tect, project manager and then heading ITSdevelopment. This was followed by entryto marketing the products and then intohigh level, executive positions in the com-pany. I have been at ITS for 16 yearsthough prior to that I worked in othercompanies.

What impresses you aboutIslamic banking?

Islamic banking is good for society.It is based, in principle, on the merits ofbuying and selling and trading of goodswhere money is not considered as a com-modity or a good to be traded and so in-hibiting the opportunity for interest or riba.That principle to me has many meanings.When you trade, that means a good has tobe produced meaning there is a factorywhich produces the good, which means thefactory has employees. Once the good isproduced it has to be shipped, whichmeans retail shops and this, in totality,makes the economy of the society work.The core principle of Islamic bankingmakes it less risky as it is not based on com-pounded interest or virtual money. I be-lieve that is why Western societies aregradually finding Islamic banking more at-tractive.

What are your opinions onthe current state of Islamic

finance? Awareness of Islamic banking is

growing year by year at a global scale. Is-lamic banking is experiencing double digitgrowth year after year which is a phenom-enon. What is especially interesting is thatIslamic banking has gradually shifted fromits original religious conceptualisation to amore business and economic paradigm.This is allowing it to grow at a faster pace.Non- Muslims are now partaking in thebenefits suggesting that Islamic banking isbreaking the barrier of religious misunder-standing and suspicion. It is now seen asan alternative business model that allowscoexistence. The choice, however, remainswith the consumer as to which model theywish to choose. This goes a long way indriving the expansion of Islamic bankingand finance.

Another paradigmatic shift over thelast year or two has been branding. Attend-ing conferences and speaking regularly toindustry practitioners, the ideology of Is-lamic banking is leaning towards ethicalbanking. That is why we called the prod-uct ‘Ethix’ to keep in line with that trend.

The industry as a whole is matur-ing; expertise on a global scale is graduallybeing built. Systems are there to supportthe business and not visa versa. Softwareand IT systems is a necessity nowadays as

it supports the growth of the business. Ifyou cannot translate business needs into anIT system that is when you find limitationson your business.

What are the challengeswhich face this industry?

A key challenge for the industry isappeasing the regulatory system of differ-ent countries. Regulation of Islamic bank-ing and finance is much easier in theMiddle Eastern countries and that is whyit has been adopted much faster. In theWestern countries, it is much slowerthough certain countries like the UK haveamended and added to present regulationsto accommodate Islamic finance.

More obstacles have to be overcomeespecially in the context of taxation. This issomething that is often spoken about inconferences and events I have attended onIslamic finance. Corporate governance isanother aspect that needs to be considered.These hurdles are gradually being re-solved. That is why we see double digitgrowth year in year out, worldwide. Ingeneral, if it keeps on growing, I see thehurdles disappearing. I feel optimistic thatthe growth will continue and actually evenexpand into different countries.

ISFIRE ••• 39


36 ••• ISFIRE

actions, loans and debt-based arrange-ments. Thus, if someone lends 40 kilo-grams of wheat to someone today inexchange for 50 kilograms of wheat aftersix months, this transaction definitely in-volves riba, even if someone argues thatthe price of 40 kilograms of wheat todaywill be equal to the price of 50 kilogramsof wheat after six months. The Shari'aprinciple is very simple. “Whatever yougive, receive it back in equal quantity.” Ifyou receive more, it is riba. End of story.Indexation of loans is necessarily a con-cept related with value. Value, however,is not a subject matter of riba. Loans inShari’a cannot be valued in terms ofsomething other than what is lent. Thus40 kilograms of wheat today cannot bemore or less in value than 40 kilograms ofwheat after some time. In other words, itis the intrinsic value that counts and notthe value of something in terms of an-other item.

The second relevant concept is thetime value of money. The time value ofmoney necessarily implies that one rupeeat hand is of more value than one rupeeafter one year. Therefore, proponents ofindexation of loans claim that someonelending one rupee for one year must re-ceive more than one rupee after one year.This concept is not acceptable in Islam.Once again, the Shari’a principle isstraightforward and definitive. If some-one had kept one rupee stored safelywithin a locker, it would not have in-creased in quantity just by the act of sav-ing it and storing it for the future. It couldincrease in value only if it was put to aproductive use, like investing in a ventureor using it in trading etc. Nevertheless, insuch a case, it is also likely that the personmight lose the one rupee (fully or par-tially) in the investment process. There-fore, Islam recommends profit losssharing in business transactions betweenthe one who provides money and anotherone who manages the business. This isthe optimal model envisioned by the fore-fathers of Islamic finance. A financial sys-tem whereby the musharaka andmudaraba, equity based products, would

be the foundations of the system. Debtbased products such as the murabaha orthe qard were meant to be an extension ofthe system and were certainly not meantto be associated with interest. These con-tracts were, and still are, sales based con-tracts, appropriate for situations whereone contracting party has insufficientfunds for the procurement of desiredgoods. They are inherently more equi-table and socially aware contracts as theyrecognise the pressing needs of one con-tracting party, resolving the issue bybringing a party with the surplus to meettheir needs. This second party is not ex-pected to gain from the adverse state ofthe first party. Hence, interest (riba) isconsidered so repugnant under theShari’a.

Third, the opportunity cost is ac-cepted in Islam as an economic conceptfor pre-evaluation of business opportuni-ties and not for valuation of loans. Thereis a clear prohibition in the Quran of de-fault penalty and charging more for theloss of income arising from a borrower’sdefault. While there is a room for com-pensating the lender for the actual loss in-curred to recover the debt, Islam does notallow charging for the opportunity cost ofnot receiving the debt in time.

Fourth, transactional justice is veryimportant in an Islamic theory of ex-change. The transactional justice is actu-ally the basis of the prohibition of riba. Inorder to ensure that no party to a transac-tion is treated unjustly, the Islamic theoryof exchange relies on numbers, quantitiesand amounts (which can be objectivelydefined) as opposed to value (which ismore subjective in its nature).

Given the above discussion, index-ation of loans is not acceptable in Islam,i.e., it is not permissible for someone tocharge the principal sum plus an addi-tional amount based on the rate of infla-tion or a formula derived from anexchange rate of currencies etc. Periodicincrease in wages of employees based onan index like Consumer Price Index, or asimilar index, does not fall under the ar-gument above.

Riba is a very misunderstood con-cept both within communities andin the Islamic finance industry. Ex-

perience has shown that many are unableto see the wisdom behind the prohibition,arguing that the interest in today’s worldis not the same as that of the exploitativeusury existing in pre-modern societiesand typical in some rustic modern dayeconomies which do not have an appro-priate regulatory framework. This argu-ment ignores the definitiveness of theavailable evidence and the plethora ofHadiths and Quranic verses which indi-cate that interest, of any value, is prohib-ited. Obfuscation of the issue is madeworse by circumventions and creation offallacious products and ideas. One suchidea is the indexation of loans, which ul-timately permits riba through the backdoor.

Many laymen and Muslim schol-ars opine that repayment of loans must beadjusted to reflect the decrease in value ofloans in inflationary environments. Ac-cording to this view, an interest-free loanof Rs. 1,000 for one year has a value lessthan Rs.1,000 if the inflation is at a posi-tive rate in the country. Thus, for exam-ple, if inflation rate is 10%, then someonelending Rs. 1,000 to another person for nointerest will receive Rs. 1,000 at the end ofthe year, which will have a real value ofonly Rs. 900. Therefore, the advocates ofindexation of loans suggest that it is onlyfair that the lender must receive the realvalue of its loan back, and that the addi-tional money (over and above Rs. 1,000)should not fall under the prohibited in-terest (riba), as long as the value of thetotal amount received by the lender doesnot exceed the value of the amount lent.This is, however, a flawed argument, forthe reasons delineated below.

There are a few Shari’a conceptsthat are relevant here.

First, the prohibition of riba (or in-terest). Riba is defined as the amount ofdifferential in a transaction in which un-equal quantities of something are ex-changed between two parties. Theprohibited riba is involved in trade trans-

Indexation of Loansand Shari’aProfessor Humayon Dar




Recipco is a private enterprise that ad-vocates private-public sector collab-oration to advance innovation in

economic theory and practice. It is the ar-chitect of a new capacity trading exchange(the Recipco Capacity Exchange) designedto improve economic and social conditionsworldwide.

The exchange serves as an interna-tional marketplace and trade facilitatorusing a special purpose global currency,based on rigorous and accepted economicmodeling, and backed in ways designed toinspire trust and confidence while con-tributing to a more inclusive, fair and justeconomy and one that is in keeping withShari’a principals of Islamic finance.

This article introduces Recipco’s in-novative economic and business proposi-tion, the Recipco Capacity Exchange, andexamines its relevance to the unsettled con-ditions of North Africa and the Middle Eastand more broadly with the global Islamiccommunity and in relation to Islamic fi-nance.

Recipco Capacity Exchangeand Universal Trading Unit

The Recipco Capacity Exchange isat the core of the new economic architec-ture Recipco is introducing. It is a transac-tion mechanism for trade discovery andsettlement that allows organizations toprofit by creating value from their unusedand available capacity. It is a non-cashtrading platform that uses a UniversalTrading Unit or UTU™ as the medium ofexchange. The UTU™, another key com-ponent of Recipco’s new economic archi-tecture, is an independently administered,non-sovereign credit supply valued on thebasis of trade flow between those partici-pating in the exchange. This trading cur-rency can be used at any time to purchasecapacity from others on the exchange. It isa system impervious to unpredictablemonetary policies, exchange rate fluctua-tions or other constraints of the current eco-nomic system. Although initially

introduced to facilitate inter-party trade ofabundant and unused capacity betweenlarge well-respected organizations thatbring trust and liquidity, it is equally appli-cable to all commercial and non-profit or-ganizations without regard to size,geography or credit status. This alternativemarket mechanism improves efficiency inthe trading of such capacities bringing par-ticipants increased sales, new sources ofworking capital, and reduces an organiza-tion’s dependence on traditional cash andcredit.

While there are a myriad of existingtrade and exchange mechanisms (such asbarter exchanges and countertrade agen-cies) to address the limitation of cash andcredit, each of these are, for the most part,cumbersome, risky and usually costly andinefficient. The effective trading of such ca-pacities through the Recipco Capacity Ex-change, is designed to address such risksand inefficiencies and invoke trust andconfidence, resulting in a more efficientand practical use of resources.

and the global Islamiccommunity

The ongoing uniqueness and success of Islamic fi-nance will depend heavily upon the principled cre-ativity of market players. They need to have thevision, keeping close to fundamental principles,which will push the industry forward. Recipco offerssuch a vision through the Universal Trading Unit andthe Recipco Capacity Exchange. These products havea real chance to alter the way we exchange, creatinga more fair and equitable financial system.

Recipco

ISFIRE ••• 3C


focuses primarily on providing alternativesto conventional interest based financialproducts by offering solutions that do notinvolve interest, but rather are based onmore equitable and just modes such asrent, equity and trade. However, a criticalaspect not adequately addressed by Islamicfinance currently and a matter of concernfor several Islamic finance scholars, is thatthe existing basic unit of exchange of value,i.e. sovereign currencies, are themselvesnot issued in a way that would be consid-ered truly Shari’a compliant. At present,there is no formal financial basis of their is-suance, with no backing by actual assets.The existing currencies are generallybacked by government debt, which in itselfis issued through interest bearing instru-ments.

Recipco has a very unique and com-pelling approach to this critical matter. TheUTU™ addresses this core issue as its is-suance is based directly on the actual abil-ity of the Capacity Exchange members toproduce goods and services – which in factis the true concept of ethical money is-suance. Furthermore, UTU™s do not earnany interest and their utility is only whenthey are utilized for actual trades, therebyencouraging UTU™ owners to spend their‘money’ for value added economic activityas opposed to hoarding it as capital to earninterest – a concept that is very much inline and encouraged by Islamic principles.

By turning capacity into workingcapital, the Recipco Capacity Exchange andits Universal Trading Unit create many po-tential social and economic benefits for theIslamic community. In addition to encour-aging a more level playing field for globaltrade, the Recipco solution has the poten-tial to increase working capital available toIslamic organizations by mobilizing un-used capacity to create a new source ofcredit that is not reliant on traditional in-terest bearing forms of capital.

In summary, the nature of theUTU™ as an alternative to cash for lend-ing, borrowing and the exchange of valueis more in accordance with basic Islamicprincipals that prohibit the fixed or floatingpayment or acceptance of specific interestor fees.

Recipco’s Relevance to theUnsettled Conditions of theMiddle East

Many Islamic countries are cur-rently facing significant political and eco-nomic turmoil. The turmoil itself is uneven

Timing for the introduction of Re-cipco's alternative market solution hasnever been more necessary, in large partdue to the recent global economic crisisand the evident dangers of the world’s cur-rent financial architecture.

Recipco’s economic solution, in-cluding the Recipco Capacity Exchange, isa result of years of extensive research anddevelopment involving a team of notableeconomists, important public figures andleading experts from financial markets andbusiness. It is a paradigm shifting eco-nomic architecture with enormous poten-tial to improve economic and socialconditions.

Recipco has spent several yearsbuilding relationships with an extraordi-nary community of global stakeholders -thought leaders, businesses, andgovernments- that bring their varied ex-pertise and add credibility and trust to thisinnovative approach to introducing a moreinclusive, fair and just global economic ar-chitecture. The Company is preparing tooperate and scale the enterprise on a globalbasis, and is bringing in key and relevantstakeholders to engage in the practical in-troduction of this new economic thinkingthat will improve economic and social con-ditions globally.

In addition to its global headquar-ters in the UK, Recipco has subsidiaries inNorth America and in China. The Com-pany firmly believes there exists additionalopportunity for expansion in the MiddleEast and particularly given the relevance ofRecipco’s economic architecture to thebroader Global Islamic Community.

Shari'a compliant Islam is the world’s second largest

religion, its followers comprising approxi-mately 23% of the world’s population. Themajority of the Islamic community residesin the Middle East, Africa and Asia; the Is-lamic community is geographically diverseand consists of both developed and emerg-ing countries. Not surprisingly, Shari’acompliant finance is a segment of modernfinance that is growing among many banksand investment houses, due in part to in-vestors eager to work with the Middle Eastas oil prices continue to increase, but alsobecause the modern banking world recog-nizes the significance of this market. West-ern financial services firms are beginningto offer Shari’a-compliant investment vehi-cles that neither pay interest, nor benefitfrom gambling.

Islamic finance, in its current form,

40 ••• ISFIRE

- much greater and far reaching in somecountries than in others. Thus, too, the eco-nomic impact of varying political instabili-ties is uneven and raises questions aroundtrade and capital movement as well as neg-ative effects on currency. Unrest tends tocreate risk while uncertainty leads tohoarding and pulling back from the mar-ket; both lead to higher interest rates andconstriction of credit. In these circum-stances, trading on the Recipco CapacityExchange facilitates multilateral trade andavoids the dangers of currency revaluation.

The efficient trading of such capac-ities through alternative non-cash or othermechanisms of exchange would providenew sources of working capital, result in amore efficient use of resources and con-tribute to the growth of global and localeconomies, in particular in unsettled coun-tries. Provision of an exchange of valuebased on the economic underpinning of theactual and intrinsic value of the productsand services traded greatly reduces frictionand risks inherent in the internationalmonetary system and links more directlyto the real economy, reducing potentialnegative impacts of speculation.

Bringing emerging Islamicmarkets into the global fi-nancial economy

For emerging and developing Is-lamic nations, as long as tradable capacityis available, economic growth and develop-ment can be funded without being con-strained by limitations in trade financing orother sources of traditional cash or credit.

According to the InternationalLabor Organization, “creating buyingpower is the first priority among strategiesfor the emerging market economies…totruly break the vicious cycle of poverty,isolation and economic exclusion”. By in-troducing a Shari’a compliant medium ofexchange that is not encumbered by the in-efficiencies, risks and volatility of the cur-rent global monetary system, Recipco canhelp to bring those countries within the Is-lamic community that are underserved bythe current financial system into the eco-nomic forefront. By allowing a mechanismthrough which to trade available and un-used capacity, Recipco offers a means forthese emerging Islamic economies to in-crease self-sufficiency, reduce poverty, andbecome stronger participants in both theglobal Islamic community and the worldeconomy. The Recipco solution, and inparticular its Universal Trading Unit


(UTU™), addresses many of the systemicissues in the global economy that prejudicethese poorer nations (who have little or noaccess to current forms of cash and credit,and whose own sovereign currencies havelimited global credibility, liquidity and areburdened with extraordinary debt). Sim-ply put, the UTU™ serves as a new sourceof both liquidity and credit that is not lim-ited by traditional sovereign currency con-straints of national debt, governmentpolicies and foreign exchange marketvolatility.

It should be noted that not onlydoes the Recipco solution help to bringemerging and developing Islamic nationsinto the global economy, it also works inreverse by providing a mechanism for Is-lamic corporations and governments al-ready operating in the current globaleconomy, to realize new and incrementalmarket opportunities for trade and com-merce with these emerging and developingnations who can mobilize their immensecapacity into new purchasing powerthrough Recipco.

ConclusionIn conclusion, Recipco offers a Shar-

i’a compliant means by which to efficientlymobilize and increase capacity and work-ing capital within the Islamic communitythat is non-reliant on traditional interestbearing instruments and credit facilities.

The Recipco Capacity Exchange is anew alternative for global trade that uti-lizes existing capacity to generate newsources of working capital, increase trans-action transparency, stimulate employ-ment, and improve market efficiency. Assuch it has the potential to encourage sus-tainable growth in both emerging and ma-ture markets while putting both on moreequal footing and less subject to the volatil-ity of financial markets.

Recipco’s mission is to create aglobal economic architecture for the ex-change of value that is more fair and equi-table, based on the actual economic valueof products and services without the risksof speculation or other inefficiencies asso-ciated with the global monetary system ofsovereign fiat currencies.

This architecture can create signifi-cant, positive social and economic impactby increasing the alternatives for participa-tion in today’s global economy and in par-ticular providing a viable alternative toconventional interest-based finance thatcan play an instrumental role within the Is-lamic community.


42 ••• ISFIRE

Islamic investmentfunds: performance and

where we are todayIslamic investment funds represent a core component of

Islamic finance’s total product portfolio. Combining anethical, religious and commercial ethos, these funds are

growing in size, profitability and popularity. Rizwan Malikcompares Islamic funds with its counterparts and finds the

Islamic fund proposition a tantalizing one for investors.

Islamic funds are still at their fledglingstage, as compared to Conventional andSocially Responsible Investment funds

both in terms of Assets under Management(AUM) and growth in the market. Accord-ing to Ernst & Young’s Investment Fundsand Investments Report 2011, Islamicfunds assets have reached $58 billion. Is-lamic funds witnessed a 7.6 percent growthin 2010- compared to 35 percent for its con-ventional counterparts- with $25.6 trillionAUM. However, it has been identified bymany researchers that Islamic funds per-form better in a bearish market whereasconventional funds tend to perform betterin a bullish market.

Previous studies showpositive results

Islamic funds started in the 1960swith an express remit to only invest inShari’a permissible assets. These funds gothrough a strict screening process by expertssimilar to the scrupulous rigour of SociallyResponsible Investments (SRI) funds, butunlike the conventional whose screening ismuch less meticulous. There are two typesof screenings Islamic funds go through:business screening and financial screening.The business screening process looks toavoid companies which are deemed non-Shari’a compliant in terms of business activ-ity. Financial screening is based on the fi-nancial performance of the company,paying close attention to its debt positionand interest payments and receipts.

There have been many studies con-

ducted comparing the performance of theconventional, Islamic and SRI funds andyet no definitive conclusion can be made.Certain studies concluded that the per-formance of Islamic mutual funds is no dif-ferent to the performance of conventionalfunds while other studies found that Is-lamic funds performed better. One consid-eration is domicile, and studies haveshown that in countries such as Malaysia,Islamic funds tend to perform better.

A comprehensive study was con-ducted in 2009 in which the authors carriedout research on the performance and in-vestment style of Islamic equity funds from20 countries in five different regions, span-ning over two decades. The study analysesthe performance of 262 equity funds. Thestudy revealed that in western markets, Is-lamic equity funds appear to underper-form as compared to their conventionalcounterparts on average. Islamic fundshave a limited stock universe to invest in.In contrast, Islamic funds from countrieswith significant Muslim populations per-form similar to conventional funds. Thisunderperformance of Islamic funds in theWest was due to the fact that there is alower Muslim population in these coun-tries and thus, lower uptake. Nonetheless,the awareness of Islamic products is in-creasing amongst Muslims and non-Mus-lims, especially after the market downturnin which Islamic products were not asgravely affected as compared to conven-tional and SRI.

Professor Rodney Wilson found inhis research that by placing restrictions on

their investment choices, ethical investorscan reduce the opportunities available tothem. However, SRI fund managers stillmaintain that even with the limitations,they still have a lot of companies to investin. It is argued that it is possible to investin SRI funds and receive a higher returnthan non-SRI funds due to the fact that itall depends on the ability of the fund man-ager to pick the right stocks that will givebetter returns.

With respect to Islamic funds, con-tracts underpinning the fund are transpar-ent; therefore it is easy to trace and trackthe performance of Islamic funds. Islamicmutual funds do not invest in highly un-certain products and take a calculated riskaccording to their risk appetite. But, with adiversified portfolio the more investmentchoices an investor has, the more chancesof making a higher return. On a perform-ance basis, the All Country World IslamicIndex has outperformed its conventionalcounterpart this year, according to datafrom MSCI. The Islamic index fell 14.6 per-cent, compared with a 15.8 percent drop bythe All Country World Standard CoreIndex.

Similarities and differencesamongst the conventional,SRI and Islamic funds:

Similarities: • All three categories are mutual

funds and have similar characteristics interms of investing.

• All three categories of funds in-


vest their assets in different asset classeswith the aim of generating profit for theirinvestors.

• All three categories of funds havea fund manager who decides on the behalfof investors the investment strategy. Themanagers decide the strategies which bestfit the objective of the fund.

• All mutual funds are subject togovernment regulations that protect in-vestors from fraud.

• Investors invest in all three cate-gories in search for profit and also, at thesame time, can invest according to their re-ligious or social beliefs.

Differences:

• Islamic funds and the SRI fundshave to go through a screening processwhich conventional funds do not have to.Islamic funds follow Shari’a guidelineswhen investing, while SRI follows sociallyresponsible guidelines.

• Islamic funds are restricted interms of scope of their investment which isguided by a religious perspective, whereasconventional and SRI funds do not face anyreligious restrictions.

• SRI and Islamic funds only investin socially responsible investments unlikeconventional funds which are free to investanywhere.

Islamic fund performance

The growth of Islamic funds hasbeen flat since the end of 2008 up till 2010with 153 funds liquidated and only 69 newfunds launched. The growth of 7.6 per centwas primarily driven by market perform-ance, and only marginally from new netmoney raised by fund managers. While thefunds performed better in 2010, it is highlydoubtful that Islamic funds would have re-peated their performance in 2011-12 due tothe political situation in the MENA regionand the sovereign debt crisis in Europewhich is testing the market confidenceonce again in the year 2012. When we ana-lyze the different sectors we see for the newfunds launched between 2008 and 2010, in-stitutional funds make up two-third of thetotal funds launched globally, althoughthis is not considering Malaysia. This canbe regarded as a structural weakness aswell as an overdependence on some insti-tutional investors. Another weakness of theIslamic funds industry is the actual size ofinvestment available to the fund managers:only 30 percent of fund managers havemore than $100m in AUM and the top 10of the 30 percent have 80 percent of themarket share. Institutional investors look

at the size of the fund rather than perform-ance of the fund in deciding where to in-vest. Coupled with this, the Islamic fundmarket is at its embryonic stages and hasfewer avenues to channel investment. Thetop 25 conventional fund managers are 50times larger than the largest Islamic fundmanager. It is like a 10 year old being askedto bat against Saeed Ajmal; of course he isnot going to score much. For the sustain-ability and long term growth, four factorsneed to be present: involvement of institu-tional players, asset managers’ strong per-formance and track record, availability anddistribution of products, and passage oftime. Further, the industry needs an im-provement in the regulatory environmentalthough Saudi Arabia is one examplewhere regulatory response has helped theindustry tremendously.

It is clear that although the size ofthe Islamic funds industry remains anissue, when it comes to the performance ofthe funds against the conventional and SRIcounterparts, in some cases Islamic fundshave outperformed the rest. While Islamicfunds have faced a recent period of flatgrowth as the market improves, there re-main opportunities for growth and withthe increased awareness of Islamic financeand the large cash pool sitting in big Mus-lim states like Saudi Arabia and Qatar,there is an expectation that there will be anexplosion of Islamic funds.

Attracting the conventionalwith aplomb

Conventional fund managers man-aging student property in UK and West arelooking at launching Islamic funds with theaim that they will tap into capital in SaudiArabia, Qatar, Malaysia, and Brunei etc.Such funds do not give a very high return,however they are stable and give a consis-tent return throughout the visscitudes ofmarket conditions. Even during marketdownturns, these funds give a stable re-turn, in essence making it attractive for arisk averse investor as they are remain sta-ble in bear markets. This will be attractiveto risk taking investors only in tough mar-ket conditions as they tend to invest inhigher return investments in a bullish mar-ket. Nevertheless, such type of propertyfunds can be made attractive by adding adevelopment feature to the fund wherethere is a room for improved performancein future. If we take the aforementioned ex-ample, a fund manager managing studentproperty may buy other pieces of land todevelop more property. The scope hastherefore increased which, in the eventmore students choose to rent the property,

will lead to improved performance in thefund.

Like the Islamic funds industry, theIslamic finance industry as a whole hashigh growth prospects, especially with theentrance of new jurisdictions like Kaza-khstan, Malta and several African nationsdriven by an increasingly affluent popula-tion, a vibrant commercial sector and poli-cies that encourage expansion. Islamicfinance is not only for Muslims; it shouldbe business decision based on business rea-sons and should not only be a faith baseddecision. In the last few decades, the Is-lamic finance industry has only prosperedin the countries with a predominant Mus-lim population but it is only a matter oftime. Increased awareness, and resilientperformance during market downturns ispulling the crowd towards Islamic financeas an alternative model which is safer andtransparent in nature. One recent examplewitnessed is a poster carried by a womannear the London Stock Exchange (LSE)which read “Let’s Bank the Muslim Way”.Islamic finance had entered the Occupymovement, where a wave of protests by or-dinary people in different cities around theworld took form, campaigning against theexcess greed of bankers and the inefficacyof regulators and politicians in dealingwith the financial crisis. The woman, wholooked non-Muslim, obviously recognizedIslamic banking as an alternative financialsystem which connects banking and fi-nance to real economy activities and whichprohibits receiving and paying interest(Riba) and also speculative activities basedon gambling; both of which underpinnedthe global financial crisis in 2008. Further,the finance Minister of Luxembourg (a huband haven for Islamic funds) Luc Friedendeclared during his tour of the ASEAN re-gion in October 2011 that “Europe can in-deed learn a lot from Islamic financethrough its principles of financial partner-ship between the creditor and debtor; theabsence of speculation and respect for eth-ical principles”. He also mentioned thewillingness of the Luxembourg govern-ment to develop Islamic finance as part ofthe national strategy for diversification andinternationalization of Luxembourg as amajor financial centre. Frieden continued:“Islamic finance has garnered growing in-terest from the international financial com-munity, mainly because of the stability ithas shown throughout the financial crisis.Islamic finance is now a component ofmore and more importance in a diversifiedportfolio of assets. Working together weenrich our cultures and use our various fi-nancial products to contribute to the pros-perity of all humanity”.

ISFIRE ••• 43


44 ••• ISFIRE

ciency levels and performance of Islamicbanks would be beneficial to making astronger evaluation of Islamic banks. Forone thing, practical evidence grants us aninsight to the day to day successes or fail-ures of Islamic banks. Specifically of inter-est to this present article is the efficiency ofbanking sectors of the GCC countries.

Overview of the GCCbanking industry

Based on high oil prices and a morediversified economic structure, the mem-bers of the Gulf Cooperation Council cur-rently witness some of the highest GDPgrowth rates worldwide with a concomi-tant development of domestic financialmarkets. Meanwhile, a growing popula-tion has caused a boom in local real estateand consumer markets, and multibillioninfrastructure investments are sought after.From heavy industries, transport, powerplants, water desalination and waste treat-ment, there is hardly a sector that does notrequire an increased amount of financing,financial services and insurance. Despitethese issues, the capital markets of themember states are still underdevelopedand underutilised. The major source of fi-nancing in this region is dominated by thebank assets. Currently, according to recent

data from Bankscope, the GCC houses 191banks with an aggregate asset size of USD2,018.3 Billion, an increase of 7.3% or USD137.1 Billion over 2010.

Over the past few years the size andthe sophistication of the banking industryhas grown to remarkable levels in the GCC.The stringent entry laws in place confineforeign banks to establish themselves andthus most banks are locally owned. Apartfrom banks, non-banking financial institu-tions have a rather limited presence in theGCC with very few exceptions. By far thefinancial sector in the GCC is dominated bythe banking sector.

Islamic banks represent approxi-mately 24 per cent of the regions bankingsystem’s assets according to recent figuresfrom Bankscope. Prolonged governmentspending sprees coupled with surplusescreated as a result of the petroleum exportsacted as a platform to further launch thecause of Islamic finance in the GCC. At thesame time, financial innovation has con-tributed to facilitating the supply of finan-cial products and services, from retailproducts, like housing or car financing pro-grams, to more sophisticated products likesukuk or mutual funds. With several banksintroducing their Islamic windows over theyears, Islamic banking has grown at aston-

In the modern age, globalisation, the in-terconnectedness of financial servicesindustry and the wide scale liberalisa-

tion of the financial markets has addedpressure on Islamic banks to maintain theircompetitiveness in a highly competitive en-vironment. They are required to competewith their conventional counterparts andalso with Islamic financial windows andsubsidiaries of eminent banks such as BNPParibas Najmah, Citi Islamic, StandardChartered Saadiq, HSBC Amanah andmany more.

Despite its considerable achieve-ments in the past few decades, empiricalevidence evaluating the performance of theIslamic finance industry is still at its in-fancy. Furthermore, studies on Islamicbanks have generally focused on theoreti-cal issues, and empirical works have reliedon the analysis of descriptive statisticsrather than rigorous statistical estimation.Studies have well documented the need tostudy bank efficiency and performance inorder to assess the behaviour of Islamicbanks. Thus, the inherent fragility of thebanking systems, especially in the emerg-ing markets, pronounces the need for suchkind of information to be available intoday’s buoyant industry.

Therefore, investigating the effi-

Measuring efficiency of

Islamic banksDespite its considerable achievements in the past fewdecades, empirical evidence evaluating theperformance and efficiency of the Islamic financeindustry is still at its infancy. Zaki Khateeb sought totackle this issue by conducting a study onconventional and Islamic banks in the GCC. His

findings show Islamic banks are as efficient as conventionalbanks. Here, he summaries his key findings.


ISFIRE ••• 49

ishing rates. According to a study con-ducted by Standard & Poor's (2010) “thegrowth of Islamic banking assets has out-stripped that of conventional banking as-sets.” The report further adds that“conventional banking assets nearly tripledbetween 2003 and 2008, while Islamicbanking assets have been multiplied byseven, albeit starting from a much lowerbase.”

The GCC banks significantly reliedon the budget surpluses, high oil pricesand the ever booming real estate marketsin these countries. However, this halcyonperiod has been halted as a result of the fi-nancial crisis that crippled the equity mar-ket, deflated oil prices, and pierced the realestate bubble bringing an end to the invest-ment boom in the GCC. Fortunately, theGCC banks did not suffer as much as theirwestern counterparts. Crucially, GCCbanks maintained a sound financial posi-tion thanks to the accumulated liquidityduring the investment boom. To supportthe financial health of these banks, the in-tervention by the governments of thesecountries at the wake of the crisis includeda number of measures such as depositguarantees, capital injections, slashed inter-est rate etc. This comforted the banks andenhanced them operationally.

Analysing Islamic banksThe Islamic banking concept has a

relatively short history. The financial crisisof 2007 has ushured in a new dawn for theIslamic finance industry. Its risk aversenessand socially responsible mandate has at-tracted Muslims and non-Muslims alike.However, research on the efficiency of Is-lamic banks is fewer in number due to thelack of significant data and the fact that themarket is relatively new.

In order to study the efficiency of Is-lamic banks, I analysed a total of 120 banksconsisting of 37 Islamic banks and 83 Con-ventional banks. My study aimed at estab-lishing a correlation of efficiency of bothconventional and Islamic banks with re-spect to their size and age. Although thereare quite a number of studies out there thathave studied the effects of size and age onthe efficiency of the banks, there are a veryfew that have documented the cost, rev-enue and profit efficiency of Islamic banksagainst conventional banks.

In line with previous studies of sim-ilar calibre, I selected a range of financialratios that captured the performance of thebanks in the sample as per their cost, rev-enue and profit. The data for the study wasmainly obtained from the balance sheetsand incomes statements of the banks in the

sample. I also conducted Data Envelop-ment Analysis, which measures technicalefficiencies of banks. Technical efficiencycan be defined as the manner and extent re-sources are used to achieve maximum out-put. Institutions that have less than 100%efficiency will not be using their resourcesin the most efficient way possible and leaveroom for improvement.

FindingsFrom my study, and from previous

studies, Islamic banks have performed fi-nancially as well as conventional banks de-spite having a very short history. Islamicbanks have a carefully structured regimewhich is gradually developing and adapt-ing to the requirements of their customers,the vicissitudes of the markets and the evo-lution of Islamic legal thinking. The Islamicbanking industry has certainly benefitedfrom the large Muslim customer base.Muslims form over a billion strong com-munity, worldwide, and stretches acrossthe globe. It is surprising that this pool, ingeneral, has to yet create sufficient uptakeof Islamic banking services. Notwithstand-ing this, the success of Islamic bankingowes itself to developing products that up-hold their values, culture and most impor-tantly faith.

Table 1 - Rankings of Islamic banking systems in GCC

Country Rank Inefficient Banks Efficient Banks Average Efficiency ScoreQatar 1 2 2 99.76%Kuwait 2 4 0 96.33%Bahrain 3 16 1 95.61%Saudi Arabia 4 3 1 95.30%UAE 5 8 0 94.85%

Table 2 - Rankings of overall banking systems in GCC

Country Rank Inefficient Banks Efficient Banks Average Efficiency ScoreKuwait 1 18 0 95.20Bahrain 2 37 1 95.11%UAE 3 28 1 95.07%Oman 4 8 1 93.58%Qatar 5 13 0 93.32%Saudi Arabia 6 13 0 92.29%


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Perhaps one of the most importantof factors for the financial success of Is-lamic banks is the nature of the Islamicbanking industry. Islamic banks com-pletely avoid speculative markets and in-terest based products. This has to a great dextent, kept them safe and well protectedfrom the fouls of financial markets, therebycontributing to their rapid growth despitethe financial crises.

Comparing efficiency ofIslamic banks andconventional banks

Using the Data EnvelopmentAnalysis (DEA) method of analysing effi-ciency, which attempts to quantify effi-ciency, we are able to compare Islamicbanks and conventional banks.

According to Table 1, Qatar has themost efficient Islamic banking system inthe region followed by Kuwait andBahrain. Comparing the results of thisstudy to previous studies shows us that Is-lamic banks are more efficient than the con-ventional banks. However, it is importantto understand this conclusion cannot bejustified completely because the analyseswere made entirely with banks belongingto either group.

According to Table 2, Kuwaittopped the table with the most efficientbanking system closely followed byBahrain and UAE. Saudi Arabia ranked lastwith an average efficiency score of 92.29%.Despite the score, the top 3 countries werefound to have the highest number of bankswith improvement potential. 28 out of 37banks in Bahrain experienced slacks thatcould be overcome, which would increasetheir output remarkably. UAE also had 16out of 28 banks that were under producinggiven the amount of input that was beingemployed. Results also show that Kuwait

houses 16 banks that have serious improve-ment potential.

According to the results of mystudy exclusively, there is hardly any dif-ference in the average efficiency of Islamicbanks as compared to conventional banks.This differs from several previous studies,which concludes that Islamic banks aremore efficient than conventional banks. Al-though, it is important to understand thatthis distinction is rather small and does notdefine in any way that an Islamic bank willgenerate extraordinary profits compared toits counterparts.

Breaking efficiency down Breaking efficiency down to cost,

profit and revenue efficiency and utilisingfinancial ratios as opposed to DEA, we cansee differences between conventional andIslamic banks. In terms of cost efficiency,conventional banks are more cost efficientthan Islamic banks. One of the most impor-tant reasons for this conclusion is the factthat over a period of time, an Islamic banktends to dispose more cash than its conven-tional counterparts in order to producesimilar results. Shari’a boards compromisea significant proportion of the costs. In ad-dition, the complexity of the Islamic prod-ucts and the legal ramifications for theircompliance involves expert legal opinionwhich incurs substantial costs that furtheradd to its cost inefficiency status.

In terms of revenue efficiency, Is-lamic banks fared better than conventionalbanks. I believe the reason for this is thefact that Islamic banks function on a profitand loss system. Keeping this in mind, onemust understand that in most Islamicbanking transactions, those structuredunder the principles of mudaraba, the lossis only borne by the Rab-ul-Mal and thusthere is no pay-out as such if the bank is theRab-ul-Mal. This has led to higher Non In-

terest Margins for Islamic banks as com-pared to conventional banks.

On the other hand, conventionalbanks are more profit efficient than Islamicbanks. This is expected considering con-ventional banks are far superior than Is-lamic banks in generating profits due to theeconomies of scale and scope as well as theaccess to a larger market than that availableto Islamic banks.

Having said that, Islamic bankshave a short history and with the progressof time, it is expected the gap between thetwo banking systems will close. As Islamicbanks grow in size, they are becomingmore efficient in their operations and areadopting regulatory standards and prod-ucts to achieve a stronger position in the fi-nancial services market.

ConclusionIslamic banks were found to be as

efficient as conventional banks. The effi-ciency results of my study is generally con-sistent with the extant literature availablethough a conclusive answer to which sys-tem is more efficient cannot be made as ofyet. However, the good news for Islamicbanks is that efficiency measures are notimpeded by transactions being in line withShari’a principles; and that both bankingsystems suffer from similar imperfections.Results derived from my analysis revealthat there is huge potential for both bank-ing systems to become more efficient bycurtailing costs and exhausting the possi-bilities to generate more profits.

Nonetheless, bank efficiencies aresubject to the endogenous and exogenousfactors that are always evolving with time.The current results are only valid for a se-lected sample and may well have disparateresults subject to changes in the sample.Additionally, the financial crisis had an ef-fect on efficiency. It has been found thateven countries like Sudan and Iran, whichfollow Islamic banking principles, have notbeen able to completely avert the recentcrises. This paints a picture that Islamicbanking, in itself, is not the answer to a sta-ble economic environment. Having saidthat, it should be noted that though Islamicbanking has made a huge impact on the fi-nancial services industry in a short span oftime and will never be able to completelyreplace the capitalistic conventional bank-ing system though it continues to makewaves, feeding the growing interest fromthe west for a more socially responsiblebanking model.

-he good news for Islamic banks is thatefficiency measures are not impeded by

transactions being in line with Shariqaprinciples( and that both banking systemssuffer from similar imperfections. Results

derived from my analysis reveal that thereis huge potential for both bankingsystems to become more efficient.




Documents

ISFIRE | Volume 2 | Issue 1 | Feb 2012