Islamic Finance

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Islamic FinanceThe New Regulatory Challenge

Second Edition

EDITED BY

SIMON ARCHERRIFAAT AHMED ABDEL KARIM

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Contents

About the Editors xv

About the Contributors xvii

Foreword xxvii

Preface xxix

Acknowledgments xxxi

PART ONE

The Nature of Risks in Islamic Banking 1

CHAPTER 1Supervision of Islamic Banks: The RegulatoryChallenge—Basel II and Basel III 3Simon Archer and Rifaat Ahmed Abdel Karim1. Introduction 32. The Structure of Basel II and Basel III: Supervisory

Implications 43. The Islamic Financial Services Board 54. Contents of This Book 6Notes 11References 11

CHAPTER 2Banking and the Risk Environment 13Brandon Davies1. The Global Risk Environment 132. The Regulatory Environment 153. The Implementation Environment

(Setting Up a Risk Management Framework in a Bank) 29

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4. The Future Risk Environment 385. Islamic Banks and the Risk and Regulation Environment 42

CHAPTER 3Risk Characteristics of Islamic Products: Implicationsfor Risk Measurement and Supervision 49Venkataraman Sundararajan1. Introduction 492. Background 523. Types of Risks in Islamic Finance and

Their Measurement 544. Overall Risk of an Islamic Bank and

Approaches to Risk Mitigation 675. Summary and Policy Conclusions 69Notes 71References 73

CHAPTER 4Risk in a Turbulent World: Insights from Islamic Finance 77Sami Al-Suwailem1. Introduction 772. Functions of Risk 783. Dealing with Risk 794. The Fundamental Law of Risk 805. Islamic Finance 846. Functions of Risk in Islamic Finance 857. Risk Exchange in Islamic Finance 878. Regulatory Implications 889. Conclusion 92Notes 92References 92

CHAPTER 5Capital Structure and Risk in Islamic Financial Services 95Simon Archer and Rifaat Ahmed Abdel Karim1. Introduction 952. Risk and Capital Structure in Islamic Banks 963. Risk and Capital Structure in Takaful (Islamic Insurance)

Undertakings 1024. Concluding Remarks 105References 105

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CHAPTER 6Inherent Risk: Credit and Market Risks 107John Lee Hin Hock1. Introduction 1072. Distinctive Risks 1073. Inherent Risks in Shari’ah-Compliant Products and Services 1094. Conclusion 112Appendix 112Notes 131

CHAPTER 7Operational Risk Exposures of Islamic Banks 133Simon Archer and Abdullah Haron1. Introduction 1332. Basel III Requirements and Their Implications

for Operational Risk Management 1343. Operational Risk: The Basel Methodology 1364. Operational Risk in Islamic Banks 1375. Unique Operational Risks of Islamic

Financing/Investment Modes 1416. Qard 1487. Concluding Remarks 151Notes 152

CHAPTER 8Information Technology Risks in Islamic Banks 153Samir Safa1. Introduction 1532. Important Understandings and Facts 1553. ITS Operational Risk—Business, Documentation,

and Legal Issues 1574. Technical and Functional Clarification for the

Imposed Risks 1595. Concluding Remarks 160Note 161

CHAPTER 9Law and Islamic Finance: An Interactive Analysis 163Yusuf Talal DeLorenzo and Michael J. T. McMillen1. Introduction and Overview 1632. Islamic Jurisprudence in Modern Times 1673. Enforceability of the Shari’ah 179

Contents ix

4. Enforceability of the Shari’ah: Case Law andTransactional Practice 189

5. Transactional Practice: Legal Opinions 1956. Sukuk: Capital Markets and Secondary Markets 1987. Summary and Conclusion 207Appendix 209Notes 216

CHAPTER 10Legal Risk Exposure in Islamic Finance 225Andrew White and Chen Mee King1. Introduction 2252. Defining Legal Risk 2263. Greater Risk from Uncertain and Undeveloped Law and

Regulation 2274. Greater Risk from Poor Documentation 2285. Greater Risk from Unpredictable Dispute Resolution Processes 2296. Concluding Remarks 232Notes 233

CHAPTER 11Shari’ah–Non-compliance Risk 237Mohamad Akram Laldin1. Introduction 2372. Risk from an Islamic Perspective 2383. The Concept of Shari’ah Compliance 2404. Shari’ah–Non-compliance Risk and Its Impact 2455. Dealing with Shari’ah–Non-compliance Risk 2466. Measuring Shari’ah–Non-compliance Risk 2497. Fiqh al-Muwazanah 2518. Rectification of a Shari’ah–Non-compliant Contract 2549. Mitigation of Shari’ah–Non-compliance Risk 25610.Conclusion 256Notes 257

CHAPTER 12Supervisory Implications for Islamic Finance:Post-Crisis Environment 261Peter Casey1. Regulation and Supervision 2612. Supervisors and Shari’ah 2613. Lessons of the Crisis and Regulatory Responses 264

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4. The Issues for Supervisors 267Notes 272

PART TWO

Capital Adequacy 273

CHAPTER 13Risk and the Need for Capital 275John Board and Hatim El-Tahir1. Introduction 2752. The Evolution of International Capital Standards 2773. The Risk-Based Financial Regulation Approach 2784. Globalisation of Financial Regulation? 2815. The Short-Lived Rise of Contingent Capital Instruments 2826. Conclusion 283Notes 284

CHAPTER 14Measuring Risk for Capital Adequacy: The Issue ofProfit-Sharing Investment Accounts 285Simon Archer and Rifaat Ahmed Abdel Karim1. Introduction 2852. Why Capital Adequacy? 2853. Application to Islamic Banks 2894. Pillar 2 of the Revised Framework and Risk Management 2945. Concluding Remarks 296Note 297References 298

CHAPTER 15Measuring Operational Risk 299Sandeep Srivastava and Anand Balasubramanian1. Introduction 2992. Operational Risk in the Context of Islamic Banks 3003. Operational Risk Capital under Basel II 3014. Operational Risk Capital under the IFSB Standard 3095. Industry Practice and Implementation Issues

for Operational Risk Measurement 310Appendix 315Notes 323

Contents xi

CHAPTER 16Liquidity Risk 325Richard Thomas1. Introduction 3252. The Regulatory Response to Liquidity Risk 3253. Asset Liquidity 3264. Trade Finance Assets as Liquidity 3275. Government Bonds and Liquidity 3286. Asset-Based Financings and Liquidity 3287. The International Islamic Liquidity

Management Corporation (IILM) 3298. Liabilities (Deposits) as Liquidity 3319. Accounting for Liquidity and Fair Value 33310. Islamic Banks and the Basel III Liquidity Measures 33411.Conclusion 335Notes 336

PART THREE

Securitisation and Capital Markets 337

CHAPTER 17Securitisation in Islamic Finance 339Baljeet Kaur Grewal1. Preface: An Overview of the Sukuk Market 3392. Securitisation and Sukuk: Some General Remarks 3423. Market for Securitisation in Islamic Finance 3464. Securitisation Structures 3495. Regulatory Framework 3576. Securitisation: A Growth Driver for Islamic Finance 361

CHAPTER 18The Role of Capital Markets in Providing Shari’ah-Compliant Liquidity 365Prasanna Seshachellam1. Liquidity and Its Importance to the Islamic Financial System 3652. Traditional Role of Capital Markets in Providing Liquidity to

Financial Systems 3673. Capital Markets—Structure and Analysis 3684. Role of Islamic Capital Markets in Providing Liquidity 3705. Enhancements to the Critical Dimensions of ICM to

Improve Its Ability to Provide Liquidity 3746. Products 3747. Players 378

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8. Infrastructure 3799. Market Segments 38110.Current Trends and Work in Progress 383

CHAPTER 19Regulating the Islamic Capital Market 387Nik Ramlah Mahmood1. Introduction 3872. The Applicability of Universal Principles of

Securities Regulation 3883. Approaches to Regulating ICM 3894. The Shari’ah Governance Framework 3915. Conclusion 395Notes 395References 397

PART FOUR

Corporate Governance and Human Resources 399

CHAPTER 20Corporate Governance and Supervision: From Basel II to Basel III 401Carol Padgett1. Introduction: Corporate Governance and the

Special Case of Banks 4012. Regulation and the Corporate Governance of

Listed Companies 4023. Basel Pillar 2 and Corporate Governance in Banks 4044. Conclusion 413Notes 414

CHAPTER 21Specific Corporate Governance Issues in Islamic Banks 417Simon Archer and Rifaat Ahmed Abdel Karim1. Introduction 4172. Salient Characteristics of Islamic Banks 4193. Corporate Governance Issues in Islamic Banks 4254. Exercising Effective Market Discipline on Islamic Banks 4345. Regulation of Islamic Banks 4406. Concluding Remarks 441Notes 443References 446

Contents xiii

CHAPTER 22Transparency and Market Discipline: Post–Basel Pillar 3 451Daud Abdullah (David Vicary)1. Introduction 4512. Compliance with Pillar 3 4533. Transparency and Market Discipline: Specificities

of Islamic Finance 4574. Concluding Remarks 469Notes 471

CHAPTER 23Human Resource Management of Islamic Banks: Responsesto Conceptual and Technical Challenges 473Volker Nienhaus1. Introduction 4732. Recruitment, Retention, and Qualification of Personnel 4743. Support Infrastructure for Islamic Financial Institutions 4804. Shari’ah-Compliance Issues 486

PART FIVE

Conclusion 493

CHAPTER 24Concluding Remarks 495Simon Archer and Rifaat Ahmed Abdel Karim1. Introduction 4952. The Challenge to Financial Sector Industry Regulators and

Supervisors 4963. The Challenge to the Islamic Financial Services Industry Sector 4974. The Challenge to Governments and Legislative Authorities 4995. Conclusions 500Notes 501

Index 503

xiv CONTENTS

About the Editors

Simon Archer is Visiting Professor at the ICMA Centre, Henley BusinessSchool, University of Reading, United Kingdom, with particular responsi-bility for Islamic finance, and Adjunct Professor at the International Centrefor Education in Islamic Finance (INCEIF), Kuala Lumpur, Malaysia. Pre-viously, he was Professor of Financial Management at the University ofSurrey, after being Midland Bank Professor of Financial Sector Accountingat the University of Wales, Bangor. After studies in Philosophy, Politics, andEconomics at Oxford University, he qualified as a chartered accountant withArthur Andersen in London and then moved to Price Waterhouse in Paris,where he became Partner in Charge of Management Consultancy Services.Since beginning an academic career, Professor Archer has undertakennumerous consultancy assignments, including acting as consultant to theAccounting and Auditing Organization for Islamic Financial Institutions(AAOIFI) and the Islamic Financial Services Board (IFSB). He has been avisiting professor at a number of universities and business schools, includingIIUM in Malaysia, Bordeaux, Metz, and Paris-Dauphine; HEC and EAP-ESCP in France; Copenhagen Business School in Denmark and Frankfurt,and Koblenz in Germany. Professor Archer is the author and co-editor ofa considerable number of works and academic papers on internationalaccounting and on issues in Islamic finance, including Islamic Finance:Innovation and Growth (Euromoney Publications, 2002) with RifaatAhmed Abdel Karim; Islamic Finance: The Regulatory Challenge, 1st edition(John Wiley & Sons Singapore, 2007) with Rifaat Ahmed Abdel Karim;and Takaful Islamic Insurance: Concepts and Regulatory Issues (JohnWiley & Sons Singapore, 2009) with Rifaat Ahmed Abdel Karim and VolkerNienhaus. In 2010, Professor Archer received an award from the CentralBank of Bahrain and Kuwait Finance House, Bahrain, for his “outstandingcontribution to the Islamic Financial Services Industry.”

Rifaat Ahmed Abdel Karim is one of the world’s foremost and renownedleaders and authority in the Islamic financial services industry (IFSI) both atthe professional and academic levels. He has played a pioneering role in thedevelopment of Islamic finance, while his leadership in the drafting of

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accounting, auditing, governance, Shari’ah, and regulatory standards hasbeen instrumental in establishing the position of the IFSI in the mainstreamof global financial services.

In addition to the international recognition of his academic publica-tions, which are mainly in tier one international journals in the field ofIslamic finance, Rifaat also earned international respect for the two orga-nisations he has played an instrumental role in creating, and for which heserved as (their inaugural) Secretary-General—the Accounting and AuditingOrganization for Islamic Financial Institutions (AAOIFI) and the IslamicFinancial Services Board (IFSB).

Professor Karim’s contribution to the IFSI has been recognised by themany prestigious international awards that have been bestowed upon himduring his career, which spans 30 years dedicated to high achievement inprofessional activities, as well as in research and academic work. Theseinclude, among others, the (inaugural) 2004 Euromoney Outstanding Con-tribution in the Development of Islamic Finance, and the 2010 IslamicDevelopment Bank Prize in Islamic Banking and Finance. In 2010, the King ofMalaysia awarded Professor Karim the Royal Malaysian Honorary Awardof Darjah Kebesaran Panglima Jasa Negara (P.J.N.), which carries thetitle “Datuk.”

Professor Karim is currently the Chief Executive Officer of the Interna-tional Islamic Liquidity Management Corporation (IILM). Professor Karimhas been Visiting Professor at the ICMA Centre, Henley Business School,University of Reading, United Kingdom, since 2008, and Adjunct ResearchProfessor at the International Centre for Education in Islamic Finance(INCEIF), Kuala Lumpur, Malaysia, since 2011. He served on the advisorycouncil of the Basel Committee for Banking Supervision, InternationalAccounting Standards Board, and International Auditing and AssuranceStandards Board.

Professor Karim is the co-author/co-editor of Business and AccountingEthics in Islam (Mansell Publishing Co., 1991) with Trevor Gambling;Islamic Finance: Innovation and Growth (Euromoney Publications, 2002)with Simon Archer; Islamic Finance: The Regulatory Challenge (1st edition)(John Wiley Asia, 2007) with Simon Archer; and Takaful Islamic Insurance:Concepts and Regulatory Issues (John Wiley & Sons Singapore, 2009) withSimon Archer and Volker Nienhaus.

xvi ABOUT THE EDITORS

About the Contributors

Daud Abdullah (David Vicary) is the President and Chief Executive Officerof INCEIF, The Global University of Islamic Finance. He has been in thefinance and consulting industry for more than 38 years, with significantexperience in Asia, Europe, Latin America, and the Middle East. Since 2002,he has focused exclusively on Islamic finance where he has contributed to anumber of books on the subject and has co-authored a book on Islamicfinance entitled Islamic Finance: Why it Makes Sense. He is also a frequentspeaker and commentator on matters relating to Islamic finance. He is aChartered Islamic Finance Professional (CIFP), a Distinguished Fellow of theIslamic Banking and Finance Institute of Malaysia (IBFIM) and a formerBoard member (2003–2007) of the Accounting and Auditing Organizationfor Islamic Financial Institutions (AAOIFI). Prior to INCEIF, he was theGlobal Islamic Finance Leader with Deloitte. He was also previously actingCEO of Asian Finance Bank, an Islamic bank based in Malaysia, andManaging Director of Hong Leong Islamic Bank.

Anand Balasubramanian is currently a Director in Ernst & Young’sFinancial Services Risk Management (FSRM) practice in Dubai. He hasmore than 12 years’ experience in the area of risk and financial consultingacross the Middle East, South East Asia, and the United States. He hasexecuted several engagements in the area of risk quantification and modelvalidation for credit risk, market risk, and operational risk.

He has prior experience with Oracle Financial Services Consulting, GE,and ICRA. Anand holds an MBA in Finance from the Indian Institute ofManagement, Calcutta, India and is certified FRM from Global Associationof Risk Professionals (GARP).

John Board has been Dean of the Henley Business School at the Universityof Reading since October 2010. Before that he was Director of the ICMACentre at the University of Reading, which he joined after being on thefaculty at the London School of Economics.

His recent research has focused on the organisation and regulationof financial markets and the development of Islamic financial markets. Someof this work has been based on large scale analyses of trading data, while

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other parts have considered more general issues of the effects of marketfragmentation as well as the various scandals and crises in financial markets.As a result of this work, he has been widely published in books and academicand professional journals, as well as radio and television. He has acted asconsultant to many U.K. and overseas markets, regulatory organisations,and trade bodies. These include the House of Commons, the Financial Ser-vices Authority, the City of London Corporation, and the European Com-mission. He also has an interest in the development of Islamic finance, onwhich he has recently acted as consultant on a major project on Islamicmarket developments around the world.

He has successfully supervised some 30 PhD students and actedas examiner for many more. His teaching work has taken place in some20 countries, including: the United Kingdom, China, India, France,Japan, Korea, Saudi Arabia, Egypt, Spain, Argentina, Serbia, Montenegro,Russia, Thailand, Qatar, Sharjah, Abu Dhabi, Egypt, Libya, Kenya, SouthAfrica, and others.

Peter Casey recently retired as Senior Director, Policy and Strategy, andHead of Islamic Finance in the Dubai Financial Services Authority (DFSA).

Peter has been involved in standards development in Islamic financethrough membership of the IFSB Technical Committee and several IFSBWorking Groups, including those on Special Issues in Capital Adequacy,Governance of Takaful Operations, and Solvency Requirements for TakafulOperators. He participated in the joint IFSB-IAIS working group on takaful,and in the IOSCO working group which analysed the application of IOS-CO’s Objectives and Principles of Securities Regulation to Islamic products.He has also been a member of the Islamic Finance Working Group of theAsian-Oceanian Standard-Setters Group. He has written two book chaptersand numerous articles on Islamic finance topics.

Before joining the DFSA in 2002, Peter was Head of the Non-LifeInsurance Department of the UK Financial Services Authority. Before that,he held senior regulatory posts in the Treasury, the Department of Tradeand Industry and the Office of Fair Trading. He has wide experience of UKGovernment, having also served in the Cabinet Office and Science ResearchCouncil, and having worked in areas ranging from export promotion to thecreation of computer misuse legislation.

He was educated at Cambridge University.

Brandon Davies is Non-Executive Chairman of Premier European CapitalLimited, a private equity company; he is also the CEO of dRisk.biz, acompany he founded, and Senior Independent Non-Executive Director(SINED) of Gatehouse Bank plc. (an Islamic Bank in London), where he

xviii ABOUT THE CONTRIBUTORS

has helped to establish the “Gatehouse Thought Leadership Programme.”He has worked with institutions, most notably in Malaysia, London, andKuwait to build on this role.

Brandon holds a degree in economics from University College London.He is a member of the Financial Markets Group at the London School ofEconomics (LSE), lectures extensively on subjects in banking and riskmanagement, and has written numerous papers and articles on these sub-jects for organisations such as the ACCA, Cass Business School, CentralBanking, the LSE, Lombard Street Research, and the Financial Times.

Until December 2009, Brandon was Managing Director of the GlobalAssociation of Risk Professionals Risk Academy. In that capacity Brandonproduced five books on Basel II and risk management, governance, supervi-sion, and enterprise risk management. These books form the basis of certifi-cation programs in both banks and central banks in China and Indonesia.

Brandon has over 40 years of work experience in the banking sector; hispositions included Head of Retail Market Risk and Treasurer of the retailbusinesses of Barclays Bank, and he was also a member of the bank’sexecutive committee. Prior to this appointment he was Managing Directorof Financial Engineering at BZW and later of Structured Products at BZWand Barclays Capital. Brandon retired from Barclays in March 2004 after32 years with the bank.

Yusuf Talal DeLorenzo of Malfa Inc. (www.malfainc.com) is a scholar ofIslamic transactional law whose 30-year career has been noted in the FinancialTimes, theNew York Times, Fortune, theWall Street Journal, theMiddle EastBanker, and others. Based in Florida, he serves as a Shari’ah advisor tointernational financial entities, including index providers, institutional inves-tors, mutual funds, hedge funds, real estate funds, private equity funds, homefinance providers, and investment banks. Shaykh Yusuf is the author of thethree-volume Compendium of Legal Opinions on the Operations of IslamicBanks, the first English/Arabic reference on the fatawa issued by Shari’ahboards. In addition, hewrote the introduction to Islamic Bonds, the 2003 bookthat introduced sukuk and transformed the world’s Islamic capital markets.His work has appeared in journals and newsletters and as chapters in books,including Islamic AssetManagement (Euromoney Books, 2004), Islamic RetailFinance (Euromoney Books, 2005), and Islamic Finance: Innovation &Growth (Euromoney Books, 2002). His entries on the terminology of Islamicfinance appear in The Oxford Dictionary of Islam.

Baljeet Kaur Grewal is the Managing Director and Vice Chairman at KFHResearch Limited (KFHR), the investment research subsidiary of KuwaitFinance House. In her capacity, Baljeet heads the Global Economic and

About the Contributors xix

Investment Research and Advisory teams at KFHR, the first Islamic bankworldwide to have a notable research presence in Islamic finance.

Prior to this, Baljeet was the head of Investment Banking Research atMaybank Group, Malaysia. Prior to that, she was attached with ABNAMRO Bank and Deutsche Bank, London, with experience ranging fromcredit structuring, loan syndication, and economic and capital marketresearch. She has broad experience in investment banking, having partici-pated in notable Islamic fund raising transactions in Asia and the MiddleEast; as well as in strategic planning and execution of investment bankingorganisational change. To date, she has undertaken research in Islamicfinance with a principle focus on debt capital markets and sukuk inemerging markets. She has written and published numerous articles andpapers on developing economies and debt markets, Islamic debt structures,and South East Asian economies; and has addressed numerous internationalIslamic conferences and forums. Since its inception, KFH Research Limitedhas been awarded nine international awards of research excellence, and iswidely regarded as the best Islamic finance research house globally.

Baljeet has a First Class Honours degree in international economicsfrom the University of Hertfordshire and has undertaken extensive researchin development studies with the London School of Economics.

She is also the award recipient of the prestigious Sheikh Rashid al-Makhtoum award for Regional Contribution to Islamic Finance in Asia2006, as well as accolades honouring women in Islamic finance.

Abdullah Haron is Assistant Secretary-General of the Islamic Financial Ser-vices Board. Previously, he was a Project Manager; his main area of work wasthe preparation of guidance on risk management and the supervisory reviewprocess. He has also participated in task forces on takaful regulation andsupervision, as well as a compilation guide on prudential databases of Islamicfinancial services institutions. His prior experience includes the developmentof a risk management and measurement framework, and insurance prudentialregulation and supervision. Abdullah received a BSLAS in actuarial sciencefrom the University of Illinois and an MBA from Ohio University.

ChenMee King is Senior Vice-President, General Counsel, and Head of Legaland Shari’ah Group of The Islamic Bank of Asia Limited, the first full-fledgedIslamic bank in Singapore. She is also an Adjunct Associate Professor of Lawin Singapore Management University’s Masters (LLM) in Islamic Law andFinance programme. During nearly 25 years of law practice, Mrs. Chen hasengaged in private practice as well as acting as in-house counsel for an Asiancommercial bank, two European commercial banks, and an Asian multina-tional investment group, before joining The Islamic Bank of Asia Limited.

xx ABOUT THE CONTRIBUTORS

Mrs. Chen’s responsibilities in The Islamic Bank of Asia involve the oversightof legal matters arising in connection with the Bank’s activities in South EastAsia as well as its representative office in Bahrain.

Dr. Mohamad Akram Laldin is currently the Executive Director of Inter-national Shari’ah Research Academy for Islamic Finance (ISRA). Prior tojoining ISRA he was an Assistant Professor at the Kulliyah of IslamicRevealed Knowledge and Human Sciences, International Islamic University,Malaysia (IIUM). In the period of 2002–2004, he was a Visiting AssistantProfessor at the University of Sharjah, Sharjah, United Arab Emirates. Atpresent, he is a member of the Bank Negara Malaysia Shari’ah AdvisoryCouncil, member of the Accounting and Auditing Organization of IslamicFinancial Institution (AAOIFI) Shari’ah Board, member of the LawHarmonisation Committee Bank Negara Malaysia, member of Shari’ahBoard of Employees Provident Fund Malaysia (EPF), member of MaldivesMonetary Authority Shari’ah Board, member of Yassar Limited (Dubai)Shari’ah Advisory Board, member of Nigerian Central Bank Council ofExperts, Chairman of the Islamic Advisory Board of HSBC InsuranceSingapore, Shari’ah Advisor to ZI Syariah Advisory Malaysia, member ofShari’ah Advisory Council International Islamic Financial Market (IIFM),Bahrain, member of Thomson Reuters Islamic Benchmark (IIBR) Shari’ahCommittee, member of Shari’ah Advisor of Dar Al Takaful (Dubai), and ofother boards locally and internationally.

In addition, he is also the Member of the Board of Studies of theInstitute of Islamic Banking and Finance, International Islamic UniversityMalaysia, and member of the Board of Trustees of the Islamic ResearchTraining Institute under Islamic Development Bank, Jeddah. Dr. Akramholds a BA Honours degree in Islamic Jurisprudence and Legislation fromthe University of Jordan, Amman, Jordan and a PhD in Principles of IslamicJurisprudence (Usul al-Fiqh) from the University of Edinburgh, Scotland,United Kingdom. He has presented many papers related to Islamic bankingand finance and other fiqh topics at the national and international levelsand has conducted many training sessions particularly on Islamic bankingand finance for different sectors since 1999. He is a registered Shari’ahAdvisor for Islamic Securities with the Securities Commission of Malaysia,and has acted as Shari’ah advisor in several sukuk issuances. In addition heis a prolific author of academic works, specifically in the areas of IslamicBanking and Finance. He is the recipient of the Zaki Badawi Award 2010for Excellence in Shari’ah Advisory and Research.

Dr. John Lee Hin Hock is the Group Chief Risk Officer (GCRO) of May-bank Group, the largest banking group in Malaysia. As GCRO, he oversees

About the Contributors xxi

the Group Credit and Risk Management function of the Group, whichincludes commercial banking, investment banking, and insurance businessacross South East Asian markets. The Group Credit and Risk Managementhas oversights on matters relating to credit management, assets and liabili-ties management, liquidity management, market risk management, andoperational risk management. As GCRO, he sits on the Executive Com-mittee and on various other management committees in the Group.

Dr. John Lee was a member of the Liquidity Risk Management WorkingGroup and the Risk Management Working Group of the Islamic FinancialServices Board (IFSB), an international standard-setting body set up toensure the stability of the Islamic financial services industry.

Prior to Maybank, Dr. John Lee was a Partner in KPMG, where he wasKPMG Global Lead for Islamic Finance, Asia-Pacific Region Head ofFinancial Risk Management, and Malaysia Head for Financial Services. Hisconsulting experience includes strategic consulting, banking strategies,capital markets, risk management, and performance management, where hecompleted numerous projects around the Asia-Pacific region.

Before joining KPMG, John was the General Manager of the KualaLumpur Options & Financial Futures Exchange (KLOFFE; now known asMalaysian Derivatives Exchange), where he was responsible for the overalloperations of the exchange. Prior to KLOFFE, John worked for a Malaysianmerchant bank, Amanah Merchant Bank Berhad, now known as AllianceMerchant Bank Berhad, in their corporate finance department.

John Lee has a PhD in financial economics and a bachelor of economicsfrom Monash University. He is also a Fellow Certified Practicing Accoun-tant of CPA Australia and a member of the American Finance Association,Econometrics Society, and the Society of Financial Studies.

Dato Dr. Nik Ramlah Mahmood was appointed Deputy Chief Executive ofSecurities Commission (SC) Malaysia on 1 April 2012. Prior to that, she wasManaging Director and Executive Director of the SC’s Enforcement Divi-sion. Nik Ramlah has served the SC for more than 19 years and has workedin areas ranging from legal and regulatory reform, product and marketdevelopment, Islamic capital markets, investor education, and enforcement.

Nik Ramlah sits on the board of the Securities Industry DevelopmentCorporation (SIDC), the training and education arm of SC, and is a memberof the Professional Development Panel of the International Centre forEducation in Islamic Finance (INCEIF), the global University of IslamicFinance and is an EXCO member of the Asian Institute of Finance (AIF).

Nik Ramlah holds a First Class Honours degree in Law from UniversityMalaya and an LLM and PhD from the University of London. For her PhD,she was a recipient of a scholarship from the Association of CommonwealthUniversities.

xxii ABOUT THE CONTRIBUTORS

Prior to joining the SC in 1993, Nik Ramlah was an Associate Professorin the Faculty of Law, University Malaya.

Michael J. T. McMillen is a Partner in the international law firm of Curtis,Mallet-Prevost, Colt & Mosle LLP. He also teaches Islamic finance at theLaw School and the Wharton School of Business of the University ofPennsylvania. Michael’s practice focuses on Islamic finance, project finance,other structured finance, international real estate finance, and private equity.He has worked in the Islamic finance field since 1996 and has receivednumerous awards for his Islamic finance work, particularly for devisinginnovative Shari’ah-compliant structures and products. He has worked inthe project and structured finance field since 1983. He was the foundingchairman of the Islamic Finance Section of the American Bar Association.Michael received his BBA from the University of Wisconsin in 1972, his JDin 1976 from the University of Wisconsin School of Law, and his MD in1983 from the Albert Einstein College of Medicine.

Volker Nienhaus was Professor of Economics at the German universities ofTrier (1989) and Bochum (1990) before he became President of the Uni-versity of Marburg (2004). His fields of academic specialisation were eco-nomics of the European Union, international and development economics,and political economy. He has made numerous contributions to Islamiceconomics, banking, and finance since the 1980s. In 2006, he was appointeda member of the Governing Council of the International Centre for Edu-cation in Islamic Finance (INCEIF), Kuala Lumpur.

Carol Padgett is a senior lecturer in finance at the ICMA Centre, HenleyBusiness School. She has extensive experience of teaching corporate financeand governance to both academic and professional audiences and haswritten a textbook on corporate governance. She is Director of Studies of theMSc in Corporate Finance at the University of Reading. Her researchinterests include governance in financial and nonfinancial institutions andthe impact of governance on the performance of acquisitions.

Samir Safa has more than 30 years of international experience in informa-tion technology and banking. He has managed large-scale transformationinformation technology projects, as well as building and implementingmultidiscipline financial information solutions successfully across NorthAmerica, EMEA, and Asia.

Since 1992, Samir has been serving the needs and requirements of theIslamic banking and finance industry in their various formations; i.e., start-ups, conversion of conventional banks to Islamic banks, and setting upIslamic finance units or windows.

About the Contributors xxiii

Prasanna Seshachellam has over 19 years of experience in the financialservices industry sector, which includes over nine years of experience in theregulatory domain. Before entering the regulatory world, he worked inmany segments of the financial services industry, including investmentbanking, equity research, asset management, corporate credit, credit rating,risk management, fund administration, and trade operations for ETFs.Prasanna has worked with Barclays Global Investors Canada Limited andwith ICRA Limited, the second largest rating agency in India and an affiliateof Moody’s Investors Service.

In his current role at the Dubai Financial Services Authority (DFSA),Prasanna Seshachellam leads the team responsible for the prudentialsupervision of a number of authorised firms, with primary focus on firmsoperating in the banking and insurance sectors. Prior to his current role atthe DFSA, Prasanna was with the Office of Superintendent of FinancialInstitutions (OSFI) Canada as a Senior Supervisor overseeing a portfolio ofbanks and other lending institutions.

Prasanna has been a key contributor to various initiatives of the DFSAin the regulation of Islamic finance. Prasanna has represented the DFSA inmany working groups of the Islamic Financial Services Board. Prasanna alsoplays a leading role in many of the critical projects aimed to enhance thesupervision framework of the DFSA.

Prasanna has a bachelor of technology degree from Anna University,India, and a masters in management from Indian Institute of Management,Bangalore. Prasanna is a CFA charter holder and also holds the FRM desig-nation awarded by the Global Association of Risk Professionals, New York.

Dr. Sandeep Srivastava is currently a Senior Director in Ernst & Young’sFinancial Services Risk Management (FSRM) practice in Dubai. He hasmore than 15 years of experience spanning all areas of risk management andhas led several projects for investment banks, commercial banks andinsurance companies. He has prior experience with KPMG in the MiddleEast, South Asia, and Europe. He holds a PhD in finance from IndianInstitute of Technology (IIT), Delhi, India, and has completed his mastersand MPhil. in finance from Delhi School of Economics, Delhi, India.

He also has taught at a reputable business school in India and hasauthored a book titled Volatility Forecasting and Derivative Trading inIndia published by Macmillan.

Venkataraman Sundararajan (who died suddenly in 2010) was an interna-tionally recognised financial economist with over 30 years’ experience in theInternational Monetary Fund (IMF), advising governments in centralbanking and financial sector issues as well as in macroeconomic policy,

xxiv ABOUT THE CONTRIBUTORS

covering over 50 countries in Asia, the Middle East, Europe, and parts ofAfrica. He also brought expertise in Islamic finance issues based on hisadvisory work with many governments on risk management, governance,and regulation of Islamic finance. He joined Centennial as Director andHead of Financial Sector Practice and was the Deputy Director of theMonetary and Financial Systems Department at the IMF. He earned a PhDin economics from Harvard University and taught at New York Universitybefore joining the IMF in 1974.

Sami Al-Suwailem, obtained his bachelor’s degree in science from King SaudUniversity in Riyadh, Saudi Arabia, in 1987. He obtained his master’sdegree from Southern Illinois University in Carbondale, Illinois, in 1990,and in 1995 obtained his PhD from Washington University in St. Louis,Missouri, both in economics. He joined Al Rajhi Bank in 1995 as a chiefconsultant, and in 1998 became Manager of Research & Development inthe Shari’ah Group at the Bank. He joined Islamic Development BankGroup in December, 2004 as a Senior Economist. Currently he is Head ofthe Financial Product Development Center at the IDB Group. He publishedseveral papers and books on Islamic finance in Arabic and English.

Dr. Hatim El-Tahir is a Director at Deloitte’s Islamic Finance Group, andLeader of the Deloitte ME IFKC, a think tank and thought leadership ini-tiative in Islamic finance aimed at prompting best practices in the industry.

Hatim worked extensively with regional and global Islamic financialinstitutions and leads the practice’s development in MENA region andcoordinates initiatives globally at Deloitte’s member firms. His areas ofspecialisation include Islamic financial regulation, risk management, andIslamic finance research and education.

Hatim’s experience spans many regions in the EMEA, including theUnited Kingdom, Africa, and 10 years in the GCC region. His recent rep-resentative accomplishments include advising on the development of atakaful act for an insurance regulator as well as leading a capacity devel-opment program in Islamic finance for a central bank in the Gulf.

He has authored numerous articles in credible industry journals,including Harvard University’ Islamic Finance Project publication, and hasbeen a regular speaker in major Islamic finance conferences, seminars, andtraining workshops.

Hatim is a regular participant in industry standards development dis-cussions, exposure drafts, consultation papers, and task forces.

Richard Thomas OBE, is Chief Executive Officer of Gatehouse Bank plc.Gatehouse received its licence to operate as a Shari’ah-compliant investment

About the Contributors xxv

bank based in the City of London from the Financial Services Authority inApril 2008.

In a career spanning over 35 years in merchant and investment bankingin the City of London, Richard’s last 30 years have been entirely in Islamicfinancial services and dedicated to establishing the Islamic economic modelas viable in the heart of the City of London. Richard has previously workedfor Saudi International Bank, United Bank of Kuwait, and Arab BankingCorporation (ABC), helping set up the Islamic asset management units ineach one. He left ABC in 2007 to follow the vision of Mr. Ayman Boodai toset up GSH (UK) Ltd. and joined the foundation committee to set upGatehouse Bank plc. from start up.

Richard is a Fellow of the Chartered Institute for Securities & Invest-ment (CISI). He is the Chairman of the working groups UK Islamic FinanceSecretariat. Richard is appointed by TheCityUK (TCUK) as Special Repre-sentative for Kuwait. In addition, he is an HMRC Tax Advisory Groupmember (IFS). He is also a British Expertise Advisory Council Member anda member of the Global Association of Risk Professionals (GARP).

In 2010, Richard received his Order of the British Empire, an honourbestowed by Her Majesty Queen Elizabeth II, in recognition for civic excel-lence and his contribution to the UK Islamic Financial Services industry.

Andrew White is the Director of the International Islamic Law & FinanceCentre, Singapore Management University, where he is also an AssociateProfessor conducting research and teaching courses in Islamic CommercialLaw and Islamic Finance, and coordinating the postgraduate specialisedmasters (LLM) in Islamic Law and Finance programme. An experiencedlawyer and commercial arbitrator with nearly 30 years on the bar, ProfessorWhite also consults and conducts professional training programs for banks,regulators, and others in the Islamic finance industry. ProfessorWhite’s recentinternational academic engagements include appointment in the University ofMelbourne Law School (Senior Fellow), the University of Melbourne Centrefor Islamic Law and Society and the Centre for Corporate Law & SecuritiesRegulation, appointment as a Visiting Professor in the Faculty of Law ofUniversitas Islam Indonesia (UII), as well as in the Harun M. HashimLaw Centre, International Islamic University Malaysia (IIUM), and in theFaculty of Law of Gadjah Mada University (Indonesia). Professor White isalso an Arbitrator for Islamic financial disputes with the Kuala LumpurRegional Centre for Arbitration (KLRCA); an Adjudicator for Islamicfinancial disputes with the Singapore Financial Industry Disputes ResolutionCentre (FIDReC), an Arbitrator with the Singapore International Arbitrat-ion Centre (SIAC), and a Fellow of the Singapore Institute of Arbitrators(SIArb).

xxvi ABOUT THE CONTRIBUTORS

Foreword

Islamic finance has continued to be the fastest growing sector of the inter-national financial system. This growth has also been in quality and depth,resulting from a high degree of innovation that has kept pace with thenew demands for financial products and services as economies continue toevolve and transform. Of significance is the greater abundance of profit-sharing and loss-bearing savings and investment products and other instru-ments that use structured finance. Given these developments, Islamic financehas demonstrated its potential to provide effective financial intermediation tomeet the needs of a modern globalised financial system and economy.

While Islamic finance has shown its resilience and sustainability duringthis recent global financial crisis, the significant and rapid evolution of Islamicfinance highlights the need for greater focus and attention on issues of pru-dential regulation, risk management, and overall financial stability. Theevolving compendium of standards, codes, and principles from the BaselCommittee on Banking Supervision, the Financial Stability Board, and otherinternational standard-setting bodies has brought greater clarity and under-standing to issues on the regulation and supervision of banks and financialinstitutions, including Islamic financial institutions.

However, given the uniqueness of Shari’ah-compliant modes of fundmobilisation, funding, and financing, the different financial stability andregulatory challenges may not be fully addressed by the global standardsthat have been issued. The Islamic Financial Services Board (IFSB) hasaddressed this in developing and contextualising the prudential, regulatory,and supervisory standards for Islamic finance. In addition, the work of theIFSB addresses the risk of Shari’ah–non-compliance and fiduciary risk,which are specific to Islamic finance, and complements the work of otherinternational standard-setting organisations by bringing a valuable per-spective to current and emerging issues.

The international standards are now being voluntarily observed in mostnations of the world in efforts to build more resilient financial systems. Theeffective implementation of these international standards at a national levelrequires enabling banking and financial legislation that is responsive tomarket developments, and empowers authorities within a clear accountability

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framework to act pre-emptively in addressing risks to financial stability. InMalaysia, the recent passage of the Islamic Financial Services Act will sub-stantially strengthen the capacity of the regulatory authority to meet thechallenges of the Islamic financial system.

The first edition of Islamic Finance: The Regulatory Challenge byProfessors Simon Archer and Rifaat Ahmed Abdel Karim was an importantaddition to the literature on the regulation of Islamic finance. This secondedition addresses the implications of the recent global financial crisis on theregulation of Islamic financial services. The book has dealt with the relevantregulatory issues in a timely manner and would be much welcomed by bothpractitioners and academics.

DR. ZETI AKHTAR AZIZ,Governor

Bank Negara Malaysia

xxviii FOREWORD