Puzzle over co-decision

It is far from clear how agricultural issues will be dealt with under co-decision once the reform treaty is enacted. Under current rules, most CAP dossiers are decided under the 'consultation' procedure, where the Council must wait for an EP opinion, but has no obligation to incorporate EP amendments into the final text.

The reform treaty retains the text of the consitutional treaty which made a distinction between 'bigger' political issues, but consultation would remain for so-called 'technical' dossiers such as those 'relating to prices, customs duties, quotas and direct aids.' In practice, some of these could be very political. In any case, the distinction is a very fuzzy one and requires clarification if the system is to work.

The EP, although very attuned to issues like the environmental costs of pesticide use, has often not been a strong advocate of reform with its agriculture committee dominated by farm interests.Any source

FANTASY SPORTS LEAGUES NOT GAMBLING

In a recent court decision, U.S. District Judge Dennis M. Cavanaugh ruled that payments for entry fees to participate in ESPN’s premium fantasy sports league are not wagers or bets, and thus does not constitute illegal gambling.

A fantasy sport is a game where fantasy owners build a team that competes against other fantasy owners based on the statistics generated by individual players or teams of a professional sport. In more competitive fantasy sports leagues, participants pay a fee to sign up or “purchase” a team, and prizes are awarded to winning teams’ managers at the end of the season.

Agreeing with the defendant, Viacom Inc., Judge Cavanaugh held “entry fees do not constitute bets or wagers where they are paid unconditionally for the privilege of participating in a contest, and the prize is for an amount…that is guaranteed to be won by one of the contestants.”

Moreover, “courts throughout the country have long recognized that it would be patently absurd to hold that the combination of an entry fee and a prize equals gambling.” Under such a definition, scores of normal contests would be considered unlawful gambling.

Cavanaugh noted that “the element of risk necessary to constitute betting or wagering is missing.” It is estimated by the Fantasy Sports Trade Association that 16 million adults in the U.S., from the ages 18 to 55, play fantasy sports. Humphrey v. Viacom Inc. et al., No. 06-2768 WL 1797648 (D. N.J. June 20, 2007).

UPDATES TO WEBSITE

Our website, Entertainment Law Resources (www.marklitwak.com) has been updated with additional checklists for Errors and Omissions insurance, Corporate and LLC formation, template lab access letter, sample producer delivery list and other information.

MAN COULD GET UP TO 3 YEARS IN PRISON FOR POSTING PIRATED TV EPISODES

A criminal complaint handed down in the U.S. District Court for the Central District of California could send a 24 year old Chicago man to prison for three years for uploading to the Internet pirated episodes of the television series “24.” The episodes were uploaded to LiveDigital.com almost a week before their premiere.

Producer Twentieth Century Fox issued a statement thanking federal prosecutors for investigating the matter. United States v. Romero, No. 07-848, complaint filed (C.D. Cal. June 1, 2007).

METHOD FEST 10TH ANNIVERSARY

The 10th annual Method Fest independent film festival is currently accepting entries for the 2008 festival, March 27 – April 3, in Calabasas, Calif. The Method Fest is dedicated to showcasing breakout acting performances in story and character-driven independent feature and short films.

In only 9 years The Method fest has launched over 85 films into the marketplace (theatrical releases, DVD/video distribution, and TV deals). The submission deadlines are: Early Deadline - December 15, 2007; Late Entry Deadline – January 31, 2008. You can contact Method Fest at www.methodfest.com or call them at (310) 535-9230.Any source

Memorandum of Understanding Signed Between BVI FSC and Jersey FSC

BVI Financial Services Commission and Jersey Financial Services Commission have entered into the Memorandum of Understanding. The information on this document (MoU) is posted on the official page of BVI FSC.

The JFSC is a statutory body established under the Financial Services Commission (Jersey) Law in 1998 ,and its purposes and functions are very much alike to those of BVI FSC. General function of the JFSC is supervision of financial services providers and financial products provided in or from within Jersey. This includes the authorisation and supervision of collective investment schemes, and fund functionaries, licensing and supervision of banks, insurance companies, investment business and trust company business, general insurance mediation business. JFSC also incorporates the Registry of Companies.

The main purpose of signing the Memorandum by the BVI FSC and Jersey FSC is providing a formal basis for co-operation, including for the exchange of information and investigative assistance. According to the document, each Authority will provide assistance to the other one, subject to its laws and overall policy; the assistance may include providing information in the possession of the requested Authority, confirmation and exchange of information, discussing issues of mutual interest, obtaining specified information and documents, inspections or examinations of financial services providers, and other issues.

Both the BVI FSC and JFSC believe that mutual co-operation will enable them to perform their functions more effectively. Each request for assistance on the above-mentioned matters will be assessed by the requested Authority to determine whether this MoU allows for providing such assistance. The criteria which will be taken into account by the requested Authority when making the decision are stated in paragraph 9 of the Memorandum. Also, for any of the reasons mentioned in this paragraph, the assistance may be denied in whole or in part.

The Memorandum of Understanding was signed by Robert Mathavious, as managing director and CEO of BVI Financial Services Commission, and John Harris, as the General Director of JFSC.

Brian Obvi,
Offshore Analyst

Article any source

The new UK tax law on Sukuk
Mohammed Amin MA FCA AMCT CTA (Fellow) Venue: British Bankers' Association London


He is a tax partner at PricewaterhouseCoopers LLP and untilr ecently led their Finance & Treasury Network. He specialises in the taxation of Islamic finance, and is a member of the Islamic Finance Experts Group formed by Mr Ed Balls, Economic Secretary to the Treasury, to advise the Government on Islamic Finance strategy. He is also a Council member of the Chartered Institute ofTaxation and a member of the Technical Committee of the Association of Corporate Treasurers.

Any source

Public Statement issued by the BVI FSC

On July 13, the British Virgin Islands Financial Services Commission issued Public Statement signed by managing director/CEO Robert Mathavious. This Public Statement concerns Boston Life and Annuity Company Limited and has been issued in order to protect the public interest and the interests of those who are somehow related to Boston Life and Annuity Company Limited.

The BVI FSC informs the public that in April 2006 it received complaints from policyholders of the above-mentioned company. According to the complaints, the company had improperly terminated insurance policies under one of its programs to deprive policyholders of a refund. The Financial Services Commission started its investigations at once, and on June 2, 2006 it issued the Notices requiring documents and information from Boston Life and Annuity Company Limited and related parties.

According to the public statement, “in July 2006, the Commission retained the services of Krill Inc./ Kroll Associates Inc. to provide investigative assistance in the first instance providing an expert Forensic Accountant to review substantial records that the Commission had obtained in the course of investigations”.

In January 2007, Kroll was appointed by the Commission as an examiner to conduct further investigations into Boston Life.

Krill Inc./ Kroll Associates Inc. has assisted the Commission in the investigation, and the BVI FSC expects the investigation to be completely carried out in 3 months.

As far as the concerns have been recently raised, on July 13, 2007, the Commission issued a directive to the company. Currently, Boston Life and Annuity Company Limited is prohibited to enter into new contracts for insurance business for 90 days, until the notice by the BVI FSC.

Brian Obvi,
Offshore Analyst

Article any source

Glimmer of hope over Doha

International trade negotiations have been the most effective driver of CAP reform for over fiften years. I haven't commented on progress in the Doha Round for some time because prospects have looked so bleak since the collapse of the G-4 talks at Potsdam. But there does seem to be a glimmer of hope.

The Potsdam talks were ominously held at the Cecilienhof complex where the 1945 conference took place that carved up Europe after the end of the Second World War (I visited there when it was still in East Germany). This time it wasn't Stalin, Truman and Churchille/Attlee round the table, but the US, EU, India and Brazil: how the world has changed.

The talks broke up acrimoniously early after Brazilian Trade Minister Celso Amorin and his Indian counterpart Lamal Nath accused the US and EU of failing to live up to the commitment of a 'development round'. For their part the EU and US accused Brazil of inflexibility and even backtracking, particularly on tariffs for industrial goods.

On agriculture there were some signs of flexibility on the US side particularly in relation to trade distorting domestic support. There were also hints that the EU might be prepared to off bigger cuts for those products with tariffs over 90 per cent, although the EU insists that the discussion was more about the combination of tariff cuts and protection for so-called sensitive products.

Farm negotiations chair Crawford Falconer has tabled a draft document, but what it leaves open is the question of 'special product' provisions which permit developing countries to shield particular commodities from cuts in tariff agreements. They are a particular bugbear for the US who say they undercut liberalisation.

An agreement is not going to come anytime soon. Election pressures are increasing in the US and the next president may be elected on a protectionist platform, Hilary Clinton having seemingly abandoned her husband's commitment to free trade.Any source

The dairy paradox

British dairy farmers are leaving the industry in large numbers, but world milk and milk product prices are heading upwards fast. How can one explain this paradox? The simple answer is, of course, that the key UK liquid milk market is largely insulated from world market factors.

Wholesale milk has doubled in price on world markets over the last year. One factor is the surging demand for milk products in China and the Middle East as diets change in respond to surging incomes. Drought problems in Australia which crippled the country's dairy output has raised the wholesale price of skimmed milk powder by 60 per cent over six months. This is an input widely used by the food processing industty and over year it has increased in price from $2,000 per tonne to $4,800.

The latest Milk Development Council survey shows that 16 per cent of dairy producers, some 3,000 in total, intend to quit. Of course, some of those may have been departures anyway given the lack of successors. It is also worth noting that they tend to be smaller producers, as the loss of 16 per cent of producers is assumed to produce a 7 per cent fall in output (although this in part depends how far larger producers increase output).

Campaigners for dairy farmers often state that many of them are not making a profit. These statements need to be treated with a little caution as generally accounts include family labour as a cost before profits are calculated. Nevertheless, the sector has been under pressure.

The decision by Tesco to pay 22p a litre for retail milk sets something of an industry standard and is a lifeline for producers. Views differ about whether it was the result of the Competition Commission's increasingly vigorous interest in Tesco or the outcome of campaigning by dairy farmers through the NFU and other bodies. However, milk used for other products like cheese and butter generally yields a poorer return.

Some of this is feeding through into consumer prices. The home delivered pint at 48p per litre is likely to go up by a penny at most, but within the past year, the supermarket price of a pint of double cream has gone up from 91p to £1.12p, an increase of almost a quarter. Processed foods and cheese are likely to see a substantial impact, while Domino's Pizza is forecasting a 30 per cent rise in the cost of its products due to cheese price increases. Chocolate manufacturers have also taken a hit, although that has often been felt more in terms of a profits squeeze than by consumers.

Export refunds for dairy products have now been phased out which is a significant gain given they were at a level of €3.01bn in 1988 and even amounted to €725m last year. They could be reinstated if the market falls, but it is currently so buoyant that the Commission is talking of reducing the meetings of the Dairy Management Committee from twice to once a month. If export refunds remain at zero, EU spending in the dairy sector would be lower than revenue from superlevy, making the sector self-financing.

The Commission is determined to phase out dairy quotas by 2015, although discussion of how to achieve a 'soft landing' continues. There have been expressions of concern from economically marginal but politically influential dairy areas like Bavaria. One solution could be to use a 'national envelope' device to provide assistance.

The EU has historically had a structural surplus of milk, while Britain has not been self-sufficient because of its historical reliance on imported dairy products from the Commonwealth. A more market oriented system should benefit larger scale UK producers, who are among the most efficient in Europe, but pressure on smaller, more marginal and more peripheral farms would continue.Any source

Horse paddocks get SFP

In the long run it is going to be difficult to justify a Single Farm Payment (SFP) model that is based on historical receipts. This model originated in the generous compensation given to cereal farmers for cuts in intervention payments in the 1992 MacSharry reforms. There will be a shift to a regional model with a flat rate payment per hectare in each region. This is already under way in England, Finland and Germany and all the new member states have a flat rate payment system.

However, those member states that have introduced a regional model have seen applications for CAP support rocket, e.g., on horse paddocks which are a popular use of land near any centre of population. These claims are frequently for small amounts, e.g., €50 - €100, but the high number of applications - 40,000 in England and 20,000 in Denmark - imposes considerable transaction costs.

It is likely that the Health Check will look at introducing some form of lower threshold for SFP funding, such as a minimum amount or raising the current 0.3 ha minimum area requirement for applications.Any source

FINANCIAL CONTRACTING IN CURRENCY MARKETS:AN ISLAMIC EVALUATION

Mohammed Obaidullah

The paper attempts to undertake an Islamic assessment of financial contracting in the globalcurrency markets. Some basic currency-related contracts in mainstream finance, such as,spot transactions, options, forwards, futures, swaps are examined in the light of Islamicnorms of financial ethics, such as, freedom from riba, gharar, jahl, qimar and maisir.Thestudy also highlights the views of Islamic scholars on various conventional as well as Shariah-based contractual mechanisms. In cases where there is some degree of divergence of views,the study examines the nature and source of disagreement as also the implications andeconomic significance of the arguments. In view of the overwhelming importance ofcurrency risk management in volatile markets, the study undertakes an assessment of thevarious financial contracts as risk management tools.

1. Introduction

Islamisation of currency markets poses a great challenge to Islamic scholars and thinkers even today. Theelimination of riba, gharar,qimarand maisirare among the major goals of the process of Islamisation offinancial markets. While significant success has been achieved in engineering an alternative Islamic model inspecific segments of the financial markets, such as, the banking and the insurance sector, the same has notbeen the case with the currency markets. A majority of Islamic scholars have held a view that only spottransactions in currencies, both domestic and foreign, are permissible. This view, specifically in relation toexchange of foreign currencies, has been labelled as unduly restrictive and somewhat impractical, by policymakers and regulators in most Islamic economies. Further, with divergent views from other Islamic scholars,the issue is perhaps largely unresolved. The outcome has been that the currency markets all over the globehave continued with “unIslamic” transactions with all the undesirable consequences that follow. Ironically,the Islamic world has realized the urgency of implementing the Islamic and ethical alternative after incurringa heavy cost, as some of the fastest growing.

Islamic economies in South East Asia have been engulfed in an unprecedented financial crisis, primarilybecause of riba-based and maisir-driven contracting that were permitted in these markets.

The purpose of this paper is to identify the Islamic system for currency exchange. Since the financial systemessentially implies the system of financial contracting, the paper focuses on the Islamicity of alternativecontractual mechanisms in the currency markets in the light of Islamic norms of ethics, such as, prohibitionof riba, ghararand maisir. The paper seeks to present a comprehensive analysis of various arguments insupport and against the permissibility of some basic contracts involving currencies. Section 2 discussessome basic forms of contracting from the Islamic legal literature that may have relevance for currencymarkets. These are also compared and contrasted with currency-related contracts found in conventionalmarkets, such as, spot contracts, forwards, futures, options, and swaps. Wealso undertake a survey ofpast studies that have examined the Islamicity of these conventional contracts. In section 3 we explicitlydeal with the issue of prohibition of ribafrom a fiqhipoint of view and examine the various contracts fromthe standpoint of riba prohibition. The central theme of section 4 is the issue of ghararand maisir. Weexamine the various forms of contracting in the light of the Islamic requirement to avoid excessive ghararand minimize the possibility of speculative gains or maisir.

In section 5 we examine the issue of risk management in volatile currency markets which is often used as anargument for tolerating speculative abuse of various conventional mechanisms called currency options,futures, forwards and swaps. Wealso highlight some Islamic alternatives for risk management. Section 6attempts to evaluate the contractual mechanisms from another fiqhiperspective, the issue of swapping onedebt for another or bai al kali bi al kali. Section 7 undertakes a holistic view of all the Shariah relatesissues as also their economic significance and provides a summary of major conclusions.

2. Forms of Contracting

The Islamic law of contracts explicitly deals with exchange of currencies. There is a general consensusamong Islamic jurists on the view that currencies of different countries can be exchanged on a spot basis ata rate different from unity. There also seems to be a general agreement among a majority of scholars on theview that currency exchange on a forward basis is not permissible, that is, when the rights and obligationsof both parties relate to a future date. However, there is considerable disagreement among jurists when therights of either one of the parties, which is same as obligation of the counterparty, is deferred to a future date.

Toelaborate, let us consider the example of two individuals A and B who belong to two different countries,India and US respectively. A intends to sell Indian rupees and buy US dollars. The converse is true for B.The rupee-dollar exchange rate agreed upon is 1:20 and the transaction involves buying and selling of $50.The first situation is that A makes a spot payment of Rs1000 to B and accepts payment of $50 from B. Thetransaction is settled on a spot basis from both ends. Such transactions are valid and Islamicallypermissible.There are no two opinions about the same.

It may be noted here that the real life spot markets for currencies often provide for actual delivery within 48hours or two banking business days due to practical reasons (for example, time differences among variousglobal markets). Some authors, such as M.Akram Khan (1988) have argued that the above practice ofallowing a two day lag cannot be accepted in the Islamic framework.1Others consider this position to betoo rigid and find this practice to be Islamically acceptable on the ground that the so-called time laginvolved in the spot transaction is not a time lag between the delivery of one currency compared to thedelivery of the other, but rather is a lag between the deals date and the execution date. Further, even if thereis a time lag, the same does not affect the price or the exchange rate between the two currencies involved.

The second possibility is that the transaction is partly settled from one end only. For example, A makes apayment of Rs1000 now to B in lieu of a promise by B to pay $50 to him after six months. Alternatively, Aaccepts $50 now from B and promises to pay Rs1000 to him after six months. There are diametricallyopposite views on the permissibility of such contracts. The Fiqh Academies3across the globe have beendeliberating on the permissibility of such contracts. Among the scholars who argue in favor of permissibilityof such contracts, the views of Justice Muhammed Taqi Usmani have received wide attention. On the otherhand, scholars, such as, Dr M Nejatullah Siddiqui have sought to justify the more commonly held view thatonly spot settlement is permissible in case of currency exchange on the ground that if settlement from oneend is allowed to be deferred to a future date, this would become a source of earning riba. Such contractsare however, not very common in the conventional financial markets.

The third scenario is that settlement of the transaction from both ends is deferred to a future date, say aftersix months from now. This implies that both A and B would make and accept payment of Rs1000 or $50,as the case may be, after six months. Such contracts are known as currency forwards and futures inmainstream finance. The predominant view is that the such contracts are not Islamically permissible. TheIslamic Fiqh Academy, Jeddah in its seventh session clearly ruled out the permissibility of such contracts.4According to Justice Taqi Usmani, “it is a well recognized principle of the Shariahthat sale and purchasecannot be effected for a future date.

Therefore, all forward and future transactions are invalid in Shariah. Secondly, because in most of the futurestransactions, delivery of the commodities or their possession is not intended. In most cases, the transactionsend up with the settlement of difference of prices only, which is not allowed in the Shariah. As futures are notpermissible, no rights and obligations can emanate from therefrom. (Further), futures are totally impermissibleregardless of their subject matter. Similarly, it makes no difference whether these contracts are entered into forthe purpose of speculation or for the purpose of hedging.”5 Other contemporary scholars, such as, SubhiMahmassani (1983), M Akram Khan (1988), M Fahim Khan (1995) and Kamali (1996) have alsoexamined the Islamicity of forwards and futures and have found these contracts to be forbidden, the notableexception being Kamali (1996). As Mahmassani notes, “contracts concerning future things (al ashya almustaqbalah) are basically invalid, for such things are non-existent at the time of contract- except for the factthat the majority of the jurists have exceptionally permitted certain contracts such as salam(forward sale) andistisna(contract of manufacture).”6M Akram Khan prefers to make a clear distinction between forwardsand futures as the latter have a “strong element of speculation”. While condemning the latter, Khan observesthat the former are not legally enforceable. The two parties may “agree” or “promise” to transact an exchangebusiness at a future date and that such an agreement is “morally” enforceable.7Mohammed Fahim Khan findscurrency forwards and futures to be totally forbidden and prefers to examine only the case of commodity-relatedcontracts for possible modification and making them acceptable in the Islamic framework. As he states, “thepresent concept and practice of foreign currency futures involves interest as well as violates the Islamicprinciple of delivery with respect to exchange of currencies ..hand to hand.”8Kamali however does not findanything objectionable about futures in general, “futures trading falls under the basic principle of permissibility(ibahah).”9However, even Kamali’s affirmative opinion pertains to futures in general without specifying theunderlying asset. Kamali also explicitly recognizes the need to view currency related contracts differently fromother commodities. While asserting that possession (qabd) is not an essential requirement of sale andtherefore futures may not be deemed prohibited on this ground, he also states that “only in case of sale ofcurrency for currency (sarf) is qabdelevated to a prerequisite of a valid contract.”

Yet another form of contracting which has been described as an Islamic swap11may be as follows. Amakes a payment of Rs1000 to and receives US$50 from B today at the given rate 1:20. Both A and B useand invest the money so received at their own risk. At the end of a stipulated time period, say six months,the transaction is reversed. A repays US$50 to and receives Rs1000 from B. This form of contracting canalso be viewed as an exchange of or swapping of interest-free loans between A and B. This is in contrastto conventional swaps which are generally interest-based and involve swapping of principal (oftennotional) and interest payments. Conventional swaps clearly have no place in the Islamic system.12Asdiscussed and demonstrated later in section 5, Islamic swaps may help both A and B in various ways, suchas, enabling them to manage their currency risk. There are again divergent views on the permissibility ofsuch contracting.

The other common form of currency-related contracting in mainstream finance relates to purchase and saleof currency options. Scholars who consider that currency exchange must be settled on a spot basis rule outthe possibility of any option for either or both parties. The currency option if considered as a promise, is notbinding as the two parties cannot agree in advance to the rate to be applied for currency exchange in futureaccording to the traditional Islamic law.13 Justice Taqi Usmani rules out the acceptability of conventionaloptions which are promises traded as independent contracts for a fee. As he asserts, “such a promise initself is permissible and is normally binding on the promisor. However, this promise cannot be a subjectmatter of sale or purchase. Therefore, the promisor cannot charge the promisee a fee for making such apromise...it makes no difference if the subject matter of the option sale is a commodity, gold, silver or acurrency..the contract is invalid ab-initio.”14 The Islamic Fiqh Academy has also resolved that all forms ofconventional options traded as independent contracts in themselves are not permissible.15These viewshowever, do not rule out the possibility of a sale contract with a stipulated option for either party or both inthe al khiyar al shart (option as condition) framework of the Islamic law of contracting. Whether thepossibility also exists with respect to currency exchange deserves further investigation.

3. The Issue of Riba Prohibition

The need to eliminate ribain all forms of exchange contracts is of utmost importance. This is emphasized by theQuranic verse: “But Allah has permitted sale and forbidden usury” (2:275). The original Quranic prohibition ofusury or ribarelates to loan contracts or riba al-jahiliyyahwhich surfaces when the lender asks the borroweron the maturity date if the latter would settle the debt or increase the same. Increase is accompanied by charginginterest on the amount initially borrowed.16Apart from this pre-Islamic form, ribamay exist in a loan contract, ifit provides any advantage to the lender. Thus, provision for any excess in the amount to be repaid by theborrower over what was borrowed in the contract is a source of usury or riba.

The definition of ribawas later extended to the exchange of currencies and several denominated articles,primarily based on the several hadiths. Onehadith that is widely quoted by scholars because of its concise formis: the holy prophet (peace be upon him) said, “Exchange gold for gold, silver for silver, wheat for wheat,barley for barley, date for date, salt for salt, measure for measure and hand-to-hand; and when thearticles of exchange are different, exchange as it suits you, but hand-to-hand..”18 The prohibition wasfurther extended by fiqhscholars to exchange of commodities other than the six mentioned in the hadith. Ribain any exchange or sale contract is defined19by fiqhscholars as “an unlawful gain derived from the quantitativeinequality of the countervalues in any transaction purporting to effect the exchange of two or more species(anwa), which belong to the same genus (jins) and are governed by the same efficient cause (illah).” Ribaisgenerally classified into riba al-fadl(excess) and riba al-nasia(deferment) which denote an unlawful advantageby way of excess or deferment respectively. Prohibition of the former is achieved by a stipulation that the rate ofexchange between the objects is unity and no gain is permissible to either party. The latter kind of ribaisprohibited by disallowing deferred settlement and ensuring that the transaction is settled on the spot by both theparties.

The prohibition of ribain the exchange of currencies belonging to different countries requires a process ofanalogy (qiyas). And in any such exercise involving analogy (qiyas), efficient cause (illah) plays an extremelyimportant role. It is a common efficient cause (illah), which connects the object of the analogy with its subject, inthe exercise of analogical reasoning. The appropriate efficient cause (illah) in case of exchange contracts hasbeen variously defined by the major schools of Fiqh. This difference is reflected in the analogous reasoning forpaper currencies belonging to different countries.

A question of considerable significance in the process of analogous reasoning relates to the comparison betweenpaper currencies with gold and silver. In the early days of Islam, gold and silver performed all the functions ofmoney (thaman). Currencies were made of gold and silver with a known intrinsic value (quantum of gold orsilver contained in them). Such currencies are described as thaman haqiqi, or naqdain infiqh literature.Thesewere universally acceptable as principal means of exchange, accounting for a large chunk of transactions. Manyother commodities, such as, various inferior metals also served as means of exchange, but with limitedacceptability.These are described as fals in fiqhliterature. These are also known as thamanistalahibecauseof the fact that their acceptability stems not from their intrinsic worth, but due to the status accorded by the societyduring a particular period of time. The above two forms of currencies have been treated very differently by earlyIslamic jurists from the standpoint of permissibility of contracts involving them. The issue that needs to beresolved is whether the present age paper currencies fall under the former category or the latter. One view is thatthese should be treated at par with thaman haqiqior gold and silver, since these serve as the principal means ofexchange and unit of account like the latter. Hence, by analogous reasoning, all the Shariah-related norms andinjunctions applicable to thaman haqiqishould also be applicable to paper currency. Exchange of thamanhaqiqiis known as bai-sarf, and hence, the transactions in paper currencies should be governed by the Shariahrules relevant for bai-sarf. The contrary view asserts that paper currencies should be treated in a manner similarto falsor thaman istalahibecause of the fact that their face value is different from their intrinsic worth. Theiracceptability stems from their legal status within the domestic country or global economic importance (as in caseof US dollars, for instance).

3.1. Analogical Reasoning (Qiyas) for Riba Prohibition

The prohibition of ribaaccording to the above quoted hadith, applies to the two precious metals (gold andsilver) and four other commodities (wheat, barley, dates and salt). It also applies, by analogy (qiyas) to all specieswhich are governed by the same efficient cause (illah) or which belong to any one of the genera of the six objectscited in the tradition. However, there is no general agreement among the various schools of Fiqhand evenscholars belonging to the same school on the definition and identification of efficient cause (illah) of riba.

For the Hanafis, efficient cause (illah) of ribahas two dimensions: the exchanged articles belong to the samegenus (jins); these possess weight (wazan) or measurability (kiliyya).20If in a given exchange, both theelementsof efficient cause (illah) are present, that is, the exchanged countervalues belong to the same genus(jins) and are all weighable or all measurable, then no gain is permissible (the exchange rate must be equal tounity) and the exchange must be on a spot basis. In case of gold and silver, the two elements of efficient cause(illah) are: unity of genus (jins) and weighability. Thus, when gold is exchanged for gold, or silver is exchangedfor silver, only spot transactions without any gain are permissible. It is also possible that in a given exchange, oneof the two elements of efficient cause (illah) is present and the other is absent. For example, if the exchangedarticles are all weighable or measurable but belong to different genus (jins) or, if the exchanged articles belong tosame genus (jins) but neither is weighable nor measurable, then exchange with gain (at a rate different fromunity) is permissible, but the exchange must be on a spot basis.21Thus, when gold is exchanged for silver, the ratecan be different from unity but no deferred settlement is permissible. Further, the possibility of stipulating optionsin the contract for either or both parties is also not lawful. It is stated in al-Hidayathat such stipulations arepreventive of mutual seisin (or settlement), which is an indispensable condition.22If none of the two elements ofefficient cause (illah) of ribaare present in a given exchange, then none of the injunctions for ribaprohibitionapply. Exchange can take place with or without gain and both on a spot or deferred basis.

Considering the case of exchange involving paper currencies belonging to different countries, ribaprohibitionwould require a search for efficient cause (illah). Currencies belonging to different countries are clearly distinctentities; these are legal tender within specific geographical boundaries with different intrinsic worth or purchasingpower. Hence, a large majority of scholars perhaps rightly assert that there is no unity of genus (jins). Additionally,these are neither weighable nor measurable. This leads to a direct conclusion that none of the two elements ofefficient cause (illah) of ribaexist in such exchange. Hence, the exchange can take place free from any injunctionregarding the rate of exchange and the manner of settlement. The logic underlying this position is not difficult tocomprehend. The intrinsic worth of paper currencies belonging to different countries differ as these have differentpurchasing power. Additionally, the intrinsic value or worth of paper currencies cannot be identified or assessedunlike gold and silver which can be weighed. Hence, neither the presence of ribaal-fadl(by excess), nor ribaal-nasia(by deferment) can be established.

The Shafii school of fiqhconsiders the efficient cause (illah) in case of gold and silver to be their property ofbeing currency (thamaniyya) or the medium of exchange, unit of account and store of value.23However, theefficient cause (illah) of being currency (thamaniyya) is specific to gold and silver, and cannot be generalized.That is, any other object, if used as a medium of exchange, cannot be included in their category. Hence,according tothis version, the Shariahinjunctions for ribaprohibition are not applicable to paper currencies. TheMaliki view also considers the efficient cause (illah) in case of gold and silver to be their property of beingcurrency (thamaniyya) or the medium of exchange, unit of account and store of value. However, according tothis view, even if paper or leather is made the medium of exchange and is given the status of currency, then all therules pertaining to naqdain, or gold and silver apply to them. Thus, according to this view, exchange involvingcurrencies of different countries at a rate different from unity is permissible, but must be settled on a spot basis. Asfar as Hanbali view is concerned, different versions attributed to Ahmad Ibn Hanbal have been recorded whichhas been documented in al-Mughniby Ibn Qudama. The first version is similar to the Hanafi version while thesecond version is close to the Shafii and Maliki version.

3.2 Comparison between Currency Exchange and Bai-Sarf

Bai-sarf is defined in fiqhliterature as an exchange involving thaman haqiqi, defined as gold and silver,which served as the principal medium of exchange for almost all major transactions.

Proponents of the view that any exchange of currencies of different countries is same as bai-sarfargue thatin the present age paper currencies have effectively and completely replaced gold and silver as the mediumof exchange. Hence, by analogy, exchange involving such currencies should be governed by the sameShariahrules and injunctions as bai-sarf. It is also argued that if deferred settlement by either parties to thecontract is permitted, this would open the possibilities of riba-al nasia.

Opponents of categorization of currency exchange with bai-sarfhowever point out that the exchange of allforms of currency (thaman) cannot be termed as bai-sarf.25According to this view bai-sarf impliesexchange of currencies made of gold and silver (thaman haqiqi or naqdain) alone and not of moneypronounced as such by the state authorities (thaman istalahi). The present age currencies are examples ofthe latter kind. These scholars find support in those writings which assert that if the commodities ofexchange are not gold or silver, (even if one of these is gold or silver) then, the exchange cannot be termedas bai-sarf. Nor would the stipulations regarding bai-sarfbe applicable to such exchanges. According toImam Sarakhsi, “when an individual purchases falsor coins made out of inferior metals, such as, copper(thaman istalahi) for dirhams (thaman haqiqi) and makes a spot payment of the latter, but the sellerdoes not have falsat that moment, then such exchange is permissible........ taking possession of commoditiesexchanged by both parties is not a precondition” (while in case of bai-sarf, it is.)26A number of similarreferences exist which indicate that jurists do not classify an exchange of fals (thaman istalahi) foranother fals (thaman istalahi) or for gold or silver (thaman haqiqi), as bai-sarf.

Hence, the exchanges of currencies of two different countries which can only qualify as thaman istalahican not be categorized as bai-sarf. Nor can the constraint regarding spot settlement be imposed on suchtransactions. It should be noted here that the definition of bai-sarfis provided fiqhliterature and there is nomention of the same in the holy traditions. The traditions mention about riba,and the sale and purchase ofgold and silver (naqdain) which may be a major source of riba, is described as bai-sarf by the Islamicjurists. It should also be noted that in fiqh literature, bai-sarf implies exchange of gold or silver only;whether these are currently being used as medium of exchange or not. Exchange involving dinarsand goldornaments, both quality as bai-sarf. Various jurists have sought to clarify this point and have defined sarfas that exchange in which both the commodities exchanged are in the nature of thaman, not necessarilythamanthemselves. Hence, even when one of the commodities is processed gold (say, ornaments), suchexchange is called bai-sarf.

Proponents of the view that currency exchange should be treated in a manner similar to bai-sarf alsoderive support from writings of eminent Islamic jurists. According to Imam Ibn Taimiya “anything thatperforms the functions of medium of exchange, unit of account, and store of value is called thaman, (notnecessarily limited to gold & silver).28As far as the views of Imam Sarakhsi is concerned regarding ex-change involving fals, according to them, some additional points need to be taken note of. In the early daysof Islam, dinars and dirhams made of gold and silver were mostly used as medium of exchange in allmajor transactions. Only the minor ones were settled with fals. In other words, falsdid not possess thecharacteristics of money or thamaniyyain full and was hardly used as store of value or unit of account andwas more in the nature of commodity. Hence there was no restriction on purchase of the same for gold andsilver on a deferred basis. The present day currencies have all the features of thamanand are meant to bethamanonly. The exchange involving currencies of different countries is same as bai-sarfwith differenceof jinsand hence, deferred settlement would lead to riba al-nasia.

Dr Mohammed Nejatullah Siddiqui illustrates this possibility with an example30. He writes “In a givenmoment in time when the market rate of exchange between dollar and rupee is 1:20, if an individualpurchases $50 at the rate of 1:22 (settlement of his obligation in rupees deferred to a future date), then it ishighly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on aspecified later date. (Since, he can obtain Rs 1000 now, exchanging the $50 purchased on credit at spotrate)” Thus, sarfcan be converted into interest-based borrowing & lending.”

3.3 Defining Thamaniyya

It appears from the above synthesis of alternative views that the key issue seems to be a correct definitionof thamaniyya. For instance, a fundamental question that leads to divergent positions on permissibilityrelates to whether thamaniyya is specific to gold and silver, or can be associated with anything thatperforms the functions of money. Weraise some issues below which may be taken into account in anyexercise in reconsideration of alternative positions.

It should be appreciated that thamaniyya may not be absolute and may vary in degrees. It is true thatpaper currencies have completely replaced gold and silver as medium of exchange, unit of account andstore of value. In this sense, paper currencies can be said to possess thamaniyya. However, this is true fordomestic currencies only and may not be true for foreign currencies. In other words, Indian rupees possessthamaniyya within the geographical boundaries of India only, and do not have any acceptability in US.These cannot be said to possess thamaniyyain US unless a US citizen can use Indian rupees as a mediumof exchange, or unit of account, or store of value. In most cases such a possibility is remote. This possibilityis also a function of the exchange rate mechanism in place, such as, convertibility of Indian rupees into USdollars, and whether a fixed or floating exchange rate system is in place. For example, assuming freeconvertibility of Indian rupees into US dollars and vice versa, and a fixed exchange rate system in which therupee-dollar exchange rate is not expected to increase or decrease in the foreseeable future, thamaniyyaof rupee in US is considerably improved. The example cited by Dr Nejatullah Siddiqui also appears quiterobust under the circumstances. Permission to exchange rupees for dollars on a deferred basis (from oneend, of course) at a rate different from the spot rate (official rate which is likely to remain fixed till the dateof settlement) would be a clear case of interest-based borrowing and lending. However, if the assumptionof fixed exchange rate is relaxed and the present system of fluctuating and volatile exchange rates is as-sumed to be the case, then it can be shown that the case of riba al-nasia breaks down. We rewrite hisexample: “In a given moment in time when the market rate of exchange between dollar and rupee is 1:20,if an individual purchases $50 at the rate of 1:22 (settlement of his obligation in rupees deferred to a future date. then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs.1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the $50 purchased oncredit at spot rate)” This would be so, only if the currency risk is non-existent (exchange rate remains at1:20), or is borne by the seller of dollars (buyer repays in rupees and not in dollars). If the former is true,then the seller of the dollars (lender) receives a predetermined return of ten percent when he convertsRs1100 received on the maturity date into $55 (at an exchange rate of 1:20). However, if the latter is true,then the return to the seller (or the lender) is not predetermined. It need not even be positive. For example,if the rupee-dollar exchange rate increases to 1:25, then the seller of dollar would receive only $44 (Rs1100 converted into dollars) for his investment of $50.

Here two points are worth noting. First, when one assumes a fixed exchange rate regime, the distinctionbetween currencies of different countries gets diluted. The situation becomes similar to exchanging poundswith sterlings (currencies belonging to the same country) at a fixed rate. Second, when one assumes avolatile exchange rate system, then just as one can visualize lending through the foreign currency market(mechanism suggested in the above example), one can also visualize lending through any other organizedmarket (such as, for commodities or stocks.) If one replaces dollars for stocks in the above example, itwould read as:“In a given moment in time when the market price of stock X is Rs 20,

ifan individual purchases 50 stocks at the rate of Rs 22 (settlement of his obligation in rupees deferred to afuture date), then it is highly probable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repayRs. 1100 on a specified later date. (Since, he can obtain Rs 1000 now, exchanging the 50 stocks purchasedon credit at current price)” In this case too as in the earlier example, returns to the seller of stocks may benegative if stock price rises to Rs 25 on the settlement date. Hence, just as returns in the stock market orcommodity market are Islamically acceptable because of the price risk, so are returns in the foreign currencymarket because of fluctuations in the prices of foreign currencies.

A unique feature of thaman haqiqior gold and silver is that the intrinsic worth of the currency is equal to itsface value. Thus, the question of different geographical boundaries within which a given currency, such as,dinaror dirhamcirculates, is completely irrelevant. Gold is gold whether in country A or country B. Thus,when currency of country A made of gold is exchanged for currency of country B, also made of gold, then anydeviation of the exchange rate from unity or deferment of settlement by either party is not permissible.However, when paper currencies of country A is exchanged for paper currency of country B, the case may beentirely different. Paper currency of B is not thamanin country A. Nor is the paper currency of A thamanincountry B. The price risk (exchange rate risk), if positive, would eliminate any possibility of riba al-nasiainthe exchange with deferred settlement.

Another point that merits serious consideration is the possibility that certain currencies may possess thamaniyya,that is, used as a medium of exchange, unit of account, or store of value globally, within the domestic as wellas foreign countries. For instance, US dollar is legal tender within US; it is also acceptable as a medium ofexchange or unit of account for a large volume of transactions across the globe. Thus, this specific currencymay be said to possesses thamaniyyaglobally, in which case, jurists may impose the relevant injunctions onexchanges involving this specific currency to prevent riba al-nasia. The fact is that when a currencypossessesthamaniyyaglobally, then economic units using this global currency as the medium of exchange,unit of account or store of value may not be concerned about risk arising from volatility of inter-countryexchange rates. At the same time, it should be recognized that a large majority of currencies do not performthe functions of money except within their national boundaries where these are legal tender.

3.4. Possibility of Riba with Futures and Forwards

So far, we have discussed views on the permissibility of deferring settlement of obligation of only one of theparties to the exchange. What are the views of scholars on deferment of obligations of both parties ? Typicalexample of such contracts are forwards and futures.32According to a large majority of scholars, this is notpermissible on various grounds, the most important being the element of risk and uncertainty (gharar) and thepossibility of speculation of a kind which is not permissible. This is discussed in section 3. However, anotherground for rejecting such contracts may be ribaprohibition. In the preceding paragraph we have discussedthat bai salam in currencies with fluctuating exchange rates can not be used to earn ribabecause of thepresence of currency risk. It is possible to demonstrate that currency risk can be hedged or reduced to zerowith another forward contract transacted simultaneously. And once risk is eliminated, the gain clearly wouldbe riba.

Wemodify and rewrite the same example: “In a given moment in time when the market rate of exchangebetween dollar and rupee is 1:20, an individual purchases $50 at the rate of 1:22 (settlement of his obligationin rupees deferred to a future date), and the seller of dollars also hedges his position by entering into aforward contract to sell Rs1100 to be received on the future date at a rate of 1:20, then it is highlyprobable that he is , in fact, borrowing Rs. 1000 now in lieu of a promise to repay Rs. 1100 on a specified laterdate. (Since, he can obtain Rs 1000 now, exchanging the 50 dollars purchased on credit at spot rate)” Theseller of the dollars (lender) receives a predetermined return of ten percent when he converts Rs1100received onthe maturity date into 55 dollars (at an exchange rate of 1:20) for his investment of 50 dollarsirrespective of the market rate of exchange prevailing on the date of maturity.

Another simple possible way to earn ribamay even involve a spot transaction and a simultaneous forwardtransaction. For example, the individual in the above example purchases $50 on a spot basis at the rate of1:20 and simultaneously enters into a forward contract with the same party to sell $50 at the rate of 1:21after one month. In effect this implies that he is lending Rs1000 now to the seller of dollars for one monthand earns an interest of Rs50 (he receives Rs1050 after one month. This buy-back or repo (repurchase)transaction so common in conventional banking is termed as bai al-einahand rightly rejected by almost allIslamic scholars.33Thus, forward and future contracts can be seen to be clearly unIslamic on grounds ofbeing a source of generating riba.

4. The Issue of Freedom from Gharar

Gharar, unlike riba, does not have a consensus definition. In broad terms, it connotes risk and uncertainty.It is useful to view ghararas a continuum of risk and uncertainty wherein the extreme point of zero risk isthe only point that is well-defined. Beyond this point, ghararbecomes a variable and the ghararinvolvedin a real life contract would lie somewhere on this continuum. Beyond a point on this continuum, risk anduncertainty or ghararbecomes unacceptable34. Jurists have attempted to identify such situations involvingforbidden gharar. A major factor that contributes to gharar is inadequate information (jahl) whichincreases uncertainty. This is when the terms of exchange, such as, price, objects of exchange, time ofsettlement etc. are not well-defined. Ghararis also defined in terms of settlement risk or the uncertaintysurrounding delivery of the exchanged articles.

Islamic scholars have identified the conditions which make a contract uncertain to the extent that it isforbidden. Each party to the contract must be clear as to the quantity, specification, price, time, and placeof delivery of the contract. A contract, say, to sell fish in the river involves uncertainty about the subject ofexchange, about its delivery, and hence, not Islamically permissible. A number of hadithsforbid contractsinvolving uncertainty.

An outcome of excessive ghararor uncertainty is that it leads to the possibility of speculation of a varietywhich is forbidden. Speculation in its worst form, is gambling. The holy Quran and the traditions of the holyprophet explicitly prohibit gains made from games of chance which involve unearned income. The termused for gambling is maisirwhich literally means getting something too easily, getting a profit withoutworking for it. Apart from pure games of chance, the holy prophet also forbade actions which generatedunearned incomes without much productive efforts.

Here it may be noted that the term speculation has different connotations. It always involves an attempt topredict the future outcome of an event. But the process may or may not be backed by collection, analysisand interpretation of relevant information. The former case is very much in conformity with Islamic rationality.An Islamic economic unit is required to assume risk after making a proper assessment of risk with the helpof information. All business decisions involve speculation in this sense. It is only in the absence of informationor under conditions of excessive ghararor uncertainty that speculation is akin to a game of chance and isreprehensible.

4.1 Gharar & Speculation with Currency Forwards, Futures and Options

Considering the case of currency forwards and futures first, where settlement by both the parties isdeferred to a future date, these are forbidden according to a large majority of jurists on grounds ofexcessive gharar. In such contracts the two parties become obliged to exchange currencies of twodifferentcountries at a known rate at the end of a known time period. For example, individuals A and Bcommit to exchange US dollars and Indian rupees at the rate of 1: 22 after one month. If the amountinvolved is $50 and A is the buyer of dollars then, the obligations of A and B are to make a payments ofRs1100 and $50 respectively at the end of one month. The contract is settled when both the parties honortheir obligations on the future date.

Traditionally, an overwhelming majority of Shariahscholars have disapproved such contracts on severalgrounds. The prohibition applies to all such contracts where the obligations of both parties are deferred toa future date, including contracts involving exchange of currencies. An important objection is that such acontract involves sale of a non-existent object or of an object not in the possession (qabd) of the seller.This objection is based on several traditions of the holy prophet.37There is difference of opinion on whetherthe prohibition in the said traditions apply to foodstuffs, currencies, or perishable commodities or to allobjects of sale. There is, however, a general agreement on the view that the efficient cause (illah) of theprohibition of sale of an object which the seller does not own or of sale prior to taking possession isgharar, or the uncertainty about delivery of the goods purchased.

Is this efficient cause (illah) present in an exchange involving future contracts in currencies of differentcountries ? In a market with full and free convertibility or no constraints on the supply of currencies, theprobability of failure to deliver the same on the maturity date should be no cause for concern. Further, thestandardized nature of futures contracts and transparent operating procedures on the organized futuresmarkets38is believed to minimize this probability. Some recent scholars have opined in the light of theabove that futures, in general, should be permissible. According to them, the efficient cause (illah), that is,the probability of failure to deliver was quite relevant in a simple, primitive and unorganized market. It is nolonger relevant in the organized futures markets of today39. Such contention, however, continues to berejected by the majority of scholars. They underscore the fact that futures contracts almost never involvedelivery by both parties. On the contrary, parties to the contract reverse the transaction and the contract issettled in price difference only. For example, in the above example, if the currency exchange rate changesto 1: 23 on the maturity date, the reverse transaction for individual A would mean selling $50 at the rate of1:23 to individual B. This would imply A making a gain of Rs50 (the difference between Rs1150 andRs1100). This is exactly what B would lose. It may so happen that the exchange rate would change to 1:21in which case A would lose Rs50 which is what B would gain. This obviously is a zero-sum game in whichthe gain of one party is exactly equal to the loss of the other.

Currency options provide a right without obligation to the purchaser of the option to exchange currencywith a counterparty at a predetermined exchange rate within or at the end of a stipulated time period. Forexample, individual A may purchase an option to exchange $50 for equivalent rupees at the rate of 1:21 atthe end of one month. If the exchange rate on the maturity date is 1: 20, this implies a gain (he would gainby exchanging Rs1000 for $50 in the market and then exercising his option to exchange the dollars forRs1100 and thus, make a profit equal to Rs100 minus the option premium). This would be the loss to theseller of the option. However, if the US dollar appreciates against Indian rupee say, to 1:23, he would bebetter off by not exercising his option. His losses would equal to the premium paid for purchasing theoption. This would be the gain of the seller of the option. In this exchange, the counterparty, in all probability,would have diametrically opposite expectations regarding future direction of exchange rates. Again likefutures, this is a zero-sum game.

This possibility of gains or losses (which theoretically can touch infinity in specific cases) encourageseconomic units to speculate on the future direction of exchange rates. Since exchange rates fluctuaterandomly, gains and losses are random too and the game is reduced to a game of chance. There is a vastbody of literature on the forecastability of exchange rates and a large majority of empirical studies haveprovided supporting evidence on the futility of any attempt to make short-run predictions. Exchange ratesare volatile and remain unpredictable at least for the large majority of market participants. Needless tosay, any attempt to speculate in the hope of the theoretically infinite gains is, in all likelihood, a game ofchance for such participants. While the gains, if they materialize, are in the nature of maisiror unearnedgains, the possibility of equally massive losses do indicate a possibility of default by the loser and hence,gharar.

4.2 Gharar with Complex Products of Financial Engineering

Another dimension of ghararis complexity which raises a question mark on the permissibility of a host ofproducts of financial engineering involving currencies. Many such contracts have embedded conditions andcan be extremely complex with the risk-return possibilities that are difficult to assess. Elimination of forbiddenghararrequires that the contracts are simple and the parties to the contract have complete knowledge ofthe countervalues being exchanged. Complexity brings in jahl,is a source of potential conflict betweenparties to the contract and hence, is frowned upon.

The Islamic swap contract highlighted in section 2 is perhaps unnecessarily complex. It amounts a compositecontract equivalent to two simultaneous bai salamcontracts entered into by both the parties. It can also beseen as a composite contract involving mutual loans (qard). There is no reason why the two contractscannot be separately executed at the same time if there is a matching need. The requirement to identify amatching need and tie up the two contracts is perhaps unnecessary.

5. The Issue of Risk Management

Currency markets across the globe are characterized by excessive volatility. In these volatile markets,economic units are faced with a need to manage currency risk. Conventional risk management tools, suchas, currency options, forwards, futures and swaps are generally believed to add to the efficiency of thesystem by serving as tools of hedging and risk reduction. It is therefore pertinent to examine the hedgingargument from an Islamic point of view.

5.1 Currency Options

Currency options provide a right without obligation to the purchaser of the option to exchange currencywith a counterparty at a predetermined exchange rate within or at the end of a stipulated time period. As asimple illustration of how currency option may enable a party to hedge against currency risk, we mayreconsider the earlier example with some modifications. Assume that individual A is an exporter from Indiato US who has already sold some commodities to B, the US importer and anticipates a cashflow of $50(which at the current market rate of 1:22 mean Rs 1100 to him) after one month. There is a possibility thatUS dollar may depreciate against Indian rupee during these one month, in which case A would realize lessamount of rupees for his $50 ( if the new rate is 1:20, A would realize only Rs1000 ). Hence, A maypurchase an option to exchange $50 for equivalent rupees at the rate of (say)1:21.5 at the end of onemonth (and thereby, is certain to realize Rs1075). In this case, A is able to hedge his position and at thesame time, does not forgo the opportunity of making a gain if his fears do not materialize and US dollarappreciates against Indian rupee (say, to 1:23 which implies that he would now realize Rs1150. He wouldobviously prefer not to exercise his option. The premium paid for purchasing the option is akin to cost ofinsurance against currency risk. In this exchange, the counterparty, in all probability, would havediametrically opposite expectations regarding future direction of exchange rates and would sell this optionwith the hope of gaining the option premium.

Conventional options as independent contracts are not admissible in the Islamic framework and there is anear consensus among Islamic scholars on this issue. However, the Shariahdoes provide for introductionof options as conditions in the framework of al khiyar al shart.In this framework, either or both parties tothe contract retain an option to confirm or rescind the contract within a stipulated time period. Studies havehinted at the possibility of designing Islamic contracts with embedded options within this framework.40Inthe context of currency exchange however, this possibility has been ruled out with the overwhelming viewin favor of spot settlement and binding nature of the currency exchange contracts. However, as discussedthroughout this paper there may a be case for permissibility to settlement of foreign currency exchangecontracts from one end. In this context, the views of Imam Shams Sarakhsi seem to admit the possibility of options: “ In an exchange involving falsand dirhams when there is a stipulated option (khiyar al shart) foreither of the parties and both parties depart after taking possession (qabd) of countervalues, then suchexchange is valid. This is so because, the settlement is deemed to be complete and the contract is bindingfor the party which does not retain any option....and possession (qabd) of at least one of the countervaluesis required here...the same is not true for bai-sarf.”41If the domestic currency because of its property offull thamaniyyais viewed similar to dirhams and foreign currency because of its property of very limitedthamaniyyais viewed similar to fals, then exchange involving a foreign currency may perhaps provide forembedded options. The issue certainly deserves further research and investigation.

5.2 Currency Forwards and Futures

It is generally believed by conventional thinkers in mainstream finance that futures and forwards are toolsfor risk management or hedging. Hedging adds to planning and managerial efficiency. In the context ofcurrency markets which are characterized by volatile rates, such contracts are believed to enable theparties to transfer and eliminate risk arising out of such fluctuations. Todemonstrate this possibility with thesame example as with options, individual A may enter into a forward or future contract to sell $50 at therate of 1:21.5 at the end of one month (and thereby, realize Rs1075) with any counterparty havingdiametrically opposite expectations regarding future direction of exchange rates. In this case, A is able tohedge his position and at the same time, forgoes the opportunity of making a gain if his expectations do notmaterialize and US dollar appreciates against Indian rupee (say, to 1:23 which implies that he would haverealized Rs1150, and not Rs1075 which he would realize now.)

While hedging tools improve planning and hence, performance, it should be noted that the intention of thecontracting party - whether to hedge or to speculate, can never be ascertained. There is little empirical datato prove or disprove any hypothesis relating to the intention of the contracting parties. There may indeed bean element of circular reasoning in the hedging argument and a confusion between micro-level andmacro-level concerns. In volatile markets, firms or individuals at a micro level may justifiably haverecourse tosome tools of risk reduction. However, permissibility to forwards and futures by enablingspeculative transactions, may actually lead to greater volatility in exchange rates, thus, aggravating theproblem at a macro level. The consequent instability brought into the system may at times prove to be toocostly for the economy as has been demonstrated in the case of the South East Asian economies. Thisperhaps is the economic justification why hedging with futures and forwards is not permissible in the Islamicframework.

5.3 Bai-Salam

It may be noted that hedging can also be accomplished with bai salam in currencies. As in the aboveexample, exporter A anticipating a cash inflow of $50 after one month and expecting a depreciation ofdollar may go for a salamsale of $50 (with his obligation to pay $50 deferred by one month.) Since he isexpecting a dollar depreciation, he may agree to sell $50 at the rate of 1: 21.5. There would be animmediate cash inflow in Rs 1075 for him. The question may be, why should the counterparty pay himrupees now in lieu of a promise to be repaid in dollars after one month. As in the case of futures, thecounterparty would do so for profit, if its expectations are diametrically opposite, that is, it expects dollarto appreciate. For example, if dollar appreciates to 1: 23 during the one month period, then it wouldreceive Rs1150 for Rs 1075 it invested in the purchase of $50. Thus, while A is able to hedge its position,the counterparty is able to earn a profit on trading of currencies. The difference from the earlier scenario isthat the counterparty would be more restrained in trading because of the investment required, and suchtrading is unlikely to take the shape of rampant speculation.

5.4 Islamic Swaps

The fourth form of contracting as highlighted in section 2 is supposed to be the Islamic variant of theconventional swap transactions. The conventional swaps have been generally observed to be unIslamic asthey clearly involve interest payments. Islamic swaps (al-muragaha al-Islamiyah)as highlighted insection 2are in use by several Islamic banks. A close look at the nature of contracting reveals that the sameessentially involves an exchange of two interest-free loans (qard) in different currencies which are repaidby both the parties at the end of a stipulated time period. It is easy to see that such swaps partially enablethe parties to hedge their currency risk. For example, bank A in India has liquid funds denominated in USdollars and currently it expects the US dollar to weaken against Indian rupee over the next six months.Bank B in US with its liquidity in Indian rupees has diametrically opposite expectations. It expects theIndian rupee to weaken against the US dollar over the next six months. Thus, both the banks are exposedto and perceive currency risk. An Islamic swap between the two banks may help both the banks topartially reduce their risk. It may comprise the following.

Today: A lends - 1 million US dollars - B borrows
and A borrows - 20 million Indian rupees - B lends
After six months A repays - 20 million Indian rupees - to B
and A is repaid - 1 million US dollars - by B

In the absence of the swap, bank A would have continued with its dollar liquidity or generated some dollarincome by investing the same. With rupee being the reporting currency and with continued fall in the valueof dollar against rupee, the bank would have faced a loss due to the currency rate changes. With the swapnow, the bank would be able to make rupee investments for the time period and generate rupee income. Atthe end of the time period, the bank reverses the transaction and gets back its dollar liquidity.A similarsituation exists with respect to bank B which can now hedge its rupee resources against the fall in the valueof rupee against dollar (dollar being the reporting currency). The major difference of this type of swap fromits conventional counterpart is that in case of the latter, the interest payments along with the principal isswapped. In case of Islamic swap, only the principal is being swapped since the incomes to be generatedon the investments are not predetermined.

Islamic swaps can also be explained using the earlier example with some modifications. Assume now thatindividual A is an exporter from India to US who has already sold some commodities to a US importer andanticipates a cashflow of $50 (which at the current market rate of 1:22 mean Rs 1100 to him) after onemonth. There is a possibility that US dollar may depreciate against Indian rupee during these one month, inwhich case A would realize less amount of rupees for his $50 ( if the new rate is 1:21, A would realize onlyRs1050 ). Let us also assume that B is another exporter from US who anticipates a cashflow of Rs1100after one month and has diametrically opposite expectations regarding future direction of exchange rates. Itis worried about a possible fall in the value of rupee against dollar which would mean a reduced dollarrealization. Now A and B may agree to enter into an Islamic swap under which A lends Rs1100 to B nowand borrows US$50 from him. (A and B are neither gaining or losing with this exchange and can alwaysfind the rupees and dollars to exchange, since the current exchange rate is 1:22). At the end of the onemonth A and B receive their respective dollars and rupees from the counterparties. When they reverse theearlier transaction and repay to each other it would imply an exchange rate of 1:22 again. Thus, A and Bwould be able to ensure that their future receipts are hedged against adverse currency rate movements.

Islamic swaps may perform many other useful functions besides serving as a tool of risk management, suchas, reducing cost of raising resources, identifying appropriate investment opportunities, better asset-liabilitymanagement and the like. These are also the benefits with conventional swaps. Islamic swaps are differentin that they do not involve interest-related cashflows. However, Islamic swaps are not free from controversiesand there is no consensus regarding their acceptability as would be discussed below.

6. Exchange of Debt for Debt (Bai al kali bi al kali)

The exchange of debt for debt, bai al dayn bi al-dayn or bai al-kali bi al-kaliis generally found to beprohibited by Islamic scholars. It is a widely recognised principle of Shariahthat in any exchange contract,“seisin of one of the parties is an indispensable requisite, lest the contract prove to be an exchange of debtfor debt.”42Such exchange of debt for debt can take various forms and scholars give a numberof instances involving such exchange.

For example, individual A borrows Rs100 from individual B for a period of three months. After one month,individual B purchases an equipment from individual C which is to be delivered after one monthin exchange ofthe loan to A. Another example may be that individual A sells an equipment to individual Bfor Rs100 payable in one month and then repurchases from B the equipment for Rs120, payable after twomonths. In both the examples, the exchanges are prohibited. The first case involves excessive gharardueto uncertainty over delivery. The second case, also known as bai al-einah, clearly involves riba. Both arealso examples of exchange of debts.

Some contemporary scholars do not agree on the precise interpretation of bai al kali bi al kali. Forinstance, Kamali notes “general consensus (ijma) is said to have materialized on the prohibition of bai alkali bi al kali...but evidence shows that such an ijmais unfeasible..the legal schools have recorded divergentrulings, which means that the claim of ijmaon this issue is unfounded.” He also notes that “its precisemeaning is also subject to doubt, as kaliis somewhat unfamiliar even to native Arab speakers.”

Some authors have attempted to demonstrate that bai al kali bi al kali refers only to riba jahiliyah orpre-Islamic riba. Shaikh Mahmud Ahmad (1992) notes that Imam Malik explains the meaning of such baiin these words: “A person sells cloth or some other goods on the promise of payment by the buyer afterone month. A month passes and the buyer, being unable to make the payment, asks the seller to sell hisdebt of one month for a debt of two months, and raise the quantum of debt. This is the sale of debt inexchange for another debt.”(italics added)

Any contract where the settlement by both the parties is deferred to a future date is a clear case ofexchange of debt for debt. The same is the case with currency forwards and futures. When A and Bcontract to exchange Rs1000 and $50 at the rate of 1:20 at a future date, say 3 months, then it can beeasily seen that A’s debt of Rs1000 payable to B after 3 months is being exchanged for B’s debt of US$50payable to A after 3 months. Thus, according to a majority of scholars who consider such exchange ofdebts as another type of bai al kali bi al kali, forwards and futures are both unacceptable in the Islamicframework on this ground.

Are Islamic swaps unacceptable also because they involve exchange of debts and fall under the categoryof bai al kali bi al kali? Available opinion seems to reject Islamic swaps on different grounds. Accordingto Mufti Muhammed Taqi Usmani, it is one of the principles of Shariahthat two financial transactionscannot be tied together in the sense that entering into one transaction is made a precondition to entering intothe second. Keeping this principle in view, the swap transaction is not permissible because the loan ofUS$50 is made a precondition for accepting the loan of Rs1100. He however goes on to say that “this ismy first hand opinion about this transaction....it needs further study and research.”46Some scholars justifya prohibition of conditional loans based on a hadithnarrated by Abdullah bin Umar “whoever advances aloan should not make it conditional with the exception of return of the loan.”47Mahmud Ahmed however,quoting Allama Wahid-uz-Zaman interprets the above hadith as that a lender should not impose anycondition which confers any advantage on the lender. Defending another financial product which has thiscommon property as Islamic swaps, he asserts that “under the above arrangement, exactly identical valuesare exchanged and no advantage exceeding the loan value received is conferred by the borrower on thelender

In fact, both the parties to the contract are simultaneously lenders as well as borrowers, and there is nothingthat one lends to the other which is anything less or more than either of them borrows from the other. Unlessthe borrower is forced to give some kind of advantage to the lender in addition to the loan value hereceives, the arrangement cannot be called conditional loan of a variety which is forbidden.”487.

7.Summary & Conclusion

In this paper we have attempted an assessment of various conventional forms of contracting, such as, spottransactions, options, forwards, futures, swaps and various complex and composite products of financialengineering in terms of the overwhelming need to eliminate any possibility of riba, minimize gharar, jahland the possibility of speculation of a kind akin to games of chance.

It is obvious that spot settlement of the obligations of both parties would completely prohibit riba, andgharar, and minimize the possibility of speculation. However, this would also imply the absence of anytechnique of risk management and may involve some practical problems for the participants.

At the other extreme, if the obligations of both the parties are deferred to a future date, then suchcontracting,inall likelihood, would open up the possibility of infinite unearned gains and losses from whatmay be rightly termed for the majority of participants as games of chance. Of course, these would alsoenable the participants to manage risk through complete risk transfer to others and reduce risk to zero. Itis this possibility of risk reduction to zero which may enable a participant to earn riba. Future is not a newform of contract. Rather the justification for proscribing may be new. If in a simple primitive economy, itwas prevention of ghararrelating to delivery of the exchanged article, in today’s’ complex financial systemand organized exchanges, it is perhaps the prevention of speculation of kind which is unIslamic and whichis possible under excessive ghararinvolved in forecasting highly volatile exchange rates. Such speculationis not just a possibility, but a reality. Independent currency options are also not permissible on this ground.Forwards and futures are prohibited also on the ground that these involve bai al kali bi al kalior exchangeof debt obligations.

Islamic swaps though may be beneficial in some ways, are not free form controversy. Viewed asa composite oftwo bai-salamcontracts, the tying up seems unnecessary. Risk management is possiblewith delinked bai-salamcontracts too. This would be simpler and more efficient. Islamic swaps may alsobe questionable, when these are seen as tying up of two interest-free loans.

The form of contracting with deferment of obligations of one of the parties to a future date falls between thetwo extremes of spot and future contracts. While Shariah scholars have divergent views about itspermissibility, our analysis reveals that there is no possibility of earning ribawith this kind of contracting.The requirement of spot settlement of obligations of at least one party imposes a natural curb on speculation,though the room for speculation is greater than under the first form of contracting. The requirement amountsto imposition of a hundred percent margin which, in all probability, would drive away the uninformedspeculator from the market. This should force the speculator to be a little more sure of his expectations bybeing more informed. When speculation is based on information it is not only permissible, but desirabletoo. Bai salamwould also enable the participants to manage risk. At the same time, the requirement ofsettlement from one end would dampen the tendency of many participants to seek a complete transfer ofperceived risk and encourage them to make a realistic assessment of the actual risk.

There is perhaps a case for reconsideration of the definition of thamaniyya. Money is what money doesand the acceptability of specific currencies as medium of exchange, unit of account and store of valuevaries widely across geographical boundaries. Such an assessment is of utmost importance as many of theShariah-related injunctions and prescriptions regarding the exchange mechanism, such as, permissibility ofbai-salam in specific currencies, are dependant upon this crucial issue.

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Corridor politics secure fruit and veg deal

The fruit and vegetable reform agreement is another step on the road to a more market oriented CAP. Yet in some ways it is more significant in terms of how it was secured and what it reveals about decision-making in an EU with 27 member states.

Despite fears of a marthon session, agreement was reached by 5 p.m. in the afternoon. This was done by conversations in the corridor rather than in plenary session of the Council. This reflects the way in which deals are increasingly being reached in the Special Committee on Agriculture or in the margins of the Council itself - over lunch or in the corridor. This has always happened to some extent, but it is more necessary in a much enlarged EU.

The existing system of processing aids for tomatoes (€329m), citrus fruit (€241m) and peaches/pears/prunes/figs (€76m) based on production and an area based scheme for dried grapes (€115m) will cease this year. The funds received by each member state will be added to the national envelope for the SFP. However, a 'coupled' aid for tomatoes can be retained by member states for four years.

Various side payments had to be made to secure the deal. Spain and Italy will get a one-off national aid of €15m in 2007/8 to help the tomato processing sector. The reference period for Greece was adjusted because of a poor peach crop in 2004, effectively giving Greece an extra €3.1m in its envelope. There will be some transitional direct payments for soft fruit on new member states, although in the case of Latvia this amounts to just €92,000. But by such adjustments deals are made.Any source

BVI Business Companies Act amended

It is not such a long time since BVI the Business Companies Act was introduced and replaced BVI IBC Act completely at the beginning of this year.

Now the British Virgin Islands Financial Services Commission (BVI FSC) has announced several amendments being readied to the new Business Companies Act. Among other things, this will facilitate simplified provisions to transfer bearer share companies to non-bearer share companies.

Initially, provisions to transfer bearer share companies to non-bearer share ones were established for IBCs in 2003 to carry forward to Schedule 2 of the BVI Business Companies Act.

In accordance with the existing transitional provisions, companies are required to fully immobilise their shares by December 31, 2010. However, according to the BVI FSC, financial industry concerns that compliance with the transitional arrangements would place a heavy burden on the industry is taken into consideration. The BVI FSC observed that this could cause substantial inconvenience to the directors and owners of former IBCs when they pass resolutions amending their memorandum of association. Accordingly, the Commission has tried to find an appropriate solution in order to will carry out the immobilisation of all bearer shares before 2010 imposing the minimum administration on BVI companies.

According to an Order by the Executive Council, this should be achieved by deeming that the memorandum of a former IBC will be amended on the transition date in order to prohibit issuing bearer shares, unless the IBC elects that the deeming provision should not apply.

So, the transition of most bearer share companies to non-bearer share ones will be a straightforward process.

During 2008-2009, former IBCs which are bearer share companies will pay the same fee as non-bearer share companies.

The Commission has expressed its pleasure regarding its efforts to meet the international standards and, at the same time, remain an appealing and cost-effective domicile for international companies.

After enactment of the BVI Business Companies Act there already have been several amendments, also related to the schedule of the implementation of one or another new regulation. For example, in the beginning of 2006 several amendments including prolonging the deadline to comply with the bearer shares regime from 31st of December 2004 to 31st of December 2010 were introduced.

Before the BVI Business Companies Act, 2004 was enacted, BVI companies were administered under 2 statutes: the resident companies were administered under Cap. 285, while offshore IBCs – under the IBC Act 1984, Cap. 291. In order to eliminate accusations of ringfencing, the BVI Business Companies Act was enacted in the British Virgin Islands in 2004.

To inform the BVI company owners and stakeholders on the new company regime and its implications, the BVI FSC will be hold a series of public workshops.

The regulator has also announced that fees for companies registered under the Companies Act will be reduced to the level of companies registered under new legislation. Last year, the fees for companies registered under the Companies Act (Cap.185) was increased to a minimum of $350.00 in order to put Local BVI Companies on equal position with companies registered under the new BVI Business Companies Act. However, the legislators decided that BVI Resident Companies not re-registered under the BVI Business Companies Act when their annual fee was due will not be obliged to pay an increased fee in 2007. So, the Registrar of Companies should refund all overpaid fees.

This year, the annual fee payable by a BVI Resident Companies will, as previously, depend on the value of its assets. If the value of assets is less than $10,000, the annual fee will be reduced from $350 to $25.

The Companies Registry will identify all overpaid fees and notify all BVI companies eligible for a refund, which is to take abut a few weeks.

The new table of capital and annual licence fee payable by BVI resident companies is as follows:

Capital / Licence Fee
do not exceed $10,000 - $25.00
exceed $10,000 but do not exceed $50,000 / $50.00
exceed $50,000 but do not exceed $100,000 / $100.00
exceed $100,000 but do not exceed $200,000 / $200.00
exceed $200,000 but do not exceed $300,000 / $300.00

Source information on latest legislation changes and guidance note is available on BVI FSC site.

Brian Obvi,
Offshore Analyst

Article any source

Islamic Finance - The New Mainstream Alternative
by Jeremy Hetherington-Gore, April 2007

2006 was the year in which Islamic finance, a concept virtually unheard of outside banking circles a decade ago, finally crossed the border-line between slightly exotic alternative territory and the mainstream. Islamic banking and finance industry has undergone something of an explosion in recent years as demand for an alternative to western banking products structured along ethically-aware Islamic principles has grown, and in early 2007 it received the financial equivalent of the accolade when UK Chancellor Gordon Brown's announced that the Islamic finance industry would be given the same tax treatment in the UK as other investments. The move was applauded by tax and finance experts, who say it puts the City of London at the forefront of the nascent but rapidly growing global industry.

What Is Islamic Finance?

It's almost no longer necessary to ask that question, but for the record, under the guiding principle of Shariah law, the goal of trade and enterprise within an Islamic-based society is the sharing of wealth and prosperity within the community through morally acceptable business activities. Likewise, Shariah law dictates that risk in trade and business should also be shared. This means that the accumulation of wealth through the receipt of interest, or riba, is prohibited, as interest income is deemed effortless profit. It also means that investment in certain business activities is forbidden on ethical and moral grounds, such as those involving alcohol, tobacco, pornography, armaments and gambling.

Whilst trade along Islamic lines is as old as the religion itself, modern Shariah banking didn’t really take off until the 1960s with the launch of the Social Bank in Egypt, a project later replicated in other areas. In the intervening years, some countries, such as Pakistan and Sudan, have made attempts to completely ‘Islamicise’ their financial systems, although the Islamic banking and investment industry has been, until recently, confined largely to the Middle East.
The concept of a bank making a profit without charging interest can be a difficult one to grasp for those of us brought up in a western-style capitalistic environment. However, numerous financial products and contracts have been developed and are appearing on the market place all the time, based on a number of structures which seek to eliminate the need for interest, and share both profit and risk.

Possibly the most popular of these is the contract known as Murabaha. Described as a cost-plus-financing contract, a Murabaha contract can be used to finance a variety of purchases. For example, in order to buy a house using this contract, the prospective buyer agrees a sale price with the seller and approaches a bank, which will buy the property and sell it back to the customer at a higher price. The house will be registered in the buyer’s name and he will agree to pay back the amount in instalments. This technique is also applied to the financing of other purchases, such as cars or household appliances. Murabaha contracts are also used to issue letters of credit and to provide financing for trade.

A similar method, known as Ijara, works in much the same way, except that the bank will buy an asset and then effectively lease it to the customer for an agreed period. During the term of the lease, the buyer is required to pay a form of rent, which is deemed by the bank to be reflective of the risk that it is taking as part of the transaction. This rent can be either fixed or variable, depending on the specific contract terms offered by the institution.

Another popular method of financing under Islamic law is Musharaka, which can be loosely translated to mean a partnership. This is widely recognised as perhaps the purest form of Islamic contract available within the modern banking framework because it has more of a basis in the profit and risk sharing principle. Within a personal banking context, a Musharaka arrangement may see the bank providing the funds to enable the customer to buy an asset, with the bank and customer agreeing a profit or equity sharing ratio for that asset. Losses are shared on a similar basis.

There are also variations on the above themes, such as Ijara-wa-iktana. This is similar to Ijara, the difference being that included in the contract is a promise from the customer to buy the asset or goods at the end of the lease period at a pre-determined price. Rentals paid during the period of the lease constitute part of the purchase price and often under these arrangements the final sale will be for a token sum.

Ijara with diminishing Musharaka means that an institution’s equity in an asset may be reduced as the buyer makes capital payments over and above the agreed rental payments or lease payments. This means that the bank’s ownership decreases and the customer’s equity increases over time, until ownership is eventually transferred entirely to the buyer.

Another important tool within the Islamic finance framework is the Mudharabah contract, which is used in the financing of new business ventures. In short, under this arrangement, one party known as the rabal-maal provides the funding, while the other party - the entrepreneur or mudarib - provides the effort and labour. Profit is shared at an agreed ratio at the start of the contract; however, in the event that the venture fails, any losses are borne completely by the owner of the capital, whilst the entrepreneur derives nothing for their efforts.

Instruments have also been developed to serve part of the investment industry that were previously off limits to the Islamic investor, such as the international bond markets, in which sukuks are fast becoming a visible feature. These certificates bear a resemblance to conventional bonds, but unlike their western counterparts, they are backed by an asset, such as pools of ijara contracts. The asset will be leased to the client to yield the return on the sukuk and backing by real assets ensures that a sukuk is also tradable in a Shariah-compliant secondary market.

Location And Size Of The Islamic Finance Sector

Key locations for the rapidly developing Islamic finance sector are Dubai and Labuan, because they are sophisticated low-tax centres in Islamic regions with concentrations of wealthy investors, while London and the Cayman Islands, as existing banking and investment fund centres, are home to the highly skilled legal and financial professional communities needed to bring Islamic products to market.

The global Islamic finance industry is now worth more than $1 trillion in terms of assets, having quadrupled in the last three years. Although this figure remains just a fraction of global assets, given a world Muslim population of around 1.5 billion people, the industry has enormous potential, and this is a fact that is starting to be recognised in boardrooms of some of the world’s largest western-based banking, fund management and insurance groups, many of which have now launched banking facilities compliant with Shariah law.

2006: A Watershed Year

A round-up Of Islamic finance developments in 2006 and early 2007 shows the growing size and maturity of the industry:

European Islamic Investment Bank Plc (EIIB), the first independent, Sharia-compliant Islamic investment bank to be authorised and regulated by the UK Financial Services Authority, announced the launch of a Sharia-compliant real estate fund. The EIIB Pan-European Islamic Real Estate Fund is structured as a tax-efficient Sharia-compliant fund which will directly purchase commercial real estate assets in the office, retail and industrial sectors in and around major cities in the UK and Western, Central and Eastern Europe.The fund takes the form of a closed-end fund with a fixed term of five years plus up to two years wind-down. With a target size of between EUR200 million to EUR500 million at launch, the fund may consider a listing on a stock exchange after the initial capital is deployed.Jeremy Beswick, Head of Asset Management, EIIB, announced that: "The launch of this fund is a significant milestone in the development of EIIB, representing an example of EIIB's intention to offer sophisticated and differentiated products to the Islamic investments marketplace. We believe there will be significant investor interest in this fund, which will deliver to investors a diversifed commercial property portfolio including exposure to the rapidly-developing markets in Central and Eastern Europe."The launch is part of the roll-out of EIIB's own Sharia compliant investment fund range, covering the real estate, hedge fund and private equity asset classes, and including capital-protected structured products.EIIB is also developing a number of derivative and asset securitisation products, and expects further new issue mandates in the coming months. EIIB will also partner with other financial institutions, both Islamic and conventional, to create bespoke Sharia-compliant investment products according to demand.

Bursa Malaysia Berhad, the Malaysian Stock Exchange, in collaboration with FTSE Group, the global index provider, launched the FTSE Bursa Malaysia EMAS Shari'ah index, designed to provide investors with a broad benchmark for Shari'ah-compliant investment for the Malaysian market. The index takes the constituents of the FTSE Bursa Malaysia EMAS Index, which has been free float weighted and liquidity screened, and overlays the Securities Commission’s Shariah Advisory Council’s (SAC) screening methodology to derive a highly investable and transparent Shari'ah-compliant index.The new index will run parallel with the existing Shari'ah index (KLSI) for nine months. The KLSI will be deactivated on 1 November 2007, making the FTSE-Bursa Malaysia EMAS Shari'ah Index the singular benchmark index for Malaysian Shari'ah-compliant investments. Bursa Malaysia’s Chief Executive Officer, Dato’ Yusli Mohamed Yusoff said: “The new index provides investors with a clearer picture of quality Shari'ah investments in the Malaysian market. It uses globally-adjusted criteria that make it easier for institutional investors to track our Shari'ah-compliant investment offerings more effectively. This is critical to ensure our Shari'ah market continues maintaining its competitiveness with other international Shari'ah investment destinations.”He added that the new index also represents a first step towards the creation of more Islamic products. “With the new FTSE Bursa Malaysia EMAS Shari'ah Index, we can now work on creating a tradable Shari'ah index which in turn allows us to introduce Islamic structured products.”

In November, 2006, Walkers, an offshore law firm, reported that their Dubai office had seen an increase in the use of sukuk, Shari'ah-compliant bonds, with the Cayman Islands emerging as one of the world's most favoured domiciles for the vehicles. "While the sukuk market is still very small compared to the conventional debt market, there is enormous potential for growth from both local investors and international markets," stated Robert Varley, a partner in Walkers' Dubai office. "As local institutions in the Middle East partner with conventional Western banks to issue these types of bonds with increasing frequency, it is certain that banks outside the region are watching the sukuk market with great interest," he added. "Recently Dubai Civil Aviation announced that it would raise roughly US$1.6 billion through sukuk to fund the first phase of the new Jebel Ali International Airport. Almost every day we see a new deal being developed," he added. "Offerings are hugely oversubscribed. The recent listing of Cayman Islands-issued sukuk on both the London Stock Exchange and the Dubai International Financial Exchange will only strengthen that demand," he concluded.Sukuk that are developed and marketed in the Middle East predominantly use Cayman-domiciled issuers over other jurisdictions because of its established trusts law regime, lower costs, relatively fast turnaround, and flexibility in structuring. The Cayman Islands' strong reputation in the world of global finance can also make listing and rating Cayman-issued bonds much easier compared to bonds issued from other jurisdictions.Meanwhile, new regulations introduced by the Dubai Capital Markets Authority and the launching of the Dow Jones Citigroup Sukuk Index earlier this year are helping to fill a number of gaps in the Islamic market, says Walkers. General business and acquisition finance, project finance, and securitizations have all been funded with sukuk.

In February, 2007, Deutsche Bank published a White Paper outlining an investment structure that facilitates the issuance of Sharia compliant securities that offer investors access to alternative asset classes.Deutsche Bank said it had made public its procedures both in the interests of transparency and in an attempt to help alleviate some of the 'supply side' constraints that exist in Islamic financial markets. These constraints are mainly related to capacity - in respect of the number of qualified bankers involved and their Islamic structuring capabilities. In addressing these issues, the market will be more able to develop in line with customer demand.Geert Bossuyt, Managing Director, Regional Head of ME Structuring, Deutsche Bank, commented: "We are confident that the structure will eventually be viewed as a significant milestone in the development of the Islamic finance industry as it provides Islamic investors with exposure, in a liquid and cost-efficient way, to new asset classes and pay-outs, removing one of the main structuring barriers. The structure itself is the result of close co-operation between academics, bankers and, of course, scholars."Too often, 'innovation' is achieved by pushing the barriers and/or misusing fatawa by taking them out of their context. Innovation ideally should be the result of a well documented and fundamental discussion on Sharia. Deutsche Bank wishes to encourage the use of academic resources to assist the industry in developing new products as this has not been a feature of the industry to date.Bossuyt concluded: "We believe that those institutions with the vision, creativity, innovation, courage and commitment to develop the Islamic financial markets will be recognised for their hard work and ideas. Sharia itself has inherent flexibility and fewer constraints than is often assumed by the financial services industry. Fundamental research is the key to unlocking this inherent flexibility, thereby allowing this market to grow to its full potential."

London's Growing Dominance

Already in 2005, the UK's RICS (the Royal Institution of Chartered Surveyors) was able to publish a report saying that London had become a major centre for Islamic banking and investment.

Based on research commissioned by international property consultants, King Sturge, the report said that London was securing its position as a major centre for Islamic banking and investment due to the availability of relevant expertise and a flexible, well developed regulatory environment.

The report detailed how Middle Eastern investment in European real estate reached £827m in 2001, an increase of 225% on the previous year. 90% of investors cited the UK as their favoured location for Shari'ah funds because of its political environment, legal and institutional frameworks, human capital and expertise. London’s wide range of skills in particular puts its commercial property industry in the strongest position to take advantage of the growth in Shari'ah compliant real estate investment.

Like “ethical funds”, Islamic investment funds require careful portfolio and stock selection to ensure compliance with Shariah law. Shariah property investment funds also prohibit renting properties to organisations engaging in business relating to pornography, gambling, arms, pork, tobacco, cinema and alcohol consumption.

The commercial and industrial property sectors are reported as the most popular investment by Shariah funds, with three quarters of respondents already investing in industrial property. A growing trend is the market’s move into property investments in leisure and care for the elderly which are compatible with Shariah principles and somewhat reflective of developments in other ethical funds.

According to Angus McIntosh, Partner & Head of Research at King Sturge international property consultants: ‘UK business is now familiar with ethical funds but there is a real need to find out more about the growing opportunities for Shari'ah compliant real estate investment and the nature of the market as this area represents a crucial opportunity for many UK businesses.’
The most important factor considered by Shari'ah compliant funds when buying and selling property was tax status (cited by 65% of respondents), followed by the availability of specialist expertise (61%), the regulation of investment and risk assessment regulation (both 47%) and the transparency of transactions (41%).

According to Ali Parsa, author of the report, and director of research at London South Bank University’s Property Surveying and Construction department: ‘The research indicates the likelihood of a substantial increase in the funds available for Shari'ah investment as a result of growing wealth in Muslim countries and communities, and that most of the new investments will be through some form of Shari'ah compliant funds.’

UK-based HSBC has launched a number of Shariah-compliant products through its Amanah Finance division. The bank is also seeking to establish a firm foothold in the US market, offering Islamic banking services through 300 branches in the New York area. Other institutions, such as the UK’s Lloyds TSB and the US-based bank Citigroup, have also stepped into the market.
However, new ground was broken in 2004 with the launch of the Islamic Bank of Britain, the first in the UK to concentrate solely on offering Shariah-compliant banking services to the country’s 1.7 million Muslims (although it must be pointed out that one doesn’t necessarily have to be of the Muslim faith to take up Islamic banking services). Its product offerings include mortgages, current accounts, savings accounts and personal finance. The bank is also planning to launch its own credit card.

Brown's 2007 budget introduces two key measures to encourage growth in Islamic finance, namely a new regime for sukuk (Islamic securitisations) giving comparable tax treatment to conventional securitisations, and guidance clarifying the treatment of diminishing musharaka (partnership share) and takaful (insurance) products.

Commenting on the move, Darshan Bijur, Director, KPMG Islamic Finance Advisory, said this new legislation has created the framework for London to emerge as undisputed global leader in the Islamic finance industry.

“Sukuk will be the equivalent of Eurobonds, and the likely exponential growth in UK Sukuk issuance will ensure that Islamic finance moves from niche to the mainstream," he observed. “It will cost the UK next to nothing, and opens up the way for UK companies to access Islamic finance, and the Middle East wealth that has been generated by oil."

Peter Muir, tax partner at Deloitte, says that the Chancellor should be applauded for his reforms, which will benefit both the Muslim and non-Muslim investment communities.
"The UK is the only country which is changing legislation to create a level playing field for both individuals and companies investing in Islamic finance products," he noted. "Reform of sukuk (Islamic bonds) is the latest addition to the suite of specific legislation that gives certainty to the taxation of Islamic financial products. Before this reform was introduced, there was ambiguity around how capital gains tax, income tax and capital allowances would apply to these products."
Muir added: “Gordon Brown seems to have taken a personal interest in ensuring Islamic products are brought into a level playing field. This is intended to meet the financial needs of the Muslim community as well as, increasingly, non-Muslim investors in these products."
"From a capital markets perspective, the reforms are a boost to the City of London, improving its global competitiveness in the Islamic finance market. Notably, the measures reach out to a potentially much wider group of international exchanges who can be given tax recognition in the UK in relation to ‘sukuk’ bonds.”

Mohammed Amin, tax partner, PricewaterhouseCoopers, said that Sukuk have become increasingly important in the Muslim world, as companies prefer to obtain finance directly from international investors.

"While London-based lawyers and bankers regularly structure and market sukuk for companies from Muslim countries, until today tax uncertainties have precluded them being issued from the UK," he stated. “The changes announced should enable the City of London to become the global centre for international sukuk issuance and trading, in the same way as it dominates the eurobond market. There should also be scope for mainstream UK companies to issue sukuk to both Islamic and conventional investors.”

Under Shariah law certain investment practices commonplace in the world of conventional finance are prohibited, the charging of interest a notable example. This is because Shariah law dictates that risk in trade and business should be shared and the accumulation of wealth through "effortless" profit is frowned upon. Islamic finance doctrine also states that investment in certain business activities deemed unethical are forbidden, such as those involving the selling of alcohol, tobacco, pornography, armaments and gambling services.

The Role Of Offshore Jurisdictions

Offshore jurisdictions have played a major role in the development of Islamic finance markets, particularly Labuan and Dubai.

Kuwait Finance House, a leading Islamic banking group, announced in December, 2005, its intention to break into the South East Asian market through a new base in Labuan, which it hopes will come on stream in 2006.

Jamelah Jamaluddin, deputy chief executive of Kuwait Finance House in Malaysia, said that the group sees potentially lucrative investment opportunities in real estate, infrastructure assets and power plants within the region.

"We want to position Malaysia as a regional hub for KFH in this part of the world which includes Thailand, Singapore, the Philippines, to a certain extent China and India, and maybe Australia and New Zealand," Jamelah stated, adding that KFH is also attempting to make inroads into the Indonesian market.

KFH's Malaysian operation will initially focus on investment banking, and will later branch out into commercial and retail banking, providing consumer credit products such as mortgages, car financing, credit cards and insurance.

Kuwait Finance House was incorporated in the State of Kuwait in 1977, and is listed on the Kuwait Stock Exchange with a market capitalization of US$1.95 billion as of 31 December 2001. The Government of Kuwait owns 49% of the equity, and the general public holds the remaining shares.

AMBB Capital (L) Ltd, a wholly owned subsidiary of AmBank (M) Berhad, Malaysia's sixth largest bank with total assets of $13.7 billion, said in July, 2005, that it would list $200 million in Hybrid Securities on the Labaun International Financial Exchange (LFX).

The bank announced that it had completed the book building process in relation to the issue of the 'Fixed-to-floating Rate Step-up Non-cumulative Non-voting Guaranteed Preference Shares,' or Hybrid Shares, with AmMerchant Bank Berhad, BNP Paribas and Credit Suisse having been appointed by AmBank as the joint lead managers and joint bookrunners.
The Hybrid Securities are guaranteed on a subordinated basis by AmBank and will be listed on the LFX and the Singapore Exchange. They are open to international institutional investors.
The initial book size was set at $150.0 million, but was twice oversubscribed, leading to its increase to $200 million.

"The Hybrid Securities issued by AMBB Capital has garnered strong demand from international investors and the attractive pricing for the Hybrid Securities demonstrates international investors' confidence in AmBank's Business model," commented Mr Cheah Tek Kuang, Chief Executive Officer of AmBank.

The LFX is an offshore exchange wholly owned by the Kuala Lumpur Stock Exchange (KLSE). It was officially launched in November 2000 and it is seen as one of the key components in promoting Labuan as an offshore financial centre.

In August 2005, the total market capitalisation of Labuan International Financial Exchange (LFX) had reached $12.09 billion, and the exchange accepted its 34th listing with the debut of Eucalyptus Investment Holdings Limited's $30 million variable rate guaranteed secured bonds.
AmBank, with total assets of RM51.6 billion ($13.7 billion) as at 30 September 2005, is the sixth-largest Malaysian bank by assets with over 170 branches nationwide.

Emirates Islamic Bank said in July, 2005, that it had launched a new real estate investment fund which will investment in property along the principles of Shariah law.

The new fund, which is registered in Jersey and managed by Belgravia Asset Management, will investment mainly in property based in the United Arab Emirates.

The fund is open to both institutional and individual investors with a minimum investment of US$100,000. Minimum top-up investments are set at US$25,000. In addition to capital growth, the fund will target an income distribution of 7% per year, which will be paid on a bi-annual basis.

“The UEA has been one of the market leaders for property development and innovation in the region," commented Mr Ebrahim Fayez Al Shamasi, CEO of Emirites Islamic Bank.
"The success of residential and commercial developments over the last three years has proved the increasing popularity of this asset class amongst investors in the Middle East," he added.
A substantial market is developing in both sovereign and corporate sukuks and some US$30 billion worth of certificates have been issued to date. Although the market is still in its infancy, on the sovereign front, sukuks are beginning to attract the attention of non-Muslim issuers and investors.

International law firm, Walkers announced in January, 2006, that it had opened the first fully transactional office for an offshore law firm in the Dubai International Finance Centre (DIFC). The office is staffed jointly with a combination of regional lawyers and leading attorneys from London who specialize in Islamic finance and Middle Eastern issues.

"As the formation of investment funds, private equity funds, and Sukuks – a type of Islamic bond – continues to soar, the need to provide global counsel has grown too," the firm explained in a statement.

"Walkers recognizes that having counsel in Dubai doing the transactional work in the same time zone and same culture is vitally important to getting the job done. Walkers’ expertise in investment funds, structured finance, and international insolvency matters coupled with a presence in the Cayman Islands, London, the British Virgin Islands, Hong Kong and now Dubai, means that the firm can offer worldwide clients an even broader range of products and services," Walkers added.

According to a survey by McKinsey & Company, more than 75 percent of the top 30 global asset managers are now active in Dubai. The MAN Group plc, a leading hedge fund group that has operated in the Gulf Cooperation Council region (GCC) for more than 20 years and was part of the McKinsey survey, reported an upswing of institutional investments in hedge funds.

"Also driving the need for greater offshore legal expertise in Dubai are the international entities who invest in the GCC region through British Virgin Islands companies and regional investment in United Kingdom commercial real estate,” observed Mr Palmer.

“With Walkers’ strong presence and experience in those jurisdictions, we can now provide a complete suite of offshore legal service to our clients in Dubai," he added.

The Dubai International Finance Centre (DIFC), a financial free zone that promotes economic development in the United Arab Emirates (UAE), has a strong regulatory framework based on best practices of the world’s leading financial centres.

Companies in Dubai recognize multiple benefits from the jurisdiction, including zero tax on income and profits, 100 percent foreign ownership, no restrictions on foreign exchange or capital/profit repatriation, operational support, and business continuity facilities.

In March, 2007, Dubai Islamic Bank listed a $750 million Sukuk on the Dubai International Financial Exchange (DIFX) after selling the Islamic securities to investors in the Europe, Asia and Middle East, cementing the DIFX's position as the leading exchange for the listing of these Islamic instruments.

The Sukuk was the first ever issued by the bank, which specialises exclusively in Islamic financial services.

Saad Abdul Razak, group Chief Executive Officer of Dubai Islamic Bank announced that: “The DIFX is a perfect venue to list our first Sukuk. It is established as the largest exchange in the world for Sukuk and its international stature gives our listing high visibility in the marketplace, both in the region and globally.”

Per E. Larsson, Chief Executive of the DIFX, added: “This listing by a prominent Islamic financial institution reinforces the central role played by the DIFX in the growth of Sukuk as an attractive asset class. It raises the value of Sukuk on the DIFX to $8.38 billion, which is more than the value on any other exchange.”

Forty-five per cent of the Sukuk issue was placed with investors in the Middle East, 30% in Europe and the balance was placed in Asia.

The Sukuk was issued by DIB Sukuk Company Limited, a company incorporated in accordance with the laws of, and formed and registered in, the Cayman Islands. The Sukuk issue is rated A1 by Moody's and A by Standard and Poor's. The lead managers and bookrunners for the issue were Barclays Capital, Citigroup and Standard Chartered Bank.

Hamed Ali, Executive Officer of the DIFX, noted: “The DIFX intends to strengthen its focus on Sukuk. The total value of Sukuk issued globally in 2006 was $27.1 billion, more than twice as much as in 2005, as issuers turn increasingly to this Islamic asset class as an effective way to raise capital.”

Also in March, the Dubai Financial Services Authority (DFSA) entered into a mutual recognition agreement to facilitate cross border distribution of Islamic investment products with the Securities Commission of Malaysia (SC).

The agreement was signed by Dato’ Zarinah Anwar, Chairman of the SC, and David Knott, Chief Executive of the DFSA at a ceremony in Kuala Lumpur, witnessed by the Second Finance Minister of Malaysia, Yang Berhormat Tan Sri Nor Mohamed Yakcop.

David Knott announced that: "The DFSA is delighted that, as a result of this joint initiative, DIFC domestic Funds will be the first foreign funds permitted to be sold into Malaysia. This arrangement is a positive step for both jurisdictions, and is intended to facilitate the cross border flow of Islamic capital market products, as envisaged when this initiative was first announced in August 2006.”

“The DFSA is committed to assisting both the Dubai International Financial Centre (DIFC) and the Dubai International Financial Exchange (DIFX) in their objective to promote innovation and growth of Islamic capital markets in the Middle East,” he added.

This is the first mutual recognition agreement entered into by both regulators, and is a significant milestone for both the SC and the DFSA in the area of cross-border regulation of Islamic investment funds, and the development of deeper and broader investment markets. Under the mutual recognition framework, Islamic funds that have been approved by the SC may be marketed and distributed in the DIFC with minimal regulatory intervention, following the inclusion of Malaysia on the DFSA’s list of Recognised Jurisdictions. Similarly, Islamic funds which have been registered or notified with the DFSA will be able to access Malaysian investors. Supported by a bilateral memorandum of understanding, both regulators will work closely in the areas of supervision and enforcement of securities laws to ensure adequate protection for investors.

This follows an earlier announcement, on 15 August 2006, of a joint initiative on regulatory alignment to facilitate Islamic finance transactions between the DIFC and Malaysia, which is now complete. The agreement today marks a significant liberalisation effort on the part of the SC and DFSA to encourage the bilateral flow of Islamic funds between the two jurisdictions.
Dato’ Zarinah said: “By entering into a mutual recognition arrangement with the DFSA, it demonstrates our mutual intention to accelerate the growth of our respective investment management industries through the trading in each other’s markets of mutually recognised investment products that are acceptable to both authorities. The mutual recognition framework will provide many benefits to market participants including lower regulatory cost as well as an enlarged investor base. It will also provide investors in each jurisdiction with greater choice of Islamic investment products. This arrangement with the DFSA is also in line with the Malaysia’s aspiration to evolve its role as an international Islamic financial centre."

In parallel with Dubai's distribution role, the Cayman Islands have emerged as the jurisdiction of choice for the listing of Islamic financial products.

The introduction of a new Arabic language facility by the General Registry in Cayman in March 2007 will trigger more valuable business from the Islamic region, according to international law firm, Ogier.

Ogier partner Gray Smith, who practices Cayman law from London, observed this week that the move demonstrated Cayman’s recognition of the Middle East as an important area for new business.

“We can now use both Arabic and English names on all documents when setting up a company and can also open bank accounts in both names. Previously we had to use only an English translation. The same ethos was applied to Chinese characters a few years ago and that was of huge benefit in Hong Kong, where both English and Chinese are used widely,” he explained .
Mr Smith went on to add that Cayman law particularly lent itself to Islamic finance structures because of its flexibility. It has become a centre for “sukuks” – bond issues that are Shari’ah compliant, prohibit interest payments and require tangible assets or equity as collateral.
“It’s straightforward, the processes are relatively easy and it’s very flexible, allowing for the drafting of articles and agreements that comply with the restrictions of Islamic law. Cayman is also a lighter regulation jurisdiction and a widely recognised international finance centre which suits Middle East companies looking for investments,” he revealed.

The Ogier partner also predicted further inflows of money into the Middle East as clients are increasingly marketing their funds outside the region.

“The inflow to Middle East funds is a new growth area. Furthermore, the establishment of the Dubai Finance Centre will enable the listing of Cayman funds on the Dubai Stock Exchange and dual listing, in Cayman and the Middle East or the Middle East and the UK,” he stated.

Islamic Insurance

The world of insurance, which by its very nature runs counter to Shari'ah principles because its profits are derived through effectively gambling on uncertain outcomes, was an area that until recently Islamic investors either had to tolerate or abstain from altogether. However, this problem has been overcome with the development of the takaful insurance industry. Using the Islamic principle of Ta'awun, or mutual responsibility, the takaful industry rests on the same foundations of profit and risk sharing as other areas of Islamic finance. On a basic level, it provides mutual protection of assets and property in the event of loss or damage based upon joint risk sharing.

Takaful Re Limited, an Islamic insurance company, was licensed by Dubai Financial Services Authority (DFSA) in January, 2006, to operate from the Dubai International Financial Centre (DIFC).

Takaful Re is dedicated to offer Shari’ah compliant reinsurance and related services to the growing Takaful & Islamic insurance markets. Takaful Re will offer reinsurance capacity in all major lines of property, marine and family Retakaful business.

Because profits in the conventional insurance industry are effectively derived through gambling on uncertain outcomes the world of insurance has been largely off limits to those wishing to invest along Shari'ah principles. However, this problem has been overcome with the development of the takaful insurance industry.

Using the Islamic principle of Ta'awun, or mutual responsibility, the takaful industry rests on the same ideal of profit and risk sharing as other areas of Islamic finance. On a basic level, it provides mutual protection of assets and property in the event of loss or damage based upon joint risk sharing.

With an authorised capital of US$500 million and paid-up capital of US$125 million, Takaful Re has plans to focus on retakaful business in the Middle East, North Africa and other Islamic countries.

“This is a significant announcement for DIFC, especially when we already have some major international insurance companies located here," commented Dr. Omar Bin Sulaiman, Director General of the DIFC Authority.

”The DIFC is committed to actively promoting the growth and development of the Islamic insurance industry in accordance with Shari'ah principles. The Takaful market is one of the fastest growing in the world. It is expected to grow at nearly 20 per cent per annum to reach US$7.4 billion in global annual premiums in 15 years. Firms domiciled in the DIFC will complement the regional market and help it grow. By providing the ideal environment, both in terms of regulations and infrastructure, the DIFC aims to maximise this potential," Dr. Omar Bin Sulaiman added.

Meanwhile, Mr. Khalid Ali Al Bustani, Takaful Re Chairman, commented that: “We are pleased to associate ourselves with the DIFC which is renowned internationally. For Takaful Re, to be in the DIFC is a commitment for integrity, transparency and efficiency."

Regulation Of Islamic Finance

Regulation and interpretation of Shari'ah law are two key issues in the Islamic finance industry. Before an institution can offer such products to the public, they must first be scrutinised and approved by a panel of Islamic scholars. However, this is by no means a clear cut issue, and the opinions of individual scholars can vary. Indeed, there are many academics in the Muslim world who have been quite critical of contemporary Islamic finance culture, and who have taken issue with certain forms of financing, notably Murabha and Ijara contracts which, it has been argued, are too similar to conventional forms of financing, and which do nothing to share risk and profit, the central tenet of Islamic capitalism.

To ensure a degree of quality control over the Islamic finance industry, regulating institutions, such as the Malaysian-based Islamic Financial Services Board (IFSB), have been set up to police the emerging industry. The IFSB serves as an international standard setting body of regulatory and supervisory agencies and its core mission is to guard the integrity and stability of the Islamic financial services industry across the spectrum of banking, capital markets and insurance. The board also provides guidance for institutions offering Islamic investment products and liaises with other rule-making bodies in the industry.

Whilst modern Islamic finance may not be as pure as some scholars and academics would like, the development of financial products to cover the whole gamut of the finance and investment industry, and the creation of the regulating institutions to oversee them, is evidence that the industry in its current form is likely to be here to stay. And the fact that the new industry has really only scratched the surface of potential demand for Shariah compliant and more ethically aware capitalism means that the Islamic banking and finance is likely to continue growing apace for some years to come.

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