Rise of Islamic finance
By Syed Imad-ud-Din Asad
ISLAMIC finance signifies financial services, mechanisms,
practices, transactions, and instruments that comply with the
provisions given in the fundamental Islamic texts.
Thus, Islamic finance not only includes banking, but also capital
formation, capital markets and all types of financial intermediation.
While there are similarities between Islamic and western financial
systems, certain norms and transactions are exclusive to Islam. In
fact, some Islamic financial restrictions are severe enough to render
certain western financial practices and transactions absolutely void.
For instance, transactions involving riba (interest and usury) and
gharar (uncertainty and excessive risk) are prohibited.
Over the years, Islamic finance has not only increased in size, but has
also grown complex as finance professionals compete furiously to
produce new sharia-compliant transactions and instruments. This
innovation is most visible in the world of sukuk. Generally referred to
as Islamic bond, sukuk signifies, speaking more accurately, an
investment certificate.
The Accounting and Auditing Organization for Islamic Finance
Institutions (AAOIFI) defines sukuk as certificates of equal value put
to use as common shares and rights in tangible assets, usufructs, and
services or as equity in a project or investment activity. AAOIFI sets
sukuk apart from equity, notes, and bonds. It is made clear that sukuk
are not debts of the issuer; they are interests in underlying assets or
investment activities.
Sukuk can be classified as (1) those that offer predetermined returns,
and (2) those that offer sharing of profit and, in certain cases, loss.
“Sukuk al-ijara” belongs to the first category; “sukuk al-mudaraba” and
“sukuk al-musharaka” fall in the second category. Of course, there are
other sukuk structures as well. All structures employ techniques that
are well developed in conventional markets for structured finance, and
have become a significant mechanism for raising finance in the
international markets by institutions, corporations, and sovereign and
state entities.
The market for sukuk has grown tremendously in recent years (from less
than $8 billion in 2003 to $50 billion by mid-2007) as sukuk provides
issuers with access to the huge and growing Islamic liquidity pool, in
addition to the conventional investor base. In 2006, banks — including
UBS, ABN Amro, Barclays, Deutsche Bank, and Societe Generale —
underwrote 190 sukuk issues, raising more than $27 billion.
Though Malaysia and the GCC countries are the centres for sukuk
issuance, its issuance is not limited to Muslim countries: there is a
growing number of issuers based in the United States, Europe, and other
parts of Asia. For instance, in June 2006, the US saw the issuance of
its first sukuk in Texas by Houston-based oil and gas concern East
Cameron Partners, which raised $166 million.
Sukuk are offered in specialised exchanges such as the Labuan Exchange
in Malaysia, the Third market in Vienna, and the Dubai International
Finance Exchange. They are assessed and rated by international rating
agencies, and are mostly issued in US dollars. However, this issuance
in US dollars means currency risk for all non-dollar investors.
It must be mentioned that not all sukuk structures are beyond
controversy. It is an unfortunate fact that, at times, in order to
create an Islamic product, finance professionals blithely re-engineer a
conventional one and then sprinkle it with Arabic names and
terminology. To an ordinary investor, Arabic alone is often enough to
prove the Islamic nature of the instrument or transaction. In fact,
last year, a prominent Muslim scholar openly questioned the Islamic
credentials of sukuk structures and claimed that most of them were in
violation of Islamic law. He particularly referred to mudaraba sukuk
and musharaka sukuk.
Interestingly, as reported by The Financial Times, people are already
trying to revive the sukuk structures declared unacceptable by the
scholar. Financial engineers are reworking the mudaraba and musharaka
structures in an effort to make the once-popular instruments satisfy
the requirements of Muslim clerics and customers alike. The sukuk
market is already turning the corner, with banks such as Credit Suisse
reporting promising developments.
In fact, the sukuk markets are expected to grow further as there are
over $1,000 billion worth of infrastructure projects planned in the
Gulf over the next decade and majority of these projects will be
seeking sharia-compliant funding.The future of Islamic finance, in
general, and sukuk, in particular, does not look gloomy — at least, as
long as the Arab oil money is around. However, Muslims need to be
careful while devising new products. They need to make sure that
Islamic principles are properly observed and that they don’t present an
un-Islamic idea as Islamic just because there is more profit in it. It
is a fact that Islamic financial products generally pay fewer returns
than their western counterparts and, consequently, western investors
are less inclined towards putting their funds in sharia-compliant
schemes. But Islamic finance is mainly for Muslims. There is no need to
compromise the standards just to make things more acceptable to the
western markets.
Fallout of Kabul blast
By Rustam Shah Mohmand
THE July 7 blast in Kabul, which left behind a trail of
devastation, will scar the political landscape of the region. The
attack targeted the Indian embassy compound in the heart of Kabul city
and was carried out by a speeding vehicle loaded with explosives. It
was a suicide attack, a phenomenon now all too familiar to people on
both sides of the Durand Line.
The Afghan government lost no time in accusing Pakistani intelligence
agencies of masterminding the attack. More than 40 people including
India’s military attaché and a political counsellor were killed and
more than 140 wounded, some of them seriously, in the deadliest attack
in the city since the fall of the Taliban.
The security cordon around Kabul city is as effective as it can be
under the circumstances. How could a vehicle carrying explosives in
such a huge quantity penetrate the defences of the Afghan capital and
slip through the many check-posts in the centre of the city? The
tragedy underlines a serious security lapse and raises questions about
the role and capacity of the Afghan intelligence agencies that are
funded so generously by foreign donors.
The blast has exposed the fragile administrative structure that has
been in place in the country for some time now. The breakdown of
institutions remains one of the biggest impediments to good governance
in matters of security, law and order, intelligence gathering, economic
uplift programmes, reconstruction, etc. In the absence of adequately
trained and sufficiently motivated civil servants, it remains a
gigantic task to put in place viable institutional mechanisms that
could deliver on vital fronts such as the collection of timely
intelligence — a failure that we share with the Afghans.
The allegation of Pakistani involvement, although a routine diatribe,
is wholly inconsistent with the ground realities. Firstly, why should
Pakistan choose to be a party to an incident for which it would
inevitably be blamed by the Afghans? What would Pakistan gain as a
result of such a dastardly attack? Thirdly, the United States wields
enormous influence in both Afghanistan and Pakistan. How could Pakistan
encourage such an act which runs totally contrary to US policy?
If anyone really believes that such an attack will damage India’s ties
with Afghanistan, he is living in a fool’s paradise. Such incidents
help cement relations still further.
For Pakistan the attack would have been an act of double jeopardy.
Accusing fingers would be pointed at Islamabad, furthering the trust
deficit between Pakistan and Afghanistan. At the same time, it would
cast a shadow on the composite dialogue between Islamabad and New Delhi.
The most recent development in the context of the insurgency in
Afghanistan is that a growing number of Tajiks, Uzbeks and Turkmen are
joining the Taliban movement. It is possible that some of these new
entrants to the insurgency may be involved in the attack. Taking
advantage of their non-Pakhtun identity, they may have organised the
logistics for the blast.
There are also strong groups within the Afghan government that have
serious differences with the president on many issues, mostly personal.
They too could have engineered the attack. Such is the scale of their
anger and acrimony that it would not be illogical to assume that such
elements indeed had a hand in the blast.
Pakistani policymakers and diplomats are confronted with a huge
damage-control challenge. Islamabad must firmly see out this very
difficult phase in its relations with Kabul as well as Delhi. In doing
so, it should not place total reliance on official contacts. Once the
spadework has been done and the dust has settled, Pakistan should seek
to promote people-to-people contacts as a means of a sustainable and
constructive engagement with its two vital neighbours.
The writer is a former ambassador to Afghanistan.
ABDUL WAHID OSMAN BELAL
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