ifp may 2013

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Islamic FinancePakistanIslamic Finance IndustryNewsletter

Volume 4, Issue 4, May 2013

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EditorialIslamic finance and its laws are being derived from Shariah laws where its

regulations are being deduced from Quran and Hadith. When the word

Islamic finance appears to our mind, we are somehow confused with manyproducts such as Modaraba, Musharaka, and Ijarah etc.

Understanding these products is way out of the league for a common man

to comprehend because the diversification of the products at high level is

too much complicated, and people may not be able to understand even a

word.

Since last decade what we have simply comprehended is that Islamic

finance has come on mainstream from niche market to the main profit

business.

According to AT Kearney reports on Islamic finance, which has somehow

elaborated that Islamic finance today is on its rise with around 21% of

growth. However, unfortunately, the employees within an organization

who are related to Islamic finance industry has a weak or very little

knowledge of Islamic finance and its products.

Similarly, this is more prominent in Islamic Banking on occasions where a

customer needs more explanation on the Shariah compliant product's

structure and functionality. The problem still exists due to fact that

employers of the Islamic finance industry don't polish and enhance the

required skills of their staff regularly.

So from this we can easily elaborate and conclude that Islamic finance is

basically a puzzle of profits, which only requires ample of time to

understand its product structure with a dedicated team in place.

Happy Reading!

Advisory Board

Mufti Irshad Ahmed Aijaz

Mufti Najeeb Khan

Anwar Ahmed Meenai

Mohammad Aslam

Mujeeb Baig

Faizan Memon

Syed Abdul Rafay Ather

Associate Editors

Shakil Khan

Muhammad Shahzad Hussain

Arshad Hussain Zubairi

Rima Farooq

Editor-in-Chief

Nusrat Ullah Khan

Ayat of Month:

And among men there is one whoworships Allah (standing) on the verge: so

if some good thing happens to him, he is

satisfied with it, and if a trial befalls him,

he turns his face back. He loses both this

world and the Hereafter. That is the

manifest loss.

[AlHajj: 11]

Hadith of Month:Narrated 'Umar bin Al-Khattab: Allah's

Apostle said, "The bartering of gold for

silver is Riba (usury), except if it is from

hand to hand and equal in amount, and

wheat grain for wheat grain is usury

except if it is form hand to hand and equal

in amount, and dates for dates is usury

except if it is from hand to hand and equal

in amount, and barley for barley is usury

except if it is from hand to hand and equal

in amount."

[Sahih al-Bukhari, Volume 3, Book 34,

Number 344:]

IFP is an initiative of IFP Forum and Hidaya Islamic Business Support Services (IBSS)

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News Story

Shariah Standard on Shirkat-ul-Milk and Diminishing Musharaka

State Bank of Pakistan is actively promoting and developing Islamic Banking industry in Pakistan as a parallel system and

this sector has so far witnessed remarkable growth and increased recognition amongst the stakeholders. In order to

guarantee effective Shariah compliance in the Islamic Banking industry and maintain trust of the stakeholders, a proper

Shariah compliance mechanism has been put in place by SBP.

Recently compliance with certain paragraphs of Shariah Standard No. 12 of Accounting and Auditing Organization for

Islamic Financial Institutions (AAOIFI) on Shirkat-ul-Milk and Diminishing Musharaka were made mandatory by State

Bank of Pakistan with effect from June 2013 issued in their circular no. 2 of 2013. It should be noted that the compliance

with Shariah Standard is in addition to the prudential regulations and guidelines issued by the Islamic Banking Division of

State Bank of Pakistan. The idea behind this is the harmonization of Shariah practices across the board. Moreover, from

June onwards the non-compliance with any of these requirements may result in a penalty to Islamic Financial

Institutions (IFI).

Diminishing Musharaka is amongst those products which is frequently offered by Islamic Banks and have a high market

share, requiring a framework to enhance its acceptability and uniformity. Diminishing Musharaka is a form of co-

ownership in which two or more persons share the ownership of a tangible asset in an agreed proportion and one of the

co-owners undertakes to buy in periodic installments the proportionate share of the other co-owner until the title to

such tangible asset is completely transferred to the purchasing co-owner. The purchasing co-owner also pays monthly

rentals to the other co-owner against his proportionate share in the asset. Diminishing Musharaka can be created only

in tangible assets. Diminishing Musharaka shall be limited to the specified asset (s) and not to the whole enterprise or

business.

Joint owners in diminishing Musharaka may agree on a premature withdrawal of their share by way of gift or sale to a

third party. The disposal may be at either the face value, market value or agreed value. A withdrawal by one of the joint

owners may not lead to the termination of diminishing Musharaka between the remaining joint owners.

Basic Structure of Diminishing Musharaka

Process flow or basic structure of DM may be as follows:

The customer approaches the Bank with the request for financing of an asset;

The Bank enters into a Musharaka (Joint Ownership) agreement with the customer and both of them pay

their respective shares to the seller of the asset;

Client pays rentals to the Bank for Banks share as per ratio of ownership;

Client promises to purchase Banks share (units) over the tenure of transaction with the help of

Undertaking to Purchase; and

Ownership of the asset is gradually transferred to the customer upon payment of asset price (with the help

of a sale transaction between Bank and customer at the end of each period).

As a Mode of Fixed Asset Financing

Diminishing Musharaka is commonly used by various Islamic banks for the purpose of financing of following:

House financing;

Car Financing;

Plant and machinery financing; and

All other fixed assets.

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Significance of Musharaka in Islamic financeCompiled by Muhammad Usman Uppal

The history of Musharaka dates back to 1500 AD where Arabs use to practice this financial structure. The meaning ofMusharaka is a joint ownership of two or more persons in a particular asset or property with or without common

intention to engage in business with respect to such asset or property. The term Musharaka used in our contemporary

books was derived from Shirkat, found in old literature.

Musharaka means relationship established under a contract by the mutual consent of the parities for sharing of profits

and losses arising from a joint enterprise or venture. Profits shall be distributed in the proportion mutually agreed in

the contract, but loss will always be borne according to the ratio of investment. Musharaka with commercial intent is

known as Shirkat-ul-Aqd while without this intent is called Shirkat-ul-Milk.

Key Principles Underlying Profit Determination of Musharaka

Rules for Profit Determination

Profit will be agreed according to percentage and not in lump sum.

Agreed percentage must be a percentage of profit and not of capital.

The profit can be distributed at any ratio agreed with mutual consent.

Ratio of profit may differ from ratio of capital / investment.

The ratio of profit of the sleeping partner should never be more than the ratio of his investment.

Loss will be suffered according to the ratio of investment.

No guarantee can be given by the partners for the payment of profit or capital.

Third party can guarantee the profit or capital subject to:

Third party has no relation with the business;

This guarantee will not be the part of Shirkat contract; and

Third party will not charge any fee for the guarantee.

Different partners may be given different weightages according to amount and period of their investment.

Both partners can agree that their profit sharing ratio will be different for different periods. Partners may also agree

that any profit above the expected profit will be distributed at some other ratio.

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Significance of Musharaka in Islamic finance

(Contd.)

Musharaka has its own significance, especially in those economies where the distribution of wealth is unequal and

there is a huge disparity between the income level of individuals. The poorer gets poorer where as the wealth gets

concentrated in the hands of elite class. Musharaka arrangement provides an opportunity for the small enterprises toobtain finance and in return sharing their profits or losses with the financier. While it is equally important for the large

enterprises to get large funding in the capacity of partner rather than borrower. It allows both the parties to get

equally benefited from their share of investment. From previous experiments it is witnessed that Musharaka has

resulted in profitable ventures.

The working mechanism of Musharaka simply concludes that every person included in the partnership has its right to

take part in the management of the enterprise. But, one condition that can be implemented is, that all of the partners

may mutually agree upon a fact that one of them will carry out the administration of whole assignment. Shariah has

clearly indicated all the rights and responsibilities of the partners along with the rules of administration and

management for the engagement of the assignment. Moreover, if there is a silent partner, he should also be taken into

account, but his share of profit should not exceed his share of investment.

Profits can easily be generated through trading activities where partners can earn the profits made on actual amount

in which risks were also undertaken on the transaction. But one thing has to be clearly understood that if no risks were

involved then the profits generated represents Riba instead of Halal income.

One of the most important factors that is vital for the working mechanism related to the profit sharing is that, it is

necessary for the legitimacy of Musharaka that each and every partner gets the profit exactly in the percentage of

profit as per mutual agreement between them.

So from this we can elaborate that Musharaka is a product in which the probability of earning profit increases for both

of the financers by availability of excess liquidity for tapping profitable opportunities. This product by large have been

used and practiced in Middle East and many business financial transactions have been made so far for this purpose.

A brief comparison...

Musharaka and its comparison with its interest based alternatives

Interest based alternatives Musharaka

In interest based financing arrangements, the lender

lends its money to the borrower and feels free, as he

demand for the risk free return on his investment.

In Shirkat both parties remain conscious and alert

regarding risks and returns of the business.

Interest based lending system is such that in this system

the lender never considers the fact that the borrower

may fail to generate the profits. Borrower is totally

bound to return principal along with interest, even if he

has suffered losses. And in case if borrower earns huge

profits, they are only liable to pay the fixed return to

the lender while the remaining profit can be wholly

enjoyed by them.

The Shirkah is based on justice, where both the partners

enjoys the earned profits and also the losses suffered.

In interest based financing system the money circulates

in few hands, thats why poor gets poorer and vice

versa (rich become richer).

While in Shirkah money disperse / circulates in the

society.

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Kenyas sole Shariah compliant

insurer to expand in region

Dubai supremacy challenged as

global banks move to rivals

Saudi Arabia was not initially my

first choice, but I found Dubai had

contracted, said the, a director of

project finance at Riyadh Bank

(RIBL), the nations third-biggest

lender. Saudi Arabia and Qatar are

where the deals are, he said.

Riyadh climbed 32 places to 33rd in

the Global Financial Centers Index

published by London basedconsulting firm Z/Yen that made

the Saudi capital the biggest gainer

on an index led by London and New

York list.

U.S. backed bonds planned by

Tunisia amid IMF talks

Tunisia will seek a U.S. guarantee

for its bonds for the second

consecutive year and will sell

Islamic debt in June as the North

African nation mobilizes funds to

shield the economy from Europes

crisis and domestic turmoil.

The government may sell $500

million of U.S. backed notes in the

second half, Finance Minister ElyesFakh said in an interview. The yield

on $485 million of similarly

guaranteed debt due July 2019 fell

21 basis points this year to 1.48

percent.

Albaraka Turk early price talk

7.75-8.00 percent for Sukuk

Albaraka Turk has revised pricethoughts to 7.75-8.00 percent from

an initial 8 percent area on its 10-

year non-call 5 Sukuk.

BNP Paribas is global coordinator

and is joined on the book by Al Hilal

Bank, Barwa Bank, Emirates NBD

Capital and Nomura.

Al Hilal Islamic Bank introduces

chip based Visa debit card

Ahli Bank's Al Hilal Islamic BankingServices has become one of the first

Islamic Banks in Oman to

introduce a chip-based debit card

for its customers.

The new Shariah-compliant debit

card can be used worldwide for

withdrawing cash as well as at

merchant outlets based on

International Banking standards,

the Al Hilal debit card is tailored to

meet the needs of Islamic Bankingcustomers.

Qatar set to become key global

hub for Shariah-compliant

products

Qatar is set to become a "keyinternational distribution hub" for

Shariah-compliant products as the

Islamic finance market continues to

emerge, a new report has shown.

While infrastructure projects will

feed new alternative fund

structures and boost public-private

partnerships, Qatar also has a long-

term interest in developing as a

centre for Islamic finance.

Takaful Insurance of Africa Ltd.,

Kenyas only Shariah-compliant

insurer, plans to expand its

operations into five East African

nations, Chief Executive Officer

Hassan Bashir said.

Under Takafuls five-year plan

spanning 2013-2017, it will expand

into Ethiopia, Tanzania, Uganda,

Somalia and the autonomouslygoverned enclave of Somaliland,

where it was granted a license this

year, he said.

Global News

Dubai Islamic Bank (DIB) repays Ministry of Finance AED 3.752 billion deposit in full

DIB announced that having received the necessary regulatory and Government approvals, the bank has repaid the

AED 3.752 billion deposit, in full and well ahead of contractual maturity, which it received from the Ministry of

Finance in 2008 citing robust financial position and strong liquidity as the key drivers for the decision.

Disclaimer:The news included here is on the basis of information obtained from local and international print and

electronic media sources. IFP and Hidaya IBSS team does not accept any responsibility about their bona-fide.

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Barwa Bank first quarter 2013

profits at QAR 156 million, 53%

up on first quarter 2012

Islamic finance a catalyst for

driving an integrated Islamic

economy

The 3rd Annual Middle East Islamic

Finance and Investment Conference

which was held at the Dusit Thani,

Dubai, saw more than 250 leaders

in the international and regional

Islamic banking and finance

industry engage in critical

discussions that focused on building

the Islamic economy and

strengthening Islamic finances links

to the real economy.

Co-located with the 8th Annual

Takaful Conference , the event was

opened with a special inauguration.

Islamic Bank of Britain beats the

big banks with best-buy ethical

savings deals

Islamic Bank of Britain plc (IBB), has

extended its reign over the long

term savings Best Buy tables,

compiled by Moneyfacts.co.uk.

The Bank has been topping the Best

Buy tables since December 2012

with its 24 month Fixed Term

Deposit (FTD) account. Now its

entire range of Shariah compliant

long-term savings accounts,consisting of 12, 18 and 24 month

FTDs, are offering market-leading

profit rates. Its 2 year FTD is even

beating the returns on offer from

the three year fixed term bonds .

United Arab Bank hires Minhaj

Advisory for Islamic banking arm

The Islamic Banking Division ofUnited Arab Bank has signed a

memorandum of understanding

with Minhaj Advisory. The services

extended by Minhaj Advisory will

include introduction of Shariah

compliant products, contracts,

supervision, auditing and training.

Minhaj will form a Shariah

Supervisory Board (SSB) with three

Islamic scholars at the helm to

extend their guidance regarding

principles of Shariah relatedproducts and services.

UAE Banks lead surge in share

value revival

Dubai Islamic Bank has kicked offearnings season for commercial

lenders with a sharp increase in net

profits for the quarter, as investors

bet on bumper profits for Banks.

Bank shares have surged as Banks

repay government life support

extended to cover the financial

damage from the Dubai property

crash of 2009. Money set aside by

banks to cover bad loans is widely

expected to have peaked.

Sukuk issuance to hit USD 275

billion by 2013 - end

The volume of Sukuk (Islamicbonds) issued by end of the first

quarter of 2013 reached USD 34.2

billion, increasing on a quarterly

basis rate at 21.5 percent, after an

abundant year that witnessed a 54

percent increase in issuance,

Kuwait Finance House (KFH) -

Research said Sunday.

Sovereign issuances continue to

dominate Sukuk issuance, followed

by issuances of corporate, then subsovereign authorities.



Barwa Bank has announced its

financial results for the period

ended March 31, 2013.

Total assets increased by 12.8% to

QAR 28.5 billion (QAR 25.3 billion as

at 31st December 2012), a growth

in the customer financing portfolio

to QAR 16 billion vs QAR 15.3 billion

as at the of 2012. Total income

increased to QAR 364 million, up by36% compared with the first

quarter of 2012 Net profits

increased by 53% compared with

the first quarter of 2012 to reach

QAR 156.7 million.

Global News

Dubai Islamic Bank (DIB) eyes double digit profit growth, acquisitions

Dubai Islamic Bank (DIB) has dealt with much of its balance sheet weakness and should see profits for 2013 grow in

the high double digits, allowing it to eye acquisitions in new markets in Asia, officials said on Wednesday.

Leaders at the world's oldest Shariah-compliant lender told Reuters it had put aside around AED 5 billion (USD 1.36

billion) against the sort of soured property loans and transactions which drew into question Dubai's future as a

financial hub in 2009.

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Meezan Bank Limited holds its

17th Annual General Meeting of

the Shareholders

The 17th Annual General Meeting

(AGM) of Meezan Bank Limited was

held on March 28, 2013 at its Head

Office Meezan House, Karachi.

Mr. Irfan Siddiqui informed the

shareholders that Meezan Banks

performance remained outstanding

in all areas of its business activities.

The Bank recorded a Profit-after-tax

of Rs. 3.5 billion in 2012 (2011: Rs.3.4 billion), earnings per share (EPS)

for the year increased to Rs. 3.88

(2011: Rs. 3.75) and deposits grew

by 35% to Rs. 230 billion as at

December 2012 (2011: Rs 170

billion).

Agreement to standardize FX and

interbank Musharaka

agreements amongst Banks

Meezan Bank, Pakistans first and

largest Islamic bank, took the

initiative of inviting senior Shariah

scholars to a meeting to discuss the

challenges in Islamic Treasury

Operations. The meeting was held

on 18th April 2013 at Meezan

House, Meezan Banks Head Office,

and was attended by several

prominent Shariah scholars.

The participants held detailed

discussion over recent issues in FX

trading and interbank products and

agreed to standardize the FX and

interbank Musharaka agreements

amongst Islamic banks and Islamic

banking windows.

Recognizing every employee as a

powerful agent of positive change,

Burj Bank has launched an

employee driven CSR initiative -

"Giving beyond the Workplace

Campaign". As part of the program,

Burj Bank Employees along with the

Senior Management team visited

the TCF (The Citizens Foundation)

Qayyumabad campus.

The campus itself like all other TCF

initiatives is a state of the art facility

designed to deliver world class

education to the underprivileged

children of the society.

Dubai Islamic Bank (Pakistan)

reports Rs. 501 million profit

Dubai Islamic Bank Pakistan Limited

has reported a year end profit before

tax of Rs. 501 million. Furthermore, a

38 percent deposit growth was

achieved in comparison to 2011,

taking total deposits to Rs. 53.11

billion in 2012.

The BoD of Bank held a meeting to

approve its financial statements for

the year ended Dec 31, 2012. A press

release said that on the asset side,

DIBPLs asset base rose by 32% incontrast to 2011 increasing the asset

base to Rs 63.5 billion in 2012. The

Banks investments grew substantially

by 65% over the year, taking total

investments to Rs 21.33 billion.

DIBPL opened 25 new branches in

2012, increasing the total branch

network to 100 in 35 cities.

Local News

Burj Bank conducts Earth Day CSR

Activity at TCF Qayyumabad

An important day in the Al Baraka

global fraternity, as Al Baraka Bank

Pakistan formally unveiled its Head

Office, Al Baraka House in the city

of Karachi, Pakistan.

Inaugurated by Chairman Al Baraka

Bank Pakistan, Mr. Adnan Ahmed

Yousuf, who is also the President

and Chief Executive of Al Baraka

Banking Group, (ABG) on Saturday,April 20, 2013 marks a new

beginning in a spirit of hope and

optimism for future growth and

progress in the current economic

mayhem.

Inauguration of Al Baraka House



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Bookin the Spotlight

As the global demand for Islamic insurance product increases, a thorough understanding of Takaful principles is vital

for accountants, auditors, and leaders of companies offering these products. This book covers the basic accounting

principles and practices of Takaful operations, including the segregation of assets, liabilities, income, and expenditures

between the Takaful operator and participants; the setting aside of cash reserves for meeting outstanding claims and

future claims; and the management of revenue and expenditure.

The book features extensive case studies from real-world situations, this book is the perfect premier for

Islamic finance students and practitioners unfamiliar with Islamic finance and Takaful operations.

Written by experts from the International Islamic University Malaysia, the leading organization in

research in Islamic finance.

Covers all the major accounting principles and practices.

Based on real-world experience and packed with illustrative case studies.

For practicing accountants and business leaders, this book offers a thorough edification in Takaful operations whilealso serving as an excellent guide for undergraduate students and researchers.

The book consist of six chapters encompassing all the major areas regarding accounting, auditing and governance

issues related to Takaful operations.

About the Authors

Dr. Sheila Nu Nu Htay - PHD: Is PhD Program Coordinator at the

Institute of Islamic Banking and Finance, International Islamic

University Malaysia (IIUM).

Mohammad Arif: Was CEO of Takaful Indonesia from 2001 to

2004. From 1985 to 2000, he was General Manager Finance and

Administration/Company Secretary of Takaful Malaysia.

Assoc. Prof. Dr. Younes Soualhi - PHD: Is an Associate Professor at

the International Islamic University Malaysia (IIUM), Chairman of

the Shariah Board of HSBC Amanah Malaysia and Chairman of the

Shariah board of Munich Re Takaful. He is also a founding member

of the French Council of Islamic Finance (COFFIS), Paris.

Hanna Rabittah Zaharain: Is an audit assistant with AFTAAS

Corporate Advisory.

Ibrahim Shaugee: Is a consultant in Islamic Finance accounting

system and taxation, based in the Republic of Maldives.

Accounting, Auditing and Governance for Takaful Operations

By Dr. Sheila Nu Nu Htay, Mohammad Arif, Dr. Younes SoualhiHanna Rabittah Zaharain, Ibrahim Shaugee

Publisher:

Wiley Finance

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Ask Us

Questions / Answers

Feed Back Corner

Please provide us with your feedback on the following

email addresses

[email protected]

Question

We came to know that combining more than one contract is not permitted in Shariah rules of financial contracts. On the

other hand it is observed that when an Islamic financial product is executed, different contracts are presented to the

client in one set of documents. Is it not the violation of above said Shariah principle?

Answer

It is permissible in Shariah to combine more than one contract in one set of document, without imposing one contract

as a condition in the other, and provided that each contract is permissible on its own. Combining contracts in this

manner is acceptable unless it encounters a Shariah restriction that entails its prohibition on exceptional basis.

Question

What are Shariah instructions about issuance of bonds?

Answer

The issuance of all kinds of bonds is prohibited when these bonds include stipulations for the return of the amount of

loan and excess in any form, whether such excess is paid at the time of the satisfaction of the principal amount of loan,

is paid in monthly or yearly installments or in another manner and whether this excess represents a percentage of the

value of the bond, as in the case with most types of bonds, or a part of it, as is the case with zero-coupon bonds.

Likewise, prize bonds are also prohibited. This applies irrespective of the bonds being private, public or governmental.

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Upcoming EventsIFN EVENTS DAIRY (IFN ROAD SHOWS)

Islamic Finance News Road show continue to educate and update the developing Islamic financial markets by organizing

key Islamic finance events with the focus heavily on education and development.

Australia

7th May 2013

Japan

12th June 2013

Pakistan

27th August 2013

Hong Kong

25th June 2013

Turkey

3rd September 2013

Sri Lanka

29th August 2013

Egypt

5th September 2013

IFN Europe Forum 2013

Interest in Islamic finance amongst the European countries has increased tremendously. The 2013 IFN Europe Issuers &

Investors Forum will take you around the continent and explore the growth opportunities, potential and challenges of

Islamic Finance. IFN Europe forum 2013 will be held from 28th-29th May 2013 in London.

In a bid to diversify its economy, seek more transparent forms of financing, and increase trade and investments with the

Middle East, Europe is fast opening up to the global phenomenon which is Islamic finance.

Morocco

28th April 2013

World Islamic Finance Conferences / Workshops and seminars

Key Islamic finance events with the focus on education and development.

4th Global Islamic Marketing Conference

Conference 29th to 30th May 2013 Istanbul, Turkey

Workshop on Islamic Asset Management

3rd June 2013

Muscat, Oman

4th Global Islamic Marketing Conference

30th May 2013 Istanbul, Turkey

Bangladesh

5th February 2013

Singapore

22nd March 2013

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Article:

Usman Uppal

Ask Us:

Mufti Ibrahim Essa and

Mufti Javed AhmedBook in the Spotlight:

Accounting, Auditing and

Governance for Takaful

Operations

News:

Local and Global news

Let us know, if you know friends or colleagues who, in your

view, may benefit from this newsletter. Send us their emailaddresses at

[email protected]

ifp may 2013

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