Wednesday, January 29, 2014

TMR: DSM aspires to intensify halal standards practices

by R Kamalavacini

The Department of Standards Malaysia (DSM) is aspiring to intensify halal standards practices to abide by Malaysian Standards (MS), said its DG Fadilah Baharin.

Fadilah said the department has found the formula for the effective ways of implementing halal practices that are up to MS, as well as to comply to the department of Islamic Development Malaysia’s requirements.

“It took almost three years to convince the stakeholders and to conduct a pilot programme namely, halal AQL certified industry foundation (CIF) programme.

“This is just the first level. There are three more levels to go for the participants to fully qualify themselves as a halal practitioner,” she told the media after presenting halal AQL certificate to 32 qualified participants in Putrajaya yesterday.

Fadilah said the programme, which started in January 2013, was conducted to ensure local industry players understand and implement the halal requirements based on the MS.

“In our preliminary selection process, about 32% of participants admitted they had zero knowledge on halal standards practices. However, after going through our foundation programme, 97% of participants excelled and qualified for AQL certification,” she added.

CIF pilot programme is a smart partner initiative which is fully funded by the government. About RM100,000 has been spent for the two series of training sessions .

Fadilah said this initiative will be continuous, however, the next batch to join the training has to bear the costs themselves.

To date, Standards Malaysia has developed more than 6,500 MS across 24 sectors and 60% of these are aligned with international standards.

This means the industry players can improve the marketability and competitiveness of their products and services in both local and global markets

Meanwhile, Censof Holdings Bhd ED Ameer Shaik Mydin said the halal AQL programme can be monetised with proper implementation practices

“I am convinced that we can achieve the objectives of transforming our economies through the halal AQL programme if we persevere in mobilising our energies towards economic growth and prosperity,” said Ameer.

TMR: Strategies to develop Waqf properties in Malaysia

THE importance of Waqf, an important institution in Islamic wealth management, was the topic of discussion during a roundtable on the development of Waqf properties In Malaysia.

Jointly organised by the International Centre for Education in Islamic Finance (INCEIF) and the Islamic Development Bank, the discussion focused on strategies for effective development of Waqf properties in order to maximise the benefits for the rightful beneficiaries.

The speakers during the event held at the Sasana Kijang in Kuala Lumpur, were unanimous in stating their agreement that with effective administration and implementation, the institution of Waqf has great spiritual and economic potential.

“I think most of us today are in agreement that the Waqf with effective administration and implementation, has great spiritual and economic potential,” said INCEIF president & CEO, Daud Vicary Abdullah.

Vicary said the outcome of the roundtable “could be significant and timely in charting the way forward for the management of Waqf properties.”

“I am confident that we should be able to galvanise our combined knowledge and experience towards that end. We may not be able to find all the answers to our questions today, but it certainly will be a significant start.” Vicary said during his introduction speech.

Ministry of Finance secretary general of Treasury Tan Sri Dr Mohd Irwan Serigar Abdullah, in a speech read during the event, recalled that on Sept 28, 2012, Malaysian Prime Minister Datuk Seri Mohd Najib Razak, in his Budget 2013 speech, announced that the Malaysia Waqf Foundation will be responsible for formulating the Corporate Waqf Master Plan taking into consideration the State Islamic Religious Council Legislative Structure.

“Furthermore, in 2013 the prime minister announced that the Malaysia Waqf Foundation will be turned into a corporate Waqf entity to optimise the value and benefit of nonfinancial assets such as property for Muslims.

“Following both the announcements, the Malaysia Waqf Foundation proposed to establish a wholly owned subsidiary to conduct business activity and undertake Shariah-compliant investment.” Mohd Irwan said.

Malaysia, which is home to a large number of Waqf properties, stands to benefit from a concerted effort to develop the properties to their full potential.

An example of the proper management of Waqf property, which was turned into a revenue generating enterprise, is the Bank Islam Malaysia Bhd building in the golden triangle of Kuala Lumpur.

The joint venture formed between Bank Islam and Tabung Haji Technologies Sdn Bhd for the building of a 34-storey premium office tower on Waqf land, and agreed by the Kuala Lumpur Islamic Religious Council.

The building is on the most strategic Waqf land in terms of location and value in Kuala Lumpur, situated in the vicinity of the Petronas TwinTowers. Though the land is a Waqf land stipulated for charity purposes with a status of public Waqf, the commercial building developed on the buildoperate-transfer concept, benefits the owners.

The roundtable was told, by the various speakers, that the concept could be used to encourage families to “Waqf” their land in a bid to benefit from commercial arrangements, thus turning the Waqf instrument into a wealth management solution.

Tabung Haji will manage the building, completed in 2010, for 25 years with a RM56.6 million lease payment to the council, while Bank Islam is the anchor tenant.

In Malaysia, the developers of Waqf land faced a setback due to lack of access to financial support, and the ground breaking project between the KL Waqf council and Bank Islam could spearhead the development of other such projects.

The entire project is seen as a landmark commercial development using the Waqf instruments, as well as an example of Waqf success in driving major investment portfolios from other financial institutions for future ventures, wrote Salobiah Mokhtar in a dissertation on developing Waqf properties, on website. — The Malaysian Reserve, 29 Jan 2014 

BERNAMA: Ku Li suggests relook Islamic finance & banking

KUALA LUMPUR, Jan 23 (Bernama) -- Former Finance Minister Tengku Razaleigh Hamzah today suggested for a relook into the Islamic banking and finance system to ensure the system is in accordance with the syariah economic principles. 

He said that in the early days when the system was at the stage of finding its footing within the industry, there was a tendency to design the Islamic finance products not to the strictest of Islamic principles and standards. 

"A relook at the system with a view to refining it is timely and opportune. This, I submit, is part of the continuous quality assurance exercise that we have to go through to keep our practice true to the dictates of the syariah," he said in his talk entitled "Islamic Finance: Straying From Syariah and Pioneer's Path' when launching a book titled "Islamic Transactions and Finance: Principles and Developments at the Institute of Advanced Islamic Studies (IAIS) today. 

Tengku Razaleigh said that it would not hurt the system "if it is to be revisited on what constitutes halal and haram in the Islamic banking and finance." 

He said that in the early days of Islamic banking in the country, it was inevitable then as the understanding and measurement of the economic and finance systems were based on the conventional system. This could have led to the development of products that were less than perfect and lacked Islamic comprehensiveness when they were measured against the syariah economic yardstick, he added. 

On the book, Tengku Razaleigh said that it is a collection of essays based on research and practice of Islamic finance in the country. "I am sure it will be of great value and assistance to Islamic banking practitioners and students," he added. 

The book was jointly published by IAIS and Malaysian Current Law Journal Sdn Bhd. One of the compilers of the book is Sheila Ainon Yusoff. -- BERNAMA


Monday, January 13, 2014

RUSHDI: The political challenge confronting Islamic finance

Answer: Fear, concern, uncertainty, oppression, de-coupling from global finance, convergence between ‘church’ and state, favouring one religion, law of unintended consequences, and so on.

QUES TION: What do pre-Arab Spring Muslim countries like Egypt, Libya and Tunisia have in common in with the Group of 20 (G-20) democratic, super-power countries like the US, India, Russia, China, France, and even Australia? The fear Islamic finance will favour other religions over others and would ‘undo’ the separation between ‘church (mosque) and state,’ while furthering the cause of extremists resulting in ‘oppression’ and decoupling the country from the interest rate based global financial system.

(Yes, there are community-based initiatives in these G-20 countries, but they have capital limitations, hence, expansion challenges beyond their localities. Yes, the UK has five Financial Services Authority (FSA) approved Islamic banks, including the only depositing taking bank, Islamic Bank of Britain, however, it required two capital rescue efforts. Thus, it seems the obvious connection between Muslims and Islamic finance still needs more work, better research reports, surveys, understanding and interpretation.)

The Arab spring is passing or has passed and Islamic finance is still about media sound bites and ‘paid-for’ country reports (on potential) in these countries. Furthermore, the cheerleaders of the movement continue to proclaim that it will reach US$2 trillion (RM6.54 trillion) by the end of 2014 due to the above countries involvement.

At one level, the cheerleaders are more dangerous than the anti-Shariah movement for Islamic finance, because the former create unreasonable high expectations which the (social) media and conferences perpetuate.

To get initial traction of Islamic finance in “concerned” Muslim and non-Muslim countries requires practical approaches with real world examples and the involvement of the “trusted” stakeholders.

Practical Approach

The script must entail the following:

1. Islamic finance is not about religion, but about justice, equity, financial inclusion, and stewardship of the planet. But, Islamic banks, with bias towards real estate financing, are not signatory to carbon, equator or climate principles! Furthermore, Islamic finance, as practiced today, is about the bankable, as there is very little Islamic micro-finance, crowd funding, venture capital or small and medium enterprise financing.

2. As it’s not about religion, then there should be a rebranding exercise. Sh Saleh Kamel, one of the pioneers of Islamic finance, recently stated it should be called “ethical” finance, but that may imply all others are unethical. It may be better to call it “Participation Finance,” like in Turkey, as it goes to the substance. Furthermore, Dubai-based Noor Islamic Bank changed its name to Noor Bank as part of its “evolution”, implies getting new customers. Finally, not one financial entity in Saudi Arabia has “Islam” or “Islamic” in its title.

3. Islamic finance must try to fit into existing regulatory infrastructure, as lobbying to amend laws opens the door to unintended consequences, especially in election years in the west. For example, it may be wiser to have easy victories, i.e., mutual funds, venture capital/private equity financing, before embarking on a deposit taking licensed Islamic bank. Furthermore, in tax jurisdictions, like the UK, regulations have become more accommodating, hence, a neutral playing field for, say, Islamic mortgages.

4. The example of Islamic finance in the UK needs to be better utilised to demystify it in the west. To date, the emphasis, in places like India, has been that there are five FSA approved Islamic banks in the UK, while important, it’s not compelling.

What needs to be emphasised is Islamic finance has been in the UK since the early 1980s, and first Islamic bank opened operations in 2004, and "all is still secular and the Queen is well". To date, in the UK:

a. There is still separation between church and state

b. The UK is still a vitally important global hub for finance, and it includes Islamic finance as part of its global offering. For example, Prime Minister David Cameron, at the World Islamic Economic Forum, restated UK’s ambition for Islamic finance to be on par with Malaysia, the United Arab Emirates, and Bahrain, and announced a £200 million (RM1.08 billion) sukuk issuance for 2014.

c. There is no favouritism towards Islam

d. The constitution remains the same and the word “Shariah” does not appear, and “stoning”and “cutting off limbs” is not part of the penal code.

e. There has been no forced mass conversions to Islam

5. Where are the Imams in Islamic finance? They, as gatekeepers to the community, are more trusted than Shariah scholars by the locals! It must be understood, finance, like politics, is all local!

6. Malaysia may not be the suitable example for Islamic finance for almost all countries! Why? Malaysia has had a patient approach to Islamic finance (from 1983), and it has had a top/ down and bottom/up approach with successive prime ministers! Many countries are in a hurry and believe Malaysia’s model can be cut and pasted on their shores! This is when the law of unintended consequences rears its ugly head!

7. The Islamic finance industry MUST establish a professional public relations (PR) firm as an investment in its future. The industry has established industry bodies, like Accounting and Auditing Organisation for Islamic Financial Institutions and Islamic Financial Services Board, to educate and make aware, and an industry supported PR firm would serve the same purpose plus more. As the industry moves beyond its traditional shores, it will encounter stiff headwinds of ‘unreason-ability,’ hence, damage control will be more important than the press releases on opening branches, launching products, establishing new banks, sukuk league tables, or awards winners at conferences.

The proposed PR firm, working with industry experts, could host a conference where all the anti-Shariah people are invited to present their evidence on the alleged evils of Islamic finance. It could also invite representatives from countries where Islamic finance is seen as allegedly catering to extremists to present their evidence!


"One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors." — Plato. Islamic finance, do you have a political game?

[Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company]


BADLISYAH: Six wishes to enhance Islamic finance in 2014

Last year, we saw China landing a rover on the moon, the US shut down its government, NASDAQ was in error for three hours during trading time, Detroit filed for bankruptcy, the rise of Bitcoin, Malaysia ranked sixth most business- friendly nation globally by World Bank and the passing ofs South Africa’s hero, Nelson Mandela.

This year, I anticipate another memorable year as we see through the tapering of the quantitative easing in the US, the finalisation of Iran nuclear deal, the realisation of Bangsa Moro autonomous rule in Southern Philippines, the further implementation of major structural reform in Malaysia, and many more.

These interesting happenings, seen and to be seen, will surely make life more exciting but alas, this column is all about Islamic finance and I guess I can’t run away from it.

So, what is in store for Islamic finance in 2014? It’s timely for a new year wish list I reckon — I can’t speak for everyone in the industry but here are my wishes for Malaysia summarised below:

1. I wish for new business development in the Islamic capital market to fill market gaps and breathe more life into the market beyond sukuk. Let’s have more Islamic initial public offerings (IPOs), Islamic warrants, Islamic structured product, Islamic real estate investment trusts (REITs), Islamic exchange-traded funds (ETFs) etc., and carry out more Islamic equity capital marketrelated activities. The Islamic debt capital market is essentially fully developed with all the needed sukuk products.

2. I wish for the government to fully undertake its financial management in a Shariahcompliant manner considering Islamic finance is able to fulfill all their financial needs. The government does not undertake non-Shariah-compliant activities in the running of the country so there is no reason why they can’t manage their financial affairs 100% in accordance to Shariah, for example, issue all Treasury Papers as sukuk. Doing so will not have any negative impact on both local and foreign conventional financial institutions active in the Malaysian financial market, since they already invest in Shariah financial products directly or through their Islamic subsidiaries/ windows.

3. I wish for the National Fatwa Council to formally declare riba as haram to remind Muslims of their obligation to avoid riba. I do not believe Muslims see riba as haram in the same context as consuming pork or liquor. The Council could work with the government and the regulator to create greater market awareness across all segments of the Muslim society that is expected to make up about 80% of Malaysian population, thus financial consumers, by 2020. The right attitude towards riba by Muslims willensure a sustainable Islamic finance industry for the long term. Riba must be taught to be a more serious offense under Shariah in schools in the same way as Muslims are taught the do’s and don’ts in their diet.

4. I wish for all Islamic financial institutions to improve their service delivery and product suite to ensure all their Muslim and non- Muslim individual customers and private sector clients would get the optimal value for money when they take on Islamic finance products and services. They must develop a plan to accentuate the value of doing financial dealings in the Islamic finance industry.

5. I wish for all institutes of higher learning to provide courses in Islamic finance and Shariah to include mantiq and usul fiqh or the science of Hadith and Quran as full or elective subjects to ensure that new talents coming into the industry fully understand Shariah instead of just knowing what Shariah is. Today, people are taught Fiqh without much understanding of its origin and how it is derived. Universities should also ensure the teaching of International Financial Reporting Standards (IFRS) and/or its national equivalent in all subjects involving accounting for Islamic finance in Islamic finance courses as well as in accounting courses respectively. Today, most seem to neglect teaching IFRS as if it does not apply to Islamic finance.

6. I wish for all stakeholders in the Malaysian Islamic finance industry to work together to enhance and promote the country’s identity as a dynamic, conducive and stable global marketplace for Islamic finance by improving the eye-appeal of its industry infrastructure and frameworks. One way is by strengthening self-governance of its key players — Shariah experts and Islamic bankers. I have always thought we need a Shariah Professions (Financial Market) Act to govern Shariah experts just like lawyers or legal experts have the Legal Professions Act to govern them.

All Islamic bankers in the future should also be professionally qualified. Create a distinction between a chartered Islamic banker and an ordinary Islamic banker just like a chartered accountant and an accountant.

I think six wishes are enough for me in 2014. The same wishes can be made for other Islamic countries but I will leave that to others. I pray to God that my wishes would come through but to realise them, a lot of people need to come together and work on a lot of things. I have high hopes.

Last but not least, I wish for everyone to have good health, happiness and prosperity in 2014. Have a great year ahead!

[Badlisyah Abdul Ghani is ED and CEO, CIMB Islamic Bank Bhd]

THE MALAYSIAN RESERVE, 06 January 2014  

TMR: M’sian JV firm taps Mid-East Murabahah mart

By Sathish Govind

A Malaysian joint venture (JV) is targeting the lucrative Middle East market in commodity Murabahah which, according to the Saudi-based newspaper Arab News, has a daily trading volume of between US$8 billion (RM26.28 billion) and US$11 billion.

In order to tap into the Middle East market, in particular the Gulf region, the local Islamic advisory firm Ableace Raakin Sdn Bhd (ABRSB) has teamed up with the Amanie Group in a 50-50 venture with the creation of a company based in Dubai.

“The JV company, Ableace Raakin-Amanie, hopes to export the Malaysian expertise in Murabahah commodity to the Middle East since we see the region as a huge market with great potential,” ABRSB MD Azzizi Mohamad Ghazi said in an exclusive interview with The Malaysian Reserve (TMR).

Ableace Raakin-Amanie will capitalise on the Amanie Group’s existing network in the Middle East to facilitate its entry in the region, principally in Dubai, to make its mark in what it says is a “virtually untapped” market by Malaysian firms.

“The company will initially capitalise on existing clients of the Amanie Group in the United Arab Emirates (UAE), namely Bahrain, Saudi Arabia, Qatar and the Northern Af rican region while the company will continue to explore new clientele altogether,” Azzizi said.

Dealing in Murabahah commodity demands extensive knowledge in Islamic Shariah as well as in commodity trading, and is capital intensive.

In this venture, Ableace Raakin is backed by industry captains in the area of palm oil, banking and commodity trading, while the Amanie Group is well known for its Shariah advisory services that expands from Malaysia to the Middle East and Northern Africa region.

Bursa Suq Al-Sila (BSAS), which is Malaysia’s trading platform for Murabahah commodity, recorded an impressive 89% increase in its average daily trading value or RM2.3 billion in 2012, from RM1.2 billion in 2011, following growing acceptance among global market participants.

In the UAE, the main tool which Gulf based banks use to manage short-term liquidity is commodity Murabahah, which is a cost-plus-profit solution widely used in the Mena region as well as in Malaysia.

Azzizi said that while the company had started in 2006 and initially offered palm oil products as the underlying assets, its portfolio has evolved to include (it has since extended to) other commodity-based products such as rubber and cocoa.

He said that although the company had undertaken its first Murabahah transactions with Kuwait Finance House (Malaysia) Bhd, it has since extended its services to other banks and financial institutions in Malaysia and Singapore.

Of the advantages of the Murabahah method of financing, Azzizi said that clients are told of a fixed profit during financing term. “Installment terms agreed upon at inception of contract in assisting in cash flow budgeting and cash forecasting.”

THE MALAYSIAN RESERVE, 06 January 2014  

BADLISYAH: Invasion of Shariah scholar wannabes

The Islamic financial market globally has been invaded by Shariah scholar wannabes and they are destroying it from the inside out.

While this is a strong statement, it is one which I have made many times in open conferences and many would agree with me. However, like so many other issues in Islamic finance, most prefer to keep such opinions to themselves.

Many real and qualified Shariah scholars have lamented about this in private and some in public but most times, like the Malay proverb, Ibarat mencurah air ke daun keladi, the lamentation goes unheeded.

These Shariah scholar wannabes have infiltrated Islamic banks at the highest level of decision-making bodies — the board of directors, the Shariah committee and the senior management — dictating what cannot be done without due consideration to stakeholders value, which at times resulted in the overnight dismantlement of businesses that took years to build.

They have infiltrated financial regulators and Shariah governing bodies and exerted unnerving and disastrous influence on industry regulatory frameworks and policies in many jurisdictions, causing Islamic finance to fail its function as a public good to facilitate optimum financial inclusion for the general populace or the Ummah, particularly Muslims. As a result, the industry becomes a non-starter in many jurisdictions until today.

They have infiltrated many institutions of higher learning and distorted the teaching of Shariah and its application in commerce or Muamalat, especially in Islamic finance, by imposing their personal opinion and biasness in their teachings.

This weakens the very foundation of the industry from the inside out as they train the industry’s workforce.

Those that provide distorted Shariah application in Islamic finance have also written many books and presented many papers, putting themselves as the industry’s authority although most of them have never done a single Islamic banking and finance business themselves.

They have a tendency to make prohibition on what has never been expressly prohibited in the Quran and Hadith, such as debt.

There have been instances where they have changed the meaning of Quranic verses and Hadith to suit their arguments and define established Shariah principles differently, such as defining “Bai” or “Bay” as risk sharing instead of its true meaning, sale.

Considering that most of them are excellent orators and have a stronger command of English than most qualified Shariah scholars, many people are easily persuaded and influenced by what they say. I believe that even if we call ourselves an Islamic economist, Islamic accountant, Islamic banker, Islamic journalist or whatever with an Islamic prefix, we are still just an economist, accountant, banker, journalist and so on.

We are not Shariah experts.

We have to accept that we cannot be a Shariah expert by simply learning about Shariah as a single subject or module in our higher education programmes.

Being a Shariah expert or A scholar certainly requires a different kind of training.

I have never referred to myself as a Shariah expert nor have I ever allowed people to think that I am one. I have my opinions. My opinions may be legitimate under Shariah and I can appear to come out very strong on it but I have never and would never impose them on others as an authority of Shariah.

Of course to be fair, most people in the industry are just like me, someone who knows Shariah from self-learning and on-the-job training and rely on real qualified Shariah scholars to guide us on Shariah matters in the industry.

However, there are some that truly takes the cake and present themselves as a Shariah scholar to the extent of instating themselves as members of the Shariah scholars’ fraternity although they have no qualification to be one.

The reality of Islamic finance is that Shariah is simple but it is the people, particularly the Shariah scholar wannabes, that make it difficult.

[Badlisyah Abdul Ghani is CIMB Islamic Bank Bhd executive director and chief executive officer]


RUSHDI: Moving on to the next level in the new year

Justin Timberlake once said: “Yesterday is history, and tomorrow is a mystery.” One way to solve a mystery is by 1) deep dive research or “Googling” it; 2) Sherlock Holmes deductions; or 3) suggestions based upon industry experience.

As we look forward to 2014, we, in Islamic finance and the halal industry, have control of some aspects of our destiny, others we hope we have control over, and, still others, we can only say “Insha’allah”.

Islamic finance is a subset of ethical finance, which is a subset of conventional finance, hence, what happens at the top has a trickle down impact. The green shoots of economic recovery in the west/China have a confidence inducing effect on Islamic finance, hence, we are hearing much chatter about the movement in UK (David Cameron statement on sovereign £200 (RM1,073.96) sukuk), parts of Africa/Commonwealth of Independent States, Islamic Development Bank attempting to map halal in Organisation of Islamic Cooperation (OIC), Islamic economy conferences, etc.

Control On Islamic finance conferences, there are two things I would like to see for 2014; first, sponsors should offer costsharing reductions premiums, please, no more thumb-drives! Sponsors, even conference organisers, should outsource products made by indigenous people and place in the conference bags. For example, several years ago, South Africa-based Oasis Asset Management Ltd gave out animals made of colourful wiring made by local people, and I still cherish mine!

Second, Dubai’s Global Islamic Economy Summit (GIES), financially challenged all stakeholders to address predetermined challenges by way of financial rewards, ie, bounty for solutions! The important Global Islamic Finance Forum will take place in Malaysia in 2014, and I hope something comparable is offered.

Malaysia hopes to become a knowledge-based, high income country by 2020, which means availability of risk capital (opposite of today’s Murabahah’s centric Islamic finance) as part of an enabling equity culture. To build a “silicon valley” environment, reverse linkage from Palo Alto, does not mean investing in venture capital firms in the valley, but rather building a “Silk-road Valley” for establishing Malaysia as beachhead of technological innovation, like common OIC diseases, and linking it to the 56 Muslim countries.

Malaysia needs to step up its approach for halal industry, because it is not a Halal hub (net importer of beef, chicken, etc) and Dubai’s ambition of being a halal hub, as part of Islamic economy capital. Thus, having Malaysian standards, halal hub division department of Islamic Development Malaysia, Halal Industry Development Corp, etc, makes it regulatory/IP halal hub, much like Bahrain and regulations for Islamic finance.

The US is actually a halal hub, as largest exporter of meats/live animals to OIC, US$17.3 billion (RM56.85 billion), in 2012, according to Thomson Reuters report of State of Global Islamic Economy. It may be time for Malaysian entities, like Federal Land Development Authority, to look beyond (real estate in) the UK and (cattle ranches in) Australia for direct investments in the US for agro-food areas to address domestic demand, nearly US$5 billion, and exporting to Gulf Cooperation Council.

Islamic finance needs a rebranding and halal needs a repositioning. Sh Saleh Kamel, one of the founding fathers of Islamic finance, recently stated it should be called “ethical” banking as it’s part of an Islamic economy. But, in calling it ethical, it implies others are possibly unethical, hence, may be better to call it, as they do in Turkey, participation finance.

Halal seems to be linked to be only for Muslims (much like Islamic finance perception) and the religious slaughter, but, in reality, it’s about two important attributes: organic/ wholesome and traceability.

The focus should be on what happens before the “knife”, the humane treatment of animals and feed ingredients, hence, linkage to ethical consumption community.

Finally, to an outsider following financing news in Malaysia, the country comes across as only about Islamic finance, be it sukuk issuance, number of Islamic funds, new Shariah screening, Islamic banking assets (20%), Islamic Financial Services Board, etc, These are “ethical” lubricants for an economy, not the economy itself.

Conclusion To lead requires aspirations, inspirations, and perspirations. The year 2013, completed 30 years of stage one Islamic finance, now Malaysia has to better itself and compete with others for Islamic finance and Halal 2.0.

[Rushdi Siddiqui, a former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ ED of a (halal) US-based agro-food company]

THE MALAYSIAN RESERVE, 23 December 2013   

TMR: Halal industry enters new phase with ‘grey areas’

By Kazi Mahmood

Halal industry experts believe the use of alcohol derivatives and other additives in food and beverages has resulted in “grey areas” as they are not predetermined by the Shariah, urging industry players to seek credible alternatives.

With the new issues surfacing in the halal industry, which was estimated to be worth RM6.3 trillion globally in 2012, the industry is entering new phases, the founding chairman and CEO, International Institute of Advanced Islamic Studies (IAIS) Prof Mohammad Hashim Kamali said.

“We are entering new phases in the industry. There are new issues that keep arising in the industry that require research since these are not pre-determined in Shariah,” Kamali said during the 'Halal Industry from a Global Perspective: Malaysia and Australia' forum in Kuala Lumpur recently.

Kamali said the halal industry is witnessing major changes beneficial to the consumers in general, but there is at times some confusion regarding the arrival of additives, colouring and the acceptance of the use of alcohol derivatives in food and beverages.

“The new developments in the halal industry, with additives, colouring among others, has influenced the decision making process in the indust ry,” said Kamali during a presentation of the new trends in the halal industry at the Halal Forum of the IAIS recently.

Prof Kamali said the fact that alcohol, often used as preservative in certain products, is accepted as permissible in low dosage but only if it loses its intoxicating effects during processing.

According to standard setting bodies, the use of alcohol has been established in two levels for the control of alcohol in food (less than 0.1%) and ingredients (less than 0.5%). The hurdles faced by the industry are also tackled by practising lawyer and expert in Islamic f inance, Fakihah Azhari.

“A controversial issue on grey areas of halal is the presence of alcohol in food and beverage. In the US for example, the Islamic standardisation is that alcohol averaging 0.1% to 0.3% is acceptable in food and beverages,” said Fakihah.

In order to understand the role of alcohol derivatives in the halal industry, Fakihah explained that various global Shariah standards setting bodies concurred that it is currently impossible to eliminate the low dose alcohol derivative used as preservative in food and beverages.

“Alcohol is not the subject matter here, it is the degree of intoxication of alcohol that is haram in Islam,” Fakihah said during an interview with The Malaysian Reserve. Fakihah said processes that remove the taste, smell and sight of alcohol means the derivatives can be used for halal products.

The process for the elimination of the taste, the smell and the colouring of alcohol and any other intoxicants are among the guidelines for the food industry to make halal certified products.

Fakihah also said that alcohol is also produced by the human body and it is present in our system, but the level is too small to cause intoxication.

“While non-toxic alcohol is currently used in food and beverages, it is time for the industry to move on from such additives,” Fakihah said.

As of June 2013, Malaysia exported RM15.7 billion worth of halal products. According to Malaysian officials, based on export statistics, Malaysia is the biggest halal product exporter among the countries in the Organi sat ion of Islamic Cooperation.

The main destinations for Malaysia’s halal production for export are China, Singapore, the US, Indonesia, the Netherlands and Japan.


HUMAYON: Islamic finance education in Malaysia

While there is no unique mix of qualifications, experience, training and skills, those who have the right and rigorous education nevertheless stand a better chance of succeeding in any career, including in Islamic banking and finance.

Malaysia has invested heavily in developing human resources for the Islamic financial services industry. Almost all the institutions of higher learning in the country offer at least some specialised modules if not full-fledged programmes in Islamic banking and finance.

A dedicated university — International Centre for Education in Islamic Finance (commonly known as INCEIF) — was also set up in 2005, with an explicit objective “to produce world-class talent for the global Islamic finance industry.” In total, there are 50 course providers and 18 universities offering degrees in Islamic banking and finance.

This year’s Global Islamic Finance Awards, held at Dubai on Nov 26, picked up Universiti Utara Malaysia’s Bachelor of Islamic Finance and Banking (BIFB) as the Best Qualification in Islamic Finance, following the 2012’s winner of Certified Qualification in Islamic Finance (CQIF) offered by IBFIM.

There is no doubt that high quality education in Islamic banking and finance is a prerequisite for starting a successful career in this field. This was obviously not the case during the first phase of development of Islamic banking and finance, when any banker and finance practitioner who had interest and passion for Islamic banking and finance had opportunities to excel in the then newly emerging industry.

The situation has changed now, as Islamic financial institutions are required, particularly in Malaysia, to employ personnel with the right and relevant qualifications. However, it seems as if the gulf between academia and industry is playing a trick, as many of the graduates of universities (including INCEIF) get confused by their own professors who seem not to be fully convinced with the practice of Islamic banking and finance.

This is particularly true in the case of the departments of economics and finance (or business schools) offering programmes in Islamic banking and finance.

The story is different in the departments of law though, if some members of their staff happen to sit on Shariah advisory boards of Islamic banks and financial institutions. The Shariah and law professors happen to have greater and better understanding of the practice of Islamic banking and finance than the academic community at business schools and economics departments.

This may lead someone to conclude that for a successful career in Islamic banking and finance, strong Shariah and law background is helpful.

This view may be supported by the dominance of Shariah scholars and the central role of Shariah advisory in Islamic banking and finance.

A close scrutiny of the academic and professional qualifications of the top management of Islamic banks in Malaysia (eg CEOs) gives a completely different story, as most of them come from an economics or business and finance background. Almost all of them have a common denominator — a foreign degree. This might be seen as a prerequisite for success in Islamic banking and finance but then it cannot be a differentiating factor as most of the successful executives and businessmen in Malaysia are foreign qualified anyway.

Thus, strong education in economics and finance seems to be the most appropriate qualification to succeed in Islamic banking and finance. Ironically, a significant proportion of economists and finance professors involved in the teaching of Islamic banking and finance happen to be sceptics.

While a lot of scepticism of such professors is based on genuine concerns, many of them certainly lack an in-depth understanding of the practice of Islamic banking and finance on a transactional level. If the authorities really want to improve the quality of instruction in Islamic banking and finance, then it should invest in these academicians to expose them to the practice of Islamic banking and finance. Failing to do so will result in inefficient use of resources, which has already been evident from the discontent of the Islamic banking and finance industry with the academic institutions and other specialised institutions offering instruction in this field.

[Prof Humayon Dar is chairman of Edbiz Corp London and a visiting professor of Islamic Finance at Academy for Contemporary Islamic Studies, UiTM]


BADLISYAH: The wherewithal of Shariah principles

The constant evolutions of sophisticated Islamic financial products structured using multiple Shariah-based contracts have resulted in a new wave of creation and innovation globally over the last 50 years since the reintroduction of Islamic finance.

Islamic finance products have become competitive and efficient both in terms of structure and pricing, giving greater choice for this essential public good to consumers. Nonetheless, product development in Islamic finance over the years has always been looked upon with cynicism and suspicion by some people who do not fully understand the workings of Shariah. They forget that in Shariah, everything is allowed unless clearly expressed or stipulated in the Quran and legitimate Hadith as disallowed.

The Islamic banking and finance industry typically contains many types of activities such as banking, asset management, debt capital market, equity capital market, private equity, takaful, etc.

Financial institutions with involvement in the various activities must come out with different products and services to intermediate between the haves and have-nots across consumer segments in different jurisdictions to meet their diverse financial needs in a Shariah compliant manner.

Product development in Islamic finance must be looked at from a demand and supply perspective done in a way that complies with the same universal Shariah principles applied on a jurisdictional basis subject to local parameters in any one country, such as the law of the land, its market conventions, its culture, its customs, etc.

The common market misperception in product development is that each Shariah principle needs to be fitted into a specific product. As an example, there is a thinking that the Shariah principle of Ijarah can only be used for an operating lease product. This is not true at all.

In the industry a singular Shariah principle can be used to facilitate various products. This is what I have labelled as “One Shariah Principle, Many Financial Activities” methodology.

An Ijarah principle can be used to facilitate many products such as operational lease, financial lease, home financing, corporate financing, car financing, project financing, credit cards and sukuk.

SUBSTANCE OVER FORM applies here. The financial product done is the real substance of the activities. The Shariah principles used do not determine the substance of the product undertaken in each activity.

The products are accounted for in the financial report distinctively, as home financing, credit card, sukuk, etc, each carries different risk profile in substance, although the same Shariah principle is used.

How can an operating lease company which leases machines to factories be reporting the same way as an Islamic bank providing credit card to individuals using the same principle? If we account everything as operating lease then there would be a misrepresentation to the different stakeholders when they read a particular Islamic financial institution’s financial and activity report. It is against Shariah to misrepresent.

Some people have also misperceived that a single Islamic financial activity when created or innovated, is facilitated by a singular Shariah principle only. This is again very inaccurate. The same financial product done by the same category of financial institutions could be done using different Shariah principles and even a combination of Shariah principles.

A home financing given by Islamic banks can be facilitated using different principles such as the Bai Bithaman Ajil, Murabaha, Inah, Ijarah, Istisna’ and Musyarakah or a combination of these principles.

The Bai Bithaman Ajil home financing facility, for example, uses Bai Bithaman Ajil (deferred payment sale), Murabaha (sale at cost plus) and Inah (buying and selling between two parties) principles.

Another example is Musyarakah Mutanaqisah home financing, which uses Bay (sale), Musyarakah (joint ownership) and Ijarah (leasing).

In my “One Financial Activity, Many Shariah Principles” methodology, no matter what underlying Shariah principles are used for the financial products, the transaction is in essence a home financing and will be treated as such under tax law and accounting practice.

Such approach is not against Shariah. If we account for something based only on the Shariah principle used, then there will be a lot of confusion in the market. Every Islamic bank will declare different things to stakeholders although they are doing the same product.

Thus making peer comparison difficult and many would be misled on material risks of the activities undertaken.

Both methodologies above are not only pragmatism in its best form available under Shariah but are very consistent with the requirement for transparency and the need to manage systemic risk in the financial market. The government, regulator and the private sector must provide the right product for each activity and must communicate the right information to the public.

Without proper disclosure, the real impact on systemic risk cannot be appreciated and monitored, any market growth and development achieved would come to nought.

In Islamic finance we create and innovate by using trade as encouraged under Shariah. It is not rocket science as the difference is only in the contracts used. Instead of an IOU or a lending contract, Islamic finance uses trade contracts consistent with Shariah that meets the financial needs identified by consumers. It is how these contracts are entered in different jurisdiction that influences how each Islamic financial product is created and innovated.

The Shariah in each Islamic finance product remains the same, only its application differs due to distinct local parameters, thus providing for a very dynamic, sustainable and stable development of Islamic finance for the next 50 years and beyond.

[Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd]

THE MALAYSIAN RESERVE, 09 December 2013   

RUSHDI: Halal-nomics — Need for standardisation, integration

One of the top 100 thinkers in the world, Turkish born Nouriel Roubini, was at Dubai’s Global Islamic Economy Summit (GIES), and he stated, “…there is a need for a more resilient system, and that’s where there is potential for the Islamic system. It is less volatile and potentially more stable than conventional financial systems. The advanced economies can learn from the Islamic system in this respect…. The Halal economy is a real opportunity, but it needs to be more standardised and integrated into global markets.”

The last six weeks, from WIEF (UK) to GIES (Dubai) to WIBC (Bahrain) and this week’s Islamic Development Bank’s Roundtable in Malaysia, Opportunities & Challenges in Global Halal Industry/Economy Development, has raised the profile and importance of the US$1.3 trillion (RM4.2 trillion) Islamic finance, an “ethical” financial lubricant, and US$2.3 trillion Halal Industry, a real economy sector.

Now, with the 2014 WIEF to be held in Dubai, recipient of World Expo 2020, there is pressure on follow-up and followthrough on some of the “lowhanging” deliverables tree.

Sizing & Seizing

According to 2103 State of the Global Islamic Economy report by Thomson Reuters, in collaboration with Dinarstandards, its core sectors (below) are structurally impacted by Islamic values and driven by end user, retail and business, needs and demands:

• Food: US$1.09 trillion expenditures (2012)

• Clothing: US$224 billion

• Travel: US$137 billion

• Media/Recreation: US$151 billion

• Pharmaceuticals: $70 billion

• Cosmetics: US$26 billion

• Islamic finance: US$1.3 trillion

The non-Muslim/non-Islamic players dominate the Halal food sector, top 10 exporters are non-Organisation of Islamic Cooperation countries and 85% of food supply chain is controlled by non- Muslims. The report will attract other such players looking to capture growth stories i n today’s low g rowt h environment of 2%.

Where are the Muslims and Muslim-owned halal producing companies? Will Muslims continue to play the role of ‘slaughtering and consuming’ fast moving consumer goods manufactured/processed by non-Muslim companies?

Therefore, packages for lamb, beef, goat, chicken, etc, should have an easy to understand logo for gassing, stunning or neither and also show if hand or machine slaughtered. The consumer in the geography will decide what method of “Halal slaughter” resonates with them and purchase accordingly.

[Rushdi Siddiqui, former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ ED of a (halal) US-based agro-food company.]

THE MALAYSIAN RESERVE, 09 December 2013   

BADLISYAH: Awal Muharam — a day of celebration

I would like to wish everyone a Happy Awal Muharam! Come sunset today, the year 1434 Anno Higarae (AH) will come to an end and a 1435 AH begins. This New Year, may you and your family be rewarded by Allah SWT with all the good things in life.

I am so glad that my monthly column conveniently falls on the eve of the first day of the new year of the Hijrah calendar. It gives me the opportunity to elucidate the significance of today to all of us generally, to Muslims specifically and to Islamic finance distinctively.

Unbeknown to many, the Hijrah calendar is a calendar first established in 638 AD by the second Caliph of the Al Rashidun Caliphate, Umar al Khattab to ensure consistency of dating, chronology of events and time management across all the Muslim land governed under the Caliphate. This calendar is based on the lunar cycle rather than the solar cycle (Gregorian) or lunisolar cycle (Chinese). Under the calendar, a new day starts at sunset instead of sunrise and the day chosen as the first day of the calendar was 1 Muharam due its significance to Muslims.

Typically, this calendar is used and adopted by all countries in the world where the Caliph ruled and subsequently in all countries deemed as Islamic countries where Muslims are the majority of the population. The calendar is followed by all of the population irrespective of whether they are Muslim or non-Muslim. It has also been taken as a private calendar by Muslims living in all other parts of the world just like the Chinese calendar is privately followed by Chinese living in all parts of the world outside of China.

So Awal Muharam to many of us generally is just the first day of a new year and we celebrate it like we celebrate any other new year. Some will play fireworks. Some will be spending time praying. Some will be visiting friends and families. Some will be joining the parades either as participants or spectators.

What is certain is that Awal Muharam is a cause for all of us, Muslim and non-Muslim living in an Islamic country to celebrate and reflect upon our lives, making new year resolutions and affirming one’s commitment for continuous improvement to be a better person. This is Awal Muharam to all of us generally.

However, 1 Muharam as a date carries a more significant meaning to Muslims than simply being a date chosen by Caliph Umar as the first day of a new year. The significance was the reason why it was chosen as the a new year date in the first place.

1 Muharam in any Hijrah year was the day that saw the Hijrah or migration by Prophet Muhammad (peace be upon him) and the early Muslims from Makkah to Madinah that took place on 622 AD. It was the day that transformed the Muslims from a downtrodden, abused and discriminated people to a free, civilised and sovereign people. The Hijrah not only impacted positively on the Muslims but also the whole world.

Hijrah, in essence, is the physical and spiritual transferance or transformation, that Muslims must undertake to attain a better situation for themselves to serve Allah SWT. In the Glorious Quran, Allah, Most High, says: “Those who believe, and migrate and strive in Allah’s cause, with their goods and their persons, have the highest rank in the sight of Allah: they are indeed the successful people. Their Lord does give them glad tidings of a Mercy from Himself, of His good pleasure, and of gardens where enduring pleasure will be theirs: They will dwell therein forever. Verily in Allah’s presence is a reward, the greatest (of all).” (Al-Tawbah, verses 20-22) The Hijrah undertaken by the Prophet was the prime example of this divine calling to Muslims and we commemorate this day to remind us of our need to continuously better ourselves in our strive for God’s cause come every 1 Muharam.

So as we celebrate the coming of a new year, we also remember the Hijrah and do hijrah of our own. The Hijrah also carries a greater significance to Islamic finance specifically and the global economy generally. The migration that took place on 1 Muharam 0 AH was a major crossing line between two major eras in Islam — the era of Makkah and the era of Madinah.

Every scholistic discourse on Shariah would be made around these two eras. If we read the Quran, we can clearly see the contrast in the revelations between the two eras. Shariah scholars divide the revelation in the Quran as the Makkan Quran being those revealed in Makkah, and as the Madini Quran being those revealed in Madinah. Both constitute one complete divine scripture of Islam but the revelations can be clearly distinguished with those revealed in Makkah focused on “Tauhid” about the Oneness of Allah SWT (monotheism), while those revealed in Madinah covered matters regarding life in general including how we conduct our finances and businesses.

It was only after the Hijrah to Madinah that we saw “riba” (ie usury) was absolutely forbidden in financial transaction. The occasion of the Hijrah should be recognised in history book and commemorated by industry players as the day Islamic finance truly came to being. We should no longer generally say Islamic finance is more than 1,400 years. We have a focal point to chronologically refer to.

All in all, the Hijrah, despite just being a journey between two cities about 200 miles apart, carries a lot more significance than many of us think or were taught. A learned man once wrote that, “it (Hijrah) marked the beginning of an era, a civilisation, a culture and a history for the whole of mankind” and knowing the above, I wholeheartedly agree.

Let us all celebrate today with this knowledge in mind. Salam Maal Hijrah!

[Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd.]

THE MALAYSIAN RESERVE, 04 November 2013 

RUSHDI: Malaysia’s role in facilitating cross-border investments

The most common Islamic investable asset classes include compliant equity funds, sukuk, commodity murabaha and real estate, then trade finance funds, micro-finance, and SME (small and medium enterprise), and finally, very little venture capital. What about the US$685 billion (RM2.19 trillion) halal-agrofood sector as an investment class?

Today, where is Islamic crossborder investing?

1. Commodity murabaha is on the London Metal Exchange and not Malaysia’s Suq Al-Sila.

2. About 85% of the market capitalisation of a global Islamic index is in the Group of 20 (G-20) non-Muslim countries with bias in three economic sectors, technology, healthcare and energy. These sectors have very little publicly listed company representation in the Organisation of Islamic Cooperation (OIC).

3. Real estate acquisitions are typically in Europe, Australia, the US, etc.

4. Islamic venture capital only exists at conference presentations by academics and Islamic microfinance is a rounding error in the US$1.3 trillion Islamic finance industry.

Thus, at one level, there is crossborder Islamic investing, but it’s about Shariah-compliant capital flight from Muslim countries, ex- Malaysia? Furthermore, the other major export from Muslim countries is talent, hence, there is a link between (outbound) capital flight and brain drain!

For example, if Malaysia can establish the Talent Corp Malaysia Bhd to address brain drain, then a comparable entity needs to be established address to guide OIC capital flight within the cluster! Thus, an OIC, not just Islamic, wealth management hub is a pressing need of the hour.

Malaysia, How You Get the Vision, Will and Means to Lead?

Islamic cross border investing is timely topic, as certain markets, like Malaysia have financially matured Islamically, especially on the Islamic debt capital markets and retail, and overseas expansion may be the only way forward. But, today, Malaysia is an island onto itself as counterpart jurisdictions with Islamic finance do not have the comparable enabling infrastructure, including Dubai and London.

Furthermore, for less mature Islamic finance markets, from Africa to MENA to Centre of Islamic Studies (CIS) to G-20, the lessons from Malaysia may be the best case study for their road ahead. Malaysia’s experiment with Islamic finance started in 1983, nearly 10 years after the (alleged) first Islamic Bank, Dubai Islamic Bank, and today, many countries and international lending agencies look at Malaysia’s blueprint for developing this niche market.

Thus, the easiest place to better understand the challenges with cross border Islamic investing may be start with Shariah-compliant equity investing.


Malaysia has a comprehensive infrastructure for Islamic investing, as Securities Commission Malaysia introduced Shariah screening before the launch of Dow Jones Islamic Market Index in 1999. It recently added financial ratios to the Shariah screening, but international Islamic portfolio investors still have not flocked to Bursa Malaysia to invest in the compliant companies!

The first take-away lesson is Shariah- compliance is only one factor for cross-border equity investing.

The analysis for investing includes examining all opportunities, currency risk, liquidity of company, performance, growth prospects of sector/company, including dividend yield, purification, which reduces returns, etc. For example, Islamic emerging-market funds may look at compliant listed companies on OIC exchanges, especially if they are part of MSCI Emerging Market Index, but will by default focus on markets like China, India, Russia, etc.

The second lesson is better posed as a question: why are Shariah-compliant Malaysian investors not investing in compliant companies listed in Saudi Arabia, United Arab Emirates, Pakistan, Turkey, Egypt, Nigeria or other OIC countries with stock exchanges?

Furthermore, the same question applies to investors in these countries for opportunities in Malaysia.

Is it because they know their listed companies and markets better than overseas? Or is it because the information has not been presented in a dash-board manner?

In June 2012, S&P/OIC COMCEC 50 Shariah Index was launched, and it was designed to measure the performance of 50 leading Shariah compliant companies from the 19 OIC markets/territories. As expected, Malaysia, Indonesia and Saudi Arabia comprise nearly 60% market capitalisation of index with 23 of the 50 companies.

But, have there been press releases on funds or an exchangetraded fund launched off this index?


Now, as a local investor in Malaysia, I know S&P/OIC COMCEC 50 Index companies like Maxis Bhd, IOI Corp Bhd and Sime Darby Bhd. For me to better understand overseas compliant companies, I would like to see an information dash board of such Malaysian companies compared to listed counterparts like Mobile Telecomm (Kuwait), Telekomunikasi Indonesia, Industries Qatar, Saudi Basic Industries, etc.

Furthermore, if I’m interested in agro-food companies, I would like to see a graph that captures a world index, Islamic world index and food product index. If you look at a graph of MSCI World Food Products index of agro-food companies and compare it to MSCI World and MSCI World Islamic Index, you will see world food product index has better returns than world Islamic and more stable/linear growth than World Index for the time period.

Thus, agro-food as an asset class addressing OIC food security. What if the food index happened to be halal agro-food companies from the OIC?

Today, there is cross-border Islamic investing, but its mainly outbound from Muslim world to safe, liquid and diversified asset classes in the non-Muslim world. To redirect some of the capital flight requires: 1) dashboard home and host country opportunities; 2) introducing new asset classes, like halal agro-food; and 3) establishing an OIC Wealth Management Hub. Thus, the challenge is the opportunity.

[Rushdi Siddiqui, former global director at Dow Jones Indexes and global head at Thomson Reuters in Islamic finance, is now president/ED of a (halal) US-based agro-food company.]


HUMAYON: Is public-listed Twitter Shariah-compliant?

Technology sector has done fairly well when it comes to Shariah-compliancy of stocks listed on exchanges around the world. On Nov 7, 2013, Twitter went public with a well-publicised initial public offering (IPO), sparking interest from the investors from around the world. Before this Facebook went for a rather controversial IPO on May 12, 2012.

Edbiz Consulting Ltd, a London- based Islamic finance advisory firm that has partnered with Nasdaq to develop a Shariah- compliant version of Nasdaq 100, reported that Twitter stock was Shariah-compliant when the company went public. What does it mean?

There are a number of Shariah screening methodologies that have been employed by index providers around the world to construct, maintain and market what are known as Islamic indices. The most widely used methodology is that of Dow Jones but other methodologies, ie, that of FTSE, MSCI and Nasdaq do not significantly differ.

There are two screens employed by Shariah screening companies: 1) business screen; and 2) financial screen. The former ensures that the overall business of a firm is not outright in contradiction with Islamic teachings on business and commerce.

The business screen, therefore, excludes all the stocks that lie in the impermissible sectors like financials (except Islamic banks and other financial institutions that explicitly commit to Shariah guidelines for conducting their businesses), gambling and gaming, entertainment (including but not limited to pornography), weapons manufacturing, alcohol, pork and tobacco etc.

The financial screen is based on a number of financial ratios. The most frequently used financial ratios are the following:

• Gearing ratio: Total interestbearing debt divided by market capitalisation of the company.

• Liquidity ratio: Cash plus interest bearing securities divided by market capitalisation.

• Cashflow ratio: Receivables divided by market capitalisation.

• Income ratio: Impermissible income divided by total income.

Dow Jones Shariah screening methodology employs the above-mentioned gearing ratio, liquidity ratio and the cashflow ratio and excludes all those stocks that exceed a threshold level of 33%.

They recommend to investors to employ a 5% threshold for the income ratio, although they do not incorporate income ratio in the process of constructing and maintaining their family of Islamic indices.

FTSE, on the other hand, uses total assets in the denominator as opposed to market capitalisation when computing the above ratios. They also include cash in addition to the receivables in the numerator when calculating the cashflow ratio. They use 33.33% as threshold for the gearing and liquidity ratios while a higher threshold level (50%) for the cashflow ratio.

FTSE may seem a bit liberal financial screening methodology but it actually depends on the market conditions to infer whether it is more conservative or liberal as compared to Dow Jones.

In bullish market conditions, Dow Jones may prove to be more liberal than FTSE, and the other way around in bearish markets.

MSCI has a similar approach to FTSE in terms of denomination of ratios but their thresholds are more consistent with Dow Jones. All the three ratios have a threshold of 33.33%.

Russell-Jadwa Islamic indices use financial ratios similar to Dow Jones’s but threshold of their cashflow ratio (with cash included in the numerator) is far higher than the Dow Jones’ — 70% for Russell-Jadwa as opposed to 33% for Dow Jones.

Securities Commission of Malaysia (SC) uses a more detailed Shariah screening methodology. Unlike other methodologies (which use 5% threshold for the income ratio), the SC uses two thresholds for this ratio to determine whether a business is Shariah-compliant.

Stocks are excluded from Shariah universe if the business of the companies issuing such stocks generates more than 5% revenue from the following sectors:

• Conventional banking including insurance.

• Gambling.

• Liquor and liquor-related activities, pork and pork-related activities, non-halal food and beverages.

• Shariah repugnant entertainment. • Interest income from conventional accounts and instruments.

• Tobacco and tobacco-related activities and other act ivit ies deemed Shariah repugnant.

The stocks will be excluded from Shariah universe only if the issuing companies generate more than 20% of their income from the following business activities:

• Hotel and resort operations. • Share trading and stock broking business.

• Rent received from tenants engaged in Shariah repugnant businesses.

• Other activities that are deemed Shariah repugnant. The other financial ratios (ie, gearing ratio and liquidity ratio) are the same as that of FTSE.

Twitter stock, when went public on Nov 7, 2013, fulfilled the requirements of all the internationally known Shariah screening methodologies.

This is true for Facebook stock as well, which along with Google, is included in Edbiz- Nasdaq 100 Shariah index.

Another interesting stock is Apple, which was Shariah-compliant until its iTunes businesses started generating more revenue, making it noncompliant with Shariah as it breached the 5% threshold on the income ratio.

[Prof Humayon Dar is chairman of Edbiz Corp London, and a visiting professor of Islamic Finance at Academy for Contemporary Islamic Studies, UiTM]