issue no. 163 - january–march 2007 / muharram–rabi al awwal 1428

IIBI LECTURES
NEWHORIZON January–March 2007
February:
How to create a Shari’ahcompliant,
balanced
investment portfolio
Sufyan Gulam Ismail, CEO and founder of
1st Ethical group, considered how to create
a Shari’ah-compliant, balanced investment
portfolio at the IIBI February lecture.
Ismail started his career with Deloitte & Touche,
a firm of chartered accountants, which also
offers advisory, financial, management and
taxation services. In 2001, Ismail identified
a gap in the marketplace for a specialist firm
to provide bespoke tax solutions to ownermanaged
businesses. He filled that gap by
starting up 1st Ethical in the same year.
The lecture was chaired by Sultan Choudhury,
director of sales, Islamic Bank of Britain.
Social responsibility is gaining increasing
popularity in the corporate world. It is
perceived as a means of self-regulation to
demystify stakeholders’ concerns about
the operations of a business and a way
of highlighting the contribution to the
community and environment in which the
enterprise is operating. Shari’ah-compliant
products, with their underlying principles
of equity and social justice, embody the
same values.
As the Islamic finance industry grows,
Islamic financial institutions must
disseminate information about the range
of products available, along with their
different risk profiles, and must commit
to responsible business conduct, investment
in people and in the community.
The basic principles of Shari’ah, as
applicable to investments, include the
prohibition of interest and the avoidance
of unethical concerns and contractual
deficiencies, such as uncertainty and ‘risk
and reward’ consideration. There are other
key factors, however, which must also be
considered when screening for Shari’ahcompliant
investments. The shares of
gambling outlets and businesses, tobacco
companies, pornographic concerns, banks
and insurance firms dealing in interest, and
manufacturers and distributors of alcohol
must be filtered out. Add to this list
organisations whose principal activity may
not centre on the above but which derive
more than ten per cent of their income
from one or more of these activities; highly
leveraged companies (with gearing in excess
of 33 per cent); and companies involved in
activities prejudicial in any other way to
the interests of the Shari’ah.
Sufyan Gulam Ismail,
1st Ethical group
Ismail looked at the current retail products
in the UK marketplace and segregated them
according to their risk profile. He also
discussed the tax efficiency of these
investments. He cited low risk products,
including the Islamic bank accounts
presently offered by HSBC Amanah,
LloydsTSB and Islamic Bank of Britain; and
Shari’ah-compliant property investments.
Medium risk products are the ethical
unit trusts, which minimise the risk of
investment by diversifying the portfolio,
such as Friends Provident, musharakah
funds and property share funds. High risk
products include Middle East Islamic bank
equity funds, Shari’ah-compliant UK
equities and direct investment in the
Dow Jones Islamic index.
March:
Risk management in
Islamic finance
For the IIBI March lecture, Professor Rodney
Wilson, director of Postgraduate Studies at
Durham University’s School of Government
and International Affairs, addressed some
of the key issues faced by Islamic financial
institutions in managing credit, operational,
liquidity, Shari’ah, legal and regulatory risk.
The lecture was jointly chaired by Richard
Thomas, the former managing director of Asset
Management at Arab Banking Corporation,
London, and Professor Mahmood Faruqui,
honorary vice-chairman, IIBI.
With an increasing number of organisations
operating across borders, facilitated by
advances in information technology,
executives are focusing increasingly on
the management of the risk incurred by
the various business operations.
As financial institutions are key players
in each country’s economic stability and
growth, governments all over the world
are developing regulations and monitoring
mechanisms.
Such mechanisms are necessary in order
to maintain and enhance public trust in
their financial institutions, in this era of
globalisation, where millions of funds
can be transferred at the click of a mouse.
While the modern Islamic banking
movement is still in its infancy, it must
devote more resources, train more personnel
and build a comprehensive strategy to
manage risk and develop confidence in its
operations and long-term sustainability.
The distinctive nature of Shari’ahcompliant
financial liabilities and assets
has implications for risk management.
Professor Wilson focused on credit risk
initially – an area of great concern for all
financial institutions, but more important
in Islamic banking as Shari’ah ruling
emphasises the need to take a lenient
20 IIBI www.islamic-banking.com