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

CONFERENCE REVIEW
NEWHORIZON January–March 2007
The London Islamic
Financial Services Summit
Investors, lawyers, accountants and bankers gathered at the
Barbican Centre in London on 29th March 2007 to discuss
developments in Islamic banking products and services.
The summit was endorsed by the IIBI.
A key thrust of the conference was
discussing London’s role in the Islamic
banking industry. Some of the City’s
heavyweight figures – including Ed Balls
MP, economic secretary to the Treasury; Sir
Michael Oliver, a former Lord Mayor of the
City of London; Michael Ainley, the head of
the UK’s FSA (Financial Services Authority –
the UK’s financial market regulator); and
wholesale banks and investment firms unit,
all made enthusiastic addresses on the way
the UK government has changed regulations
to accommodate Islamic banking. There
were several references to the way in which
the UK has adopted a ‘principles-based’
approach rather than ‘just ticked boxes’
in a ‘rules-based’ approach.
To create a ‘level playing field’ between
the conventional banking market and
the rapidly developing Islamic market,
the government has passed legislation
specifically aimed at accommodating Islamic
instruments and has adopted changes to its
tax environment. In the March 2007 Budget,
the Chancellor announced changes to
accommodate ‘alternative finance investment
bonds’ specifically intended for the sukuk.
Currently, there are around 25–30 regulated
firms in the UK that are authorised to offer
Islamic products, with more applications
from banks in the pipeline. A UK base
enables firms to open in any EU country.
Some speakers felt that other worldwide
regulations and accords are proving more
problematic for Islamic banks to adopt.
The Basel II Accord, for example, is more
difficult to apply to an Islamic financial
institution because the instruments
it uses have different risk profiles from
conventional ones. Basel II requires banks
to allocate capital according to the perceived
risk of each asset class. The IFSB (Islamic
Financial Services Board) is attempting to
create capital adequacy guidance standards
for Islamic financial institutions, which will
provide a standard platform to help these
institutions make allocations against
specific Basel II risk categories.
New structures of Islamic products are
being developed and some were presented
to the conference. The world of derivatives
is now being made available to investors in
a form that is acceptable to Islamic scholars.
Traditionally, scholars saw these instruments
as speculative and a form of gambling. They
are now increasingly being accepted as a
hedging tool. The lack of standardisation in
Shari’ah products and differences between
countries makes developing Shari’ahcompliant
derivative products a more
expensive process. The ISDA/IIFM
(International Swaps and Derivatives
Association/International Islamic Financial
Market) are jointly discussing the principles
of a Shari’ah-compliant ‘master agreement’.
The developed draft is being reviewed by a
working group in conjunction with Islamic
scholars. The agreement will make derivative
products much easier to structure.
The conference was told that the most
common Shari’ah derivative structures
are the murabaha followed by the arboun
(resembling a conventional call option) and
then the salam (resembling a forward sale).
The murabaha can be used to configure
a profit rate swap which is a structure
equivalent to an interest rate swap in the
conventional market. The murabaha profit
swap is often used in conjunction with a
tawaruq. Also, Deutsche Bank has published
a white paper on how it structured an
innovative product using wa’ad (promise)
features that allows Shari’ah-compliant
investments to reference a wide range
of asset classes, including indices.
There are over 260 Islamic scholars around
the world involved with banking in some
way, although there are only around 20 who
are recognised globally. Of these, a dozen or
so regularly deal with Western banks. The
objective of having an Islamic scholar to
review a structure is to obtain a fatwa
regarding the Shari’ah compliance of the
product. One respected scholar shared
his viewpoint on the concept of Shari’ah
compliance with the conference. He pointed
out that Shari’ah consists of two parts: the
practical; and the theoretical representing
belief based on faith. When a product is
accepted as being Shari’ah compliant it
means that it is in-line with the practical
aspects and therefore doesn’t offend Islam.
This is not the same as a product being
Shari’ah based – one that incorporates a
full partnership between the bank and the
customer for their mutual benefit, including
genuine assistance as well as sharing of the
profits and risks. In this scholar’s opinion,
Islamic banking has grown from almost
nothing 30 years ago to a significant
business today. Currently, he feels, it is trying
to copy the conventional banking products
that have been developed over hundreds of
years. He questions whether the aim should
be to become Shari’ah based, rather than
simply Shari’ah compliant.
Although the sukuk is regarded by some
as a ‘new’ product, one speaker pointed
out that it is, in fact, one of Islam’s oldest
instruments. There are references dating
back to the Islamic Caliphates about the
‘sakk’ (whose plural is ‘sukuk’). The word
means ‘note or certificate’ and relates to
ancient traders acquiring additional capital
through mudarabah when setting off on
trading missions to India and other places.
Modern structures are more complex.
22 IIBI www.islamic-banking.com