NEWHORIZON

NEWHORIZON Shawwal-dhu al Hijjah 1431
IIBI NEWS
Structuring Innovative Islamic Financial Products
4th Annual Three-Day Residential Workshop
The Islamic finance sector is one
of the fastest growing segments
of the global financial industry.
It has received tremendous
attention recently due to its
avoidance of the worst effects of
the recent financial storm.
Among the factors that shielded
Islamic financial institutions
(IFIs) are the facts that the
Islamic financial industry aims
to support real economic
activities rather than pure
financial ventures; the Islamic
economic framework offers
certain rules for the trading of
debt and therefore prevents
Islamic financial institutions
from the trading of debt as
practised in conventional
financial markets and Islamic
investment guidelines exclude
highly leveraged companies.
As the effects of this crisis,
however, started to appear in
real economic activities and the
value of real assets plummeted,
IFIs especially those with assets
concentrated in a few sectors of
the economy such as real estate,
began to feel the pinch. In the
last 18 months or so there have
a number of Islamic finance deal
defaults, notably sukuk
transactions and others are in
the process of being
restructured. This scenario has
created new challenges for
Islamic finance practitioners
trying to grow and expand their
business in the aftermath of the
worldwide financial crisis and
effectively serve their clients and
the markets in which they
operate.
Against this backdrop, the
Institute’s 4th annual three-day
residential workshop,
‘Structuring Innovative Islamic
Financial Products’ was held at
the University of Cambridge’s
Churchill College from 30 July
to 1 August 2010. The
workshop was attended by
bankers, fund managers,
regulators, accountants, lawyers
and heads of finance as well as
other senior managers in Islamic
and conventional financial
institutions, who came from as
far afield as France, Greece,
Lebanon, Luxembourg, Kenya,
Kuwait, Mauritius, Nigeria,
Saudi Arabia and Trinidad and
Tobago. The workshop was
supported by Path Solutions – a
leading system provider for the
Islamic financial services
industry and Kuwait-based
Rasameel Structured Finance,
which specialises in Islamic
securitisation - raising,
structuring and distributing
Islamic debt through financial
engineering as well as mergers
and acquistions. The
presentations and discussions at
the three-day interactive
workshop sought to define the
underlying concepts and
techniques that may be used in
developing innovative Islamic
financial products.
The workshop, led by Dr
Humayon Dar, CEO of BMB
Islamic – an international
advisory firm and a member of
the IIBI Editorial Advisory Panel
for NewHorizon, began with a
discussion of the key ingredients
which are essential for Islamic
financial innovation. These
include cutting-edge knowledge
of the latest financial
technology, a deep
understanding of the Shari’ah
principles related to transactions
and a proper understanding of
the clients’ requirements, as well
as trends in the Islamic financial
industry. He followed up with
an exploration of the innovative
applications of traditional
Islamic finance contracts such as
murabaha, musharaha,
mudarabaha and ijarah for
financial structuring. He moved
on to consider the possible use
of the some of the conventional
structures such as UCITS
(Undertakings for Collective
Investments in Transferable
Securities) for Islamic
investment and corporate
banking. Dr Dar examined the
possibility of using UCITS for
restructuring Islamic banks and
their businesses while keeping in
view the legal and regulatory
issues.
Mohammed Shafique of the
Institute of Islamic Banking and
Insurance then discussed the
concept and applications of
sukuk, normally referred to as
Islamic bonds. According to the
Bahrain-based Accounting and
Auditing Organisation for
Islamic Financial Institutions
(AAOIFI) – an international and
credible standards – setting body
for the Islamic financial services
industry, ‘Investment sukuk are
certificates of equal value
representing undivided shares in
the ownership of tangible assets,
usufructs and services or (in the
ownership of) the assets of
particular projects or special
investment activity’. Shafique
then went on to analyse the
evolution and growth of the
sukuk market; how they differ
from conventional bonds; key
underlying structures in sukuk
transactions and, using ijarah
sukuk as an example, he looked
at the various stages of a sukuk
transaction. He then examined
the impact of the February 2008
AAOIFI statement on sukuk,
which coincided with the
liquidity crisis in the financial
markets and resulted in a major
slowdown in sukuk activity in
2008. The sukuk market,
however, has gradually picked
up in late 2009 and 2010 with
the revival of investor
confidence and an improvement
of liquidity conditions in the
financial markets.
Muhammad Nurullah Shikder,
EVP and Head of Shari’ah
Advisory and Shari’ah
Compliance at Gatehouse Bank
UK elaborated the key Shari’ah
considerations to be observed
while structuring sukuk
transactions. These include the
concept of ownership in
Shari’ah in the context of
sukuk, AAOIFI rulings and the
use of purchase undertaking in
sukuk deals as well profit
distribution mechanisms for
sukuk investors and managers.
Ms Haliza Abd Rahim, Head of
Project Mangement at BMB
Islamic followed with a
presentation about
documentation issues with
Islamic financial products. As
there is often a trade-off
between achieving Shari’ah
compliance and conformity to
the local regulations, Ms Rahim
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