Transcript Islamic Finance Was, Warum und Wie

Islamic Wealth Management
Zurich, 12th January 2010
Michael Gassner, Islamic Financial Engineer
Sustainable Swiss Private Banking since 1841.
Islamic Finance intensively discussed …
Vatican Newspaper
Professor Willem Buiter,
„L‘Osservatore Romano“
London School of Economics
International Monetary
Fund
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Introduction

Islam is the youngest among the three Abrahamic religions and shares many
religious, social and ethical values with Judaism and Christianity.

Islam recognises all the prophets

The Messenger Muhammad is regarded by Muslims as the seal of the
prophets.

To understand the implications for the financial sector the basic religious
contents should be briefly outlined.
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Pillars of Islam
1.
Al Shahadah, is the first of five pillars of Islam and the only formal requirement
to become Muslim
2.
As Salat, a Muslim is obliged to perform five prayers to certain periods of time
in a special ritual manner
3.
Zakat, an obligatory social tax on Muslims owning wealth.
4.
Saum, fasting in the month of Ramadan for those capable of it
5.
Hajj, the pilgrimage to Mecca for those who could afford it
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Three Major Areas of Islam
Major Goals (Maqasid)
Legal Principles :
Fiqh (Muamalat)
Ethics (Akhlaq)
Finance focuses on the Islamic legal principles. Economics is stronger geared towards the
major goals (welbeing in the here an the hereafter, custodianship of mankind). Crossborder
business is dominated by secular jurisdictions like UK and review of Sharia compliance in
the sense of non violation of the principles.
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Islamic Law
Sources of Shariah
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Primary sources: Quran and Sunna (Hadith, transmitted sayings of the prophet)
Secondary sources: Consensus (Ijma), Analogy (Qiyas), Reasoning (Ijtihad), Public
Interest (Ihtisan), Legal Presumption (Istishab)
Objectives of Shariah (Maqasid Al Shariah)


Wisdom and welfare of people in the here and in the hereafter
Welfare in faith, intellect, posterity and property
Principles of Shariah (Fiqh)


Sources and methodology: Usul Al Fiqh
Branches of law: Furu al Fiqh, for Islamic Finance: Fiqh Muamalat
Schools (Madhab) of Fiqh


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Four schools (named after the scholar): Hanafi (Turkey, Egypt, Indian subcontinent, West
Africa), Maliki (North Africa, West Africa), Hanbali (Arabia), Shafi (Malaysia)
Wide majority of rulings are the same, but certain differences occur
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Tawhid and Ownership
Tawhid ( ‫) توحيد‬, meaning "declaring God one", is the Islamic concept
of monotheism.
According to Muhammad Nejatullah Siddiqi, the essence of Tawhid „is
a total commitment to the will of Allah, involving both submission and
a mission to pattern human life in accordance with His will. The will of
Allah constitutes the source of value and becomes the end of human
endevour. Life on earth is a test, and its purpose should be to prove
succesful in the test by doing Allah´s will. The entire Universe with
all the natural resources and powers is made amenable to
exploitation by man, though it is owned by Allah and Allah alone.
[...] Real ownership belongs to Allah, man holds property in trust
for which he is accountable to Him [...]“.
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Social Responsibility
Being a trustee of supreme ownership, Islamic Economics recognises
private and public ownership. However, this ownership is bound to
ethical and social considerations:




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Harmful goods and activities are not permissible, such as: alcoholics, gambling,
pork, pornography etc.
Wasteful use (or not making use) and extravagance is undesirable
Usage which injures or harm public interest has to be avoided
Creates obligation to support needy family members
Ownership creates duty of obligatory charity (Zakat)
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Permissibility
everything is permissible unless explicitly prohibited

Principle of Permissibility (Ibaha)
– Everything is permissible unless explicitly prohibited
– All prohibitions shall protect the Muslim

Islamic Finance requires proof of permissibility, because
– Complexity in regard to various jurisdictions and tax issues arising
– Predominance of impermissible financial transactions
– The single Muslim is not able to make himself proper due dilligence
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Workflow of Certification
corrections
Concept
ok
Sharia Board
Contracts
corrections
Sharia Review
(Audit)
Launch
ok
Sharia Board
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Prohibition of Riba = ‚interest on money lent‘

[Sura Al Baqarah (2), verse 275]

‫الذين ياكلون الربوا ال يقومون اال كما يقوم الذى يتخبطه الشيطن من المس ذلك بانهم قالوا انما البيع مثل الربوا‬
‫واحل هللا البيع وحرم الربوا فمن جاءه موعظة من ربه فانتهى فله ما سلف وامره الى هللا ومن عاد فاولئك اصحب‬
‫النار هم فيها خلدون‬

„Those who charge Riba are in the same position as those controlled by the
devil's influence. This is because they claim that Riba is the same as
commerce. However, GOD permits commerce, and prohibits Riba. Thus,
whoever heeds this commandment from his Lord, and refrains from taking Riba,
he may keep his past earnings, and his judgment rests with GOD. As for those
who persist in Riba, they incur Hell, wherein they abide forever. “

Majority opinion: Riba is prohibted disregarding the amount (high or low). It
means basically any increment in an exchange of the same item (money for
money but not money for commodity).
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Gharar / Maysir

Gharar: Uncertainty in contracts (aleatoric Element):
– Sale of an unborn camel
– Object of contract not clearly identified
– Uncertainty about the price

Maysir/Qimar: Elements of gambling
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Islamic Finance Rules 1x1

Al Ghunm bil Ghurm, „Returns are justified through risks taken“

Bay Kali bi kali, no trading of obligations with each other
– payment and delivery is postponed: Forwards, Futures

No trading of debts without consent of all parties at nominal value

Gold, Silver etc. are considered currencies, which are restricted to spot trading
without increment

Options not recognised (Object of the contract shall be an asset / commodity not
a right to purchase or sell)

„Form over substance“ – key critic on contemporary products, which are fulfilling
contractual forms but without following the substance of the rules
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Islamic financing techniques
Non-profit oriented techniques
Insurance
Money Lending
Takaful,
Profit oriented techniques
Asset
Financing
Equity
Services
Hawala
Murabaha
similar
Qard Hasan,
Ijara
Musharakah
Sarf
Cooperative
interest free loan
Istisna
Mudaraba
Wakalah
insurance
Salam
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Asset Financing – Return from capital not for capital
Contract
English meaning
Delivery
Payment
Murabaha
Sale with deferred
payment / installment
purchase
Spot
Deferred
Salam
Sale with full
prepayment
Deferred
Spot
Istisna
Sale of an item to be
manufactured
After finishing
Flexible till delivery
Ijara
Lease
Spot or deferred
During the term of
lease flexible
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Differences between Islamic Asset Finance and Loans

Operational costs require equity financing
– Credits in Islam all asset bound; wages, rents and installments need cash
flow from the project or equity to get paid, debt finance not foreseen
– Results into more solid financing structure, temporary shortage of credit can
be better borne, less insolvencies due to lack of liquidity caused by financial
sector

No interest on interest, hence exponential growth of debt avoided
– Only for negligence penalty is accepted for charitable purposes

Emphasis on solid equity financing

Credit is permissible, but needs to be modest enough to be paid off upon death
Impact on debt/equity structure and vicious circle of debt
(exponentional growth stopped)
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The Impact on Asset Management?

Portfolio Management
– Screening required

Operational Processes
– Sharia supervision and auditing
– Amendments to the legal documentation

Smaller universe and lower number of products
– Sufficient for professional equity portfolios
– Challenging for balanced portfolios
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Financial Screening Criteria (Islamic)
Financial Ratios:

Leverage Compliance:
Total Debt / market capitalisation (12 m average) < 33 %

Cash Compliance Level 1:
Account receivables / market capitalisation (12 m average) < 33 %

Cash Compliance Level 2:
(Cash + Cash Equivalents) / market capitalisation (12 m average) < 49 %

Interest Income to Total Income below 5 %
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Negative Industry Screens Compared
Islamic Finance
Sustainability
Pornography
Pornography
Tobacco
Tobacco
Alcohol
Nuclear Energy
Gambling
Armaments
Financials (Interest prohibition)
Chlorine & agrochemicals
Porc
Genetic engineering
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Solutions: Bank Sarasin Product Portfolio
Trusts
Estate &
Succession
planning
Murabah
a
Maraya
Wakala
Money Market &
Structured
Products
Portfolio & Fund
Management
Asset Management
Zero-Interest Loan
Murabaha Financing
Guarantee
Financing
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Islamic Estate Planning – Core Issues

Protection of the heirs, “do not leave your heirs poor” - to leave wealth to the
heirs is seen as recommended

After your death three deeds would last and support you in the hereafter:
– Having a righteous son who is praying for the parents
– Your teachings to people where they last benefitting from
– An ongoing charity (Trust/Waqf) which is doing good on a sustainable basis

Will
– A religious requirement
– Up to one third of the estate can be disposed by Will
– Remaining balance to Quranic heirs

Gift
– Completed and accepted Gift during lifetime (and before death is apparent)
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Various Types of Trusts Offering
Islamic Trusts
Charitable
Discretionary
During Lifetime
Income to Family
Capital to Charity
Irrevocable
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Islamic Finance Team
Fares Ahmad Mourad: University Graduate in Economics and
holder of a Post Graduate Diploma in Islamic Finance. 28 years of
finance experience at Arab Bank, UBS, CS out of which 9 years are
in Islamic Finance.
+41 (0)44 213 9308
[email protected]
Michael Saleh Gassner: University Graduate in business
administration. Prior to joining Bank Sarasin he was Division Head
in the Islamic Banking Group, Bank AlJazira, Saudi-Arabia. He is
also a frequent speaker and publisher on Islamic finance.
+41 (0)44 213 9306
[email protected]
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