Chazi, Rao & Syed: Tapping Funds for Development – A Case for Sukuk Financing

ABSTRACT:

It is a well-known fact that the infrastructure in many African countries is woefully inadequate. This has persisted for many decades despite the fact that these countries are rich in natural resources. We argue that Islamic bonds may provide a panacea for this chronic problem. This paper presents alternative Sukuk structures that can be considered for this purpose. It is our firm belief that if properly structured, Sukuk can be used as a catalyst for the development of infrastructure projects in African countries.

Available for download here.

 

Elasrag: Corporate governance in Islamic Finance – Basic concepts and issues

From the Introduction:

Islamic finance is the only example of a financial system directly based on the ethical precepts of a major religion, providing not only investment guidelines but also a set of unique investment and financing products.” Islamic finance is based on Shari’a, the Islamic law that provides guidelines for multiple aspects of Muslim life, including religion, politics, economics, banking, business and aspects of the legal system What Shari’ah compliant financing (SCF) seeks to do is to shape financial practices and accompanying legal instruments that conform to Islamic law. Major financial principles of Shari’ah include a ban on interest, a ban on uncertainty, adherence to risk-sharing and profit-sharing, promotion of ethical investments that enhance society and do not violate practices banned in the Qur’an and tangible asset-backing.(Elasrag 2011)

This book reviews Institutions offering Islamic financial services’ (IIFS’) corporate governance (CG) challenges and suggests options to address them. Four main concerns motivate this attention to the CG of IIFS:
1. CG is important for economic development;
2. the assets of IIFS are significant and growing,
3. sound CG may be more critical for financial than other
organizations, and
4. the CG vulnerabilities of IIFS may not have received adequate attention in conventional CG frameworks This book is one of few papers that highlight the importance of studying corporate governance for institutions offering Islamic financial services. The book is of value in describing governance in Islamic institutions and how there are many issues under the investigation process, especially issues related to the Shari’ah Supervisory board and its functionality.

One of the objectives of this paper is to discuss, and create greater awareness of, some of the crucial issues related to corporate governance in Islamic financial institutions. A second, but in fact more important, objective is to provide, in the light of this discussion, certain essential guidelines to improve corporate governance in these institutions and thereby enable them to not only maintain their momentum of growth and international acceptance but also safeguard the interests of all stakeholders. The paper gives particular attention to the mechanisms for corporate governance, including the Board of Directors, Senior Management, shareholders, depositors, and regulatory and supervisory authorities. It also focuses on the effective management of risks and, in particular, on creating a supporting environment through moral uplift, social, legal and institutional checks, greater transparency, internal controls, and Shari’a as well as external audit. The paper also indicates briefly the shared institutions that are needed for effective corporate governance.

 

Available for download here.

Belouafi & Chachi: Islamic Finance in the United Kingdom – Factors Behind its Development and Growth

ABSTRACT:

This paper aims at capturing the latest developments and growth of Islamic finance (IF) in the UK. The study also aims at shedding light on the driving factors that have been attributed to the rise of this phenomenon in this country. To meet these objectives, the paper utilizes historical and thematic analytical methodologies to draw some lessons and recommendations. The results show that the UK is the country number one in the West, in view of the number of institutions and Universities involved in the educational and training aspects relating to IF, the number of licensed intermediaries providing ‘Islamic’ financial services, and the number of law firms involved in legal and consultancy services in the IF field. Among the prime factors that have been explored to explain the gradual, but steady progress of IF in the country, are: (i) – The UK’s government proactive role, and (ii) – The active role played by a number of UK Muslim organizations.

 

Available for download here.

Elasrag: Corporate governance in Islamic financial institutions

From the Introduction:

Islamic finance is the only example of a financial system directly based on the ethical precepts of a major religion, providing not only investment guidelines but also a set of unique investment and financing products.” Islamic finance is based on Shari’a, the Islamic law that provides guidelines for multiple aspects of Muslim life, including religion, politics, economics, banking, business and aspects of the legal system What shari‘a compliant financing (SCF) seeks to do is to shape financial practices and accompanying legal instruments that conform to Islamic law. Major financial principles of shari‘a include a ban on interest, a ban on uncertainty, adherence to risk-sharing and profit-sharing, promotion of ethical investments that enhance society and do not violate practices banned in the Qur’an and tangible asset-backing.

Money, according to Islamic teachings is a measure of value, not a commodity. Debt is a relationship in which risk and responsibility are shared by all parties to a contract. Money must be put to practical use in creating real value for the participants of the transaction. It must be used to create, and not be a commodity in on and of itself. It because of this that the perception of hoarding capital, and the earning of a passive return on capital keyed to the passage of time, -i.e. interest – is prohibited. In short, money must not be made from money. The establishment of modern Islamic financial institutions started three decades ago. Currently, there are at least 70 countries that have some form of Islamic financial services; almost all major multinational banks are offering these services.

 

Available for download here.

Askari & Krichene: Islamic finance – an alternative financial system for stability, equity, and growth

From the Introduction:

Today, a number of poor countries suffer from slow economic growth with unproductive industrial and manufacturing sectors. A principal explanation lies in their unsupportive financial sector – low investment, shallow and fragile capital markets, and banks focused on short-term loans to the few corporations that have marketable collateral. Moreover, many of these countries are heavily indebted and face recurrent debt crises. The conventional financial system has not served them well. The advanced countries have been plagued by recurring financial crises. Minsky (1986) maintained that conventional finance was inherently unstable in the developed world. Periods of prosperity alternated with periods of depression and massive unemployment (Siegfried, 1906) and inevitable vicious cycles of periodic debt crises that push the economy into a recession or depression and wipe out much of the real income gains achieved prior to the crisis. Significant wealth is redistributed to debtors who have defaulted on their loans. Moreover, it is inflationary and, therefore, again inequitable. Prominent politicians have been critical of conventional finance. Eminent economists during the 19th and 20th centuries, witnessing financial crises occurring during their lifetime, proposed reforms that establish 100% reserve commercial banking and an investment banking system that channels investments on a passthrough basis. Some reforms called for abolishing interest-based credit and its replacement with equity-based investment. 100% reserve deposit banking was painstakingly described in the Chicago Reform Plan of 1933 (Phillips, 1994). However, financial institutions see fractional reserve banking and leveraging as important factors for their profitability and are opposed to such reforms.

The basic principles of financial stability advocated by many of these authors happen to be similar to those of Islamic finance. Islamic finance draws its precepts from the Quran and Sunnah. Basically, Islamic finance has two pillars: (i) a 100% reserve banking system and equity-based investment banking, and (ii) prohibition of interest and interest-bearing debt. Thus the only significant difference between the recommendations of these authors and Islamic finance is that all interest bearing debt is prohibited in Islam. In the Islamic system, credit plays a negligible role; there are no borrowers or lenders; there is no conflict between borrowers and creditors. There are only equityholders. There is no creation of money out of thin air or through the credit multiplier. Money injection does not multiply through the banking system, as banks do not lend deposits. Investment banks cannot cause a financial crisis as they invest their clients’ money only on a pass-through basis and thus systemic risk is minimised. As a result, Islamic finance is inherently stable.

Available for download here.

Mehri: The Differential Effects of Law, Culture and Political Risk on Fees, Performance and Risk-Taking Behavior of Islamic and Conventional Funds

ABSTRACT :

This paper considers an international sample of conventional and Islamic mutual funds to assess whether law, culture, and political risk affect the performance, risk-taking behavior and compensation fees of mutual funds. Overall, the results show strongly that legal conditions, culture, and political risk have robust differential effects on fees, performance and risk-taking behavior of Islamic funds and conventional funds. We find that Islamic mutual funds in countries with higher legal conditions receive lower fees, whereas conventional funds receive higher carried interest, lower fixed management fees and weaker expense ratio. In such conditions, conventional and Islamic fund managers have lower performance and take higher specific and systematic risk. Overall, Hoefsted culture’s measures affect significantly the fees structure, performance and risk-taking behavior with robust differential effects on Islamic and conventional funds. Focusing on political risk effects, we show that, in countries with higher political risk, carried interest and performance will be higher, whereas the specific and systematic risk will be stronger for Islamic and conventional funds. The components of country legality and political risk Index have significant differential effects on Islamic and conventional funds’ characteristics.

 

Available for download here.

Al-Kuwari: Mission impossible? Genuine economic development in the Gulf Cooperation Council countries

ABSTRACT:

The Gulf Cooperation Council (GCC) is considered one of the most important regional entities in the world. It provides a framework for stability regarding world oil and gas supplies and facilitates great wealth from oil and gas exports. After more than thirty years of promises from GCC countries, however, how does oil and gas wealth impact actual economic development, particularly in the non-oil economy and private sector? This study highlights the existence of economic development in the GCC states in three aspects: the current demographic structure, economic growth and diversification, and the role of private sector development. The analysis shows that an unbalanced population structure causes a great drain on national income and turns the national population into a minority in some of the GCC states. Furthermore, the GCC countries’ economy still depends heavily on oil revenue, resulting in public sector domination. As a result, the private sector is underdeveloped and still does not exert significant influence on economic development. The study concludes that, in spite of the declaration of the GCC articles of association regarding the link between development and integration, the GCC is still far from demonstrating real long-term development.

Available for download here.

Ulus: Fixed Income Investment (Sukuk) in Islamic Finance

 

ABSTRACT:

Recently many books, newspaper articles and research papers have been written under the  heading of “Sukuk”. In this article we will try to provide a brief explanation of the meaning of Sukuk and its presence in the global financial markets. New Sukuk issuance worldwide could once more exceed $100 billion this year (2013), according to S&P (March 2013) due to support from tight yields and innovative structures. Funding needs and large infrastructure investments in the Organization of Islamic Cooperation countries (OIC), combined with better global investor sentiment, lie behind today’s momentum in the Sukuk market. The Gulf Cooperation Council countries (GCC) and Asia will remain the key engines for growth of the Sukuk market. Growth in cross-border Islamic bond issues points to greater convergence in an industry that has been divided by tensions between the Middle East and Asia regarding Sukuk rules, opening the door to a much wider pool of investors. However, structures are still not standardised, and some Gulf-based Shariah scholars have objected to certain structures used in Asia, a region that has proven to be more flexible in its transactions.

Available for downoad here.