Global Leaders In Islamic Finance: Industry Milestones And Reflections c3s1x

Table of Contents

Title Page

Copyright

Dedication

Acknowledgments

Selected List of Acronyms

Introduction

Selection of Leaders

Revealing Thoughts

Chapter 1: The Islamic Economist/Activist

Early Influences: Muhammad Iqbal, Muhammad Asad, and Sayyid Abul A'la Mawdudi

Operationalising Islam: Sayyid Abul A'la Mawdudi and Jama'at-e-Islami

Milestone: First International Conference on Islamic Economics

International Influence: Islamic Economics as an Academic Discipline

Spreading the Message Abroad: Europe and the Islamic Foundation in the United Kingdom

Islamisation of the Pakistani Economy

Islamic Economics versus the Narrow Pursuit of Profit

Forty Years On: The Wood for the Trees

The Last Word

Notes

Chapter 2: The Very First Mover

Always Begin at the Beginning

Dubai: The Environment

Dubai Islamic Bank: Early Response

First Islamic Banking Conference—May 1979, Dubai

Development and Challenges

DIB, UAE, and Corporate Governance

Hajj Saeed, Dubai, and the Islamic Economy

Forty Years On

The Last Word

Notes

Chapter 3: The Well of Influence

Germination

Catalysis: The Establishment of Dar Al-Maal Al-Islami

The Business of DMI: Navigating Uncharted Waters

Current Holdings

Forty Years On: “The Aura Is Much Bigger than the Reality”

“The Muslim World Went to Sleep”

“Eventually, I Think, Everybody Will Become a Salafi”

The Last Word

Notes

Chapter 4: Steadily Spreading the Blessings

Spreading the Baraka

Gone West: Al Baraka in the United Kingdom

Advancing the Islamic Economy

Islamic Megabank

World Zakat Fund

The Halal Industry

Ask Not What the Community of Islamic Countries Can Do for You

Forty Years On: Mechanisms over Maqasid

The Last Word

Notes

Chapter 5: The Systematic Rise of a National Industry

Lead-up to the 1981 Decision

National Steering Committee and Establishing Bank Islam

Building an Industry Systematically

On Growth and Development

Islamic Capital Market: Malaysia as a Global Sukuk Leader

A Model Nation for Islamic Finance

The Better System

Thirty Years On: And Still Much More to Be Done

The Last Word

Notes

Chapter 6: The Islamic Economist

The Second Stage of Islamic Economics

Risk Transfer and the Global Financial Crisis

Advancing Risk Sharing for the Benefit of All Humanity

“In Islam, the ‘Other’ Doesn't Exist”

IMF and Islamic Finance

Forty Years On: The Wood for the Trees

Building the Roads to a Better Economy

The Last Word

Notes

Chapter 7: The Global Standard-Setter

ing for a New Paradigm

AAOIFI: A Landmark in the History of Modern Islamic Finance

Setting the Standards

IFSB: Working with the Regulators

Changing the Landscape: Integrating Islamic Finance into the Global Financial Architecture

Twenty Years of Setting Standards for Islamic Finance

Moving Forward

The Last Word

Notes

Chapter 8: The Shari'ah Scholar

The Role of Shari'ah Scholars in Islamic Financial Institutions

What Is Shari'ah Compliance?

Shari'ah Compliance for an Ethical Society

Second-Generation Shari'ah Scholars

On Training Shari'ah Scholars for Islamic Finance: Climb the Stairs One by One

Two Boards, Three Boards, Four Boards, Five. How Many Is Too Many?

Great Strides in Islamic Finance: The Contribution of Shari'ah Scholars

Forty Years On: The Wood for the Trees

The Last Word

Notes

Chapter 9: The Lawyer

Many Firsts

“The United States Is Probably the Second Largest Islamic Finance Market in the World”

“The United States Is One of the Easiest Places in the World to Do a Shari'ahCompliant Deal”

Consulting and Structuring Deals Worldwide

Critical Factors for the Development of Islamic Finance

Code of Conduct: Lawyers and Shari'ah Scholars

101: On Wholesale and Retail

Maqasid al Shari'ah and the Non-Muslim Islamic Finance Lawyer

Seventeen Years On: The Woods for the Trees

The Last Word

Notes

Chapter 10: The Equity Capital Market Man

Building Indices and Benchmarks for the Global Industry

Global Viability: Outperforming Conventional Indices and Averting Enron

Wherefore the Pulse?: Shari'ah-Compliant and Shari'ah-Based Indices

Gaps and Disconnects

Major Disconnect: On Information

The United States of America, Islam, and Islamic Finance

The Halal Industry

The Last Word

Notes

Chapter 11: More than the Sum of Its Parts: Forty Years of Islamic Finance

Growth beyond Expectations

My Shari'ah, Your Shari'ah: What Is So Authentically Islamic about This System?

A Viable Business Model

Beyond Banking and Finance: The Islamic Economy

The Last Word: Commitment to the Islamic Basis as a Better Way

Notes

Glossary

References

About the Author

Index

Cover image: © iStockphoto.com/George Clerk

Cover design: Andrew Liefer

Copyright © 2014 by John Wiley & Sons Singapore Pte. Ltd.

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Acknowledgments

Whoever does an atom's weight of good will see it, And whoever does an atom's weight of evil will see it.

—Al Qur'an, Sura 99, Az Zalzalah, Verses 7–8

Many have helped make this book possible, and I would like to thank all for any and every contribution. Please accept my sincerest apologies if I have missed anyone.

None of this would have been possible without the graces and blessings of Allah (swt), and I am very thankful for His infinite generosity and guidance.

My most special thank you to my most-loved and cherished friends who have kept me sane for so many years. The most special thank you and my utmost debt of gratitude to Tatiana Tahir-Craven who, even from Melbourne, Australia, provided me with much-needed on a daily basis. I speak nothing but the truth when I write that I could not have survived without her friendship. My love and thanks also to Rashidah Brandeis in Singapore, Samija Serifa in Latvia, and Annex Achieng in Italy. By extension, thank you Peter Craven, Paul Brandeis, Luigi Leotta, and all your bubbly brood—Sarah, Thara, Sonia, Lea, Umred, and Agostino.

My appreciation to Nick Wallwork, Jules Yap, Gemma Rosey and Chris Gage at John Wiley & Sons in Singapore and to Siti Kasim in Kuala Lumpur, who

ed me enough to introduce me to Nick some moons ago.

For the work of transcribing dozens of hours' worth of interviews, thank you especially Jason Gray in South Africa and Zaheer Thai Kandy in Dubai.

For suffering the reading of draft chapters, thank you especially to Al Zaquan Amer Hamzah in Kuala Lumpur and Nagham Osman in Cairo for introducing me to Tanya Chan-Sam in the UK. Many thanks also to others who provided and comments, including Ameena Al Haddad and Juhaina Kasimali in Bahrain, Zuzanita Zakaria in the United States, and Nurini Kassim of Securities Commission Malaysia. To Cheryl-Ann Low in Singapore, thank you for your fresh eyes on the pages.

Thank you to all at Thomson Reuters Islamic Finance Gateway for the work that has taught me a lot, including Dr Sayd Farook, Wiebke Buelow, Blake Goud, Shaima Hasan, Ammar Radhi, Yusuf Radhi, Redha Al Ansari, Karim Arafa, Ameena Al Haddad (again), Juhaina Kasimali (again), Dua'a Al Masqati, Noor Khamdan, Mazen Al Saleh, and Sameera Al Bulushi.

The interviews were made possible with the help of many people including Shiraz Gull and Ajmal Mehmood Awan of the Institute of Policy Studies in Islamabad, Pakistan; Ahmad Majid Lootah in Dubai; Edith Butcher of Dar AlMaal Al-Islami in Switzerland; Sharaf Khawaja of Ithmaar Bank in Bahrain; Hassan Ibrahim, Dato' Vaseehar Hassan, and Mohamed Mousa of Dallah AlBaraka Group in Saudi Arabia; Maznah Bahari and Ima Abu Bakar of Perdana Leadership Foundation in Kuala Lumpur; Wan Zaleha Radzi also in Kuala Lumpur; and Siham Ismail and Yazmin Aziz of IFSB in Kuala Lumpur.

Thank you very much to those who very generously gave of their time to entertain my questions and provide me with much background information,

including Dr Ibrahim Kamel; Professor Rodney Wilson; Dr Yahia Abdul Rahman of LARIBA; Khalid Abdulla-Janahi of Dar Al-Maal Al-Islami; Daud Vicary Abdullah of INCEIF; Professor Simon Archer; Professor Hossein Askari; Rafiza Ghazali of Cagamas; John Goodman of Ogilvy Noor; Abdulaziz Goni of Thomson Reuters; Dr Wafik Grais; Farrukh Habib then of INCEIF and now of ISRA; Rafe Haneef of HSBC Amanah; Abdullah Haron then of IFSB; Dr Zamir Iqbal of the World Bank; Shelina Janmohamed of Ogilvy Noor; Sairana Mohd Saad; Jahanara Sajjad of Hawkamah in Dubai; Sheikh Muddassir Siddiqi; Anthony Travis, and Dr Murat Ünal of Funds@Work.

Last but most certainly not least, thank you to the individuals who very graciously and generously gave of their time to sit through the interviews with me. Encounters with them have been inspiring: Professor Khurshid Ahmad, Hajj Saeed Lootah, HRH Prince Mohamed Al Faisal Al Saud, Sheikh Saleh Abdullah Kamel, Tun Dr Mahathir Mohamad, Tan Sri Nor Mohamed Yakcop, Mustapha Hamat, Wan Rahim Kamil, Professor Abbas Mirakhor, Professor Rifaat Ahmed Abdel Karim, Sheikh Nizam Yaquby, Michael McMillen, and Rushdi Siddiqui.

Selected List of Acronyms

A AAOIFI ADB AED B BCBS BCCI BIS BNM BoE C CIBAFI COMCEC D DIB DJIMI DMI E ESG G GCC GIC GII I IAIB IASB IBB

ing and Auditing Organisation for Islamic Financial Institutions Asian Development Bank Emirati dirham Basel Committee on Banking Supervision Bank of Credit and Commerce International Bank for International Settlements Bank Negara Malaysia (the Malaysian Central Bank) Bank of England

General Council for Islamic Banks and Financial Institutions Committee for Economic and Commercial Cooperation of the Organisation of the Dubai Islamic Bank Dow Jones Islamic Market Indexes Dar Al-Maal Al-Islami Environmental, social, and corporate governance Gulf Cooperation Council Government Investment Certificate Government Investment Issue International Association of Islamic Banks International ing Standards Board Islamic Bank of Britain

ICM IDB IFRS IFSB IICG IIFM IILM IIMM IIUI IMF INCEIF IOSCO IRTI ISRA IZO K KFH L LIBOR M MENA N NGOs NYT O OIC P PwC R RM S

Islamic Capital Market Islamic Development Bank International Financial Reporting Standards Islamic Financial Services Board Islamic Investment Company of the Gulf International Islamic Financial Market International Islamic Liquidity Management Corporation Islamic Interbank Money Market International Islamic University in Islamabad International Monetary Fund International Centre for Education in Islamic Finance International Organisation of Securities Commissions Islamic Research and Training Institute International Shari'ah Research Academy for Islamic Finance International Zakat Organisation Kuwait Finance House London Interbank Offered Rate Middle East and North Africa Nongovernmental organisations New York Times

Organisation of the Islamic Conference, or Organisation of Islamic Cooperation (f PricewaterhouseCoopers Malaysian ringgit

SAC U UAE UNDP W WSJ

Shari'ah Advisory Council United Arab Emirates United Nations Development Programme Wall Street Journal

Introduction

What is Islamic finance, and how is it different from “regular” finance? Why is there a need for it, and how did it all start? Is it only for Muslims?

This book is not a technical book or textbook on Islamic finance; it will neither teach you the finer details of Islamic financial structures nor present the minutiae of technical issues that challenge the Islamic finance industry.

This book brings you the individuals who have built the industry from scratch, individuals who were there from the very beginning of this new industry, and individuals who have contributed to Islamic finance at the global level. Within these pages you will encounter the motivations behind industry milestones and learn about the major challenges and issues affecting the modern Islamic finance industry since its birth in the 1970s through the perspectives and very candid opinions of leaders responsible for some of the industry's most significant developments.

The modern Islamic banking and finance industry is widely acknowledged to have its roots in the Mit Ghamr Savings Bank in Egypt, which opened its doors in 1963. The bank was established by the late Dr. Ahmed Al Najjar, and operated more along the lines of an interest-free cooperative credit union. Unfortunately Mit Ghamr Savings Bank was shuttered in 1967 due to various political reasons. Thereafter the first Islamic commercial bank opened in Dubai in 1975. From that first Islamic commercial bank to over 600 Islamic financial institutions in more than 50 countries today, the Islamic financial industry continues to grow much faster than the conventional interest-based system, charging forward as it escaped relatively unscathed from the direct impact of the global financial crisis that started in 2007–2008.

But Islamic finance did not just magic into existence from the 1960s. To different degrees, Muslim communities have been influenced by and aligned their trade rules and financial transactions with shari'ah since the spread of Islam from its Meccan and Medinan epicentres in the seventh century. European colonization of Muslim lands punctuated the development of Islamic finance, and introduced the now all-pervasive banking model. It was only from the 1970s that we see an institutionalized financial system following shari'ah, albeit largely in the “Western” banking and finance mould, that has grown to become international. Fuelled by Islamic revivalism and Middle Eastern petrodollars, the industry mushroomed following the establishment of two pan-Islamic initiatives: the Organisation of Islamic Conference in 1969 and the Islamic Development Bank in 1975. This contemporary industry is the focus of this book.

From 2000 to 2011 global Islamic finance assets achieved a compounded growth rate of 27 percent, with the period 2000 to 2007 recording a higher 30 percent. Growth slowed post 2008 due to the impact of the global financial crisis on the real economy which in turn impacted negatively on assets held by the Islamic finance industry.

Most Islamic finance assets today are based in the Middle East and North Africa, followed by Southeast Asia (primarily Malaysia). But these regions are not the only ones with Islamic finance activities. Additionally, not all Islamic finance practitioners, clients and customers are Muslims. In Malaysia, for example, more than half of Islamic banking customers are non-Muslims, and there are many conventional financial institutions who now have Islamic businesses or who are involved with shari'ah-compliant finance, including Barclays, Citi, Deutsche Bank, HSBC, and Standard Chartered. While Muslims were Islamic finance's target market in the 1970s and 1980s, the expansion of Islamic finance from the 1990s pushed its appeal and use beyond the epicentres in the Middle East and Malaysia. Following the 2008 global financial crisis the Islamic financial industry has increasingly been considered as a viable and sustainable alternative financial system. The challenge for the Islamic finance industry today is how to move forward to widen its appeal based on differentiating itself from the

conventional financial model and offering its own unique products and services. In short, how does Islamic finance co-exist with the dominant global financial system while remaining distinct from it.

The prominent individuals considered in this book cover the broad range of sectors within the Islamic finance industry: banking, capital market, shari'ah, law, economics, policymaking, and international standard setting. Each chapter leads with the work and contributions of the leader and explores relevant issues while presenting insights and perspectives on Islamic finance-related matters closest to each individual's heart. All interviews were conducted face-to-face and in person except for two—the interviews with Professor Khurshid Ahmad and Michael J. T. McMillen were conducted online due to scheduling difficulties.

The pages of this book expose unswerving hearts steeped in the belief and conviction that the Islamic system is a strong and viable financial alternative. At the same time, they unreservedly address the industry's shortcomings. The leaders reveal what they consider to be the Islamic finance industry's achievements; perhaps more interestingly, they also reveal their own disappointments and misgivings about the industry's methods and current trajectory.

During the course of the writing of these chapters, drafts were read by people working within the Islamic finance industry as well as those completely unfamiliar with the subject matter. To the author, the more valuable reactions and came from the latter group. The main challenge faced by the author has been, firstly, to faithfully represent and relate the message of the merits and value of Islamic finance sans gross hyperbole and overstatement. The other challenge was to make accessible financial and Islamic financial jargon and argot to a non-Islamic finance readership. It is the author's sincerest hope that these twin challenges have been met to some extent; in working towards these aims, the honest from the non-Islamic finance readers has been invaluable.

Selection of Leaders

The ten leaders in this book stand on their own strengths and merits.

In selecting people to be interviewed for this book, the overarching aim was to include living individuals whose contributions to Islamic finance have made a global impact and who have blazed new trails and broken new ground for Islamic finance. To this end, the pioneers who built the industry from scratch are easy to spot in any lineup—these include Professor Khurshid Ahmad, Saeed bin Ahmed Al Lootah, His Royal Highness Prince Mohamed Al Faisal Al Saud, Saleh Abdullah Kamel, and Tun Dr Mahathir Mohamad. While the leadership, calibre, and influence of most of the interviewees are undisputed, every person involved in and/or familiar with the Islamic finance industry has their own views as to who or what a global leader in the Islamic finance industry is or should be. The views of a cross-section of the industry the author reached out to were revealing—in some cases, criticisms and attacks ad hominem were easily dismissed, but beyond this baseline almost everyone had different candidates to propose. Perhaps reflective of the progress and trajectory of the Islamic finance industry over the past four decades, this author learnt that you cannot please everyone and that you must press on towards a bigger picture with the knowledge that the final outcome would incur (no doubt impending) criticisms of many an industry stalwart. The author hopes that others will continue what this book has started and continue to document industry milestones and perspectives of its leaders.

The chapters are organised according to the interviewee's year of formal entry into the Islamic finance space. We start in Chapter 1 on the Indian subcontinent, looking at the roots of Islamic revivalism that inspired and influenced an entire generation of Muslims. From the upheavals of the Indian fight for independence and the Indian Muslim's struggle for a separate nation-state, we meet Islamic economist Professor Khurshid Ahmad, whose work and activism from the early 1970s led to the watershed First Islamic Economics Conference in Mecca in

1976.

In the oil-rich Gulf, we hear in Chapter 2 from Hajj Saeed Bin Ahmed Al Lootah whose deep piety and leap of faith resulted in the world's first Islamic commercial bank in Dubai in 1975. Hajj Saeed reveals Dubai Islamic Bank's difficulties growing up amid the emirate's booming wider economic environment. In Chapter 3, we learn of the travails of banks and industry building with the pioneering multinational Islamic financial institution established by HRH Prince Mohamed Al Faisal Al Saud, whose vision, conviction, and international reach has served as a well of influence for the industry. Then in Chapter 4 we hear from another larger-than-life trailblazer, Sheikh Saleh Abdullah Kamel, whose contributions and initiatives have set the foundation for the global Islamic finance industry.

In Southeast Asia, Malaysia's rise to global Islamic finance prominence is mapped in Chapter 5 by the country's former prime minister Tun Dr Mahathir Mohamad, who led the country's economic development for 22 years.

From the work of these pioneers who established the first academic, professional, and commercial institutions serving the Islamic finance industry come the second generation who have strengthened the industry and pushed its boundaries beyond core Muslim markets. In Chapter 6, one of Islamic finance's “intellectual godfathers,” former International Monetary Fund executive director Professor Abbas Mirakhor, gives us direct insight into the very essence and raison d'être of Islamic finance. We see how, through his leadership and expertise, a vital bridge between Islamic economics and conventional economics was built. In the same vein, in Chapter 7, Professor Rifaat Ahmed Abdel Karim leads the way in securing the stability and soundness of the global Islamic industry while pushing its integration with the global financial architecture. At the very core of shari'ah compliance we speak in Chapter 8 to one of the industry's most influential and prominent gatekeepers, shari'ah scholar Sheikh Nizam Yaquby. Working closely with Sheikh Nizam and other leading shari'ah scholars, leading expert and lawyer Michael J. T. McMillen, the topic of Chapter

9, has been responsible for some of the industry's most significant innovative legal structures and financial transactions, and he gives direct insight into the widespread use of Islamic finance in the United States. Last but not least, in Chapter 10 we hear from Rushdi Siddiqui, whose leadership launched the Dow Jones Islamic Market Index in 1999, an industry game-changer. From him we learn the difficulties the Islamic finance industry faces with regard to staying relevant to the man on the street while striving to achieve the highest levels of global professional efficiency.

Pulling all the threads together, Chapter 11 presents an overview of the main issues and concerns of the 40 years of the global Islamic finance industry as discussed in the 10 chapters.

Revealing Thoughts

It is important to point out that the focus of the book is Islamic finance. Through the interviews with the leaders, the book presents the subject's many facets and offers multiple perspectives on the world of Islamic finance. During the interviews, some leaders chose to focus primarily on their own work; others were more comfortable offering their opinions on a broad range of issues. As a result, the chapters are not structured in the same manner. This book is a collection of interviews that reveal different insights and opinions about Islamic finance and its development and growth over the past four decades. The author's aim has been to record each leader's main concerns, flesh them out, and position these concerns within the bigger financial and socio-economic context.

The interviewees in the first five chapters paint their work and contributions and the development of the Islamic finance industry in much broader brushstrokes than the next interviewees do. This could perhaps be due to their need to distil their decades of experience down to a memorable essence. At the same time, it is reasonable to expect most details to be lost from memory. In certain instances, some leaders chose to reveal more than others, but none was indecorous— readers hoping for a tabloid tell-all volume will be disappointed.

Most in the industry prefer to focus on the bigger textures and needs of Islamic finance than to count their own achievements. But not all shy away from the limelight. A leader or two asked the author why she had decided not to list awards and prizes won by the interviewees. Any mention of awards or prizes in the book s a much larger theme or strand of argument; by and large, it is hoped that the achievements and influence of our ten leaders speak through their actions, decisions, and thought leadership.

Lastly, readers will notice that some of our leaders are ed in their chapters by

others who have worked alongside them. These other individuals are featured where their voices and contributions are contextually fitting.

Broad Overview of the Development of the Islamic Finance Industry, Showing Milestones, Earliest Islamic Banks and Events/Institutions Mentioned in This Book

¹⁵s ¹ s Early interest-free experiments ¹ ⁷ s Kick start of operations ¹ ⁸ s Dominated by Islamic banking Second phase of Islamic economics ¹ s Rise of Islamic capital market Participation of global players ² s Infrastructure-building institutions Sukuk market takes off Industry shows its mettle post global financial crisis ² ¹ s Internationalisation and cross-border focus

Start of the developm Mit Ghamr Savings B ¹st International Con Advancement of Isla Shell MDS first suku General Council for Malaysia's first globa International Islamic

Chapter 1

The Islamic Economist/Activist

Khurshid Ahmad

Whoever rallies to a good cause shall have a share in its blessings.

—Al Qur'an, Sura An Nisa, Verse 85

“What Is Islamic Economics?” was the keynote address delivered by Professor Khurshid Ahmad at the World Assembly of Muslim Youth in Riyadh, Kingdom of Saudi Arabia, in 1973. That conference led to his involvement in organising the watershed First International Conference on Islamic Economics in Mecca in 1976. Professor Khurshid's vision and activism planted the seeds for the development of Islamic Economics at the institutional, political, and academic level. He started the first ever academic Islamic economics programme in the 1960s at Karachi University, and served as the founding chairman of the International Institute for Islamic economics at the International Islamic University in Islamabad, established in 1983. Nationally he has been involved with the Islamisation of Pakistan's economy since 1978. Professor Khurshid's work also extends to the United Kingdom, where the Islamic Foundation, an institution he founded in 1973, has been a major influence.

In my youth I was groping in search of an ideology and a life mission. The

choice was between socialism, which had glamour for the youth at that time, or going back to my own roots, Islam.

—Professor Khurshid Ahmad

Khurshid Ahmad was born in 1932 in Delhi, India. It was a time of heightened debates and demonstrations over the position of Indian Muslims as of a minority community in British India amid the much wider struggle for Indian self-government. By the time Professor Khurshid was born, Mahatma Gandhi had become the dominant figure in Indian politics, after more than a decade of campaigning for self-government from the British; his nonviolent movement became more important after the bloody Amritsar massacre of 1919 that saw British and Gurkha troops kill hundreds of peaceful and unarmed demonstrators protesting British forced conscription of Indian soldiers and the heavy war tax.

As part of his political activism, Mahatma Ghandi called for a new way of economics, or “true economics,” as he put it. His call was for economics that “stands for social justice, or promotes the good of all equally including the weakest, and is indispensable for decent life.”¹ But where Gandhi based this “decent life” on Hindu precepts of dharma (righteousness), artha (material wealth), kaam (happiness), and moksha (freedom from life), Indian Muslims were devoting their energies to establishing Islam as the foundation for their separation from predominantly Hindu India.²

Professor Khurshid grew up in this highly charged nationalist and Islamic revivalist atmosphere. He first received traditional Islamic schooling and then attended Anglo-Arabic Higher Secondary School, where he excelled academically. Stoked by the political overtones of the day, his pedigree and abilities as an activist and leader shone through from a very young age. A year before the partition of India, in 1946, he was elected president of the Children's League in Delhi. In this capacity at the age of 14, he regularly led demonstrations for Pakistan's independence. Following partition in 1947, his

family emigrated, first to Lahore, then to Karachi. In 1949 he wrote his first article, on Pakistan's budget, which was published in the Muslim Economist.³

In that same year he made the decision which would prove to be the wellspring for his life's work: he became a member of the Islami Jamiat-e-Talaba, the autonomous students' organisation that draws its inspiration from the Islamic revivalist party Jama'at-e-Islami founded by Sayyid Abul A'la Mawdudi in 1941.

From early on Professor Khurshid looked to Muslim thinkers who were searching for a new interpretation of Islam suited to the modern context. “In my youth I was groping in search of an ideology and a life mission. The choice was between socialism, which had glamour for the youth at that time, or going back to my own roots, Islam.”

He further explained his early influences: “It took about two years to discover that Islam should be my destiny. In this search I was influenced by Iqbal, Muhammad Asad and Mawdudi. But the most profound and all-embracing influence was that of Mawlana Mawdudi.”

Early Influences: Muhammad Iqbal, Muhammad Asad, and Sayyid Abul A'la Mawdudi

Much of the drive and early impetus for Professor Khurshid's work was informed by the activism and influence of these three leading Muslim thinkers of the twentieth century. The overwhelming discourse of Islamic revivalists like Sayyid Abul A'la Mawdudi and Muhammad Iqbal was political. All three planted within the Muslim consciousness the notion that Islam provides a holistic solution to human life as faced in the modern era. This was the prevalent contemporary Indian Muslim perspective in the face of the two-pronged challenges: colonial occupation and the predominant Indian Hindu design for an independent India. Muslims in India were seeking to both oust their British colonial masters and establish an Islamic system they could live by.

The fourteen-year-old Khurshid Ahmad who led student demonstrations for the Muslims of India was very much influenced by Muhammad Iqbal. Iqbal (1876– 1938) is far and away the predominant individual to have “captured the minds and imaginations of Muslims in India-Pakistan.”⁴ In his famous 1930 Allahabad Address, Iqbal advanced the idea for a separate land for the Muslims of India. (While Iqbal has been largely credited for the political vision of the separate nation-state for Indian Muslims, others argue for Chaudhari Rahmat Ali as the first to have coined the term “Pakstan”—a combination of Punjab, Afghan Province (North-West Frontier Province), Kashmir, Sind and Baluchistan—and enunciate a systematic plan for the formation of the Muslim nation-state.⁵)

Iqbal described Islam as a “social nizam” (social order) and argued that the religion was the best suited of all religions for the organisation of life, as it applied to every aspect of the life of the individual and society. He also called on the leaders in Europe, especially colonial Great Britain, to take a serious interest in Islam beyond culture and religion and to see it for its economic system that provides practical solutions to contemporary problems.

Iqbal and Muhammad Asad knew each other well. In his 1954 autobiography The Road to Mecca, Muhammad Asad called Iqbal “the great Muslim poetphilosopher and spiritual father of the Pakistan idea.”⁷ The two met in Lahore when Muhammad Asad ventured there following his life-changing six-year sojourn in Saudi Arabia, from 1926 to 1932, during which time he converted to Islam. (See Chapter 3 on Prince Mohamed Al Faisal Al Saud for encounter between Muhammad Asad and the prince's late father King Faisal in Saudi Arabia.)

Muhammad Asad (1900–1992) was born Leopold Weiss, an Austrian Jewish convert to Islam famed for his travels and writing and his translation and exegesis of the Qur'an. His view on economics and Islam was that “material prosperity is desirable, though not a goal in itself…. Islam does not it to the existence of a conflict between the moral and the socio-economic requirements of our life.”⁸ When he first met Iqbal in Lahore, Muhammad Asad was on his way farther east to eastern Turkistan (in Central Asia), China, and Indonesia. He never made it there. Iqbal persuaded him to remain in India “to help elucidate the intellectual premises of the future Islamic state.” According to Asad, both men agreed that “this dream represented a way, indeed the only way, to a revival of all the dormant hopes of Islam, the creation of a political entity of people bound together not by common descent but by their common adherence to an ideology.”¹

Iqbal did not live to see the establishment of Pakistan in 1947. Muhammad Asad did, and upon the creation of the new land, he was called on by the government to organise and direct the Department of Islamic Reconstruction. He wrote that the department “was to elaborate the ideological, Islamic concepts of statehood and community upon which the newly born political organisation might draw.”¹¹ As a result of his contribution to the new state, Pakistani citizenship was conferred on him, and Muhammad Asad served as Pakistan's foreign minister before reg as the country's Minister to the United Nations in 1952.

Operationalising Islam: Sayyid Abul A'la Mawdudi and Jama'at-e-Islami

Where Iqbal and Muhammad Asad captured the young Khurshid's imagination of an independent Muslim state and the need to revive Islam as a complete system of life, it was Sayyid Abul A'la Mawdudi's practical application of the religion that proved most attractive to Professor Khurshid. The professor explains that it was Mawlana Mawdudi's work that enabled him to have a clear understanding of Islam, its objectives, principles, norms, and the changes it wants to bring about in human thought and society. Professor Khurshid says, “It was in this context that Mawlana Mawdudi's ideas on economics had profound impact on my thinking.”

Mawlana Mawdudi (1903–1979) has often been said to be against the separation of Muslim Pakistan from India, a point that Professor Khurshid strenuously dispels. Mawdudi, according to Professor Khurshid, was not active in politics during the Pakistan movement, which largely fell between the years 1940 to 1947. During this time Jama'at-e-Islami, which was founded in 1941, worked as an ideological movement, not as a political party. Mawdudi, says Professor Khurshid, ed the Two Nation Theory and was one of the most effective critics of the concept of territorial nationalism expounded by Congress and nationalist Muslims. Mawdudi expounded the concept that Muslims are a nation based on faith and not territory, i.e., his vision was pan-Islamic in nature. Although Mawdudi did not participate in the Pakistan movement (a fact that perhaps contributed to later narratives reporting his alleged opposition to separation), he publicly stated his vote for Pakistan when the plan for Partition was announced in June 1947.

Mawlana Mawdudi migrated to Pakistan following partition. He was a friend of Professor Khurshid's father and was a regular visitor to the family home in Lahore. A prolific writer, Mawdudi produced over 120 books and articles

primarily on the contemporary application of Islam. His major contribution lies in his magnus opus, Tafhim al-Qur'an, an exegesis of the Qur'an, in which he presented the Book's relevance to everyday problems. The Tafhim took him more than 30 years to complete.

Mawdudi set up Jama'at-e-Islami in 1941 and devoted his life to articulating how Islamic revivalism could be brought about in political, social, cultural, and economic arenas. He attempted to make the religion more “operational” to mobilise the masses. Mawdudi's ideas were said to have “profoundly influenced” Sayyid Qutb, a leading member of Egypt's Al Ikhwan Al Muslimun in the middle of the twentieth century.¹² On the Indian subcontinent, Mawdudi has been hailed as the person who established the “economics of Islam” as a separate branch of knowledge.¹³ However he is far better known for his brand of political Islam as spread through his writings and Jama'at-e-Islami.

By its own description, Jama'at-e-Islami is “an ideological party”¹⁴ that stands for “complete Islam”¹⁵ and whose mission, according to Article 4 of the party's constitution, is the “establishment of Divine Order or the Islamic way of life”¹ “in its entirety, in individual and collective life, and whether it pertains to prayers or fasting, Haj or Zakat, socio-economic or political issues of life.”¹⁷

From its ideological roots, Jama'at-e-Islami moved into a more political phase when Mawdudi decided that the party would participate in Pakistan's 1958 national elections¹⁸ but the party did not gain much political success until 1977 with the arrival of General Zia ul-Haq in a military coup that overthrew Prime Minister Zulfikar Ali Bhutto. With Zia initially ive of Jama'at-e-Islami and the Mawlana himself, there were hopes from the party for a complete Islamisation of Pakistan. When Zia finally held national elections in 1985, Jama'at-e-Islami won only 10 of the 68 seats it contested in the National Assembly and 13 of the 102 for various provincial assemblies.¹ With Jama'at-eIslami proving to be less of a force than expected on the national stage, Zia's for the party waned. Although Jama'at-e-Islami did not become the force in politics it had hoped to be it nevertheless continued to have an influence in

Pakistani politics.² Outside its rank and file, sympathisers and ers, the party has many critics both at home and abroad especially for its strict interpretation of Islamic norms.

Professor Khurshid became active in Jama'at-e-Islami's student wing, Islami Jamiat-e-Talaba (the Islamic Student Association) in 1950, during his time at the Government College of Commerce and Economics in Karachi. He was elected head of the Karachi group in 1950 and from 1953 to 1955 served as its national president.

He latched on to Mawdudi's approach of making Islam “more operational,” understanding that this notion needed to be advanced to better serve the changing modern context. Professor Khurshid emphasised that Islam is not confined to piety in ritual but that the discipline of Islamic economics has to be “solid” if it is to be presented as a viable alternative system. To this end, he understood that Islamic economics has to be treated as a social discipline distinct from traditional exposition of the economic teachings of the Qur'an and Sunna of the Prophet Mohamed (pbuh). His own entrenched traditional Islamic education was followed by academic achievements at the undergraduate and postgraduate level; he received a BA in commerce in 1953, followed by an MA in economics in 1955, an LLB in 1958, and an MA in Islamic Studies in 1964.

With a strong foundation in both Islamic knowledge and “Western” commerce and economics, Professor Khurshid left Pakistan for the United Kingdom in 1968, heading to the University of Leicester, where he was a research scholar until 1973. He continued to live in Leicester until 1978. Between then and his return to Pakistan in 1978, he was a regular speaker at events organised by the UK's Federation of Student Islamic Societies, speaking generally about Islam. His activism and speaking engagements took him to many countries, including Algeria, Italy, Libya, Malaysia, the Netherlands, Turkey, the United States, Saudi Arabia, and West .

Milestone: First International Conference on Islamic Economics

By 1973 when Professor Khurshid was invited to give the keynote address at the annual conference of the World Assembly of Muslim Youth in Riyadh, he already had more than a decade's worth of scholarship and activism in Islam and Islamic economics. He had started teaching economics in 1955 at Urdu College Karachi and then ed Karachi University in 1961, where he taught economics until 1968. While there, he developed a course in Islamic economics within the undergraduate programme. The establishment of a master's programme followed —a programme he claims was “arguably the first of its kind in any university in the world.” Professor Khurshid formally retired from Karachi University in 1974.

“My own contributions, humble they are, were, in the earlier phase, to explain what Islamic economics is and show why a new approach was needed in economics. There was also a need to show that riba [interest] is at the root of many problems, not only in the Muslim world, but globally, and that we have to get rid of it.” The Qur'an makes several references to riba. Chiefly, following the line from the Qur'an found in the second chapter, Al Baqara, verse 275, “God has permitted trade and forbidden interest,” most Muslims take the injunction against riba as the cornerstone for Islamic banking and finance, and so its elimination is seen as necessary. (For details, see Chapter 6 on Abbas Mirakhor.)

Professor Khurshid addressed these issues in his 1973 keynote address. He also put forward the need for a research centre and a journal for Islamic economics in order to advance the field systematically. These projects were taken on by King Abdulaziz University of Saudi Arabia. (See Chapter 4 on Saleh Abdullah Kamel.) Professor Khurshid served on the Supreme Advisory Council of the research centre from 1979 to 1983.

Significantly, his suggestion for an international conference on Islamic economics was taken up. He re it well: “Immediately after the conference a small meeting was organised by Dr Muhammad Omar Zubair [president of King Abdulaziz University] and a follow-up meeting was held the very next week. A steering committee was formed to organise the First International Conference on Islamic Economics.” Professor Khurshid was a member of that steering committee.

The conference was originally scheduled for the end of 1975 but was pushed to February 1976, due to the assassination of King Faisal of Saudi Arabia in March 1975.

These initiatives were consolidated and implemented with haste due to the palpable momentum for Islamic solidarity surging through the Muslim world. This Islamic resurgence had started heating up during colonial times and was pronounced in the Indian subcontinent, with the activism and influence of leaders like Muhammad Iqbal, Muhammad Asad, and Mawlana Mawdudi spurring on young Muslims like Professor Khurshid to demonstrate and protest for separate Islamic nation-statehood. Other major Muslim countries were also stirring after independence. Egypt finally saw the British leave in 1952, the French left Morocco and Tunisia in 1956 and Algeria in 1962. In Southeast Asia, Tunku Abdul Rahman succeeded in gaining independence for Malaysia from the British in 1957. In the Arabian and Persian Gulf, the United Arab Emirates was formed in 1971 following the expiry of the British-Trucial Sheikhdoms agreement, and Bahrain and Qatar also became fully independent.

In of the development of Islamic economics, banking, and finance, the 1950s and 1960s saw early experiments in interest-free models. Most prominent was the Mit Ghamr Savings Bank in Egypt in the years 1963 to 1967 and Tabung Haji in Malaysia from 1963. Otherwise, the interest-based system introduced and practised by their colonial masters was common in the Muslim world, which

also adopted European systems of law.

Overall, newfound independence increased the tempo and clamour for panIslamic solidarity. When Al Aqsa Mosque in Jerusalem, Islam's third holiest site after Mecca and Medina, fell victim to an arson attack in August 1969, Muslim sensitivities (and rage) were ignited, and leaders established the Organisation of the Islamic Conference just a couple of months later. The movement, which started with 25 Islamic states, was championed and led by the late King Faisal of Saudi Arabia. It is now made up of 57 . (See the reference to Tunku Abdul Rahman in Chapter 5 on Mahathir Mohamad and the Malaysian story.)

The assassination of King Faisal in March 1975 punctuated that Islamic revivalist energy but did not derail plans already set in motion before his death for the establishment of the Islamic Development Bank in 1975 and the organisation of the conference. It was also in 1975 that Dubai Islamic Bank, the first commercial Islamic bank driven by the private sector, was born. King Faisal's son, Prince Mohamed Al Faisal Al Saud, went on to honour his father's wishes to see Islamic banks spread across the world, beginning with the Faisal Islamic Bank of Sudan in 1978 and the Faisal Islamic Bank of Egypt in 1979. (See Chapter 3 on Prince Mohamed Al Faisal Al Saud.)

Professor Khurshid considers the 1970s significant years for pan-Islamic solidarity, with more light being shone on Islamic economics, banking, and finance. Speaking specifically about this, he says, “The [interest-free banking] experiments in Pakistan in the 1950s and in Egypt in the 1960s were steppingstones. We reached the stage of take-off in 1975 and 1976 at the operational level.” As to the experiments in the 1950s that Professor Khurshid refers to, there was a short-lived experiment in Pakistan in the late 1950s when rural landlords set up an interest-free credit network.²¹ The one in Egypt in the 1960s was Dr Ahmad Al Najjar's Mit Ghamr Savings Bank from 1963 to 1967. Apart from these and Tabung Haji in Malaysia as prominent examples, Muslim countries adopted the conventional interest-based banking model.

“I regard the holding of the First International Conference in Mecca in 1976 as the most important milestone in our march towards Islamic economics, banking and finance,” says Professor Khurshid. The conference, whose idea he advocated, is widely viewed as the beginning of the development of Islamic economics and finance as modern scientific disciplines.

“What is clear is that Islamic economics is a new paradigm. It's not just some modification of the capitalistic paradigm. It's really clear that in Islam, the moral dimension—halal [permissible] and haram [forbidden]—provide a framework in which economic decisions have to take place.”

International Influence: Islamic Economics as an Academic Discipline

Building Islamic economics into an academic discipline, or as Professor Khurshid calls it, a “social discipline” would, in the strict sense of “social science,” entail adherence to the scientific method, as science must necessarily be value-free. The challenge for Islamic economics is that its basis is not scientific per se, but its fundamental precepts are based on the knowledge as revealed in the Qur'an and the life and teachings of the Prophet Mohamed (pbuh). This is still, in the twenty-first century, a challenge for Islamic economics. Perhaps unsurprisingly Islamic banking and finance has received the greatest share of attention by Islamic economists, as the banking and finance sectors have largely been driven by business needs and demands.

Defining “Islamic economics,” let alone its methodology, is a challenge. In view of the nascent stage and evolving process of the discipline (and Professor Khurshid still considers it nascent and evolving in 2013), a good part of the earlier work on Islamic economics was focused on explaining the fundamental economic doctrines of Islam or attempting to develop viable models for the operation of economic institutions in concert with Islamic teachings. The early works in the 1970s and early 1980s were followed by more scientific and quantitative methods that have more successfully caught the attention of Western economists. (See Chapter 6 on Abbas Mirakhor.)

Islamic economists must be well acquainted with shari'ah (Islamic law) and conventional economic theory and methodology. Some of Professor Khurshid's contemporaries include Anas Zarqa, Mohammad Abdul Mannan, Mustafa Zarqa, M. Akram Khan, Nejatullah Siddiqi, Syed Nawab Haider Naqvi and Umer Chapra. Professor Khurshid may not have produced as much work within the field as his contemporaries, but his activism has truly advanced the field of Islamic economics as an academic discipline.

Dr Umer Chapra, who is still actively involved in the field with the Islamic Research and Training Institute (IRTI), an organisation of the Islamic Development Bank, wrote in 1996:

However valuable the contributions made by some scholars in their individual capacities, they could not provide the thrust needed to establish the separate identity of the subject. It was the First International Conference on Islamic Economics held at Makkah in February 1976 which served as a catalyst at an international level and led to an exponential growth of literature on the subject. Dr Muhammad Omar Zubair and Professor Khurshid Ahmad played a pioneering role in the holding of this Conference as well as a number of other conferences and seminars that have helped provide momentum to the discipline.²²

Muhammad Nejatullah Siddiqi's Muslim Economic Thinking: A Survey of Contemporary Literature, published in 1981 by the Islamic Foundation, cited some 700 Arabic, Urdu, and English titles of original and commentary works on Islamic economics, most written in the decades from the early 1950s to the late 1970s. One matter that the survey brought to light is that the study of Islamic economics had, in the three decades surveyed, been referred to by various names and : “Islamic approach” was one, “from an Islamic perspective” and “Islamic economic system” were others.²³ Only in the 1970s did the term “Islamic economics” start gaining currency.

Following the First International Conference in 1976, Islamic economics entered into the conscience and discourse of international Islamic and Muslim initiatives. The push for the field to be taken seriously as an academic discipline was further ed by its recognition at separate initiatives towards the end of the 1970s and the start of the 1980s. These include the World Conference on Islamic Education and the Universal Islamic Declaration of Human Rights.

The resolutions of the First, Second, and Third World Conference on Islamic Education in 1977, 1980, and 1981 studied the needs, aims, and possible curricula for Islamic education at all formal levels. The second conference, held in Islamabad, agreed that an Islamic civilisation course should cover economics and be taught at the university level in all Islamic countries.²⁴

In the same year, the Universal Islamic Declaration of Human Rights, prepared on the initiative of the Islamic Council of Europe which was established in 1973, was penned by scholars, Muslim jurists and representatives of various Islamic movements. It included the objectives and features of an Islamic economic system, stating that it is based on social justice, equity, moderation, and balanced relationships.²⁵

These initiatives contributed to the development of Islamic education, Islamic economics included, in several Muslim countries around the world, including in Pakistan with the International Islamic University in Islamabad (IIUI). The IIUI, established in 1982, grew out of the shari'ah faculty at the Quaid-i-Azam University. A year after the IIUI's founding, Professor Khurshid became the founding chairman of the newly created International Institute for Islamic Economics there, a position he held until 1987. Ziauddin Ahmad, former deputy governor of the State Bank of Pakistan, was its first director general.

The institute was a pioneering initiative. To this day it offers undergraduate and postgraduate degrees that are a blend of conventional economics, Islamic economics and jurisprudence related to Islamic economics. It has been a fertile ground for scores of Islamic economists who would go on to contribute to Islamic economics, banking, and finance at the international level. Professor Khurshid re the earliest of the institute: “Munawar Iqbal and Mohammad Fahim Khan were among the senior staff of the Institute. Munawar Iqbal was a senior research fellow in the Pakistan Institute of Development Economics in Islamabad…. It was at my request that he ed the

International Institute of Islamic Economics. Both he and Fahim Khan have been the architects of the Institute and later served as its directors general.”

Professor Khurshid also re the institute's earliest students: “Tariqullah Khan and Humayon Dar were both students at the institute when I was its chairman. They were among the brightest of our students and have made their mark in the profession.” Dr Tariquallah Khan went on to serve at the IRTI for many years and is still active on the global scene, teaching and speaking about Islamic economics, banking and finance. Dr Humayon Dar is also active on the global Islamic finance scene.

From that first institute in Pakistan, other courses began to pop up around the world. Islamic economics, banking and finance began to be introduced in universities in Muslim countries like Egypt, Jordan, Malaysia, and Saudi Arabia. They also began in the United Kingdom. Dr Humayon Dar went on to cofound, with Dr John Presley, Loughborough University's Master of Science (MSc) programme in Islamic economics, banking and finance in 2000. In the late 1990s, Durham University started offering postgraduate programmes in Islamic finance, driven by Professor Rodney Wilson at the helm. Unlike Loughborough's programme, which was discontinued in 2005, Durham's has grown from Professor Wilson's one-man department to the establishment of the Durham Centre for Islamic Economics and Finance, offering Masters and PhD programmes.

In 2000, Professor Khurshid's Islamic Foundation opened the Markfield Institute of Higher Education to offer postgraduate courses in Islamic Studies and Islamic banking, finance and management. Professor Khurshid was its rector from 2000 to 2009. The institute is now an associate college of the University of Gloucestershire, and Professor Khurshid is the chairman of the institute's board of directors. He is also still a member of the board of trustees of the IIUI.

Spreading the Message Abroad: Europe and the Islamic Foundation in the United Kingdom

Professor Khurshid has long harboured the desire to spread the message of Islam and Islamic economics beyond the Muslim world. His activism as a scholar touring Europe from the late 1960s laid the foundation for his interest in establishing a base on the continent. He was most familiar with the United Kingdom, having been based at the University of Leicester from the late 1960s to the 1970s. Very early on in his career, even before the first seminal conference in Mecca in 1976, Professor Khurshid established the Islamic Foundation in 1973. The Islamic Foundation is based in Leicester in the English East Midlands, and specialises in research, education, and publication, working to advance Islamic economics and Islam in general.

Leveraging on its position in Europe, it also focuses on interfaith relations. This is an area that Professor Khurshid himself has long been involved in. Since the late 1960s when he was traveling throughout Europe as a scholar and activist, Professor Khurshid became involved in several interfaith dialogues. From 1974 to 1978 he was the vice president of the Standing Conference on Jews, Christians, and Muslims in Europe (a project which celebrated its 40th conference in March 2013), and in 1976 he was the co-chairman of the Christian-Muslim Dialogue in Chembasey, Switzerland. Professor Khurshid still participates in interfaith dialogue events, and the Islamic Foundation publishes the biannual journal Encounters: Journal of Inter-cultural Perspectives.

In the field of Islamic economics, the Islamic Foundation has served as a research centre and publisher of books and journals as well as a centre of education and training through its Markfield Institute. Its Islamic Economics Unit opened its doors in 1976 and since then has produced some 30 titles, in addition to its biannual Review of Islamic Economics. Muhammad Nejatullah Siddiqi's Muslim Economic Thinking: A Survey of Contemporary Literature was

one of the first of its publications, followed by Insurance in an Islamic Economy by the same author in 1985. The Islamic Foundation has also compiled, edited and published much of Mawlana Mawdudi's work, making it widely available throughout the Muslim world. Two important titles are Let Us Be Muslims (1985), a book that Khurshid himself has been greatly influenced by, and First Principles of Islamic Economics (2011), which was translated from Urdu by Shafaq Hashemi, a senior fellow of the Institute of Policy Studies in Islamabad, and edited by Professor Khurshid.

Islamisation of the Pakistani Economy

In 1978 the newly installed military leader, Zia ul-Haq, announced the Pakistani government would enforce Nizam-i-Mustafa, or the Islamic system. Professor Khurshid was summoned back from the United Kingdom, and he assumed the position of deputy chairman of the Planning Commission. He was appointed to the position, he said, as an economist to overlook the Islamisation of the country's economy. Professor Khurshid went on to become chairman of the Standing Committee on Finance, Economic Affairs, and Planning during his first tenure in the Pakistani Senate from 1985 to 1997.

However, as he points out, Pakistan's vision of Islamic economics was embedded 30 years earlier in the Objectives Resolution ed by the Constituent Assembly of Pakistan in 1949, following independence, but very little effort was made to actualise that vision. He wrote, “It was during General Zia ul-Haq's period that some piecemeal and disted efforts were made in that direction. That process too did not go far enough. Most of the changes were only ornamental. That is why they could not bring any substantial change in the system.”²

The Pakistani government was keen on completely Islamising the country's economy, but this did not go as planned. They realised, in 1991, that the intended switch to the preferred profit and loss-sharing system as a replacement for the interest-based system had not, in fact, taken place. Professor Khurshid considers these failed attempts largely the result of a lack of political will.

The main drive to Islamise the economy was based on the elimination of riba, or interest, since the Qur'anic injunction against riba is vehement.

The ideal alternative to an interest-based system is profit and loss sharing, which still remains under-used in the global Islamic finance industry today due to its higher risks. Instead, the Islamic finance industry is considered largely riskaverse and primarily uses debt-based modes such as murabaha (cost plus profit) and tawarruq (a commonly used method designed to provide liquid assets such as working capital finance and short-term financing), both of which either resemble conventional interest-based products or have very little links to the real economy, which is an important requirement of shari'ah.

As can be seen in Table 1.1, it was the government that first started to falter on the plan, and to this day the Pakistani economy is still struggling to achieve its aim of being fully Islamised. National efforts continue and in July 2013 there was a flurry of government announcements advancing Islamic finance. The State Bank of Pakistan, the country's central bank, announced its intention to further promote Islamic banking with a national mass media campaign. As at March 2013, Islamic banks in Pakistan held approximately $8.44 billion, or 8.7 percent of total banking assets. The government is aiming for Islamic banking share of the country's total banking sector to reach 15 percent by 2017.²⁷ Also announced in July 2013 was the adoption by the central bank of a global standard for sukuk (commonly referred to as Islamic bonds), a move designed to attract foreign inflows especially from shari'ah-sensitive investors from the Gulf Cooperation Council (GCC) countries as well as Southeast Asia and elsewhere.²⁸

Table 1.1 Timeline of Islamisation of the Pakistani Economy

¹⁸ ¹ ⁸¹ ¹ ⁸⁴ ¹ ⁸⁵ ¹ ¹ ¹ ²

Council of Islamic Ideology report on the elimination of riba from the economy produced Profit and loss sharing s of commercial banks introduced, effective January 1, 198 State Bank of Pakistan introduced 12 tools of Islamic finance. Commercial banks claimed to have switched over to profit and loss banking. Federal Shariat Court judged that the switchover to profit and loss banking had not taken Federal Shariat Court declared all forms of interest-based banking un-Islamic.

¹ ³ Government put in place the Shariat Enforcement Act. However, the Islamisation Commi ¹ ⁷ Islamisation Commission reconstituted in 1997, drawing largely on the Report of the Self ¹ Shariat Appellate Bench of the Supreme Court, on December 23, 1999, upheld the 1992 j

Source: Information gathered from Khurshid Ahmad, 2004 and 2010.

As can be seen in Table 1.1, in 1999 the Sharia Appellate bench of the Supreme Court instructed the government to eliminate all forms of interest-based banking by 2001. Professor Khurshid was one of the witnesses to the 1999 Supreme Court decision and considers the judgment “historic.”

“It covered all the dimensions from shari'ah, as well as from the economic, monetary and financial viewpoints. A roap was given as to the transformation of the economy. After that things began to change slightly but again because of the lack of political will, the entire report could not be implemented. But somehow the central bank started to move in that direction and that is how, from 2002 onwards, Islamic banks or banks which would have totally self-contained Islamic units came into existence.”

Overall, Professor Khurshid laments the historical process of Islamising Pakistan's economy and reiterates the lack of political will. But he thinks the country is now on the right track. “Now, [progress] is very slow but the direction is correct. But there are a number of problems because of the lack of political will and a lack of ing ancillary activities that should have taken place in other parts [of the economy] because of the non-implementation of the Supreme Court judgment [of 1999]. We had wanted to create laws, or amend or change laws. Yet now we have two parallel streams, about 90 percent in interest-based and about 10 percent Islamic-based.”

At the age of 80, and after 33 years of his country's unsuccessful attempts at completely Islamising the economy, Professor Khurshid has not given up any hope and still continues to chip away at the predominant interest-based system, a testament to his firm belief, commitment, and dedication to the cause. He continues to work in the UK at his Islamic Foundation and in Pakistan with his

Institute of Policy Studies to advance Islamic economics.

Professor Khurshid describes a new phase of mobilising the Pakistani masses towards the Islamic system: “We are now again in an exercise to mobilise for a bottom-up approach. That is the grassroots for Islamic finance. Financial products not only help with growth but also in distributing justice, generating employment, and including [economic] participation of people at the lower level, with the small and medium industries. From this we find a new beginning. I hope that with the two parallel movements—top-down from the state level and bottom-up involving and inculcating the private sector, especially the agricultural sector and the cottage industries—we can change things in a more effective manner, and in a shorter period of time.”

Islamic Economics versus the Narrow Pursuit of Profit

In 1973 Professor Khurshid Ahmad asked, “What Is Islamic Economics?” in his keynote address to the World Assembly of Muslim Youth in Riyadh. Forty years on he answers, “Islamic economics, to me, is an evolving nascent discipline. It's no longer just economic teaching of the Qur'an and the Sunna. Now it is a new social discipline.”

What is Islamic economics? “My short answer is that Islamic economics consists of the study of economics from an Islamic perspective. It covers all areas of concern to conventional economics, including vision, analysis, policies and history. However, what makes Islamic economics distinct is its value framework and the normative parameters within which the entire study and practice of economics is to take place. Economics, in this framework, becomes instrumental in promoting simultaneously the ends of development, efficiency, equity and well-being for all.”

In 2005 Professor Khurshid explained that the Islamic approach to economics addresses not only externalities but encomes a wider matrix, a more holistic system of betterment and development. He wrote:

The Islamic scheme for social change and regeneration of human societies is unique as it is based on a methodology that is different from the one pursued by all major economic and political ideologies of post–Enlightenment Europe and America. The methodology and strategy of this change, as developed and practised in contemporary secular societies, has assumed that a radical transformation of humans can be brought about by changing the environment and society's institutions. That is why emphasis has always been placed on

external restructuring. The failure of this method lies in ignoring individual persons as its real focus—their beliefs, motives, values, and commitments. It ignores the need to bring about change within men and women themselves, and concentrates more on change in the outside world. What, however, is needed is a total change—within people themselves as well as in their socio-economic environment.²

The Islamic framework does not condemn profit-making but does not condone the narrow pursuit of profit. Profit-making lies within a framework of halal and haram. Professor Khurshid added:

Self-interest is a natural motivating force in all human life. But self-interest has to be linked to the overall concept of good and justice. Reward for effort and suffering for failure in effort provide the best framework for human society and the economy. Islam acknowledges it and accepts it as a first principle for economic and social effort. But Islam also lays down a moral framework for effort, spelling out values and disvalues, what is desirable and what is reprehensible from a moral, spiritual, and social perspective. Halal (permissible) and haram (forbidden) provide a moral filter for all human actions.³

With the failures of the interest-based system leading to the global financial crisis that started in 2007/8, the furore in the UK over bankers' bonuses and the London Interbank Offered Rate (LIBOR) scandal that broke in mid-2012, there has been a widespread call for morality and ethics to be re-injected into banking and finance. Not many who have followed the LIBOR fallout would forget former Barclays CEO Bob Diamond being acrimoniously reminded by John Mann, a member of the UK House of Commons Treasury Select Committee, of the three founding principles of the Quakers who set up Barclays: honesty, integrity, and plain dealing.³¹ Beyond normative professions, modern Islamic economics, banking, and finance over the last 40 years have slowly been constructing an operational framework based on ethics, justice, and morality.

Addressing the recent global financial crisis that started in 2007/8, Professor Khurshid wrote that Islamic economics must be paid special attention in light of the need to reform the global capitalist economic system and to revise the fundamentals of the discipline of economics. With the failure of free markets, his view is that morality and ethics must be re-discovered and re-established.³² He is certain that Islamic economics has the answers but concedes: “There's a long way to go. Unfortunately the dominant system remains the global capitalistic system. Similarly, local vested interests are much more powerful.” However, the advancements made by Islamic banking and finance over the last 40 years are causes for optimism.

Forty Years On: The Wood for the Trees

Professor Khurshid cites four aspects that he considers achievements for Islamic economics, banking, and finance since the 1970s:

1. A well-thought-out critique of an interest-based economy in particular, and of conventional economics in general.

2. A clear exposition of the main features of an interest-free economy, Islamic banking and major parameters of an Islamic economy.

3. The introduction of Islamic economics, banking, and finance as a taught subject in academic institutions in different parts of the world and the establishment of a number of research institutes engaged in theoretical research as well as evaluation of operational experiments.

4. The establishment of Islamic banking and financial institutions, which have been increasing over the last 30 years, on an average growth rate of 10 to 15 percent per year. These cater to the financial needs of people who want to undertake their economic and financial activities within an interest-free framework. While Professor Khurshid considers this an evolutionary process, he believes that significant progress has been made.

Professor Khurshid Ahmad's work in the advancement of Islamic economics is a significant thread that runs through the fabric of the Islamic system. However, he considers his contributions and the 40 years of growth and development as mere

“first few steps.”

He acknowledges some of the landmarks that have pushed the industry forward: “In the field of finance, in the field of banking, investment, takaful, the question of ing and auditing, I think, in all these areas, noticeable developments have taken place. But it's still very early.”

Does he see a model Islamic economy anywhere in the world? “I don't see a model Islamic economy anywhere in the world. In fact, my view is that first of all you'd have to have a phase of Islamising the economy and then only will we be able to reach an Islamic economy. But definitely progress has been made and I'm quite hopeful about Pakistan, about Iran, about Sudan, about Turkey, about Egypt. I hope that things will move.”

He looks around again and says, “Malaysia has also made good progress. Even in Indonesia, which came [into the Islamic system] very late, but the last ten years, I think, have moved quickly in certain areas. But all these, in my view, are only initial, elementary positive developments, and they only bear a very limited influence.”

Many challenges still lie in the way of a more complete Islamic economic system. He explains, “First, [there is a] lack of political will within leaderships who wield power. Secondly, [there is a] lack of education and proper understanding [of the subject and system] by the people. Emotionally, they are committed to Islam, but intellectually and operationally, they are not. Thirdly the influence of the conventional global system—while we want to remain fully engaged with it, we want a space for ourselves. That is why we have to set our eyes on attaining self-reliance, so that we could preserve our identity and pursue our priorities. Of course this would take place in the context of our being a part of the global system.”

Professor Khurshid completed his second tenure as a member of the Pakistani Senate, serving from 2003 to 2012 (his first was from 1985 to 1997). Combined with his activism and involvement in the socio-economic sphere, Professor Khurshid has a great deal of experience and intimate familiarity with Pakistan, a country notorious for its widespread corruption. The Corruptions Perceptions Index published by Transparency International since 1995 ranks countries and territories according to their levels of public sector corruption, with 10 being least corrupt. On this index, Pakistan has averaged a score of 2.34 for the 11 years since 2001. The Scandinavian countries, New Zealand and Singapore continue to dominate top rankings with scores between 9.0 and 9.9.

Professor Khurshid says that he has tried to impact policy making in his 21 years as a Senate member and in his activism through his Institute of Policy Studies. His work in educating generations of Islamic economists has also slowly moved the ground. But at the end of the day, more action based on shared vision is needed to tackle multidimensional challenges. “We need political leadership, economic leadership, intellectual leadership that shares a vision and that is committed to it, to mobilise the resources of the state and society. Unfortunately, leadership in most Muslim countries has failed to deliver—whether they are monarchies, dictatorships or so-called democracies.” This is regrettable, to say the least, considering the fervour and cooperation of the Muslims in building pan-Islamic solidarity since the 1960s.

As to what he regrets, Professor Khurshid responds: “The list could be long but I will only mention two—first while the Muslim world is resource-rich and Islam has given us a clear vision of a socio-economic order based on our values, the leadership in most of these countries lack political will as well as moral and professional credibility. Because of that we have not been able to move in the right direction. Whatever effort has been made is too slow. Secondly, I feel that experiments in the field of Islamic banking and finance have so far been concentrated more on ‘shari'ah-compliant’ techniques and we have not moved adequately towards what is desired, i.e., ‘shari'ah-based’ system. Similarly so far our approach has been what can be described as a ‘top-down’ approach. It is high time we move simultaneously and more vigorously towards a ‘bottom-up’ approach, involving people and institutions at the grassroots. Both these

approaches are inseparable and must go hand in hand. That is my vision for the future.” (See Chapter 10 on Rushdi Siddiqui for discussion on shari'ah-compliant versus shari'ah-based.)

Hence, according to Professor Khurshid, there are three main issues:

1. Governments in Islamic countries are incompetent and have not furthered more concerted efforts to implement what Islam offers in the way of an economic system to better use and distribute the abundance of resources found in Muslim lands.

2. Islamic banking and finance has concentrated more on the technical aspects of making products and instruments to circumvent interest as opposed to fulfilling the substance of shari'ah, which is aimed at justice and equity.

3. Any government efforts must be ed by grassroots initiatives.

These issues dominate the timeline of the development of Islamic banking and finance, and are not restricted to Pakistan by any means, although they affect different countries on different levels and at varying intensities. They are mentioned throughout this book and concern leaders like Prince Mohamed Al Faisal Al Saud, Saleh Abdullah Kamel, Abbas Mirakhor, Rushdi Siddiqui, and the leaders and experts in Malaysia's Islamic finance industry.

It is regrettable for the bigger vision of the Islamic economy that the fervour for Islamic solidarity petered out following the establishment of the first institutions, such as the Organisation of the Islamic Conference in 1969 and the Islamic

Development Bank in 1975. It is perhaps meaningless to wade into counterfactuals, but who knows what would have happened if the global Muslim community had followed through with its momentum towards a true pan-Islamic solidarity to advancing Islamic economics, banking, and finance.

The Last Word

Professor Khurshid is optimistic about the next 40 years, saying in no uncertain : “I am confident in the next 40 years the development of Islamic economics, banking and finance will take place in all the major areas of theory and practice. This would result in efforts towards transforming the entire financial and economic system on the normative foundations given by Islam. Initially this movement will gain strength in the Muslim world, and then hopefully this may become a model to influence the rest of the world. However, all this would depend on the clarity of our vision and sustained loyalty to it, as well as on the persistent professional integrity, high degree of efficient organisation, good governance and, most importantly, effective political will.”

Notes

¹ O. P. Misra, Economic Thought of Gandhi and Nehru: A Comprehensive Analysis (New Delhi: M D Publications Pvt Ltd, 1995), p. 104.

² Ibid.

³ John L. Esposito and John O. Voll, Makers of Contemporary Islam (New York: Oxford University Press, 2001).

⁴ John J. Donohue and John L. Esposito (eds.), Islam in Transition: Muslim Persepctives, 2nd ed (New York: Oxford University Press, 2007), p 71.

⁵ Iqbal Singh Sevea, The Political Philosophy of Muhammad Iqbal: Islam and Nationalism in Late Colonial India (New York: Cambridge University Press, 2012), p. 36.

Ibid.

⁷ Muhammad Asad, The Road to Mecca (New Delhi: Islamic Book Service, 2004). [Online]. Accessed 5 November 2012. Available from: http://muhammadasad.com/Road-to-Mecca.pdf.

⁸ Muhammad Asad, Islam at the Crossroads (Gibraltrar: Dar Al-Andalus, 1982). [Online].. Accessed 8 September 2012. Available from: http://muhammadasad.com/Islam-at-Crossroads.pdf.

Asad, The Road to Mecca, p. 2.

¹ Ibid.

¹¹ Ibid.

¹² Haynes, Jeffrey (ed.). Routledge Handbook of Religion and Politics. London: Routledge, 2008, p. 163.

¹³ Farooq Aziz and Muhammad Mahmud, 2009. “Islamic Economics System in the Eyes of Maulana Maududi—An Analysis,” Indus Journal of Management & Social Sciences 3, no. 2 (2009): 45–50.

¹⁴ Jamaat-e-Islami Pakistan official website. [Online]. Accessed 10 January 2013. Available from: http://jamaat.org/beta/site/page/3.

¹⁵ Ibid.

¹ Jamaat-e-Islami Pakistan official website. [Online]. Accessed 10 January 2013. Available from: http://jamaat.org/beta/site/page/5.

¹⁷ Ibid.

¹⁸ Roy Jackson, Mawlana Mawdudi and Political Islam: Authority and the Islamic state (Oxon: Routledge, 2011). p. 73.

¹ Ibid., p. 166.

² Ibid., pp. 165-166.

²¹ Aurangzeb Mehmood, 2002. “Islamisation of Economy in Pakistan: Past, Present and Future,” Islamic Studies 41, no. 4 (2002): 675–704. Islamic Research Institute, Islamabad, Pakistan.

²² Muhammad Umer Chapra, “What Is Islamic Economics?” Islamic Development Bank, Islamic Research and Training Institute, 1996, p. 45.

²³ Ahmed A. F. El-Ashker and Rodney Wilson, Islamic Economics: A Short History (Leiden: Brill, 2006).

²⁴ Joseph Kenny and Mustafa Koylu, Philosophy of the Muslim World: Authors and Principal Themes (Washington, DC: Council for Research in Values and Philosophy, 2003).

²⁵ Ibid.

² Khurshid Ahmad, “Islamizing the Economy: The Pakistan Experience.” In Robert M. Hathaway and Wilson Lee (eds.), Islamisation and the Pakistani Economy. [Online]. Washington, DC: Woodrow Wilson International Centre for Scholars, 2004. p.41. Accessed 6 November 2012. Available from: http://www.chicagobooth.edu/alumni/clubs/pakistan/docs/Islamizationandpakistanieconomy2004-woodrowwilsoncenter.pdf.

²⁷ Bernardo Vizcaino, “Pakistan adopts AAOIFI standards for investment sukuk,” Reuters, 17 July 2013. [Online]. Available from: http://www.reuters.com/article/2013/07/17/islamic-finance-sukukidUSL6N0FN0LN20130717.

²⁸ Ibid.

² Khurshid Ahmad, “The Challenge of Global Capitalism: An Islamic Perspective,” in John H. Dunning (ed.), Making Globalisation Good, pp. 193– 194 (Oxford: Oxford University Press, 2005).

³ Ibid., p. 194.

³¹ United Kingdom House of Commons, Oral Evidence Taken Before The Treasury Committee—Evidence from Bob Diamond, Wednesday 4 July 2012. [Online]. Available from: http://www.parliament.uk/documents/commonscommittees/treasury/treasury_committee_04_july_12_bob_diamond.pdf.

³² Khurshid Ahmad, “Global Economic Crisis Need for a Paradigm Shift,” Policy Perspectives 8, no. 2 (July–December 2011). Islamabad, Pakistan: Institute of Policy Studies.

Chapter 2

The Very First Mover

Saeed Bin Ahmed Al Lootah

O ye who believe! Stand out firmly for Allah, as witnesses to fair dealing, and let not the hatred of others to you make you swerve to wrong and depart from justice. Be just: that is next to piety.

—Al Qur'an, Sura Al Ma'ida, Verse 8

Saeed Bin Ahmed Al Lootah established the world's first Islamic commercial bank in 1975. His reason for creating the Dubai Islamic Bank (DIB) was based on his view that business exists fundamentally to serve people, a view that had served him well in building another successful business from scratch. This ethic is entrenched in steep piety and an unswerving determination to live by the teachings of Islam. The establishment of DIB was backed by the Dubai Ruler's Decree, and its founding shareholders included the Dubai and Kuwaiti governments. For his business, banking, philanthropic, and social contributions to the United Arab Emirates, Hajj Saeed, as he is known, is regarded as a true visionary and a pioneer.

I neither consider myself a scholar nor an educated man. I consider myself a seeker hungry for knowledge, always asking for knowledge.

—Hajj Saeed Lootah

It is a pleasant winter's morning in Dubai, the comfort of which makes you forget the searing temperatures that scorch most other months of the year. In the marble lobby of the Lootah Technical Institute in the district of Al Muhaisanah, not too far from the Dubai International Airport, a small party had gathered to await the arrival of Hajj Saeed. There was nothing special about that morning; it just was a good excuse for everyone to extend morning greetings.

In this year 2013, Hajj Saeed is about 90 or 92 years old, says his nephew, confirmed by a technical institute staff member. “We're not so sure [of his age],” they add, chuckling. Hajj Saeed still shows up at the office every working day. He has left the running of the main businesses to the younger generations, confining himself largely to his educational and philanthropic interests. He can mostly be found at the technical institute, inspecting the work of apprentices hovering over a prototype solar-powered houseboat or peeking into a laboratory where students are deg computer animation sequences.

Right next to the institute sits the Dubai Medical College, a private college for girls to study medicine. Hajj Saeed established the college in 1986, and it was the first institution to award a degree in medicine and surgery in the United Arab Emirates (UAE). The college received accreditation from the UK's General Medical Council in 1995 and since 2000 has been recognised by the World Health Organisation. It has produced more than 900 qualified doctors who practise all around the world. Walk through the college and you will learn that Hajj Saeed established it because he felt that women were not given fair opportunities in the medical field, believing that their “inherent qualities of sensitivity and comion” would make them good physicians.

The Dubai Medical College and its sibling institute were designed based on the

system of education that Hajj Saeed espouses, one that is steeped in Islamic values. The college has a clear code for “Islamic Sorority” and “Islamic Identity” that includes points such as “eagerness to perform acts of worship in proper time preferably as a congregation, observing humility of manners and avoiding false pride, being honest to oneself as well as to others, and doing one's duty under the conviction that Allah is overseeing all our actions.” Studying fiqh, or Islamic jurisprudence, is required of all undergraduates. An hour a week for the life of the course is devoted to the study of fiqh.

At the technical institute, the curriculum model adopted is different from the one at the college, which is largely aligned with international medical education standards, although they share the same Islamic values. The institute combines the academic and the vocational. Students from Hajj Saeed's private school, the Islamic School for Training and Education, established in 1983, add to their academic education with practical skills in such areas as engineering, electronics, lathe work, and audio video. The school is designed for students from the age of six to 16, and it is based on the philosophy that knowledge is not just something to have but something to be acted upon for the good of the wider society and economy.

Within that setting of the Dubai Medical College and the technical institute, and hearing Hajj Saeed's team explain the system of education they impart, it is not difficult to understand why a successful businessman in 1970s booming Dubai would choose to open a bank that completely went against the grain of business and financial sense as then known to society. Very simply, he believed it the right thing to do.

Always Begin at the Beginning

Hajj Saeed starts meetings and calls gatherings to order by reciting Al Fateha— the opening chapter, or sura, of the Qur'an. He shapes each word of the seven lines as if encountering them for the very first time. When he is finished, he explains why he insists on starting with Al Fateha.

“I have read what scholars explain about Al Fateha but I wasn't convinced with their explanations that somehow didn't make common sense to me. I started reading the sura a lot, and thinking about it a lot. It came to me that there are three types of people addressed in the sura—the blessed, the cursed and the lost. And the straight path—sirat al mustaqim—is for the blessed one who strives for Allah's favour.”

Hajj Saeed goes on to explain that Muslims who pray five times a day will recite Al Fateha a total of 17 times daily. It is a daily guidance for us Muslims, he says. “On a daily basis 17 times we get to review ourselves and set the path that we want to take—to gain Allah's favour to be one of the blessed who will be directed to the right path. Every day I remind myself and I remind the people around me of this. Allah has made us read this 17 times as reassurance that every day you get to choose what type of person you want to be.”

Most Islamic finance literature points to DIB being set up by a group of traders and businessmen; however, Hajj Saeed insists that the idea was his and he was the central figure in the establishment of the bank. He relates his story on the impetus behind DIB.

“I was raised on Islamic teachings and these say that riba (interest) cannot be

touched. Travelling to many countries I saw how people transacted with banks and did their business and trading. Over here in Dubai there were also these riba banks. And nobody said anything, nobody objected. That made me think: Why do we have to accept their banking and financial system? Why don't we use Islamic principles? People can buy and sell and do financing, all of that without involving riba.” With that in mind, Hajj Saeed went to consult with the ruler of Dubai, Sheikh Rashid bin Saeed Al Maktoum.

“Sheikh Rashid was ive of the idea, but he told me to keep it quiet for a while until it was fleshed out. So I studied the idea some more, thought of the concept and put it down on paper. Then I decided to consult with the shari'ah scholars to gain their perspectives.”

On his meeting with the scholars, Hajj Saeed says: “I spoke to the scholars and realised they didn't know anything about banking or economics. So I went to the bankers and economists, and they didn't know anything about religion. I realised then that I couldn't benefit from any of them, so I decided that I would start the bank with the knowledge that I myself had, and based on my experience in trading and business.”

At the time, the UAE did not have a central bank, but Hajj Saeed had to convince the Currency Board—which was established in 1973 when the UAE dirham was introduced—of the bank's intentions—and present an operational framework for his new Islamic bank. With the Currency Board's blessing, Hajj Saeed proceeded to establish Dubai Islamic Bank on March 10, 1975. Before the bank could formally open its doors, Hajj Saeed was faced with a management problem. The people he had approached to lead and manage the bank, he says, were very receptive in the beginning but “at the last minute they left before we started the bank.” Hajj Saeed did not want to be drawn into the minutiae of the matter, saying instead, “I realised after thinking about it deeply for three days that this new idea needed strong leadership; someone to take the lead. I decided that I would take it on myself. I didn't need to rely on other people whose hearts and faith were not firm and who didn't believe in the venture.”

He installed himself as managing director and the founding chairman of the board of directors, with his brother Sultan as his deputy chairman. They surrounded themselves with other family to manage the bank. But from the very beginning, he says, he was very cagey of being in charge of such a new and unfamiliar venture. According to him, he requested to be personally liable for any of his decisions that incurred losses for the bank.

Hajj Saeed describes the way the bank operated at the time: “What we did, basically, was to take the system of the conventional banks, and we cleaned it of all that go against Islamic teachings and principles. Essentially we removed all the riba and the processes that included riba.” The bank accepted deposits and investment s, but more focus was put on trading facilities, such as letters of credit and letters of guarantee. The bank also provided financial assistance to commercial agricultural and industrial projects and was involved in the sale and purchase of commodities.¹

DIB was a bold pioneering venture that arose primarily from Hajj Saeed's leap of faith. Not only did the bank not have any Islamic banking models to learn from, it also had to grapple with how to stay in business as the only Islamic bank on the much bigger interest-based financial landscape, “When we started, we were the only Islamic bank within a conventional system,” says Hajj Saeed. With no other Islamic banks to trade with, DIB had to interact with the interest-based banks. Hajj Saeed explained: “We approached them and said that whatever we deposit with you, we shall not take any interest, and vice versa, you too will not get any interest from us. They refused. They didn't want to cooperate. Their faith in the Islamic system and in Islam was not strong. They didn't even want to consider or study it.”

He re the biggest challenge DIB faced at the beginning, which, as it turned out, came to haunt him many years later, “One of the issues that I feared as a lone bank was a rush of withdrawals. How would I be able to satisfy that so

the bank would not collapse? But al hamdu lillah, praise be to Allah, everything went well. When the other (Islamic) banks opened from 1977, we started dealing with each other.”

The only other Islamic bank that was operational in 1975 was the Jeddah-based Islamic Development Bank (IDB), which had started operations a few months after DIB had opened. Hajj Saeed was well aware of the establishment of the IDB, saying “Yes, they opened after us. But they are a bank for development, for countries. We are a commercial bank that deals with everybody's daily life. You can't go and open an in an Islamic development bank, but you can with us.” DIB continued as the only Islamic commercial bank in the world until 1977, when other Islamic banks, such as Kuwait Finance House, Jordan Islamic Bank, and the Faisal banks in Egypt and Sudan, entered the picture.

Hajj Saeed and DIB, in fact, became founding of several of these new Islamic banks, including Bahrain Islamic Bank (1979), Islami Bank Bangladesh Limited (1983), Tadamon Islamic Bank Sudan (1983), and Albaraka Islamic Investment Bank (1984).² Although Hajj Saeed was a founding shareholder of these other banks, UAE was always his core banking focus, in contrast to other pioneers, such as Prince Mohamed Al Faisal Al Saud and Saleh Abdullah Kamel, who opened a number of banks across different countries in quick succession in the 1980s.

Dubai: The Environment

Sheikh Rashid bin Saeed Al Maktoum's famous saying—“What is good for the merchants is good for Dubai”—encapsulates the mood of the new era in Dubai's economic development, which began when he became the nation's ruler in 1958. Sheikh Rashid was known as a shrewd, cunning and hardworking merchant who was tolerant and broded. He built Dubai on free enterprise led by a proactive business-minded government. As soon as he became ruler he announced plans for a new airport (completed 1960). In the following year in 1961 he visited the United Kingdom for the first time, meeting Queen Elizabeth II. His development plans continued, and in 1960 the dredging of the Dubai Creek began to allow larger ships into the inlet. The creek was historically the centre of Dubai and the emirate's traditional trading port, providing early economic prosperity for Dubai.

With Sheikh Rashid's national infrastructure development plan in place, there was much work in the construction and contracting industries, to the benefit of companies like Hajj Saeed's SS Lootah Contracting Company. A first central water supply was built, as was the first electricity power station. By 1965 Dubai glowed with its first streetlights. In that same year the Dubai Chamber of Commerce was founded. Development was steady, but Dubai's fortunes suddenly changed when oil was discovered in Fateh in 1966.³ With its first oil export three years later in 1969, Dubai's economy started to boom, with growth further boosted when Port Rashid opened in 1972.

On the political front, a 1968 British government review of its resources and strategy led to the withdrawal of its military forces and therefore political control throughout the Indian Ocean area by 1971⁴ causing Dubai and the six other emirates to become independent of British protectorate. Since then Dubai has not looked back, continuing to build and grow. There were opportunities aplenty for native Emiratis and the foreigners it had long attracted.

Dubai's merchant and trading community had always been a lively one—for a long time the emirate built its wealth on the pearling industry, which was badly hit with the Japanese discovery of cultured pearls in the 1920s and the Great Depression in the 1930s. Hajj Saeed's family was in the business of pearling. He re his youth at sea, where he spent four to six months a year diving for pearls with his father, Husain ibn Naser Al Lootah, who was a merchant and poet.⁵ The business also gave the young Saeed the opportunity to venture up the Persian Gulf to Iraq and cross the Arabian Sea to India. When the Great Depression hit and the pearling industry dried up, Hajj Saeed's family, like thousands of others, was forced to find other means of income. His family went into the construction business in the 1940s. Hajj Saeed continued in the same line, establishing the SS Lootah Contracting Company in 1956 with his brother Sultan.

By the 1970s Dubai's merchant and trading activity had taken on an international flavor due to the oil boom. The emirate's traders and merchants were well served by the international banking institutions that the ruler Sheikh Rashid had courted since the 1960s. First National City Bank of New York opened its doors in Dubai in 1964. The bank, of course, later became the giant Citigroup. Several other Western banks established themselves in Dubai, including the Chartered Bank, Commercial Bank of Dubai (which was a t venture of Commerzbank, Chase Manhattan Bank, and Commercial Bank of Kuwait) and the British Bank of the Middle East (bought by HSBC in 1959).

There were also local banks. Sheikh Rashid himself ordered the opening of National Bank of Dubai in 1963, and a few years later the Al Ghurair family established Bank of Oman in 1967 (later renamed Mashreq). Another illustrious Dubai commercial family, the Galadari family, opened Dubai Bank in 1970 (now Emirates Islamic Bank). Similarly, Hajj Saeed established DIB ed by his family .

Dubai's population reached 58,971 in 1968, according to its first population census. The population more than doubled by 1975, when it topped 183,187, 72 percent of whom were non-nationals.

Dubai Islamic Bank: Early Response

Dubai Islamic Bank (DIB) was set up with an authorised capital of AED 50 million (US$13.6 million) divided into 100,000 shares. The bank started modestly, working out of a small two-room office. It was only four years later, in 1979, that the bank moved to bigger premises near the landmark Deira Clock Tower, and those same premises remain the bank's head office till today.

The bank's launch attracted media attention beyond the Middle East, with articles appearing in the Wall Street Journal (WSJ) and the New York Times. The WSJ article that appeared on May 20, 1975 called the bank “an experimental, interest-free bank.”⁷ On June 1, 1975, a Times article splashed the headline “Banking Without Interest Rates.”⁸ Both carried more or less the same information, leading with the no-interest angle and citing a handling fee to be charged for each customer in the absence of interest rates. In the early years of the bank's operations, its main areas of investment were through partnerships, sale with profit, and taking shares in d projects.

As the only stand-alone Islamic bank in the UAE until the arrival of Abu Dhabi Islamic Bank in 1997, DIB has been well ed by the business community. In its first year of operations, the bank attracted 890 s, of which 550 were current s, 221 savings s, and 119 investment s. By the end of 1976, total assets stood at AED 100 million (US$27.23 million). This almost doubled by the end of 1978, when total assets reached AED 195.4 million (US$53.1 million), with growth coming from investment activities in five main areas: commercial, industrial, real estate, construction, and fishing.

About two years after the bank's opening, says Hajj Saeed, three religious scholars came knocking on their door. Two of them, he says, came from Great Britain while the third was from Southeast Asia. He does not recall their names.

“They told me, ‘You have created an Islamic bank. You will either set back the Muslims 40 years, or you will take them forward.’” Hajj Saeed was perplexed as to what the three expected of him but welcomed their . They asked if they could study the workings of the bank and review its products and processes. Hajj Saeed had been actively involved in setting up the bank's systems and was confident they would stand up to the gentlemen's scrutiny. “I had given instructions to everyone that any questions the gentlemen asked, they will get answers, so long as they didn't encroach on any confidential bank matters,” says Hajj Saeed.

Following the men's review of the whole bank, they thanked Hajj Saeed and said that they had no objections to DIB. They also asked if they could return the following year. Hajj Saeed later realised that the three Islamic preachers were concerned that this new innovation called an Islamic bank would in fact be harmful for Muslims if it was an innovation away from Islam's teachings and principles.

“From that time onward, people started coming to us, and started learning from our system. Some even added on to our work and helped us develop,” says Hajj Saeed. But while DIB was welcomed by most, its operations were not spared from criticism. One in particular struck a nerve—Hajj Saeed had gotten wind that one of the leaders of a neighbouring Arab country had accused DIB of being mere smoke and mirrors and that there was nothing Islamic about the bank as it achieved the same results as a conventional bank by going around interest in a roundabout way. Hajj Saeed was very hurt by the allegation. Because of it, he decided that it was time to bring everyone together to properly discuss the workings of an Islamic bank.

First Islamic Banking Conference—May 1979, Dubai

In May 1979, DIB hosted the first Islamic Banking Conference. “Scholars from all over the world attended the conference,” says Hajj Saeed. His stand was firm going into the event: “We have created an Islamic bank. There was no stepping back, only moving forward.”

By the time the conference was held, there were already several Islamic financial institutions on the landscape. These included the Faisal banks of Egypt and Sudan, Kuwait Finance House, Islamic Investment Company, Jordan Islamic Bank, and an Islamic window of Bank Misr Cairo. At the time, DIB was the largest bank, with a paid-up capital valued at over $13 million.

The first Islamic Banking Conference signalled the start of the centrality of fatwa in Islamic finance. The shari'ah scholars in attendance included Sudan's Sheikh Al Siddiq Muhammad Al Amin Al Darir, Kuwait Finance House's Sheikh Badr Al Mutawalli Abdul Basit and Saudi Arabia's then mufti, Sheikh Abdul Aziz bin Baz. Several topics were discussed, chief of which was the murabaha contract as presented in Dr Sami Hamoud's proposal. The murabaha is a cost-plus profit markup contract which, for the purposes of financing, involves the bank first purchasing the item desired for the customer and then reselling it to the customer at a markup representing the bank's profit.

As part of Dr Hamoud's murabaha proposal, the conference studied the legality of wa'ad (promise) as part of the murabaha sale contract, an issue which continued to be debated in the 1980s, with the contention being the binding (or nonbinding) promise. After assessing the murabaha proposal, the shari'ah scholars ed a fatwa endorsing its use. The wording of the fatwa dealing specifically with wa'ad stated that “an Islamic financial institution may require its customer sign a binding promise that he will purchase the finance property on

credit (with an agreed-upon markup) once the bank buys it based on his order.”¹ Apart from the murabaha, the conference also studied the acceptability for a customer to overdraw on a current and agreed that this was acceptable if certain conditions were met. Delegates also looked into the different types of musharaka modes.¹¹ The conference clarified the use of several banking products, paving the way for the banks to move into the 1980s with greater confidence.

Development and Challenges

Moving into the 1980s, DIB's steady development paid off and expansion came in 1982 with the opening of a branch in neighbouring emirate Abu Dhabi. Further expansion followed with the first branch opening in Al Ain in 1983. All of these branches had a separate ladies' banking section, which helped attract many women to the bank.

By the end of its first decade, in 1984, DIB had started to invest internationally. It began in Cairo, where the bank invested in a few real estate as well as industrial and trading interests. The bank also ventured into Sudan, investing in an agriculture company. By 1985, DIB had 45,928 customers with deposits worth AED 1.4 billion ($386.4 million) and gross revenue of AED 74.5 million ($20.2 million).¹²

The year 1985 was an important one for Dubai and UAE, with the establishment of Emirates Airline and the Jebel Ali Free Zone in Dubai, strongly signalling the emirate's desire to diversify its economy away from hydrocarbons. Amid this burgeoning Dubai economy, DIB continued to expand, opening new branches across UAE: The bank's Ras Al Khaimah branch was opened in 1987, followed by new openings in Fujairah and Sharjah. In 1993 DIB opened its eighth and ninth branches at Bani Yas in Abu Dhabi and in Bur Dubai.¹³

The bank's capital base had grown from its initial AED 50 million ($13.6 million) in 1975 to AED 200 million ($36.3 million) in 1987, to AED 500 million ($136 million) in 1990.¹⁴

DIB was building its books mainly on the use of the debt-based murabaha

contract, the extensive use of which is not unusual for the risk-averse industry even today. Murabaha ed for 67.3 percent of DIB's mode of financing for the period 1988 to 2006. For the same period, the partnership or risk-sharing contracts that are the ideal for Islamic finance—mudaraba and musharaka— made up only 9.3 percent of the bank's mode of financing.¹⁵ According to DIB itself, the bank started using the mudaraba contract only in 1987.¹

The extensive use of murabaha was not without its challenges. In the 1980s cases were heard in Dubai courts involving sales on the murabaha. In one such case filed with Dubai First Instance Court in 1984, a buyer had requested DIB to buy a car according to his description and promised that he would buy it from the bank according to the agreement signed on the murabaha contract. The bank imported the car and handed it over to the customer. After driving around in it for a while, the customer complained that the specifications of the car were not as agreed upon in the contract. Long story short, the court sided with the bank because the buyer accepted the car as it was at the time of delivery.¹⁷ A second case at the Dubai High Appeal Court in 1986 heard that bank employees, at the insistence of a ship buyer, changed the year that the ship had been built from 1967 to 1980 to allow the buyer to the ship in Saudi Arabia.¹⁸ Its employees should not have been a party to recording false information to begin with, an internal governance issue that the bank had to address.

In of shari'ah supervision, as Hajj Saeed revealed, the bank did not work with any shari'ah scholars or shari'ah board of advisors in the beginning, unlike the other early Islamic banks. As a pious Muslim and successful business leader, Hajj Saeed was confident that he could steer his bank to stay on the right path of shari'ah without the need for any sort of full-time shari'ah body advising it. The bank did, however, benefit greatly from the contributions and of shari'ah scholars at the first conference in 1979. Thereafter, it established relationships with several of these scholars with whom it would consult from time to time.¹ It was only in 1989 that DIB formed its first Shari'ah Supervisory Board, with its need to expand its range of products and services.

Unfortunately for Hajj Saeed and DIB, the institution was hit by cases of fraud in the 1990s and again in 2008. These cases exposed the bank's corporate governance weaknesses. In the 1990s especially, the bank's history was dotted with high-profile scandals.

Hajj Saeed itted that DIB faced growing pains and governance issues when in 1988 he said that as a comparatively new bank, there were not enough competent people on whom the bank could depend. He added that personal considerations were the overriding factors in the recruitment of bank employees, but the current staff was picking up the necessary experience as they went along.²

The first of the scandals the bank faced involved its deposits with the Bank of Credit and Commerce International (BCCI; which was backed by Abu Dhabi's Al Nahyan family), specifically for commodity investment. As it turned out, BCCI was defrauding clients all over the world, not just Islamic banks. The deposits BCCI received from DIB (and other Islamic banks) went unrecorded, which allowed BCCI to manipulate its s. DIB had placed $86 million with BCCI.²¹ The nonexistent commodity contracts BCCI had collected from Islamic banks totalled approximately $589 million. DIB and other Islamic depositors (which included Tadamon Islamic Bank, Kuwait Finance House, and Faisal Islamic Bank of Egypt) were not suspected of any wrongdoing, and BCCI was shut down in 1991.

In another case, DIB lost $50 million when a bank official did not conform to its internal credit in 1998. This proved almost disastrous for DIB as public confidence was hit and resulted in a run on the bank's deposits—in one day $138 million was said to have been withdrawn, representing 7 percent of the bank's total deposits.²²

In the same year, a bizarre case of fraud hit the bank. It filed a lawsuit in Miami, Florida, in the United States, charging Foutanga Dit Babani Sissoko, a West

African tycoon, of swindling the bank of a total of $242 million. One of the bank's branch managers claimed that he surrendered the money to Sissoko in a series of transfers because he had been put under a black magic spell. The manager was consequently arrested.²³

As a result of these losses and the run on the bank—something Hajj Saeed had been concerned about in the very early days when operating as the lone Islamic institution—the bank needed a bailout and hence became part owned by the government of Dubai, with its management and capital framework restructured. The bank went public in 2000, but Hajj Saeed still retains a share in the company. As at April 2013, he held 7.20 percent of all shares. DIB underwent a rebranding in 1999, by which time its total customer deposits had reached AED 7.63 billion (US$2.1 billion), five and a half times the amount of deposits it held in 1985 [AED 1.4 billion (US$386.4 million)].

After going public, more shari'ah-compliant financial investment instruments were launched: DIB started to increase its use of wakala for fund management and the leasing mode ijara. A significant milestone for the bank came in 2001 when it undertook its first aircraft leasing for Emirates Airline, a deal that was considered groundbreaking for the Islamic bank, and which began the first of many such leasing deals for the airline.

However, another major case of fraud hit the bank in 2008. Seven of its employees were charged with embezzlement and defrauding the institution of AED 1.8 billion (US$500 million). In the end, six of the accused were found guilty and each was sentenced to a 10-year jail term; the seventh was acquitted.²⁴

Despite its growing pains in the 1980s that primarily centred on (the lack of) employee competence and internal governance issues, and the scandals it encountered in the 1990s and 2008, DIB remains the largest shari'ah-compliant bank in the UAE. This is largely due to the 22-year head start it had on its competitors—the second stand-alone Islamic bank, Abu Dhabi Islamic Bank,

was established in 1997—which allowed DIB to build a considerable customer base. The Dubai government's of the bank, primarily the capital injection that led to the bank's restructuring in 1998/9, was also crucial. From the one bank established by Hajj Saeed in 1975, 12 other local UAE commercial banks now provide Islamic banking services either as stand-alone Islamic banks or as units of interest-based banks. These include the National Bank of Abu Dhabi, Abu Dhabi Commercial Bank, United Arab Bank, Rakbank, National Bank of Umm Al Qaiwain, First Gulf Bank, Abu Dhabi Islamic Bank, Emirates Islamic Bank, Mashreq Bank, Noor Islamic Bank, Al Hilal Bank, and Ajman Bank. UAE's total Islamic banking assets now rank third globally behind Saudi Arabia and Malaysia. At home, Islamic banking assets for approximately a quarter of all banking assets in the country.

From a simple two-room office in 1975, in July 2012 DIB was the third largest stand-alone Islamic bank (in list of stock market listed Islamic banks) in the world holding $28 billion in assets, behind Saudi Arabia's Al Rajhi ($49 billion) and Kuwait Finance House ($45 billion).²⁵ Its closest Emirati rival, Abu Dhabi Islamic Bank, sits two rungs down with $20 billion in assets. DIB had 79 branches in the UAE at the end of December 2012 with 38 in its stronghold Dubai and the remaining 41 branches distributed across the country: Abu Dhabi (9), Sharjah (17), Ras Al Khaimah (4), Ajman (2), Umm-Al Qaiwain (1), Fujairah (2), and Al Ain (6).²

Abdulla Al Hamli, DIB's CEO from 2008 to July 2013, told the Reuters news agency in May 2013 that the bank had spent the last five years (i.e., after the 2007/8 global financial crisis) “cleaning its books and strengthening its core banking operations.” He said, “I can confidently say that Dubai Islamic Bank has nothing to hide. We are very strong, clean and ready for the next growth phase.”²⁷

The bank formalised a code of corporate governance in 2010 that it has made public and available on its corporate website. The code says: “We at Dubai Islamic Bank firmly believe the only way to generate long-term value on a

sustained basis for all our shareholders and stakeholders is through the implementation of corporate governance practices which are benchmarked with global best practices.”²⁸

As part of its next growth phase, DIB promoted Deputy CEO Adnan Chilwan to the top CEO position at the end of July 2013, replacing Abdulla Al Hamli who became the bank's Managing Director and board member.

DIB, UAE, and Corporate Governance

Corporate governance is an area of concern for DIB and the UAE in general. Put simply, corporate governance is the system by which companies are directed and controlled to limit abuses. While the big fraud cases that affected DIB exposed its internal corporate governance fragilities, it must be noted that DIB was not the only financial institution in the UAE to fall victim to fraudsters. As a whole, Dubai's and the UAE's reputation for lax supervision of its banks has been called into question. As a result of high-profile cases affecting UAE banks (including Madhav Patel's Solo Industries, which disappeared with approximately US$200 million of UAE banks' money in 1999² ), the central bank tightened its supervision of all banks, earning it the International Monetary Fund's approval in 2003.³ Even then, the overall business and financial environment was still considered a hotbed for illicit money flows. A 2008 study of the emirates by the 36-jurisdiction member Financial Action Task Force, an intergovernmental organisation that coordinates and monitors efforts to block money laundering, singled out Dubai as particularly vulnerable because of the exponential growth in its migrant population and in investment and infrastructure since 2001. The UAE's own central bank's Anti-Money Laundering and Suspicious Cases Unit reported 1,729 cases of questionable money movements in 2009, an increase from 1,170 in 2008.³¹ Commenting on the state of corporate governance in the Gulf as a whole following a number of major scandals in public corporations between 2008 and 2010, Arab affairs commentator Sultan Saoud Al Qassemi, then of the Dubai School of Government, wrote in 2010: “Today, corporate governance must be taken more seriously. . . . Unfortunately, despite many people's efforts to reform corporate governance laws and stamp out corruption, very few changes have actually been made and collective action has been largely absent.”³² A series of corporate governance codes has been put in place by regulators in the UAE for all companies since the 2000s, and the international Islamic finance industry itself recognises the importance of good corporate governance for all Islamic financial institutions. The Kuala Lumpur–based Islamic Financial Services Board (IFSB), the international standard-setting body that issues prudential standards for the Islamic finance industry, has issued several standards and guiding principles on corporate governance and promotion of transparency and market discipline for all Islamic financial institutions,

whether they provide banking, Islamic insurance (takaful), or investment schemes. IFSB, however, has no power to enforce its standards; regulators as well as financial institutions themselves can choose to voluntarily adopt them or not. (See Chapter 7 on Rifaat Ahmed Abdel Karim.)

In April 2013 the Red Flag Group, a compliance consultancy, surveyed publicly available information issued by listed groups in the UAE and concluded that the companies are failing to show potential investors that their corporate governance policies are stringent enough for a new era of compliance.³³ The study awarded the UAE only 5.5 out of 32 points. The same study conducted in the financial centres of Singapore and London resulted in average scores of 12.6 and 18.2 respectively.³⁴

Sheikh Rashid bin Saeed Al Maktoum's famous saying—“What is good for the merchants is good for Dubai”—which encapsulated the spirit of free enterprise that built Dubai's economy from the 1960s, obviously needed updating for the 1990s and beyond. For DIB, piety, Islamic values, and ethics needed to be translated into and manifested in strong corporate governance structures and risk frameworks.

Following its public listing in 2000, DIB adopted a new strategy of further diversifying its holdings within the UAE and venturing abroad. Its interests within the emirates are mainly in real estate, including the developer Deyaar and real estate financier Tamweel. Pakistan was its first target abroad with DIB Pakistan founded in 2006, followed by Jordan DIB in 2010. DIB suffered from the global financial crisis that started in 2007/8 largely due to its exposure to the emirate's real estate and construction sectors. Its profits slipped drastically from 2007 (AED 2.5 billion) (approximately US$680 million) to 2010 (AED 813 million) (approximately US$220 million), only slowly recovering in 2011 (AED 1.1 billion) (approximately US$300 million). Its share price fell from AED 11.2 in October 2007 to AED 1.95 by July 2010.³⁵ The bank had to borrow billions of dirhams from the central bank in 2008 and only finished repaying the full AED 3.8 billion (US$1.03 billion) in April 2013.³

Hajj Saeed, Dubai, and the Islamic Economy

Hajj Saeed is famous for saying that the economy and education are the two most important areas that need development in the life of man. While his life's work in Islamic banking and finance has been limited primarily to Dubai Islamic Bank in the UAE, he has made far-reaching contributions to the overall Islamic economy through his businesses and educational institutions that are established and run based on Islamic precepts.

From one bank established in 1975 to an industry of national (and international) economic interest in 2013, Hajj Saeed's pioneering and visionary contributions to the development of Dubai's Islamic economy flow through his DIB and can also be seen through the wider work of the SS Lootah Group. From as early as 1981, DIB started holding seminars and forums to introduce and spread the concept of Islamic economics and banking, also launching the Arabic-language magazine Al Iqtisad Al Islami (The Islamic Economy) as an information channel. It was also in 1981 that DIB became involved with the Dubai Cooperative Society to ensure compliance with halal (permissible) food processing. In fact, the Dubai Cooperative Society was established by Hajj Saeed's SS Lootah Contracting Company in 1972, which led to Hajj Saeed establishing Al Islami Foods in 1981. Al Islami set up the first meat processing plant in the Jebel Ali Free Zone, and today it is the leading halal food producer in the Middle East and one of the leading consumer brands in the Gulf region. Apart from halal food production, Al Islami also owns Al Farooj, the fast food chain. Al Islami has been recognised as a Top 40 Arab brand by Forbes magazine. Its full approach to halal spans procurement and preparation of halal ingredients to the manufacturing and delivery of the final product to the shelves.³⁷ Al Islami's managing director, Saleh Abdullah Lootah, is also the chairman of Dubai Chamber's Food and Beverages Manufacturing Business Group.

DIB has also extended qard al hassan (interest-free loans) since 1983 especially

to help Muslims finance marriage, medical treatment, and settlement of outstanding personal debts. Further, through the bank's investments, major undertakings were made possible, including the Madinat Badr Housing Project in 1983 that provided much-needed residential accommodation in Dubai. The DIB-owned housing project housed 1,000 largely low-income families. Unfortunately for those families, they were removed in 2004/5 to make way for redevelopment undertaken by DIB's subsidiary Deyaar Development Company.

For more than 30 years, Hajj Saeed and his SS Lootah Group have founded and run numerous companies across a diverse range of economic sectors based on Islamic principles and values. Today the concept of an “Islamic economy” has finally gained national recognition (beyond Dubai, the Islamic economy is also now a focus for other jurisdictions such as Malaysia). In January 2013, the ruler of Dubai, Sheikh Mohammed bin Rashid Al Maktoum (the son of Hajj Saeed's old friend, the late Sheikh Rashid bin Saeed Al Maktoum), publicly announced the emirate's aim of becoming the world's capital for the Islamic economy, which includes Islamic finance, Islamic insurance, Islamic contracts arbitration, Islamic food industry and trade standards, and Islamic quality management standards.³⁸ Dubai is committed to advancing its Islamic economy in a big way, with various organs of government focused on it. In July 2013 the emirate launched the Dubai Centre for Islamic Banking and Finance to further its international standing in the sector.

No doubt Hajj Saeed's lifetime of work, not only through DIB but all other companies and educational institutions under the SS Lootah Group, has played a pioneering and leading role in Dubai's Islamic proposition, succeeding long before the term “Islamic Economy” became fashionable in the 2000s.

Forty Years On

Hajj Saeed lives by a code of Islamic values and ethics which begins with the basic need for honesty, trust, and mutual care and respect. He s enforcing a code of ethics in the workplace, he says. In the companies under the SS Lootah Group, for example, the code of ethics demands, among others, that nobody shall lie and nobody shall break promises. Trust, he says, is paramount. “Even the conventional banks are based on trust. People trust banks to safeguard their deposits. Trust—Amanah.”

Looking back at DIB's development, Hajj Saeed refers to “two times” in its history that upset him, although he declined to name the two. He expresses disappointment that most Muslims limit their piety to matters of ritual. “I thought the people who say they are Muslims know what Islam is. I have found out after so many years that people only know Islam for rituals like prayers and fasting.” Worship, says Hajj Saeed, is not confined to the rituals of praying and fasting but embodies everything permissible that one performs in the pursuit of Allah's blessings.

This includes work. Hajj Saeed rebukes those who display a lack of what he considers primary Islamic values and ethics and has harsh words for Muslims who do not live up to Islamic standards. “If you ask me what the right method of working is, it is that everybody, all stakeholders—from the founder to the management to the smallest employee to the depositors—are all in it together and working together. If they don't look out for each other or care for each other as Islamic banks demand, then they haven't actually become Muslims.”

This expectation and the implicit assumptions about virtue and steadfastness is not isolated to Hajj Saeed's DIB. The situation is very much the same at the London branch of Saleh Abdullah Kamel's Albaraka International Bank in the

1980s where “forays into profit-and-loss sharing activities proved disastrous” because bank executives trusted people who “did not deserve their trust.”³

Hajj Saeed also acknowledges management failures and oversights, and the need for a universal system for Islamic banking, echoing the sentiment of Prince Mohamed Al Faisal Al Saud. (See Chapter 3 following.) He says “I realise that as economies grow, the banks also grow bigger. We should not have one big bank. When the bank becomes too big management may relax or not be as vigilant.” Instead, he favors a series of small banks that will all follow the exact same system. “Islamic banks should be the same. They should be all over the world, in Malaysia or Dubai, everywhere else, and they have to work according to the same system. There is a need for a network of banks that work based on the same principles.” This, he says is something he is actively thinking about.

Looking to the future and the bright side of Dubai's economic growth, he is encouraged by Dubai's aim of becoming the global hub of Islamic economy, the rallying call announced by the government in January 2013. “In my view, the government is the istrative arm of the country, and governments manage or ister for the good of the people. What the project needs is the right people for the job. Like I said earlier, if we work properly we will reach our goals quicker.”

The reason why Hajj Saeed is so focused and intent on his schools, he says, is that all the chaos in the world—and he points to the global financial crises as well as poverty (and perhaps he would also include financial fraud and scandals) — is caused by ineffective education systems. “If we don't raise our children right, if we don't teach them right, we create this chaos.” Hajj Saeed's education model, as implemented in the Islamic School for Training and Education, pitches academic pursuits on a par with vocational training within a framework imbued with Islamic values. This holistic system spans nine years—three for foundational education, three years for guidance, and the last three years to specialise in areas such as engineering, ing, architecture, and media. The aim is to nurture future generations of Muslims steeped in Islamic values and

who will be productive leaders of and contributors to the world. He has also pushed for and developed one-classroom models in rural Sudan in which one teacher follows a class throughout the nine years of schooling and education, teaching all the basic subjects: Arabic, English, mathematics, science, information technology, ing, and Islam.

The Last Word

Hajj Saeed is sure of one thing: The Islamic economic system will emerge the dominant global system. “I was once visited by a general manager of a bank who asked me when I thought the Islamic system will replace the conventional system. I said to him, that depends on me and you. If we work on it the right way, then we will get there sooner rather than later. So when will the Islamic system replace the other? It depends on the efforts of Muslims.”

To the Islamic banking fraternity, he says, “I pray every day that Islam returns to us. We are just starting to see the truth emerge now, bit by bit. But there is still much work to be done.”

Notes

¹ John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988).

² Ibid.

³ Arab Information and Public Relations Establishment, “Petroleum Industry in the United Arab Emirates”, (Abu Dhabi, United Arab Emirates, 1984), p. 187.

⁴ Albert Hourani, A History of the Arab Peoples (London: Faber and Faber, 1991), p.408.

⁵ Celia de Anca, “Beyond Tribalism: Managing Identities in a Diverse World” (Basingstoke, Hampshire, UK: Palgrave Macmillan, 2012), pp. 100–101.

United Arab Emirates National Bureau of Statistics, “Population by Emirates 1975-2005.” 2010. [Online]. Available from: http://www.uaestatistics.gov.ae/EnglishHome/ReportDetailsEnglish/tabid/121/Default.aspx? ItemId=1869&PTID=104&MenuId=1.

⁷ Wall Street Journal. “Interest-Free bank is established in Dubai by three Arab nations,” May 20, 1975.

⁸ New York Times, June 1, 1975. “Banking without interest rates,” June 1, 1975.

Ahmed Al-Suwaidi, Finance of International Trade in the Gulf (Arab and Islamic Laws) (London: Graham & Trotman, 1994).

¹ Mahmoud A. El-Gamal, Islamic Finance: Law, Economics and Practice (New York: Cambridge University Press, 2006), p. 33.

¹¹ Abdullah Saeed, Islamic Banking and Interest: A Study of the Prohibition of Riba and Its Contemporary Interpretation, 2nd ed. (Leiden: Brill, 1999).

¹² Dubai Islamic Bank. 2013. [Online]. Available from: https://www.facebook.com/dib.uae.

¹³ Ibid.

¹⁴ Ibid.

¹⁵ Mehmet Asutay, “Islamic Banking and Finance and Its Role in the GCC-EU Relationship: Principles, Developments and the Bridge Role of Islamic Finance,” in Leif Stenberg and Christian Koch (eds.), The EU and the GCC: Challenges and Prospects under the Swedish EU Presidency, pp. 35–58 (Dubai: Gulf Research Center, 2010).

¹ Dubai Islamic Bank. 2013. [Online]. Available from: https://www.facebook.com/dib.uae.

¹⁷ Al-Suwaidi, Finance of International Trade in the Gulf.

¹⁸ Ibid.

¹ Monzer Kahf, “Islamic Banks: The Rise of a New Power Alliance of Wealth and Shariah Scholarship.” 2001. [Online]. Available from: http://monzer.kahf.com/papers/english/The_rise_of_Islamic_banks_power_alliance_REVISED MESA.pdf2001.

² Basil Mohammed, “Letter of the United Arab Emirates,” Al-Noor Journal 52 (January 1988): 16.

²¹ Ibrahim Warde, Islamic Finance in the Global Economy (Edinburgh: Edinburgh Press, 2000), p. 84.

²² Ibid., p. 155.

²³ Ibid., p. 156; Reuters, “Suit: African Uses ‘Black Magic’ to Get Bank's Money,” Hurriyet Daily News, August 1, 1998. [Online]. Available from: http://www.hurriyetdailynews.com/default.aspx?pageid=438&n=suit-africanuses-black-magic-to-get-banks-money-1998-08-011998.

²⁴ Salam Al Amir and Awad Mustafa, “Record 10-Year Sentences over Dh1.8bn DIB Fraud Case,” The National, 27 April 2011. [Online]. Available from: http://www.thenational.ae/news/uae-news/record-10-year-sentences-over-dh18bn-dib-fraud-case.

²⁵ The Banker, “Top 1000 World Banks,” (London: The Banker, July 2012).

² Central Bank of the United Arab Emirates, “Monthly Statistical Bulletin, Banking & Monetary Statistics” December 2012. [Online]. Available from: http://www.centralbank.ae/en/pdf/bulletin/SBull-December-2012.pdf.

²⁷ Reuters, “Dubai Islamic Bank Eyes Double-Digit Profit Growth, Acquisitions,” Gulf News, 5 May 2013. [Online]. Available from: http://gulfnews.com/business/banking/dubai-islamic-bank-eyes-double-digitprofit-growth-acquisitions-1.1179275.

²⁸ Dubai Islamic Bank, “Code of Corporate Governance,” 2010, p. 5. [Online]. Available from: http://www.dib.ae/docs/investor-relation/code-of-corporategovernance.pdf.

² Sally Ramage, Fraud Investigation: Criminal Procedure and Investigation (iUniverse.com, 2009), p. 137.

³ K. Raveendran, “IMF Commends UAE for Strong Banking Supervision,” Gulf News, 1 August 2003. [Online]. Available from: http://gulfnews.com/infocus/dubai-2003-2.1291/imf-commends-uae-for-strong-banking-supervision1.362569.

³¹ Angela Giuffrida,. “Dubai Labors Under Money-Laundering Image,” New York Times, 1 December 2010 [Online]. Available from: http://www.nytimes.com/2010/12/02/business/global/02iht-m02blaunder.html? pagewanted=all&_r=0.

³² Sultan Sooud Al Qassemi, “Lack of Corporate Governance Holds Gulf States Back,” Dubai School of Government, April 2010. [Online]. Available from: http://www.dsg.ae/en/publication/Description.aspx? PubID=177&PrimenuID=11&mnu=Pri&AspxAutoDetectCookie=1.

³³ Simeon Kerr, “UAE Corporate Governance Falls Short,” Financial Times, 15 April 2013. [Online]. Available from: http://www.ft.com/cms/s/0/53b79214a5ab-11e2-9b77-00144feabdc0.html#axzz2THLvFD2H.

³⁴ Red Flag Group, “London and Singapore Outperform the UAE When It Comes to Disclosure of Compliance and Corporate Governance,” 11 April 2013. [Online]. Available from: https://www.redflaggroup.com/newsroom/uaecompanies-fail-see-importance-compliance-and-risk-transparency-report-reveals.

³⁵ Rodney Wilson, “The development of Islamic finance in the Gulf Cooperation Council states,” in David Held and Kristian Ulrichsen (eds.), The Gulf: Politics, Economics and the Global Order, pp. 35–58 (Oxon: Routledge, 2012).

³ The National, “DIB repays Dh3.8bn funding,” The National, 7 April 2013. [Online]. Available from: http://www.thenational.ae/business/industryinsights/finance/dib-repays-dh3-8bn--funding.

³⁷ Baker Ahmad Alserhan, The Principles of Islamic Marketing (Farnham, Surrey, UK: Gower Publishing, 2011), p.100.

³⁸ Gulf News, “Mohammad Announces Dubai as Capital of Islamic Economy,” Gulf News, 9 January 2013. [Online]. Available from: http://m.gulfnews.com/business/mohammad-announces-dubai-as-capital-ofislamic-economy-1.1130035.

³ Warde, Islamic Finance in the Global Economy, p. 155.

Chapter 3

The Well of Influence

Prince Mohamed Al Faisal Al Saud

Among the believers are men who have been true to their covenant with Allah; of them some have completed their vow (till their death), and some still wait, but they have never changed their determination in the least.

—Al Qur'an, Sura Al Ahzab, Verse 23

Perhaps the most prominent pioneer of Islamic finance, His Royal Highness Prince Mohamed Al Faisal Al Saud's driven activism in the 1970s and 1980s planted the seeds for numerous developments that have contributed to the creation and growth of the global Islamic finance industry. The son of the late Saudi King Faisal, who reigned from 1964 until his assassination in 1975, Prince Mohamed followed through with his late father's desire to see Islamic financial institutions spread across the world. Prince Mohamed's Dar Al-Maal Al-Islami exploded onto the scene in 1981 in quite prominent fashion and was the Islamic finance industry's first ever multinational corporation.

Genius is being the first to recognize the obvious.

—His Royal Highness Prince Mohamed Al Faisal Al Saud

Prince Mohamed Al Faisal Al Saud is used to making international headlines. In October 1977, TIME magazine singled out his scheme as the most promising one to come out of a conference held at Iowa State University in the United States. The conference, itself a brainchild of the prince, gathered 175 scientists and like-minded iceberg lovers. According to Iowa State University's archives, Prince Mohamed donated $50,000 of his own money to the conference. At that time the prince was president of Iceberg Transport International Ltd, a company he had spent $1 million to form. Prince Mohamed believed that icebergs would supply enormous quantities of drinking water and help alleviate his country's water issues. He reckoned that a towed Antarctic iceberg, wrapped in sailcloth and plastic to slow its melting, would reach Saudi Arabia by 1980, at a cost of $100 million.¹

In the end, the prince's group towed a block of ice around San Francisco Bay for a while “and proved to their own satisfaction that no iceberg would ever survive to cross the equator.”²

Thus, Prince Mohamed is used to making international headlines for matters of global iceberg proportions. But while he could not move the wells of Antarctica to the austere plains of Arabia, his radically more lasting legacy has been to break and fertilise new grounds for Islamic finance away from his native land.

Germination

The year 1977 was a very busy one for the prince, for when he was not trying to tug icebergs across the globe, he was laying the ground for the establishment of pioneering Islamic financial institutions. Or, as he reminds us: “Actually the International Association of Islamic Banks was established before the banks.” By the time the prince set up the International Association of Islamic Banks (IAIB) in August 1977 under the auspices of the Organisation of Islamic Conference, there were already three Islamic banks established—Dubai Islamic Bank (DIB), Islamic Development Bank (IDB), and Kuwait Finance House (KFH)—and the very First Conference on Islamic Economics had been held in Mecca the year before, in 1976. Prince Mohamed is quick to point out that the first two commercial banks, DIB and KFH, were operating locally and transacting based on rudimentary banking and finance modes. In comparison, the prince's Islamic financial institutions were international.

Prince Mohamed charts the lead-up to the formation of the first Islamic bank he opened—Faisal Islamic Bank of Egypt (FIBE). “We were in the process of getting our licence for the first bank in Egypt, but it took two years to get it. So we went ahead and established the IAIB with us as , and Dubai Islamic Bank, Kuwait Finance House and the Islamic Development Bank. The IDB then retired from the association because it is a governmental level bank, not a private commercial bank.”

The licence that Prince Mohamed refers to was finally obtained in 1977. It took two years to convince Egyptian officials to approve the type of banking he had in mind—which was primarily interest-free banking—and this in the land of the late Dr Ahmad Al Najjar, the “godfather of Islamic banking,” whose Mit Ghamr Savings Bank from 1963 to 1967 is widely considered to be the first modern example of an Islamic bank (although it behaved more as a cooperative credit union and hence operated differently from mainstream contemporary Islamic banks).

It took two years for FIBE to obtain a banking license as the Law No. 48 that governed its establishment accorded the bank advantages and exemptions which many of Egypt's parliamentarians opposed.³ But after debates and defence of the law by Sheikh Muhammad Mutawalli Al Sha'raawi (see also Chapter 4 on Saleh Abdullah Kamel), who was then the Minister of Religious Endowments, the law was unanimously ed by parliament. The bank was officially inaugurated on July 5, 1979.

At around the same time, the Faisal Islamic Bank (Sudan) was set up in August 1977 and opened its doors in 1978.

The establishment of these two banks, says Prince Mohamed, was the most significant in his Islamic banking timeline as they represent the overcoming of initial resistance and challenges to the idea of Islamic banking. The rest, he waves off as details.

The prince explains why he worked for two years to open his first Islamic bank: “As a Muslim I have no choice but to combat riba (most often translated as interest). The task was to find alternatives, Islamic alternatives, which nobody believed was there in the beginning. At the beginning everybody was laughing at us and saying what does religion have to do with economics?”

Despite resistance, Prince Mohamed's financial institutions were growing. Adding to the banks in Egypt and Sudan, he set up the Islamic Investment Company of Nassau in 1977 and the Islamic Investment Company of the Gulf (IICG) (in Sharjah) in 1978. Dr Ibrahim Kamel, who had for some years in the 1970s been laying the ground for a shari'ah-compliant investment company of his own, came on board IICG in 1977 at the invitation of Prince Mohamed and later served as Chairman of Dar Al-Maal Al-Islami until 1983. According to Dr Ibrahim, he and the prince met with stiff resistance from Kuwait (possibly in a

protectionist move on the part of Kuwait which opened its first Islamic financial institution—Kuwait Finance House, in 1977).

The investment companies raised capital via private placements and public via Islamic participation certificates, a new type of financial instrument that Prince Mohamed and his team introduced to the market. These participation certificates combined two principles: mudaraba and qard al hassan. IICG acted as a partner (participant), with the investing general public (holder of participation certificates) as the “beneficial owners” or lenders.⁴ IICG (and later Dar Al-Maal Al-Islami [DMI]) issued many rounds of these Islamic participation certificates.

Dr Ibrahim recalls when IICG first started promoting these certificates, “We started with a blitz. We spent maybe $1 million in publicity, the first time the Muslim world in the Gulf and Egypt were submitted to full-page adverts which read—Participate in the first Islamic mudaraba. We had a section on the lower side of the page where the chiefs of state who had been involved, mainly Sheikh Zayed (Emir of Abu Dhabi), would have a quotation. Sheikh Zayed had a lovely quotation, he said—If you succeed people will come to you like ants to sugar. So we used that slogan.”

IICG obtained fatwa, or religious ruling, for these participation certificates in order to certify their shari'ah compliance. The late Sheikh Abdul Aziz bin Baz, then Mufti of Saudi Arabia, signed off on the certificates in 1978. Dr Ibrahim re the occasions he visited the mufti: “He was a blind man and had an incredible sense of smell and hearing. Every time I would go to see him he would say to me Sheikh Ibrahim, when are you going to stop smoking? I would laugh and say, Sheikh Abdul Aziz, what would you prefer, that I stop working and stop smoking, or that I work and smoke? He would laugh and say, Okay, you work and smoke.”

Sheikh Abdul Aziz gave them the fatwa in March 1978, according to Dr

Ibrahim. “And then the world went crazy. At that time we could not open offices as an Islamic investment company in Saudi Arabia but had established IICG in Nassau and Sharjah. We first started working out of the offices of Prince Mohamed in Saudi Arabia where we had people receiving the money and paying out, giving people receipts and so on.”

The public response to the participation certificates was enthusiastic and overwhelming, according to Dr Ibrahim. “We had several offices operating in Saudi Arabia, and we were receiving millions. One evening on a Thursday night I was driving past our offices in Riyadh and I was shocked by the number of people standing outside. So I stopped and walked in. And people were filed up and queued along the staircase up to the first floor. I walked in, there were people all over the place handing out money, counting money, stacks of money.”

With no Islamic finance industry to speak of at that time, IICG was putting money in instruments such as interest-free deposits and participating in commodity and currency trading. It became clear in 1979 that the company needed to expand its portfolio, but it was very careful approaching investments in Islamic countries, says Dr Ibrahim. This was because Islamic countries did not have organised markets, and their unstable currencies exposed investors to currency exchange risk. IICG also did not have local resources to supervise projects on the ground.

It was then suggested that the Prince look into setting up a much larger institution with capitalisation of up to $1 billion so as to better afford higher risks. This idea became Dar Al-Maal Al-Islami.

Catalysis: The Establishment of Dar Al-Maal AlIslami

Every movement starts extreme because it has to make an impression. Once it breaks through it becomes mellower and develops into something else.

—Prince Mohamed Al Faisal Al Saud

Prince Mohamed explains the start of Dar Al-Maal Al-Islami (DMI): “We created Dar Al-Maal Al-Islami, which, if you translate is the ‘House of Islamic finance.’ We established it, in 1981, with the idea of going international, and we established it in the Bahamas. We already had a fiduciary operations company, a money management company called the Islamic Investment Company of the Gulf, or IICG. So that, with the banks in Egypt and Sudan, these all became subsidiaries of Dar Al-Maal Al-Islami.”

The banks were to provide facilities to the general public at the local level, and the investment companies were to focus on high finance and internationally oriented Islamic investment. DMI is ed as a trust under the laws of the Bahamas and wholly owned by DMI S.A., which is ed in Geneva, Switzerland.

DMI was the Islamic finance industry's first-ever multinational corporate entity.

In the lead-up to DMI's establishment, Prince Mohamed set out for Wall Street seeking worldwide promotion. According to Dr Ibrahim, DMI hired the services

of advertising agency Doremus to gather Wall Street's investment bankers for meetings and to position the company strategically. (Dr Ibrahim re paying Doremus a pretty penny for services rendered.)

The press conference, re Dr Ibrahim, was “jam packed.” Bankers and journalists alike wanted to know how they could make money when no interest was involved, how IICG intended to mobilise money, reinvest it, and what types of investments were allowed.

ments and articles started to appear in newspapers such as the Wall Street Journal (WSJ) and the New York Times (NYT), announcing the arrival of this new and unique financial institution, DMI. One WSJ article splashed the headline “Islamic-Style Bank and Investment Group Is Formed with Capital Set at $1 Billion.” The article wrote: “Political and business leaders from 10 Moslem states have created a banking and investment group to be run on Islamic principles, where interest is shunned in favor of a stake in the venture.” It went on to state: “Islamic banks capitalized by an organization of the standing of DMI will have a greater capacity to attract deposits from the public and governments” and that fixing its capital base at $1 billion would help it “compete with wellestablished and well-capitalized Western financial institutions.” DMI commented that it would invest in noninterest-bearing time deposits, foreign exchange and commodity trading, and the Islamic equivalent of commercial lending on a profit-participation basis.⁵ In a full-page ment DMI took out in the WSJ on June 12, 1981, the organisation's “Covenant and Call to Ummat Al Islam” (global community of Muslims) laid out the and conditions that govern the international enterprise:

1. The Founders declare their faith in Allah, exalted be his Omnipotence, and their belief in the teaching of the Holy Koran, in the ordinances of the Hadith and the tenets of the Glorious Shari'a.

2. The Founders acknowledge the religious obligation to not only manage

their own conduct and the material bounty bestowed on them by Allah to the content of the Glorious Shari'a, but their religious duty to promote the observance of the Glorious Shari'a by other Muslims.

3. The Founders observe with dismay the pernicious temptation afforded to Muslims by the all pervasive influence of the Riba-dominated financial structures established in Ummat Al-Islam in imitation of institutions alien to it, and the Founders will in a Holy Struggle for the sake of Allah, exalted be His Name, to eliminate Riba from Ummat Al-Islam, since Riba as defined by the Glorious Shari'a is banned by Allah.

4. The Founders, being persons favoured by Allah, praised be his Glory, with the riches of this world, recognize that they will gratefully fulfill a religious duty by sheltering Muslims throughout the World from the effects of Riba by providing access to Islamic Financial Institutions that are truly Halal.

5. The Founders acknowledge the ethical and social utility to Ummat Al Islam in the growth of an Islamic Financial System based on equity and social justice in contrast to the alien Riba System.

6. The Founders wholly the Muslims revival in Ummat Al Islam, acknowledge the dissatisfaction expressed by the majority of Muslims with the Riba System and the public demand for the development of Islamic Financial Institutions responsive to the economic and social conditions of Ummat Al Islam.

7. The Founders acknowledge the utility of the application of the most modern management and istrative techniques in the functioning of the Islamic Financial System according to the precepts of the Glorious

Shari'a.

8. The Founders in their struggle for the sake of Allah to fulfill these common principles shall endeavor to secure the prosperity of all Muslims dealing with Islamic Financial Institutions expressing their belief that, Allah willing, these Muslims will be blessed with generous financial returns.

9. Reluctantly acknowledging the difficulty of immediately displacing the Riba system which will require the united cooperation of all Muslims, the Founders have chosen the Halal alternative and the Founders are confident that when offered commercially competitive Islamic Financial Institutions Muslims will also choose the Halal alternative and be blessed in this World and the next.

DMI also dealt with the financial centre across the Atlantic, trading in commodities on the London Metal Exchange. By this time, the company also had cautiously started financing and investing in projects within and around the Arabian Peninsula.

“We had a long list of companies working with us because obviously we were diversifying our risks,” says Dr Ibrahim. He rattles off a few names: “There was EF Hutton, Merrill Lynch who had a commodity arm, we dealt with Goldman Sachs, JP Morgan. I don't recall the other names but there were definitely others.” DMI's professional services were taken up by PricewaterhouseCoopers, which remains their ants and auditors to date.

DMI's establishment, in the words of academic and scholar Ibrahim Warde “was a potent mix of finance, politics and religion.”⁷

The prince's activism and proselytising, as well as the legacy of his father (who was an extremely influential, visionary modern leader and “the king of the Ummah”), opened many doors for DMI. An ment published June 12 and June 26, 1981, in the WSJ lists its founders (see Table 3.1).

Table 3.1 DMI Founder Shareholders

Name Sheikh Issa Bin Salman Al Khalifa Dr Oman Abdel-Rahman Azzam Dr Ibrahim Kamel President Ahmad Sekou Toure Sheikh Sulayman Al Duayg Al Sabbah Sheikh Mohammad Sulayman Al Fadl Al Sabbah Dr Abdel Razzaq Al Udwani Tunku Abdul Rahman Mohammad Zia Ul-Haq Dr Ahmad Khorshid Sheikh Khaled Bin Mohammad Al Thani Djaafar Mohammad Al Numayri Sadek Al Mahdi Dr Hassan Al Turabi Sheikh Zayed Bin Sultan Al Nahyan Sheikh Faysal Bin Sultan Al Qasimi Prince Abdallah Al Faysal Al Saud Prince Mechaal Bin Abdel Aziz Al Saud Prince Bandar Bin Abdel Aziz Al Saud Prince Abdel Mohsen Bin Abdallah Bin Jalaoul

Position and Country Emir of Bahrain Egypt President of the Republic of Guinea Kuwait

Former Prime Minister of Malaysia President of Pakistan Pakistan Qatar President of the Democratic Republic o Sudan President of the National Islamic Front President of the United Arab Emirates United Arab Emirates Saudi Arabia

Prince Mohammad Al Faysal Al Saud Prince Majed Bin Abdel Aziz Al Saud Prince Saad Bin Mohammad Bin Abdel Aziz Al Saud Prince Megren Bin Abdel Aziz Al Saud Prince Saud Al Abdallah Al Faysal Al Saud Prince Bandar Bin Mohammad Bin Abdel Rahman Prince Sultan Bin Mohammad Bin Saud Al Saud Prince Saud Bin Abdel Rahman Al Turki Al Sodayri Sheikh Abdel Aziz Mohammad Al Salem Dr Abdel Aziz Al Feda Sheikh Ahmad Mohammad Al Gosaibi Sheikh Awwad Sahou Al Otaybi Sheikh Saad Mohammad Al Moajil Sheikh Abdel Aziz Ahmad Sab

Source: Wall Street Journal, Display Ad 48, 12 June, 1981. p. 28.

DMI set up its own Religious Supervisory Board whose function was to approve all Islamic operating systems. The chairman of the board was the former Grand Mufti of Egypt, Sheikh Mohamed Khater Mohamed Al Sheikh. included Sheikh Yusuf Al Qaradawi and Sheikh Al Siddiq Muhammad Al Amin Al Darir, highly prominent and eminent shari'ah scholars well known especially in the Middle East and North Africa.

The high-profile composition of DMI's founder shareholders and shari'ah board was considered important for its international ambitions, as these big names could serve as leverage for expansion into new (Islamic) markets. But there were different reasons for high-level patronage and, as Prince Mohamed points out, not everyone shared his level of belief and commitment to Islamic finance. To some extent, the big names on the list were “a promotional aspect,” says the prince. “Whether those shareholders worked to establish DMI or Islamic finance…they put their names in there for my sake.”

Working to convince high-level and high-profile officials during those initial years was not easy. “There was a lot of resistance, a lot of resistance because we were challenging a lot of interests. You must , the whole Muslim world had banks, and all of them were interest-based, or riba, banks. I was going there and saying that all of them are haram. So immediately there was a clash.”

But to be fair, not everyone challenged the entire notion of Islamic banking; some felt that interest-based banking was already too deeply entrenched to uproot. Prince Mohamed its, “It was not a question of most of them not seeing the value of it. A lot of people said yes, we believe in what you are saying but we cannot do it.”

Beyond the immediate Middle East and North African region, the prince re flying to Kuala Lumpur to meet Malaysian officials about setting up an Islamic bank in the country. He was already familiar with the former prime minister of Malaysia, Tunku Abdul Rahman, who worked closely with the prince's father, King Faisal, on establishing the Organisation of Islamic Conference in 1969 and again in the early 1970s with the planning for the establishment of the IDB. Tunku Abdul Rahman became one of DMI's founding . The prince also met with Tun Dr Mahathir Mohamed, he said, when the man was minister of trade and industry before becoming prime minister in 1981. “I went to Malaysia in order to promote it [Islamic banking] and Mahathir was one of the people I saw. At the time he wasn't very interested. The idea died in Malaysia for a while and then got revived. I don't know what Mahathir recalls,” says the prince, “but what I told him was that we are Muslims, this is a system, and we think it will work. You should adopt it.” Tun Dr Mahathir may not have been interested then, but he picked up the idea when he became prime minister in 1981. (See Chapter 5 on Mahathir Mohamad and the Malaysian Story.)

Who were the biggest ers of all the officials and heads of state the prince met in the beginning? “I am sorry to say that there weren't any biggest ers. There were some people who believed the idea because of religion. There were some who believed the idea was workable as an economic product, or as financial products. Most people, though, didn't believe it at all.”

The prince does not name names but continues, “I am talking about the elite. I am not talking about the people on the ground themselves. I'm talking about the elite who are supposed to be the ones who think about these things and develop them. I would say the majority of the elites are still against Islamic banking.”

Again, he does not name any names but reveals an underlying simmer of cupidity (and even hypocrisy?) within the Islamic community. “Some of the

Islamic finance people today are the ones who went into it not because they want to promote the system but because they want to make money. It's a good gimmick. Some of the most important Islamic finance people today were the same ones back then who were telling us, “You are crazy.”

In spite of all the resistance he faced, Prince Mohamed continued to forge ahead with DMI.

The Business of DMI: Navigating Uncharted Waters

The pioneering Islamic financial institutions in the 1970s and 1980s faced a very steep learning curve, and pioneers such as Prince Mohamed did not take their stewardship of influence (and affluence) lightly. For the most part, they had to go down the banking route of the Western model because of the predominance of the much wider interest-based global financial environment they were operating in. One of the most difficult problems to resolve concerned deposits, as shari'ah demands that deposits be held in trust. The pioneering Islamic bankers, such as Prince Mohamed and Saleh Abdullah Kamel, preferred to go the way of profit and loss partnership contracts (such as mudaraba and musharaka), which did not fit comfortably into the Western banking model.

With such challenges to overcome and because DMI had placed itself in the limelight, the trust's teething problems, troubled adolescence, and other growing pains have attracted public interest since the very start. DMI's high-profile shareholders and alliances further intensified scrutiny.

DMI's first decade was one of rapid growth. Prince Mohamed was able to sustain a level of momentum generated by its explosion onto the scene and the international publicity that came with its launch. This high, however, sobered down to earth toward the late 1980s when a couple of scandals in Egypt affected Faisal Islamic Bank.

In its first few years, DMI set up a whole string of financial institutions including investment companies in Bahrain, Egypt, Guinea, Niger, Senegal, and Sudan; banks in the Bahamas, Bahrain, Guinea, Niger, Senegal, and Turkey; takaful (Islamic insurance) companies in Luxembourg and Bahrain; and a retakaful company in the Bahamas.⁸

By 1985, DMI's subsidiaries were using the full range of Islamic contracts at their disposal: murabaha, musharaka, mudaraba, ijara, ijara wa iqtina', and qard al hassan. The takaful companies in Bahrain and Luxembourg used mudaraba arrangements.

If most of the elites (as he described them) considered Prince Mohamed and his plans crazy, the general populace certainly proved to be more welcoming of Islamic banking. DMI's operations were lifted by a groundswell of , and funds under management grew very quickly, hitting the $1 billion mark just three years after the company's establishment. Table 3.2 shows funds under management from 1979 to 1985.

Table 3.2 DMI Funds under Management 1979–1985

Year ¹⁷ ¹⁸ ¹ ⁸¹ ¹ ⁸² ¹ ⁸³ ¹ ⁸⁴ ¹ ⁸⁵

Funds under Management in USD $12 million $29.9 million $113.1 million $453 million $873.1 million $1.11 billion $1.367 billion

Source: John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988).

But while business was growing, the double whammy of scandals in Egypt toward the latter half of the 1980s hit both DMI and the very nascent Islamic finance sector. The first was the Ponzi schemes at the hands of Islamic money management companies, as well as the Bank of Credit and Commerce International (BCCI) debacle.

The emergence of Islamic banks in Egypt, with Faisal Islamic Bank a main driver, paved the way for a proliferation of Islamic money management companies from the mid-1980s. There were nearly 200 of them, all touting shari'ah compliance and baiting Egyptians with returns of up to 26 percent at a time when both conventional and Islamic banks could not offer more than 11 percent.¹ Some commentators estimate a million Egyptians had invested in these companies, but no accurate figures for their assets are available.¹¹ The Egyptian central bank began trying to audit the companies from around late 1986. Most of them collapsed in May 1988, a month before the enactment of a new investment law.¹² With the collapse of these companies, Egyptian depositors instigated a run on the banks as they tried to withdraw their money out of fear that the authorities would clamp down on Islamic banks; Faisal Islamic Bank of Egypt (FIBE) was affected. With so many Egyptians hurt by these Ponzi schemes at the hands of so-called Islamic investment companies, public confidence in Islamic banking and finance sank.

As for the BCCI scandal, the funds from Islamic banks were meant to be invested by BCCI in commodity contracts in compliance with shari'ah. The Islamic banks affected were FIBE, DIB, Khartoum-based Tadamon Islamic Bank (which DMI had interest in), Qatar Islamic Bank, and Kuwait Finance House. BCCI was not an Islamic financial institution, but it had set up an Islamic banking unit in London in 1984, which some estimate held up to US$1.4 billion

in deposits.¹³ The bank was ed in Luxembourg in 1972, with offices in Karachi and London. BCCI was involved in financial crime on a massive and global scale, defrauding investors of billions of dollars. A NYT article on August 12, 1991 reported that BCCI's “stateless” bank operations had started to make regulators in the United States uneasy—the bank was operating in the United States and about 70 other countries while it was “chartered in Luxembourg, run by Pakistanis, owned by Arabs, headquartered in Britain and serviced by outposts in the Cayman Islands.”¹⁴

Following the liquidation of BCCI in 1991, it was discovered that the Islamic banks' commodity murabaha contracts were never recorded. The lack of due diligence on the part of the affected Islamic banks then became a huge issue.¹⁵

DMI's current group chief executive, Khalid Abdulla-Janahi, would not go into the specifics of each case but insists that DMI got all its money back following these widely-publicised scandals. “That was all part and parcel of doing business. It wasn't that we were not strong enough . . .” He trails off. “We got all our money back,” he insists.

With DMI choosing not to invoke the ghosts of 1980s Egypt s differ as to the extent of losses suffered. Some write that FIBE had started doing business with BCCI in the late 1970s and by 1982 had $171 million on deposit, peaking at $245 million at the time of BCCI's demise.¹ Others push the number out to $358 million.¹⁷

While Islamic financial institutions were not BCCI's only victims, the extent of the fraud shone an unflattering light on the Islamic sector.

Wracked first by the Islamic money management companies then by BCCI, Egypt's Islamic banking sector was never quite the same again. Matters reached

a critical stage when the then mufti, Sheikh Mohammed Sayed Tantawi, issued a fatwa in 1989 ruling that the type of interest charged and received by conventional banks was in fact lawful from a religious standpoint. Tantawi's move is seen by some to have been politically motivated.¹⁸ Further, a former governor of FIBE, Ahmed Zendo, revealed that during his time, the bank both invested in conventional bonds and received interest payments.¹

Islamic banks, then, suffered at the hands of external fraudsters who wrapped their products in shari'ah compliance as well as internal management who were practising shari'ah noncompliance (based on Ahmed Zendo's testimony above). The BCCI affair raised questions about international bank supervision especially with regard to cross-border money movement and communication between bank regulators, triggering a major re-assessment of domestic and international legal regimes governing foreign banks. This major review consequently also affected Islamic financial institutions. (See Chapter 4 on Saleh Abdullah Kamel for the impact of fallout of BCCI on Al Baraka International Bank.)

Islamic banks in Egypt, the Faisal bank included, eventually regained public confidence and welcomed back depositors. Positive growth rates were posted from around the middle of the 1990s. The bank weathered the storms and is still going strong, serving a million s (according to its website). Its profits for the first half of 2013 reached approximately US$53 million, up from approximately US$40.54 million in the same period in 2012.² DMI Trust owns 49 percent of the Egyptian bank.

DMI also faced challenges beyond Egypt. Dr Ibrahim Kamel, who was DMI chairman until 1983, also speaks about losses incurred in 1982 due to DMI buying and selling open positions in gold. According to one estimate, DMI lost $279 million on bullion trading in 1982/3 (Dr Ibrahim's estimate was far more modest), and in 1984 suffered from substantial numbers of difficult loans to Sudan.²¹

Since that first decade of the 1980s, DMI went on to various mergers and acquisitions, new setups, and divestments. It underwent a streamlining of its business towards the end of the 1990s. Khalid Abdulla-Janahi attributes this to business as usual. “The world changes so you have got to change with it. The industry changes and you have got to move along with the industry. It is not easy and a lot of times things work, and sometimes they don't work. That is the nature of the animal.”

More recently in the 2000s, DMI Trust went through another relatively highprofile challenging period when its Faisal Private Bank, the first Islamic bank in Switzerland (opened in 2006), suffered heavy losses on its real estate portfolio. Its 2010 Annual Report cites external economic factors badly hitting the bank's real estate investments in the United States and Europe made prior to the 2008 global financial crisis. Its losses wiped out the bank's capital base, and in 2012 Faisal Private Bank was converted into a family office.

Despite such challenges since the 1980s, a glance at DMI's s for its second decade onwards shows the group undergoing choppy performance but enjoying more years in the black than red. Figure 3.1 charts DMI's net profits from 1981 to 2012 while Figure 3.2 charts the company's funds under management (on and off balance sheet) from 1994 to 2012.

Figure 3.1 DMI Profit/Loss 1981, and 1992–2012 in Millions of U.S. Dollars

Source: John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988) and DMI Annual Reports.

Figure 3.2 DMI Funds under Management 1981–1985 and 1994–2012 in Millions of U.S. Dollars

Source: John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988) and DMI Annual Reports.

Current Holdings

When DMI's Board of Supervisors was established in 1981, it had 19 . As of year-end 2012, this number had been reduced to 9. DMI remains multinational and has Islamic banking, Islamic investment and Islamic insurance businesses in four continents.

Primary financial and business holdings include Faisal Islamic Bank of Egypt, Islamic Investment Company of the Gulf (Bahamas), Ithmaar Bank (Bahrain), Faysal Bank Limited (Pakistan), Faysal Private Bank (Switzerland), Faisal Finance (Jersey), Ithmaar Development Company (Cayman Islands), Sakana Holistic Housing Solutions (Bahrain), Cantara (Switzerland), and DMI istrative Services (Switzerland).

DMI also has interests in many other companies, including Faisal Islamic Bank (Sudan), Solidarity Group (Bahrain), CITIC International Asset Management (Hong Kong), and CIAM-Shamil Asset Management (Hong Kong).

Forty Years On: “The Aura Is Much Bigger than the Reality”

In and of themselves, the financial institutions that Prince Mohamed founded contributed significantly to ensuring the visibility, profile, and growth of the Islamic finance industry. It has obviously not been easy, but the group has proven its consolidated strength and, despite losses and casualties throughout the years, it continues to provide Islamic financial services. If there is anything that the information about DMI in the last few pages indicates, it probably is that while there was great ion, desire, and public interest accompanying the birth and first baby steps of such an international Islamic financial institution as DMI, the translation and operationalising of the Islamic alternative to sound practice had to through the baptism of business and sound risk management, both for DMI and for the industry that was developing as a direct and indirect consequence of its efforts.

Trailblazers like Prince Mohamed had to demonstrate that the Islamic alternative could be developed into a viable system. In the absence of a tried and tested path, they were confronted by many new risks, and they and the emerging industry made mistakes along the way. This is something the prince its. When asked how he thinks he has managed to convince people of the Islamic system, he says, “By insisting, trying to promote it and trying not to make mistakes, if possible. I know we made a lot of them.”

The industry is emphatic about paying homage to its pioneers and leaders (with some making a business out of it), and Prince Mohamed is widely recognised as both. Does he see himself as a leader of the Islamic finance industry? “No.” Not at all? “It is not a question of leadership. It is a question of contributing your thoughts. If somebody else can add to it, fine. If somebody else can sur it, fine. That is the way we should take.”

How about his pioneering achievements? “It isn't about my achievements. I was the ‘exciter’ and then it took off. It has grown faster than I thought it would.” But while the industry's growth has sured his expectations, looking around at the Islamic financial institutions today, he says they are still “boutique operations.” To his mind achievement for the industry would be when Islamic finance becomes quotidian. “So far we are not even beginning to go that way. We are still too small. The aura is much bigger than the reality.”

“Small”: The global industry's growth rates have hit double-digit figures, and after four decades, aggregate assets of the Islamic finance industry are approximately $1.6 trillion, or 1 to 2 percent of total global financial assets. At 80 percent Islamic banking constitutes the lion's share of global Islamic financial assets. The sector grew at a compound annual growth rate of 40.3 percent between 2004 and 2011.²² Even with these impressive numbers, Prince Mohamed acknowledges that there is still a long way to go for Islamic finance and that the current shape of the global industry is not the be-all and end-all of the Islamic system. “1 percent is a good beginning. But let's not claim things for ourselves that we don't have. I mean, 1 percent is what? It's nothing. When we become 10 percent, then that's something. We claim too much. Let's accomplish first.”

To get to under 2 percent in 40 years and still believe that the industry's growth has been faster than expected says a lot about how thin expectations must have been in the 1970s. DMI “reluctantly” acknowledged in 1981 that the interestbased system could not be immediately displaced and that commercially competitive Islamic financial institutions would be required to break through.²³ If the goal is to displace the interest-based system (as DMI's 1981 covenant proclaims), then the global Islamic finance industry faces a Herculean task. Does the prince think the industry has succeeded in any way? He answers the question with a question: “How do you measure success? Do you measure it by being an example or do you measure it by accomplishing your goal? Our goal is not yet accomplished, and we still have a long way to go. But if you measure success as being an example, then we have succeeded. We are telling the whole world we

have a system, that the system is operable; here it is, if you want you can use it. Even a lot of riba banks today offer Islamic services so in that sense, our products now are being promoted by our competitors.”

The prince adds, “I think now is the time to systemise. Western banking, riba banking, they have developed a system that is universally applied. We have to follow that route in putting the principles into a form that can be accepted, and the implementation of them becomes professional.”

A system to be universally applied has been the prince's vision since the very beginning of his Islamic finance career. The IAIB, which he initiated in 1977, and thereafter the International Institute of Islamic Banking and Economics in the Turkish Republic of Northern Cyprus, which he established with the late Dr Ahmad Al Najjar in 1982, both further the prince's conviction that there should be united cooperation of the industry. This is explicit in point number nine of DMI's 1981 Covenant and Call to Ummat Al Islam, as seen earlier and reiterated here, whose substance, sentiment and language are strikingly still current. It reads in whole (emphasis added):

Reluctantly acknowledging the difficulty of immediately displacing the Riba system which will require the united cooperation of all Muslims, the Founders have chosen the Halal alternative and the Founders are confident that when offered commercially competitive Islamic Financial Institutions Muslims will also choose the Halal alternative and be blessed in this World and the next.²⁴

Thirty-two years later, Prince Mohamed says, “People copied the idea of an Islamic bank. But unfortunately there isn't a unified system because everybody is doing it alone. That was why we created the International Association of Islamic Banks to coordinate matters for the industry. But unfortunately we Muslims don't like to cooperate with each other.”

The IAIB lost its early influence and effectiveness as the industry grew and different markets and jurisdictions pursued different agendas. The institute in Cyprus was short-lived, with the prince forced to withdraw his after two years.²⁵

The need for industry standards also drove the prince and DMI, together with the IDB and a handful of other market players, including Saleh Abdullah Kamel's Al Baraka, to form the ing and Auditing Organisation of Islamic Financial Institutions in Bahrain in 1991. (See Chapter 7 on Rifaat Ahmed Abdel Karim.)

But “a system that is universally applied” is not to be mistaken as a call for centralised bodies. Prince Mohamed is not an advocate for an industry centralised shari'ah body, for example. “No, you cannot [have a centralised shari'ah body for the industry] because you'll put yourself in a straitjacket. On the contrary, the more differences there are the better because it will allow you to have different approaches.” He stresses the need for consensus and common understanding of fundamental precepts. “The central tenets should be the same because they stem from shari'ah and the same Islamic principles. I mean, you cannot have different interpretations of riba. Riba is riba, that's all there is to it. But you can have different interpretations of the mudaraba, for instance, or the murabaha. There could be some differences.”

The industry would need to systemise and apply universal core values, such as those the conventional interest-based banking system has implemented successfully. But, Prince Mohamed warns, the Islamic offering cannot just copy Western thought and ideas. The Islamic finance industry, and indeed all Islamic concerns, must gain intellectual independence and devise its own truly Islamic way—substance must be commensurate with form. But (and this is a big but) the prince does not believe that the Islamic world has the right institutions to move it forward. “No, I don't think we have the right institutions because everything is based on Western thought that we don't fully understand.” The prince's perspective on this is considered later in this chapter.

DMI's Group Chief Executive, Khalid Abdulla-Janahi, expands on the prince's view that the Islamic world cannot be a mere mirror of the West with examples from Islamic finance. Far from a shrinking violet, Khalid thumps his dissatisfaction with the way the Islamic finance industry has compromised its fundamental identity. His view is that Islamic finance is intrinsically about asset management and risk sharing, but the industry's core business has become banking based on the Western mould, resulting in a much greater slant toward debt-based financing. Janahi's professional background is in business advisory and ing, and he had been involved in the work of DMI long before he ed the institution in 1998. Khalid Abdulla-Janahi was a partner with PricewaterhouseCoopers in Bahrain and had been working on DMI's s since the 1980s, together with Anthony Travis, who was with PwC's offices in Switzerland. (See Chapter 7 on Rifaat Ahmed Abdel Karim.)

Islamic finance, Khalid stresses, is about growing what you have— investing what you have either in capital or effort and sharing in the profits and the losses, not what you do not have—that is, the creation of credit and debt-based financing. Due to the entrenched framework and attraction of the dominant deposit and lending interest-based model the Islamic financial system that was introduced in the 1970s and 1980s could not compete on its own , and since regulators govern the practices and operations of the banking and finance industry, their for the operationalising of any different financial paradigm is required. Khalid confesses, “We as an industry, we should blame ourselves. We should have been much more adamant with the regulators. We should have helped the regulators explain properly to the big boys what Islamic finance is really about. Our own regulators across the Arab and Muslim world, unfortunately, bend to the big boys.” By “big boys,” he means the likes of the influential Western institutions, such as national banking regulators, international ing boards and the Bank of International Settlement's Basel Committee on Banking Supervision.

In Khalid's opinion, because regulators across the Arab and Muslim world fall under the sway of the Western powers and the Western way of banking,

“Conventional rules and regulations are becoming much more the norm than they should in this [Islamic finance] industry.”

He continues, “People, especially regulators, are in a comfort zone when they follow the conventional way,” because it is the dominant way. Because global influence lies with the “big boys,” so it is they who needed to be won over to the Islamic finance proposition. But the opportunity for Islamic financial institutions then to fully implement and operate profit and loss sharing (as opposed to predominantly debt-based banking) ed. For this reason, 40 years later, the industry, says Khalid, although it has achieved impressive growth figures, has not made as significant an impact as it could have.

Interestingly, some of the more influential Western financial regulators do know what Islamic finance is about and understand how it does or does not fit into their financial framework. Prince Mohamed recalls a conversation he had in 1979 with Gordon Richardson, the Bank of England governor, in which Richardson “spoke seriously about Islamic finance.” The prince re this well because “he [Richardson] was the only one who talked seriously about it while the Muslim central bankers were telling me that I was crazy.” The Prince cites the meeting with the Bank of England governor as the most significant he had in the early days of Islamic finance.

Richardson's successor, Robin Leigh-Pemberton, told the publication Arab Banking and Finance in November 1984: “although Islamic banking tenets provided a perfectly acceptable mode of investment, they did not fall within long-established, well understood definitions of what constitutes banking in the UK.” The same article went on to say that “the point he [Leigh-Pemberton] made was that Western banking regulations insisted on capital based security for depositors. Moreover, deposits were not regarded as liabilities on an Islamic bank's balance sheet. The depositor had to take part in all the risks and profits and losses of the institution.”²

Looking at Islamic banking now, (most) deposits can be and are regarded as liabilities on the balance sheet, and the depositor does not have to take part in all the risks and profits and losses of the institution. The move was made toward the type of banking that falls within long-established, well-understood definitions of what constitutes banking, as in the United Kingdom. This is at the heart of Khalid Abdulla-Janahi's discontent with some of the fundamental choices the Islamic industry has made (or been forced to make, others would say) that he believes have compromised the Islamic system.

However, the supply side of the equation is not entirely blameworthy, and Prince Mohamed and DMI understood this when, in 1981, their covenant and Call to Ummat Al Islam spoke of “the united cooperation of all Muslims” in order to displace the riba system. (See Chapter 9 on Michael J. T. McMillen and Chapter 10 on Rushdi Siddiqui for a discussion of the demand side.)

With regard to the workings of Islamic financial institutions, first, as LeighPemberton pointed out, under profit and loss sharing investment s such as mudaraba, for example, the money placed with an Islamic financial institution by the rab al maal, or the investor in a mudaraba contract, is not the same as the deposit that you would place into a savings in an interest-based conventional bank. Most significantly, the money placed by the rab al maal under mudaraba is a profit and loss sharing in which shari'ah requires the customer to accept not only the sharing of profit but also the risk of loss of the original capital. But by law regulators like the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom (these two institutions are successors to the abolished Financial Services Authority as of April 1, 2013) require that banks protect all deposits. In the United Kingdom, bank deposits up to £85,000 are protected by the deposit insurance scheme. So deposits with the Islamic Bank of Britain, for example, must fall under the same deposit insurance scheme (which depositors can turn down after the event, citing religious reasons).

As ever, there are yeas and nos on the shari'ah permissibility of deposit insurance

or guarantee. In a 2009 survey on Islamic deposit insurance, the International Association of Deposit Insurers found that along with the United Kingdom, several other surveyed jurisdictions offering Islamic banking also implement deposit insurance schemes as “part of their safety net arrangement.” These jurisdictions include Bahrain, Bosnia and Herzegovina, Indonesia, Jordan (hip in the scheme not mandatory), Kuwait, Malaysia, Singapore, Sudan and Turkey.²⁷

But while today's Islamic banks accept mudaraba investment s, Khalid Abdulla-Janahi casts an especially disparaging eye over the concept of “restricted” and “unrestricted” investment s. Restricted profit-sharing investment s are placed off balance sheet and deal directly and personally with specific investors with specific (such as mutual funds but treated under the Islamic bank and not a separate legal entity). Unrestricted profitsharing s are on the balance sheet. They are treated rather similarly to a conventional bank's deposit liabilities.

Thus, the general public perception of these s is that they are similar to conventional interest-based deposits, but where the conventional deposits give out interest gains, the Islamic s share out profits, while both are similarly guaranteed.

In their critically-acclaimed book, “Islamic Law and Finance: Religion, Risk, and Return”, Harvard professors Frank E. Vogel and Samuel L. Hayes III wrote that Islamic banks are pressured to replicate conventional interest-based banks in order to survive. Islamic banks, they say, have developed assets and liabilities that look roughly like those of commercial banks in of return, risk, and maturity, and with the same sort of balance between them.²⁸

Others have pointed out that, in practice, Islamic banks do not share profits and losses with depositors; rather they distribute profits even if there are no or low profits, which creates distortions and puts strains on the equity shareholders,

who are principally the capital providers. In practice, Islamic banks have limited use of partnership agreements like the mudaraba, and they veer toward less risky short-term assets.²

Khalid Abdulla-Janahi finds it regrettable that Islamic banks treat the money received on a mudaraba as a deposit and hence place it on the bank's balance sheet as a savings as in a conventional bank, hence distorting the risksharing paradigm. When this happens, the risk falls on the bank and not on the mudaraba's investment. This also has direct implications for the bank's capital adequacy, the imposition of which comes down through local regulators from the Basel Committee for Banking Standards in Switzerland, one of the “big boys” that Khalid spoke about. Prince Mohamed's son, His Royal Highness Prince Amr Mohamed Al Faisal Al Saud, who sits on the Board of Supervisors of DMI, Faisal Bank of Egypt and Sudan, and is the chairman of DMI subsidiary Ithmaar Bank, considers the most recent stricter Basel III bank capital adequacy regulations biased against the developing world and believes that the whole world is paying for the mistakes made by a few developed nations: “Those regulators who have been sleeping on the wheels are responsible for the financial turmoil and had never been punished and to me, the implementation of Basel III is locking the stable door after the horse is stolen…. This myopic view to implement Basel III in this part of the world [the Middle East], to punish the entire world for the mistakes of [a] few developed nations, will virtually choke the entire banking system, and I am sure that Basel III will be abandoned.”³

Khalid Abdulla-Janahi believes that if the Islamic finance paradigm was accepted and nurtured in its purer form and substance, after four decades the global Islamic finance industry would have grown to become a major world player in asset management as opposed to a banks-dominated sector made to chase after the interest-based banking system, trying to stay competitive (subject to overall successful investments, bearing in mind setbacks like those faced by Faisal Private Bank in Switzerland). Referring to the Islamic finance industry and its place in the bigger scheme of the global financial architecture, he says, “We are followers, we are not leaders, whether we like it or not.” Islamic finance has developed quickly over the last 40 years, he agrees, but where its quantitative growth has been impressive, it has not grown proportionately in

quality, based on his argument and belief that the industry has veered from the true meaning of Islamic finance.

Khalid Abdulla-Janahi's example from the industry echoes his boss's convictions, which are offered as more erudite abstractions about the Muslim's relationship with Islam and the globally dominant Western system. The central thesis of the prince's eruditions, which form the foundation for Khalid's views, is that Muslims are disadvantaging their opportunities by not being true to themselves and Islam, and they will live up to their potential only when they fully understand the value of the Islamic way and stop compromising their standards by persisting on following a Western and non-Islamic route that is alien to the very DNA of a Muslim.

“The Muslim World Went to Sleep”

In the nineteenth/twentieth century, the poet Saiyid Akbar Husain (1846–1921), popularly known as Akbar Allahabadi, was a critic of the Western-style education the British brought to his homeland, India. In the next four lines he denounces the uprooting of young Muslims from their tradition:

We do not learn the things we ought to learn—

And lose what was already in our keeping;

Bereft of knowledge, plunged into heedlessness,

Alas, we are not only blind but sleeping.³¹

Approximately a century later, Prince Mohamed Al Faisal Al Saud's words evoke the same idea: “The Muslim world went to sleep. They forgot. , they were the leaders of the world at one time.” The “Golden Age of Islam” is widely considered to be from the beginning of the eighth century, when warring Arab tribes united, until the fall of Baghdad to the Mongols in 1258. The Baghdad-based “House of Wisdom,” founded by Caliph Harun Al Rashid and furthered by his son Al Ma'mun, was considered an intellectual centre from where Muslims contributed to advancements in science, mathematics, astronomy and engineering. Additionally, Islamic Spain from the eighth to the early seventeenth century was considered sophisticated, learned and technologically advanced.³²

Reflecting on the Islamic caliphates and empires over the centuries, from the fall of Baghdad in 1258, the expulsion of the Moriscos from Spain in 1614 and the final dismantling of the Ottoman Caliphate in 1924 with the birth of the secular Republic of Turkey, vis-à-vis the rise of European imperialism resulting in our modern recognition of the “West” and the lines in the sand drawn by Western powers that effectively divided the Middle East and the Arab world, Prince Mohamed comments on what he sees as the process of Muslim fracturisation from Islamic sources. He first cites the example of English as a more valuable currency than Arabic. “The lingua franca of the world five centuries ago was Arabic because of the Qur'an. Today the lingua franca is English. There is no problem with the language. Rather, it is how you use it.”

Where the lingua franca has changed, the substance that could have fuelled Islamic advancement has also been fractured from the source, with Muslims veering to non-Islamic thought and systems, from within their own new nationstates. Since the rise of European empires, the Islamic world has been in flux as both Akbar Allahabadi's Muslim-minority India and Muslim-majority lands, including the Middle East, North Africa, and Southeast Asia, adopted nonIslamic systems including those for education, banking, and finance at the expense of innovating more bona fide Islamic systems rooted in Islamic values and thought. The prince observes that during this interregnum, Muslims became accustomed to and even glorified Western institutions and systems. The modern Islamic finance industry, including its practitioners and clients, continue along the same modus operandi. This, he believes, is to the detriment of the Islamic system, “We lose what we had [of the Islamic way] and we don't gain what the West has. Until we get to that point where we develop our own systems, we will never be equal to them [i.e., the West].”

But what is it that is intrinsically Islamic? “It is the recognition,” Prince Mohamed said, leaning forward. “It is the recognition that I have something of value that I can produce for the world, which is the system of Islam. This is not in the sense of prayer and other rituals but in the sense of akhlak, good morals, the sense of equity, the sense of justice.”

Like Khalid Abdulla-Janahi, the prince also addresses the Islamic world's diffidence with regard to the West, turning first to colonialism. “The colonials came and they colonised us because we deserved it. They were the superior.” But following the departure of colonial masters from Muslim lands, “We then tried to be the same as the colonials! We have taken their principles, their ideas, everything. But we are not them. So we couldn't implement their ways. We should have taken the ideas that they have and see if we have something that can be put forward according to our culture.”

Prince Mohamed cannot stress enough that Muslims must abandon the thought once and for all that they are inferior to the West or that Muslims must live by Western standards in order to achieve equality with the West. “This is the first thing that we have to eliminate from our thinking. God has created man and he is born in nine months, and women are born in nine months. We are equal with all the basics. The difference is in our use of them. And our [Muslim] society is lazy. We don't want to think. That is why we lost our way and the West became so great.

“We forgot that Islam is there. I once I was in Pakistan and I was giving an interview. The interviewer asked me, How did you get the idea for Islamic banks? I told him. Well, I was walking in my room and I found a book that was dusty and old and I started to read it, and I got the idea. Which book is that? he asked. I told him, the Qur'an. Very simple.”

His Qur'an was dusty? “NO! I am exaggerating, you know! But it was dusty in the sense that we don't use it. We don't read it.”

He arrives at his main point: that a Muslim with belief in Allah is fundamentally different from the person who divorces God from all aspects of his life, be it in finance or government. “It is almost genetic—our psyche is different. If you

believe in God, the psyche is different. The West has abandoned that idea [of God]. Today the church is becoming more secular. How can a church be secular? It's a contradiction in .”

The prince then brings democracy into the picture, saying that democracy has not helped alleviate the problems of the Islamic world and Muslims need a different system because of the fundamental difference in the psyche of the Muslim who believes in Allah. “I am anti-democracy. I don't think the democratic system is the system for Muslims because of one important thing— democracy has eliminated God. I as a Muslim, I cannot accept this.”

The conversation moves to the Arab Spring, and as we sit in the Cairene suburb of Heliopolis not 15 minutes from Tahrir Square (depending on traffic conditions, of course), the prince addresses the situation in Egypt. “Take the revolution. They made the revolution and they want democracy. It has been two years now. Where is the democracy? Does it exist? Why? Because they don't know how to implement it. But if you come and say ‘shari’ah' then the man in the depths of the Egyptian countryside will know what you are talking about. So take the shari'ah, give it to him in a simplified form and not in the scholarly high language. You will find that he will respond to it.”

He expands his view on democracy, referring to the Islamic belief of man as God's vicegerents on Earth. “Everybody is running after democracy. What is important is not democracy, as democracy is a system to implement values. But when you look at the values—which are really the important thing—they are the same—there are universal values whether you are a Muslim or not, like equity and justice. It is how you implement them that differs. The idea of istikhlaf, or vicegerency, was given by God to the whole world, not just to the Muslims. If you depart from istikhlaf, it means that you are putting man in the place of God. Man is the God if you take it to the extreme, and that is a problem, especially for a Muslim. If you take it to the end you are saying that God does not exist.”

It is the shari'ah, the law of God, says Prince Mohamed, which Muslims have to live by. The way that Islamic finance is based on shari'ah is a first step to developing a whole system for contemporary Muslims. We see now how the shari'ah has been applied to the banking and financial system, but how would the prince translate shari'ah to government? His response confirms that Muslims like him are still grappling with the concept and that no viable system can be implemented as yet, at least not a system that can be universally applied without being roundly castigated by the non-Muslim world and criticised by factions of fellow Muslims, as in the cases of the Islamic Republic of Iran, the Islamic Republic of Pakistan and the Kingdom of Saudi Arabia, for example. Prince Mohamed says, “We have to apply our minds to develop it, by applying the values of shari'ah and putting them in an understandable form so people can see them and understand them and live by them. The Muslims did this at one time. Unfortunately they stopped doing it and they became unjust, uneducated, ignorant, disorganised. Muslims cannot regain that better life by borrowing something they don't understand.” Shari'ah-compliant banking and finance, then, must be adopted by all Muslims if all Islamic countries are to advance economically and financially, on their own Islamic .

What has truly proven divisive, believes the prince, is the idea of the nationstate. “It is no longer possible to have the caliphate today, it is no longer viable today. Unfortunately it is because of the development of the idea of the nationstate, which the West has imposed on the rest of the world. For me as a Muslim, the nation-state is one of the most pernicious ideas that has come about. That idea fractured the world and made you different from me and me from you.” What the prince means is that borders drawn by Western powers that resulted in nations and nationalities (especially in the Middle East and Africa) some 100 years ago have successfully divided up Muslims even more. Now geographically, politically and economically divided, those who want to further Islamic teachings and practices across borders, says the prince, must now start doing so on the basis of the implementation of the core values of the religion. Islamic finance and economics have started that cross-border conversation, and the areas where Muslims and the Islamic finance industry are unwilling or unable to converge only serve to further fracture pan-Islamic unity, which was more easily facilitated under the caliphate system during the time of Islamic empires.

With all his talk about Muslims being better off abiding by shari'ah, how would the Islamic world then interact with the rest of the world? What of interfaith relations? “I don't have any hope for interfaith work. The king [referring to King Abdullah] is working a lot on the interfaith matter. But I don't have any hope for it because the Muslim world's thinking is lower than everybody else's. You can never understand each other unless you are equal.” And as he earlier stressed, Muslims cannot achieve equality with the West, or with the non-Muslim world, if they view Western or non-Islamic values and standards as their benchmark for success. The Muslim's benchmark for success must be based on Islamic values and shari'ah.

“Eventually, I Think, Everybody Will Become a Salafi”

On September 19, 2001, DMI's Group Chief Executive, Khalid Abdulla-Janahi, received telephone calls from journalists asking him how much DMI had gained from short selling in the United States, implying that DMI had prior knowledge of the 9/11 terrorist attacks and profitted from them. Khalid retorted dryly, “I told them that our shari'ah board doesn't permit speculation so we couldn't short on anything.”

DMI's history is connected to the U.S. indictment of the organisation as one that finances terrorism in a convoluted way. All this came to a head post-9/11 when DMI became a defendant in a consolidated $1 trillion lawsuit brought by the families of those who died on September 11. The prince himself was originally named in the case, but all lawsuits were dismissed in 2005. The Americans have long linked DMI with “Muslim extremists” and terrorists. DMI has had ties with religious figures Western countries such as the United States considers extremists: individuals such as Hassan Al Turabi, who once welcomed Osama bin Laden to Sudan in 1991, and Sheikh Yusuf Al Qaradawi, who has expressed views considered controversial in the West and who has in the past been barred from entry to the United Kingdom and . The lawsuit filed against DMI also named Yassin Abdullah Kadi, who was designated a terrorist by the Americans in 2001. Abdullah Kadi was once a shareholder of DMI. As the prosecutors pointed out, these links are just the tip of the iceberg.

Prince Mohamed is not afraid to say that he is an Islamist and a Salafi and reclaim what he believes to be the true meaning of Salafism, which has been, at the least, caricatured, and at the worst, vilified by the West. This, he believes, stems from the West's conception of Islam to begin with. “The West has a skewed view of Islam, and the Muslims are the ones who put it in their mind, because of our actions. Because, what do the West see? They see crazy people.

And they want to see [us] as crazy people, you know what I mean? But it is on us, us, us. It always comes back to us.” As the prince said earlier, the system of Islam that Muslims must produce for the world “is not in the sense of prayer and other rituals but in the sense of akhlak, good morals, the sense of equity, the sense of justice.”

So, Salafi?

Answers Prince Mohamed: “I had an interview once with somebody and he was asking me about this and I was telling him about my thoughts. At the end of the interview he asked, Are you a Salafi? I said, After the whole interview you haven't realised that I am a Salafi?” He throws his hands up and exclaims, “I am a Salafi.”

What, to Prince Mohamed, is Salafism?

“A lot of people think of Salafism as a long beard and a short thobe, and that's it. That is not Salafism. The interviewer told me, ‘You are from the Ikhwan, the Muslim Brotherhood.’ I said, ‘No, I am not from the Ikhwan. My reference is totally different.’” The clean-shaven prince in his handsome suit indicates that his reference is three Mohameds: “Mohamed ibn Abdullah (pbuh); Mohamed Al Saud, my great-great-great-grandfather; and Mohamed Abd Al Wahhab, who is the reformer in Saudi Arabia. To me, that is Salafism.” Mohamed Abd Al Wahhab was an eighteenth-century Saudi reformer. Present-day Wahhabism, dominant in Saudi Arabia, takes its name from his teachings. Wahhabism is considered by most as ultra-conservative. The Wahhabism and Salafism are often used interchangeably, although proponents of one or the other would distinguish them.

The prince bemoans the Muslims who call themselves Salafis but who, like the

Taliban, he says, misrepresent the religion. “The Taliban, this is a misrepresentation of the religion. But that doesn't mean they are all wrong. The Taliban are not all evil. But they have done things that are not perfect. They don't understand what they are doing.

“Unfortunately,” continues the prince, “a lot of Salafis call themselves Salafis but don't know what they are talking about.”

Again, what is Salafism to him?

“Salafism is to take those values at the time of the Prophet and develop them for the modern day so people can understand them. That is Salafism as far as I'm concerned. So I am a Salafi. Yes, I am a Salafi.”

The prince understands that the predominant Western (and even mainstream “moderate” Muslim) perception of Salafism is a negative one, one that calls for a literalist interpretation of the Qur'an and a return to the practices of the salaf (predecessors or ancestors), the earliest Muslims who are taken as examples of Islamic practice, and he is very quick to point out that Salafism, to him, is not about standing still and wanting to implement the Islamic way as it was literally practised at the time of Prophet Mohamed (pbuh). He offers his work in Islamic finance as proof of this conviction. Islam is not a static entity, the prince says, and shari'ah is not impervious to the changing times throughout the centuries. (See Chapter 8 on Sheikh Nizam Yaquby.)

Prince Mohamed implores, “Being Islamic is not just by rote, repeating what our scholars have said before. the resources of the real thinking, the real philosophies in the Muslim world as a whole is 500 years old. We have to renew our knowledge of these sources, our interpretation of them for the modern world. We are retrograde and unfortunately we blame Islam for it, not ourselves.”

On this, Prince Mohamed is on the same wavelength as other Muslim thinkers from past centuries, such as Jamal Al Din Al Afghani (1838–1897), who advocated pan-Islamic unity, and Muhammad Asad (1900–1992), who met Prince Mohamed's father King Faisal when the king was a 22 -year-old prince with a “beardless face” “in a library under the arcades of the Great Mosque,” and enjoyed the company of then King Abdul Aziz Al Saud³³ (see Chapter 1 on Khurshid Ahmad regarding Muhammad Asad vis-à-vis British India and Pakistan).

According to Asad: “We have no right, in our present misery, to boast of past glories. But we must realize that it was the negligence of the Muslims and not any deficiency in the teachings of Islam that caused our present decay.”³⁴

Al Afghani wrote: “My brothers, Arise from the sleep of neglect. Know that the Islamic people were (once) the strongest in rank, the most valuable in worth…. Later this people sank into ease and laziness.”³⁵

When Prince Mohamed was pushing for the first Islamic financial institutions in the 1970s, it was the Muslim elite who proved the most resistant. He reiterates that this elite must be the first to change. “It is always the elite who starts and then people can adopt what they like. So the real responsibility for our retrograde situation is our elite because they don't want to refer to the Qur'an. They want to refer to Western thought and philosophies. They don't consider the scholars of Islam on the same level as the scholars of the West.”

But he senses change. Considering the growing momentum of the revival of Islam, especially amid the cycles of financial crises brought on by the interestbased system that has wrecked economies and communities, the prince says that he believes everyone (and by everyone he means all Muslims) will become Salafi as Muslims look to a more complete way of life to live according to the

shari'ah. “Eventually, I think, everybody will become a Salafi but not in the sense of the Western understanding of a Salafi. It is Salafism in the sense that it is reviving the message of the Prophet (pbuh) in the modern world; the values have to be developed for today's world.”

The Last Word

After all the talk about DMI, Islamic finance, the malaise of the Muslims, the Muslims' relationship with the West, the fundamental psyche of a Muslim, democracy, and what it means to be a Salafi, Prince Mohamed explains that he is now harnessing the sum of all his thoughts and experiences to focus on the next step beyond Islamic banking and finance: the Islamic economy. With DMI he has laid the foundation and contributed to the development of the global Islamic banking and finance industry. While he believes that the industry still has a long way to go to fulfill its potential and mandate for all Muslims, he wishes to leave the work of promoting Islamic finance to the younger generations. Considering himself semiretired, he is shifting his focus from banking to the theories and systems underlying the much bigger notion of an Islamic economy. Issuing an open invitation, Prince Mohamed says that he will talk to “anybody he can find” about the Islamic economy. “I need to promote it,” says the prince.

His last word encomes the journeys and trajectories of the main thread that has permeated his life's work and dedication: “It is not about achievement. It is about religious obligation. My responsibility is to the Muslims.”

Notes

¹ Alexis C. Madrigal, “The Many Failures and Few Successes of Zany Iceberg Towing Schemes,” The Atlantic, 10 August 2011. [Online]. Available from: http://www.theatlantic.com/technology/archive/2011/08/the-many-failures-andfew-successes-of-zany-iceberg-towing-schemes/243364. Joann S. Lublin, “An Iceberg in Iowa: How It Got There and What's the Use,” Wall Street Journal, 5 October 1977.

² Marq De Villiers, Water: The Fate of Our Most Precious Resource (Boston: Mariner Books, 2001), p. 285.

³ Samer Soliman, “The Rise and Decline of the Islamic Banking Model in Egypt,” in Clement M. Henry and Rodney Wilson (eds.), The Politics of Islamic Finance, pp. 265–284 (Edinburgh: Edinburgh University Press, 2004).

⁴ Traute Wohlers-Scharf, Arab and Islamic Banks: New Business Partners for Developing Countries (Paris: Development Centre of the Organisation for Economic Co-operation and Development, 1983).

⁵ DMI, “Covenant and Call to Ummat Al Islam,” Wall Street Journal, 12 June 1981, p. 28.

Ibid.

⁷ Ibrahim Warde, Islamic Finance in the Global Economy (Edinburgh: Edinburgh Press, 2000).

⁸ John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988). Clement M. Henry and Rodney Wilson (eds.), The Politics of Islamic Finance (Edinburgh: Edinburgh University Press, 2004).

Presley, Directory of Islamic Financial Institutions.

¹ Soliman, “The Rise and Decline of the Islamic Banking Model in Egypt.”

¹¹ Clement Henry Moore, “Islamic Banks and Competitive Politics in the Arab World and Turkey,” Middle East Journal 44, no. 2 (1990): 234–255.

¹² Joel Beinin, “Political Islam and the New Global Economy: The Political Economy of Islamist Social Movements in Egypt and Turkey,” Paper prepared for the conference on French and U.S. Approaches to Understanding Islam, 12– 14 September 2004. -Stanford Center for Interdisciplinary Studies. [Online]. Available from: http://stanford.stanford.edu/sites/stanford.stanford.edu/files/Beinin.pdf.

¹³ Warde, Islamic Finance in the Global Economy, (2000). p. 84.

¹⁴ Steve Lohr, “World-Class Fraud: How B.C.C.I. Pulled It Off—A Special Report. At the End of a Twisted Trail, Piggy Bank for a Favored Few,” New York Times, 12 August 1991. [Online]. Available from:

http://www.nytimes.com/1991/08/12/business/world-class-fraud-bcci-pulled-itoff-special-report-end-twisted-trail-piggy-bank.html?pagewanted=all&src=pm.

¹⁵ Grais and Pellegrini 2006b

¹ Warde, Islamic Finance in the Global Economy (2000). P. 84.

¹⁷ Jonathan Beaty and S. C. Gwynne, The Outlaw Bank: A Wild Ride Into the Secret Heart of BCCI (Washington, DC: Beard Books, 2004).

¹⁸ Clement M. Henry, “Islamic Finance in the Dialectics of Globalisation: Potential Variations on the ‘Washington Consensus,’” Journal of Arabic, Islamic and Middle Eastern Studies (Australia) 5, no. 2 (1999): 25–37.

¹ Soliman, “The Rise and Decline of the Islamic Banking Model in Egypt.”

² Daily News Egypt, “Jump in bank profits in the last six months,” Daily News Egypt, 28 July, 2013. [Online]. Available from: http://www.dailynewsegypt.com/2013/07/28/jump-in-bank-profits-in-the-lastsix-months/.

²¹ Jean-Francois Seznec, The Financial Markets of the Arabian Gulf (London: Croom Helm, 1987).

²² Islamic Financial Services Board, Islamic Financial Services Industry Stability Report 2013 (Kuala Lumpur: IFSB, 2013).

²³ DMI, “Covenant and Call to Ummat Al Islam.”

²⁴ Ibid.

²⁵ Murat Cizakca, Islamic Capitalism and Finance: Origins, Evolution and the Future (Cheltenham, UK: Edward Elgar, 2011).

² Seznec, The Financial Markets of the Arabian Gulf.

²⁷ International Association of Deposit Insurers. 2010. Survey on Islamic Deposit Insurance: Results. Islamic Deposit Insurance Group, International Association of Deposit Insurers, 2010. [Online]. Available from: http://www.iadi.org/docs/Survey_on_Islamic_DI.pdf.

²⁸ Frank E. Vogel and Samuel L. Hayes III, Islamic Law and Finance: Religion, Risk, and Return (The Hague, the Netherlands: Kluwer Law International, 1998).

² Hennie Van Greuning and Zamir Iqbal, Risk Analysis for Islamic Banks (Washington, DC: World Bank Publications, 2008).

³ Mahmood Rafique, “Basel III to Wreak Havoc on Third World Banking System,” Saudi Gazette, 1 April 2013. [Online]. Available from http://www.saudigazette.com.sa/index.cfm? method=home.regcon&contentid=20130401159348.

³¹ Pankaj Mishra, From the Ruins of Empire: The Revolt Against the West and the Remaking of Asia (London: Allen Lane, 2012).

³² Michael Barry, “Homage to Al-Andalus: The rise and fall of Islamic Spain,” (Dublin: Andalus Press, 2008).

³³ Muhammad Asad, Islam at the Crossroads (Gibraltrar: Dar Al-Andalus, 1982), pp. 19–20. [Online]. Available from: http://muhammad-asad.com/Islam-atCrossroads.pdf.

³⁴ Ibid., pp. 66–67.

³⁵ Mishra, From the Ruins of Empire, p. 70.

Chapter 4

Steadily Spreading the Blessings

Saleh Abdullah Kamel

And for those who fear Allah, He (ever) prepares a way out, And He provides for him from (sources) he never could imagine.

—Al Qur'an, Sura At Talaq, Verses 2–3

Saleh Abdullah Kamel, or Sheikh Saleh as he is referred to, is a pioneer whose contributions have left an indelible imprint on the Islamic banking and finance industry. He has established Islamic financial institutions, and initiated research centres and a widely respected annual symposium, all of which are foundational building blocks of the industry, and all of which have advanced and ed the development of the global industry. His Al Baraka banks started with the Jordan Islamic Bank in 1978 and to date can be found in 13 countries. He is perhaps even better known away from the financial sector, as he is regarded as one of Saudi Arabia's most successful business tycoons. Sheikh Saleh rode the wind of the oil boom in the 1960s and his Dallah Works and Maintenance Company, set up in 1969 in Riyadh, won infrastructure contracts from the Saudi government to build roads, pipelines and sewerage networks. The company also gained contracts for maintenance works for Islam's holiest sites in the kingdom. Dallah grew to become the Dallah Al Baraka conglomerate. Over a period of four decades the international business empire grew to hold diversified interests including trade, real estate, construction, healthcare, and media. Sheikh Saleh

retired from business life in the late 2000s but continues to keep busy with new projects and initiatives. He heads a string of organisations including the Islamic Chamber of Commerce and Industry, and the General Council for Islamic Banks and Financial Institutions.

When we started out no one believed there could be a bank without interest. But al hamdu lillah, praise be to Allah, we did it.

—Saleh Abdullah Kamel

The name Saleh Abdullah Kamel is almost synonymous with the modern Islamic finance industry. Sheikh Saleh was one of the pioneers driving the fledgling industry in the late 1970s. His interest in Islamic finance piqued in the 1960s, he says, when his mother started asking him questions about his dealings with the banks. “My story with Islamic banking started in the 1960s and early 1970s. This was after I had quit my job with the Ministry of Finance and I had my own small business. Like any businessman I dealt with the banks. My mother said it was haram. I told my mother that no, I don't take interest on my money. To which she asked what happens when I need money from the banks. Then, I said, I would pay interest. Again she said, It is haram.”

Sheikh Saleh did not immediately take his mother's words to heart, but “she repeated it, she repeated it, she repeated it. Then one night we had Sheikh Sha'raawi, a famous ulama' (Islamic scholar) and a friend of the family, in the house, and my mother took me to task with the sheikh, complaining to him about my dealings with interest from the banks.”

The late Sheikh Muhammad Mutawalli Al Sha'raawi was an Egyptian Islamic scholar who also served as minister of religious endowments under former Egyptian president Anwar Sadat in the late 1970s. He was educated at Al Azhar

University in Cairo but became a theological lecturer in Saudi Arabia, where he taught in the 1950s and 1960s, then later reed Al Azhar as director of teaching. Sheikh Sha'raawi became popular in Egypt and the Gulf States, especially after he started appearing on a weekly television programme in 1975, preaching Islam in a style and language accessible to the masses.

Sheikh Saleh tried to explain to Sheikh Sha'raawi that it was the normal way of business to pay interest to the banks and, so out of necessity, paying interest to the bank could not entirely be considered haram. He was not quite prepared for Sheikh Sha'raawi's response, but that discussion essentially laid the ground for his first step into Islamic finance.

Sheikh Sha'raawi's response was “Necessity? That's for when you may die from hunger. Necessity is when you may die from the cold. But if you want to grow your money and your business, this is not necessity. And [taking and paying interest] is haram, as your mother says.”

At this point Sheikh Sha'raawi introduced Sheikh Saleh to the concept of mudaraba, a partnership arrangement under which one party is the rab al maal, or financier, and the other is the mudarib, or the entrepreneur, with proportionate share in profits to be determined by mutual agreement.

The concept of mudaraba was all fine and good, thought Sheikh Saleh, but the problem was “How would I convince any bank in the world to do this?” Sheikh Sha'raawi assured him, “Make the niyat [pray with the intent], and Allah will find the way for you.”

After a couple of days Sheikh Saleh dropped in on the manager of the Banque du Caire in Riyadh and had a chat with him about mudaraba. The bank manager, Bahjat Khalil, asked to meet Sheikh Sha'raawi personally to clarify certain

details of mudaraba before deciding anything. Following their meeting, Bahjat wrote to his bank's headquarters in Cairo.

“Every day for one month I asked Bahjat if there was any answer from Cairo. He said that he would work with me whatever happened. The answer from Cairo never came, but he agreed to start using the mudaraba with me.

“I my turnover at the beginning of that year was 3 million Saudi riyals. By the end of the year it grew to 30 million riyals and the profit for the bank was 24 percent. Comparatively the interest at the time was 4 percent. Allah (swt) had given baraka [blessing] to them and to me.”

Sheikh Saleh's dealings with Banque du Caire did not go unnoticed. It was not long before the bank manager from Citibank in Riyadh paid him a call at his office. “That year my turnover was 300 million riyals, and Banque du Caire made their 24 percent from profits. Then the manager of Citibank came to me in my office and asked why I was angry with them. Angry? I told them that I was not angry, but why was he asking? He said, ‘Your money comes to us and after a few minutes it leaves for the Cairo Bank.’ So I explained to Citibank how I was working with mudaraba with the Cairo Bank. He went away and returned after one month. He informed me that he had written to his office in New York and they had agreed to work with me using mudaraba.”

Spreading the Baraka

“Al hamdu lillah in about four years or so, my turnover went from 30 million riyals to 300 million riyals to 3 billion riyals. Allah had showed me the way, with my mother and with Sheikh Sha'raawi and with the bank manager at Cairo Bank.”

Sheikh Saleh then thought that he must not have been the only Muslim businessman to have participated in interest-based banking. “It was from then that I decided to open Islamic banks and research into the Islamic economy.”

Understanding the need for collective work, research, and the sharing and disbursing of knowledge on Islamic finance and Islamic economics, Sheikh Saleh initiated the establishment of the Islamic Economics Research Centre at the King Abdulaziz University, the very type of centre that Professor Khurshid Ahmad had called for in his 1973 keynote address to the World Assembly of Muslim Youth. (See Chapter 1 on Khurshid Ahmad.)

Sheikh Saleh then went on to found the Saleh Kamel Centre for Research and Islamic Commercial Studies at the Faculty of Commerce in Egypt's Al Azhar University in 1979. The centre was later renamed the Saleh Kamel Centre of Islamic Economics and became officially d to the university in 1990.

In 1981 he started the Al Baraka Symposium on Islamic Economics, which has become a widely respected annual gathering for shari'ah scholars and Islamic finance practitioners. This symposium has become one of the three institutional shari'ah authorities for the Islamic finance industry, the other two being the shari'ah committee for the ing and Auditing Organisation for Islamic

Financial Institutions and the Organisation of Islamic Cooperation (OIC) Fiqh Academy.

And then there are the financial institutions. “I heard at that time that there was Prince Mohamed Al Faisal and another man, Sheikh Saeed Lootah, who were setting up Islamic banks. So the three of us started the first bank in Cairo, the Faisal Islamic Bank, and then the Faisal Bank of Sudan.”

Sheikh Saleh became a founding member of both the Faisal Islamic Bank of Egypt and Faisal Islamic Bank of Sudan, both incorporated in 1977. This was the same year Kuwait Finance House (KFH) was incorporated, with founding the Kuwaiti Ministry of Finance, Ministry of Justice, and Ministry of Awqaf and Islamic Affairs. KFH's board was chaired by the late Sheikh Ahmad Bazie Al Yaseen, who played a leading and pioneering role in the establishment of KFH.¹

Sheikh Saleh decided to go his own way very soon after, incorporating Jordan Islamic Bank in 1978 and starting operations in 1979. He was assisted on the operations and shari'ah side of the banks in Jordan and later in Bahrain (1984) by Dr Sami Hamoud, whose seminal 1976 thesis on the use of murabaha financing paved the way for the widespread use of such financing in the Islamic banking industry. (See Chapter 2 on Saeed Bin Ahmad Al Lootah for First Islamic Banking Conference, May 1979.)

Uncorroborated claims point to a rift between the earliest founding shareholders of Faisal Islamic Bank of Egypt. One claim involves the difficulties fitting in both Sheikh Al Sha'raawi (who was close to Sheikh Saleh) and Sheikh Mohamed Al Khater, who was Prince Mohamed Al Faisal Al Saud's chosen chairman for the bank's shari'ah board. It was Sheikh Al Sha'raawi, then Egyptian minister of religious endowments, who had submitted to and defended in parliament the law that enabled the formation of Faisal Islamic Bank of Egypt. Sheikh Saleh was no longer listed as a member of the board of directors of Faisal Islamic Bank of

Sudan from 1982.

There was much opposition to the new Islamic banks, predominantly from Muslims. “They called me a man,” Sheikh Saleh reveals. “They did not believe that a bank not using interest was possible.” Despite the antagonism he faced and at some personal financial risk, the sheikh took that leap of faith.

The following decade Al Baraka was busy opening Islamic financial institutions in several countries: Egypt (1980, started as Egyptian Saudi Finance Bank), Tunisia (1983), Bahrain, Pakistan, Sudan and Turkey (1984), United Kingdom (1987-1993) and South Africa (1989). With the exception of Al Baraka International Bank in the United Kingdom, all others are still operating. Algeria (1991) and Lebanon (1992) came in the following decade. In the 2000s and beyond, Al Baraka opened Itqan Capital in Saudi Arabia (2007); and representative offices in Indonesia and Syria (2007), and Libya (2011)². A branch of Al Baraka Türk Participation Bank opened in Iraq in 2011. When asked as to the lack of Al Baraka banks in the wealthier states of the Gulf Cooperation Council countries such as the United Arab Emirates, Qatar and Kuwait, Sheikh Saleh says, “I go where people need my help. Countries like the UAE are already rich.”

Al Baraka Banking Group was incorporated in Bahrain in 1998³ and was the beginning of an attempt at a unified corporate identity after years of separate Al Baraka subsidiaries. The banks formally fell under the new Group banner in 2002⁴, when Sheikh Saleh's overall business interests under the holding company Dallah Al Baraka were streamlined. In 2006 the group achieved a combined private placement and 30 percent public issue. It has grown slowly but steadily, with total assets never floundering even through the most recent global financial crisis from 2007/8, although net income was hit, and nosedived in 2009. As of year-end 2012, the group's total assets reached $19 billion. Figure 4.1 charts the Group's total assets from 27 June 2002 to the end of 2012 and Figure 4.2 shows growth/dip in net income for the same period.

Figure 4.1 Al Baraka Banking Group Total Assets 27 Jun 2002–Year-End 2012 in U.S.$ Millions

Source: Al Baraka Banking Group Annual Reports 2004–2012.

Figure 4.2 Al Baraka Banking Group Net Income 27 Jun 2002–End 2012 in U.S.$ Millions

Source: Al Baraka Banking Group Annual Reports 2004–2012.

Gone West: Al Baraka in the United Kingdom

Perhaps what was most interesting in the 1980s was Al Baraka's and Sheikh Saleh's northern exposure: Al Baraka opened a bank in the United Kingdom after taking over deposit-taking bank Hargrave Securities in 1982. Calling itself Al Baraka International Bank, the company offered banking services that were shari'ah compliant. It opened branches in London first on Whitechapel Road in 1987 and then on Edgware Road in 1989, later expanding outside the capital city with a branch in Birmingham in 1991. By this time the bank had over 10,000 clients. The bank offered deposits based on mudaraba for sums exceeding £5,000 as well as current facilities. Deposits rose from £23 million in 1983 to £154 million by 1991. The bank also started offering home mortgages from 1988. But Al Baraka in the United Kingdom was most successful by far in the area of investment management.⁵

Things seemed to be progressing well for Al Baraka International Bank until the early 1990s, when the Bank of England (BoE), the central bank, decided to tighten its regulatory requirements, and Al Baraka surrendered its banking licence. Sheikh Saleh recalls Al Baraka's British sojourn: “I started from the early '80s, perhaps it was in '80 or '81 when I bought a licence for a bank. For 11 years we worked according to the shari'ah and according to the Bank of England rules, and we didn't make any mistakes. We were accepting deposits not only from Muslims but also from non-Muslims.”

Sheikh Saleh now believes that the BoE came down on Al Baraka because it was practising Islamic modes of banking. “Suddenly in the early 1990s they said we had to shut down because they didn't accept Islamic banks. I told them that we don't even call ourselves an Islamic bank, that we were Al Baraka International Bank, and we hadn't broken any of their rules. But they insisted they didn't want an Islamic bank operating in the country. So we closed the bank.”

New Horizon, the publication of the Institute of Islamic Banking and Insurance in the United Kingdom, interviewed Sheikh Saleh immediately after Al Baraka decided to stop taking new deposits and pay out all existing depositors. In an article dated May 1, 1993, Sheikh Saleh was quoted as saying that Al Baraka had been in talks with the BoE for a year about broadening its ownership structure after the BoE had said that it was simply implementing the provisions of the Basel Concordat of July 1992 that said no bank should be owned by individuals or by a family, and that the ownership structure had to be diversified. Al Baraka, which was held by Sheikh Saleh and his family, then submitted to the BoE several proposals for different ownership structures. While that was being worked out, the BoE made it clear that Al Baraka's issues were not in any way an indictment of Islamic banking. Sheikh Saleh had expressed puzzlement as to the BoE's stand, telling New Horizon magazine in May 1993: “I don't know what the real reason is for the Bank of England's attitude. After ten years of supervising Albaraka in London, they certainly know what Islamic banking is all about. In the beginning when we started in London in 1982, we could not talk to them about Islamic banking. Now they write to us and say that they fully understand what it involves and they do riot [sic] have any objections to it.” Sheikh Saleh, according to the New Horizon report, “could not say whether there is any discrimination involved against an Arab or Islamic financial institution.”⁷

The Independent newspaper reported on April 2, 1993: “In principle there is no conflict between Islamic banking and the Banking Act.” In a reverse run on the bank, the same article reported angry Al Baraka customers refusing to withdraw their money even though the bank announced that it was closing.⁸ Sheikh Saleh was bemused. “We had depositors who refused to take their money. In the end I opened an in Barclays Bank and I put their money there, and told them to take their money from Barclays.”

Al Baraka chose to surrender its banking licence instead of putting itself through a costly ownership restructuring exercise.

Sheikh Saleh now says, “I didn't like to work in the West any more after what they did to me in 1993. They don't believe in Islamic banking, but they will allow it if they get their piece of the pie. Let us be frank, they don't believe in it. They do it for the money, of course. Not for Islam. But if they allow us to practice banking according to our religion, then thank them.”

Sheikh Saleh's discontent with the West intensified after the terrorist attacks on the Twin Towers and the Pentagon in the United States on September 11, 2001 when he and Al Baraka were subject to criminal investigations for allegedly financing international terrorism. All suits against him were dropped by the Federal Court of South New York in December 2006. In an Arab News article dated December 18, 2006, his lawyer quoted the sheikh as saying, “Where do I go to get my name and reputation back?” Almost immediately post-9/11, Sheikh Saleh was quoted as saying “Islam is completely misunderstood in the West. The West knows about Islam only through the bad example of terrorism…. There is no media that convey our message across to the West.”¹ He stepped up a media push to explain Islam to the West mainly via his Iqra satellite channel, which is part of his Arab Radio and Television Network (ART) media organisation, which he formed with Prince Al Walid bin Talal, ¹¹ coincidentally in the same year Al Baraka withdrew from the United Kingdom.

New Horizon ran a feature article in May 1993 that stated that it believed the BoE's issue with Al Baraka did not stem from opposition to Islamic banking but to the narrow ownership structure, which did not meet the new Basel banking rules.¹² These new banking rules of 1992 came about following the Bank of Credit and Commerce International (BCCI) scandal and eventual collapse in the middle of 1991.

BCCI was not an Islamic financial institution, but it had set up an Islamic banking unit in London in 1984. According to academic and scholar Ibrahim Warde, that unit had amassed up to $1.4 billion in deposits from Islamic banks that were meant to be used for commodity investments, although no such investments were ever made.¹³ Faisal Islamic Bank of Egypt, Dubai Islamic

Bank, Khartoum-based Tadamon Islamic Bank, Qatar Islamic Bank and Kuwait Finance House were affected by the scandal.

Sheikh Saleh insists that the Al Baraka banks were affected by the BCCI scandal only through its Tunisian branch and that they lost approximately $200,000 in total. “We didn't work with them [the BCCI], because from the very beginning I knew there was something wrong. If the market price for commodity is 5 and someone promises to give 8 or 9 for it, you know that there is something wrong,” says Sheikh Saleh about BCCI's promised commodity investments. “I didn't believe in them.”

Al Baraka's experiences in the United Kingdom and the BCCI debacle started Sheikh Saleh thinking a lot more about transnational and international banking. It was during this time, he says, that he started thinking of the idea of an Islamic megabank.

Advancing the Islamic Economy

“I am chairman of both the Islamic Chamber of Commerce and Industry [ICCI] and the General Council for Islamic Banks and Islamic Financial Institutions [CIBAFI]. Through both institutions I try to practise and implement initiatives and rules that can advance the Islamic economy. The Islamic economy is much bigger, of course, than just Islamic banks. At the least, it is our duty to keep our money in our countries in order to develop them. It is not our duty to collect money from the people and send it to the London markets or the New York markets. That is not Islam.”

The ICCI is an organ of the OIC. Sheikh Saleh was installed as its president in 2006. The Bahrain-based CIBAFI is an industry body that works to develop the Islamic finance industry. Established in 2001, CIBAFI is an international Islamic finance infrastructure institution and, like the ICCI, is also an organ of the OIC. While CIBAFI has been primarily focused on the Gulf Cooperation Council countries, since 2013 it has set its sights on expanding its presence beyond the Arab Gulf countries, looking also to emerging Islamic finance markets in North Africa and Central Asia in order to ensure that the industry grows and expands worldwide from a strong platform.

In of advancing the Islamic economy for the betterment of Islamic countries, Sheikh Saleh has worked for many years on a number of big initiatives. His pet project is the Islamic megabank.

Islamic Megabank

Ask anyone in the Islamic finance industry, and they would probably tell you that the Islamic megabank story has been floating about for many years but nothing has materialised. “I'll believe it when I see it” would probably be the most common refrain. The Islamic megabank is Sheikh Saleh's brainchild. He has, for many years, tried to get the idea off the ground, along the way speaking to numerous chief executives, captains of industry, central bankers, and current and former heads of state, among others. Although the Islamic megabank does not yet exist, the idea for such an institution has inadvertently penetrated the psyche of the global Islamic finance fraternity. It is a concept that the industry has now become familiar with, thanks in large part to Sheikh Saleh and his dogged persistence. He would probably be the first to it that he has spent many years planning for the Islamic megabank. The latest iteration of plans for this bank emerged in 2012 when Al Baraka Banking Group signed a memorandum of understanding with the Islamic Development Bank (IDB) and the Qatari government to forces on its establishment.

Proponents for the Islamic megabank, chief of whom is Sheikh Saleh, argue that a mutibillion-dollar capitalised Islamic bank is needed to underwrite big projects and help Islamic banks manage their liquidity better. Kuala Lumpur, Manama and Doha have all been touted as possible homes for the bank, with the latest 2012 iteration favouring Doha.

Critics of the Islamic megabank say that Islamic finance already has multibillion-dollar capitalised banks; they just do not go around calling themselves “mega.” Such banks include Saudi Arabia's Al Rajhi and Kuwait Finance House, for example.

Still, Sheikh Saleh remains undeterred. He is pleased that he has a large

institutional er in the IDB, saying “Dr Ahmed Mohamed Ali, the president of the Islamic Development Bank, himself is convinced of this megabank. We have made many trips to different countries together to explore this idea.” While the IDB is a multilateral agency working primarily at the governmental level to provide developmental financing and aid to countries of the OIC, the Islamic megabank will serve as the OIC countries' international commercial financier, bankrolling projects across the world.

Sheikh Saleh explains his idea for how this megabank will work: “We will have four sources of capital. The first is management shares amounting to at least $1 billion, the paid-up capital. This money will be put in as seed money to search for profitable projects for the Muslim world. This is long-term money, not shortterm. The second source comes from ordinary shares amounting to $10 billion. With ordinary shares, we can then start pumping money into projects to develop them. When projects are near completion we turn to the third source—the investment fund. Once projects are completed and they start to generate returns, then we issue sukuk (often translated as Islamic bonds) which will use these projects as their underlying assets and bring in returns for sukuk investors.”

Sheikh Saleh believes the Islamic megabank can succeed and that it will contribute to financing infrastructure and create jobs for the 57 Islamic member countries of the OIC. Sheikh Saleh had hoped to launch the bank in 2009, but the global financial crisis rattled investor confidence and stalled efforts. But a series of nonstarters has not punctured his sails, “We will keep on trying, and in sha' Allah, God willing, it will happen soon.” Sheikh Saleh says that if this megabank gets up and running, he would devote most of his time to ensure its success.

World Zakat Fund

In 2006 Sheikh Saleh in his capacity as chairman of the ICCI spoke about launching a World Zakat Fund to streamline the collection and distribution of zakat, or tithes. The plan was to have offices in all Islamic countries and countries with large Muslim populations. In a 2006 article in Arab News, Sheikh Saleh was quoted as saying the fund “will collect both zakat al-fitr and zakat almal (wealth) and the funds will be distributed under the supervision of a specialised committee.”¹⁴ The committee, according to the newspaper article, would include experts from the IDB, the OIC, and the ICCI. The plan for the fund was welcomed by well-known Muslim scholars, including Sheikh Yusuf Al Qaradawi, who was then chairman of the World Forum for Muslim Scholars. Sheikh Yusuf is no stranger to the world of Islamic finance, having been on Dar Al-Maal Al-Islami's first shari'ah board in the 1980s. (See Chapter 3 on Prince Mohamed Al Faisal Al Saud.) Sheikh Yusuf told the newspaper that he had been calling for such a fund for many years. The fund had the potential to collect billions in zakat every year for distribution to the benefit of those who would need the money the most.

The sheikh was not the only one who welcomed the idea. On November 28, 2006, the then Malaysian prime minister, Abdullah Ahmad Badawi, called for the speedy establishment of the International Zakat Organisation at the International Conference on Zakat in Kuala Lumpur.¹⁵ (It was during this conference that the ICCI signed a memorandum of understanding with Malaysia's Halal Industry Development Corporation to tackle the world's halal (permissible) meat market. The g of the memorandum was witnessed by Abdullah Badawi. At the time, Sheikh Saleh was the ICCI's newly appointed president.)

In May 2007 the Malaysian government, through Syed Hamid Albar, then the minister of foreign affairs, tabled a resolution for the formation of the International Zakat Organisation (IZO) at the thirty-fourth session of the Islamic

Conference of Foreign Ministers of the OIC in Islamabad. In 2009 the Malaysian government announced its World Zakat Fund, granting the mandate to manage the fund to a company called BMB Islamic. In the Malaysian press, the IZO was described as “an international zakat body under the Organisation of the Islamic Conference…set up on the suggestion of Prime Minister Datuk Seri Abdullah to eradicate poverty among the Muslims worldwide.”¹

Sheikh Saleh explains: “I saw and spoke to Abdullah Badawi many times. We, the [ICCI], worked on the World Zakat Fund, and Abdullah Badawi announced it in Malaysia. They hijacked the organisation that was always meant to be an international one, making it Malaysian.

“We, the [ICCI], continue to work on the International Zakat Organisation, as we are an of the OIC.” In its annual report of its activities, ICCI has laid out its work over the last few years on building the zakat framework for Africa. The ICCI regularly holds workshops and training sessions on zakat in African countries, and efforts have been made to establish zakat foundations throughout the continent, including in Mauritania, Benin, Senegal, Sierra Leone and Nigeria.

The Halal Industry

In 2008 the OIC picked the ICCI to work at further developing the global halal industry. Sheikh Saleh took up the gauntlet, opting to focus first on the most basic aspects of the sector: global standards and certification. “ICCI's mission for halal is not only to provide credible and professional halal certification but also to help develop existing halal certification bodies to be at par with global industry requirements,” he said in 2008.¹⁷

The ICCI has made some progress in this sector, linking up with the non-profit International Halal Integrity Alliance (IHI Alliance) in 2010 and publishing the Halal Standard, which claims to be the first internationally acceptable halal standard with modules on logistics, food services, slaughtering and processing and animal welfare. IHI Alliance had been working on the Halal Standard following the resolution for its development at the inaugural World Halal Forum in Kuala Lumpur in 2006.

But Sheikh Saleh concedes that even for the most basic aspects of global halal standards and certification, the halal sector is fragmented and the road remains fraught with challenges. There are approximately 300 different halal certification bodies around the world, and not all of them are properly licensed. Experts and practitioners working in the halal sector would like to see more streamlined and standardised certification to facilitate and increase cross-border flows. The way Sheikh Saleh sees it, Muslim countries chase national glory over the needs of the entire global Muslim community, hence creating barriers and impediments to growth and development. “Halal is very important for all Muslims. But Malaysia wants to be the centre, and Turkey wants to be the centre, and Iran wants to be the centre. For such matters, one state cannot serve the entire Muslim world. The Islamic Chamber of Commerce and Industry is representative of 57 Islamic states. We work with Malaysia, with Turkey, with Iran, with Egypt, etc. But each of them only looks to their own country, and they don't look to Islam. When they talk, it's about Islam, but when it comes down to taking action, the Turks are

Turks, the Malaysians are Malaysians. Each comes before Islam.”

Ask Not What the Community of Islamic Countries Can Do for You

Even with the existence of collective efforts like the OIC, Sheikh Saleh is disappointed by the discord within the global Muslim community. Sheikh Saleh is a successful tycoon working within the nimble world of business; the pace of an organisation such as the OIC must feel glacial to him. When asked what he thinks the OIC has done to improve the lives of Muslims globally he retorts, “Nothing. Two years ago, in 2011, I said this in front of them in Turkey, in Istanbul, in front of Abdulla Gül [president of Turkey]. I told them that Turkey is the president of the OIC's COMCEC, the Committee for Economic and Commercial Cooperation of the Organisation of the Islamic Cooperation. For 32 years, can you tell me what you have done? Why your country is developed economically and the Islamic world is not developed? You are a good model for the Muslims who want to develop their own countries. But what have you done for the other Muslim countries?”

Sheikh Saleh is visibly frustrated by what he considers to be a highly fragmented and unproductive Islamic cooperation. For him, working for the good of the Muslim community worldwide is a given, but after more than three decades, he does not consider the OIC to be an effective organisation, “The Muslim world as a whole is not developed because each country only looks to its own needs and development. The OIC, at their meeting every year they only come to talk and eat. So, nothing. From the beginning I have tried, tried, tried, working with them.”

Forty Years On: Mechanisms over Maqasid

Sheikh Saleh says that the Islamic finance industry, while having woven itself a great success story and developing very well “quantitatively,” as he puts it, has not radically changed any economy. “It has been beyond our dreams to have Islamic banks all over the world, holding this amount of money. You know in shari'ah there is maqasid (goals of shari'ah that include equity and social justice) there is mechanism, and there is result. What we have now is good mechanism, but the maqasid and the result, do they feel Islamic? I would say no.”

He continues: “We know the solution but we don't want to take it on. The solution is that we should develop and build on the earth, what Allah (swt) has created, to make jobs for others, and invest, exchange, and grow. But we want to follow what the West has. The Islamic bank, essentially, is not like the Western commercial bank. But most people follow the Western bank because it's easier that way. The Islamic bank is an investment bank. It is investment, and sharing. But we don't share.”

A long-running criticism of Islamic banking (and a criticism that runs through this book too) is that risk-sharing models like mudaraba and musharaka are less favoured because they are riskier to the financial institutions. This lack of appetite for risk sharing (see Chapter 6 on Abbas Mirakhor) and the overwhelming preference for debt-based contracts both in banking and in the capital market has left Islamic finance somewhat vulnerable to attacks on its authenticity.

Al Baraka banks, Sheikh Saleh says, always try to align with the maqasid, but being a part of the bigger industry means that the Group is also exposed to transactions and methods that it may not agree with completely.

With the exception of South Africa and the United Kingdom, Al Baraka's Islamic banking business and influence has remained in Muslim-majority countries. Sheikh Saleh's business nous understands that the Islamic proposition cannot be overtly pushed and marketed in countries like South Africa and the United Kingdom (as evidenced by his comments about Al Baraka's experience in the UK). But it is very clear that for Sheikh Saleh Islamic banking and finance is, very simply, about following the values and principles of Islam and the shari'ah; a duty incumbent on all Muslims. While he probably does not oppose the different ways of describing Islamic finance (as ethical, for example), he is clear that whatever you call it or however you describe it, the core message must be understood and ed on, for it is only this understanding of the core holistic message that will ensure the long-term success of Islamic finance and further the cause of the Islamic economy.

He is candid with his views on Islamic banks: “Most of the board of directors of Islamic banks today they don't know what Islamic banking is. Ninety-nine percent of the employees of Islamic banks don't know what Islamic banking is. They take it as a business. They either don't know or don't understand the message behind Islamic banking. The business and the message, they should work together, not separately.”

Shari'ah scholars, he says, are also to blame. “Before, we saw that the shari'ah scholars didn't understand the economy and economics. Now I can say that some of them don't understand shari'ah either. I wouldn't say all shari'ah scholars, but certainly some of them don't look to the maqasid, they only look to the mechanism. If they do this it means that they don't understand shari'ah.” (See Chapter 10 on Rushdi Siddiqui for discussion on shari'ah compliant versus shari'ah based.) Sheikh Saleh declines to name and shame but says instead that he does not see much maqasid in instruments like commodity murabaha, which is widely used by Islamic banks to provide short-term interbank liquidity using commodities like base metals or palm oil as the underlying asset. This liquidity need was what prompted the earliest Islamic financial institutions to work closely with the London Metal Exchange in a big way. What happens in a

simplified commodity murabaha transaction is that Bank #1 sells palm oil, for example, to Bank #2 today. Bank #2 pays for this palm oil on a deferred payment basis, and with a markup. In the meantime, Bank #2 can sell the commodity to a third party on a cash payment basis. The delivery date and repayment date are agreed up front. Islamic banks do this because shari'ah requires all transactions to be based on assets, including all inter-bank money market transactions. Conventional inter-bank money market loans, ranging from overnight loans to 12-month loans, are based on interest rates. Conventional and Islamic banks borrow on the inter-bank market to meet any shortfalls of liquid assets (such as cash). Banking regulators set liquidity thresholds, and banks must hold a certain amount of liquid assets daily to meet customer withdrawals.

The main criticism of the commodity murabaha, and what Sheikh Saleh frowns on, is that typically Islamic banks neither hold the underlying commodity nor have any use for it–the underlying assets are bought and sold to meet financing requirements but the transaction is not based on real economic activity, which is a key shari'ah principle. Islamic inter-bank money market transactions have been dominated by commodity murabaha, or tawarruq, because it is a common way to build on existing money markets since Islamic banks are able to meet liquidity needs from conventional banks because tawarruq placements are used to buy and sell commodities (such as earlier said palm oil) and are not directly placed into interest-based banks.

This example of the use of tawarruq for liquidity management is, to Sheikh Saleh, how the industry is good at the mechanics but not the maqasid. For Sheikh Saleh, Islamic banking and finance must first gain a solid maqasid foothold within Islamic communities. Muslims must be the first to develop the system closely aligned with maqasid al shari'ah and champion the cause if there is any hope the Islamic financial and economic system can present itself as the definitively better alternative to the interest-based system.

(Sheikh Saleh's views on the lack of adherence to maqasid al shari'ah are not isolated by any means. As part of background research for this book the author

interviewed two of Malaysia's top bankers, both of whose institutions are major players in Islamic finance. One said candidly that banks and bankers become involved in Islamic banking because there is a lot of money to be made in it. To him, the sector in its current guise has “gotten out of hand” and needs to be “reined back in” to what he feels it should be—banking along the lines of investment banking, mezzanine banking and merchant banking. The other commented that regulators “don't have a clue” about what they are doing vis-àvis Islamic finance and that bankers would have to continue pushing for what he believes is a more ‘authentic’ Islamic way. Both have requested not to be named. In the previous chapter on Prince Mohamed Al Faisal Al Saud, Dar Al-Maal AlIslami's Group Chief Executive Khalid Abdulla-Janahi also expressed that regulators have not been ive of a more authentic form of Islamic finance.)

In a paper he wrote in 2009 about the global financial crisis, Sheikh Saleh reiterated that “the economy must be established on the bases of morals, values, lofty principles to achieve the needed balance among the actors of the economic activities whether they are institutions or individuals, and to prevent injustice and aggression on others' rights.”¹⁸ It is his firm belief that the global financial crises have occurred due to economic activities being managed without regard for moral values.

Although Sheikh Saleh understands that the economies of Islamic countries cannot be isolated from the global framework, he believes that Islamic economies should not be subservient to aspects of the conventional economic and financial system that have ready alternatives or solutions within the Islamic system. This is where Islamic banking and finance needs to differentiate itself from the conventional system and not to grow toward it. The Islamic system needs to ensure a sustainable model not just “quantitatively” but more so maqasid-wise.

The Last Word

In view of the predominant success of mechanics over maqasid, the Islamic finance industry, Sheikh Saleh believes, needs to review its direction and rework its path into the future.

Sheikh Saleh can speak at length about conduct becoming a Muslim, especially for the Islamic finance industry but his core message is simple: “There are very few Muslims who really live Islam. Many Muslims merely trade in the name of Islam. If you are only practising Islam in your five daily prayers and that's it, then you are not a real Muslim. You have to practise Islam for your whole life, especially in mu'amalat [financial transactions]. Because if you pray or you don't pray, that's between you and your God. But if you cheat people, if you treat them badly, if you are dirty, if you don't take care of your own house or your street, then you give a bad example of Islam.”

Sheikh Saleh's parting thought is that if he ever wrote his life story, he would not write about his successes. “I've had more failures than successes. But people don't know about the failures. People only want to see the successes.” These words reflect the character of the man. Despite his wealth, Sheikh Saleh is a Muslim whose combination of vision, risk taking and firm religious beliefs has blazed new trails.

Notes

¹ John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988).

² All dates taken from Al Baraka Banking Group corporate website. Al Baraka Banking Group, Group History. [Online]. Available from: http://www.albaraka.com/default.asp?action=category&id=18.

³ Central Bank of Bahrain, Licensing & Policy Directorate List of Banks & Financial Institutions. [Online]. Available from: http://www.cbb.gov.bh/assets/CBB%20/IsBL-Jun2013.pdf.

⁴ Al Baraka Banking Group, Group History. [Online]. Available from: http://www.albaraka.com/default.asp?action=category&id=18.

⁵ Wilson 2000.

New Horizon, “Albaraka London Closure Raises Some Important Questions,” New Horizon, 1 May, 1993. [Online]. Available from: http://www.newhorizonislamicbanking.com/index.cfm?section=features&action=view&id=11356.

⁷ Ibid.

⁸ Peter Rodgers, “Depositors refuse to cash in: MP criticises Bank of England as Albaraka closes,” The Independent, 2 April 1993. [Online]. Available from: http://www.independent.co.uk/news/business/depositors-refuse-to-cash-in-mpcriticises-bank-of-england-as-albaraka-closes-1452849.html.

Barbara Ferguson, “US Court Throws Out Case Against Saleh Kamel,” Arab News, 18 December 2006. [Online]. Available from: http://www.arabnews.com/node/292445.

¹ Arab News, “Saleh Kamel Accuses West of Double Standard,” Arab News, 5 2002 November. [Online]. Available from: http://www.arabnews.com/node/225706.

¹¹ William A. Rugh, Arab Mass Media: Newspapers, Radio, and Television in Arab Politics (Westport, CT: Praeger, 2004).

¹² New Horizon, “Albaraka in London: The Lessons for Islamic Banking,” New Horizon, 1 May 1993. [Online]. Accessed 9 January 2013. Available from: http://www.newhorizon-islamicbanking.com/index.cfm? section=features&action=view&id=11354.

¹³ Ibrahim Warde, Islamic Finance in the Global Economy, 2nd ed. (Edinburgh: Edinburgh University Press, 2010).

¹⁴ Galal Fakkar, “Plans to Establish World Fund for Zakah,” Arab News, 26 October 2006. [Online]. Available from: http://www.arabnews.com/node/289590.

¹⁵ Bernama, “Speed Up Establishment of Zakat Organisation, Says Abdullah,” Almotamar net, 28 November 2006. [Online]. Available from: http://www.almotamar.net/en/1649.htm.

¹ Bernama, “IZO Eyes RM10 Billion Zakat Collection,” Bernama, 18 February 2009. [Online]. Available from: http://www.bmbgroupltd.com/media/BMB_Bernama_18Feb2009.pdf.

¹⁷ Khaleej Times, “OIC Sets Its Eyes on $580b Global Halal Industry,” Khaleej Times, 22 March 2008. [Online]. Available from: http://www.khaleejtimes.com/DisplayArticle09.asp? xfile=data/business/2008/March/business_March667.xml&section=business.

¹⁸ Saleh Abdullah Kamel, paper presented to the Private Sectors Forum at the inaugural Arab Economic, Social and Development Summit, Kuwait, 2009.

Chapter 5

The Systematic Rise of a National Industry

Mahathir Mohamad and the Malaysian Story

Man can have nothing but what he strives for; That the fruit of his striving will soon come in sight: Then will he be rewarded with a reward complete.

—Al Qur'an, Sura An Najm, Verses 39–41

The story of Malaysia's Islamic finance industry is very different to the Middle Eastern experience as related by Saeed Bin Ahmed Al Lootah, Prince Mohamed Al Faisal Al Saud, and Saleh Abdullah Kamel. In Malaysia, no one entrepreneur blazed the trail and pioneered Islamic financial institutions. Instead, the country prides itself on nurturing the industry to global prominence and leadership based on a gradual and systematic approach that has been strongly driven and backed by the state. Shortly after he became prime minister in 1981, Tun Dr Mahathir Mohamad ordered the formation of a national steering committee to explore the possibility of opening an Islamic bank in Malaysia. The formation of the country's first Islamic bank in 1983 was a direct result of the recommendations of that committee. Since then the country's Islamic finance industry has grown from strength to strength. Today Malaysia is recognized as the country with the fullest functional Islamic financial system comprising banking, capital market, and takaful (Islamic insurance).

If you ask me to run an Islamic bank, I will say I cannot. I can talk generally about it, but I don't know the details.

—Tun Dr Mahathir Mohamad

Tun Dr Mahathir Mohamad is a self-confessed nonexpert in Islamic finance. What's he doing in this book? you might wonder. Shortly after becoming prime minister on July 16, 1981, Tun Dr Mahathir ordered the formation of a national steering committee to look into setting up an Islamic bank. The recommendations of that committee resulted in Bank Islam in 1983 from which grew Malaysia's current Islamic finance industry. Tun Dr Mahathir presided over the country's global rise in Islamic finance as prime minister from July 1981 to October 2003, during which time the country saw five central bank governors and five finance ministers (including Tun Dr Mahathir himself) in office. His government nursed the country's Islamic finance industry to global prominence. This rise mirrors the characteristics and resolve of Tun Dr Mahathir's leadership and governance, based as it is on the same fundamental core beliefs and values of nation and economy building.

The two prime ministers who succeeded him, Tun Abdullah Ahmad Badawi and Dato' Sri Mohd Najib Tun Abdul Razak, continued the state's policy of fully ing the country's Islamic finance industry. As to Tun Dr Mahathir's pivotal decision in 1981, that came about as a confluence of three main strands of influence.

Lead-up to the 1981 Decision

Three factors led to Tun Dr Mahathir's 1981 decision to order a committee to study the possibility of establishing an Islamic bank for Malaysia. The first was Tabung Haji, or the Hajj Pilgrim's Fund; the second was Tunku Abdul Rahman, the founding father of independent Malaysia; and the last was Prince Mohamed Al Faisal Al Saud.

Influence #1: Tabung Haji

The first strand involves the Hajj Pilgrim's Fund, or Tabung Haji, the country's first interest-free nonbanking Islamic savings institution. The Hajj Pilgrim's Fund was the brainchild of Professor Ungku Abdul Aziz bin Ungku Abdul Hamid. While he was a professor at the University of Malaya, Professor Ungku developed a working paper, Pilgrims Economy Improvement Plan, exploring options to help Malaysian Muslims save for the costs of the Hajj pilgrimage. The Hajj is one of the five pillars of Islam and is incumbent on all able-bodied Muslims who can afford the journey.

For many, the Hajj is a once-in-a-lifetime journey to the holiest sites of Islam in Saudi Arabia. Because of the enormous costs involved in the Hajj, rural and poor Malaysians often sold their homes and lands in order to afford the age and stay in the holy land. Professor Ungku wanted to find a way to help his fellow Muslims to save for the pilgrimage without having to sell their property and other assets.

Professor Ungku's working paper was presented to the Federation of Malaya government in 1959. His proposal took shape, and in 1963 Tabung Haji started

life as Perbadanan Wang Simpanan Bakal-bakal Haj, or the Pilgrim's Savings Corporation.

In the main, Muslims in Malaysia did not use interest-based banks and had no riba-free banking recourse. The success of Tabung Haji and the new Islamic banks in the Middle East led Malaysians at the academic, financial services, and political levels to start lobbying for their own Islamic banks. In 1980 Tabung Haji and the Muslim Welfare Organisation of Malaysia started their own committees to study Islamic banking. The matter was discussed with some urgency at different meetings and seminars, and an informal local delegation visited the Faisal banks in Egypt and Sudan to study their operations. When Tun Dr Mahathir became prime minister a formal government-sanctioned committee started exploring the matter in-depth.

Influence #2: Tunku Abdul Rahman, the OIC, and the IDB

Mingling with this first influential Tabung Haji strand are the contributions of the founding father of independent Malaysia, Tunku Abdul Rahman. Mustapha Hamat, one of Malaysia's Islamic banking pioneers, believes that Tunku Abdul Rahman's work establishing the Jeddah-based Islamic Development Bank qualifies him to be considered “the first person that was involved in Islamic finance.”

Tunku Abdul Rahman served as prime minister from 1957 to 1970. He was instrumental in the formation of the Organisation of the Islamic Conference (OIC; renamed Organisation of Islamic Cooperation in 2011) following the arson attack on Al Aqsa mosque in August 1969. In his own words he describes events leading up to the establishment of the OIC:

It started off in a miraculous way. A mad Australian attempted to burn down the holy mosque, the Al-Aqsa of Jerusalem and this caused great excitement among Muslims throughout the world. At the time I was holidaying in Hong Kong and received a message from His Majesty the late King Feisal of Saudi Arabia to attend a conference which he and the king of Morocco were holding in Rabat, Morocco…. There was much talk and much excitement at the conference and in the end it was resolved to form a united Muslim organisation. I was asked to head it.¹

The OIC started out with a hip of 25 Islamic countries. Today it has 57 , making it the second largest intergovernmental organisation after the United Nations (UN). The OIC has a permanent delegation to the UN. It serves as the collective voice of the Muslim world and works predominantly with and through governments. The organisation works for the development of member countries in all areas including social, humanitarian, vocational, cultural, scientific, economic, legal, financial, and education. A few years after the formation of the OIC in 1969, Tunku became responsible for setting up the Islamic Development Bank (IDB), a multilateral financing institution under the OIC. The IDB is similar to multilaterals like the World Bank and the Asian Development Bank except that it operates as an Islamic financial institution and its remit is to serve its Muslim member states. Tunku continues the story following the formation of the OIC:

After a time I decided to win greater popularity for our movement by forming the Islamic Development Bank to give financial help to member countries, to make them feel they were taken care of by their richer Muslim brothers. I had to leave the [OIC] Secretariat to organize the bank and finally at the request of the Finance Ministers in 1974 I handed over the management of the bank to Professor Dr Ahmad.²

Tunku planned the bank with the help of a Malaysian team composed of legal experts Tan Sri Abdul Aziz Zain and Dr Tawfiq Shawi, with help from Dr Rais Saniman of Bank Bumiputra. Work was carried out at the Dewan Bahasa

Building in Kuala Lumpur. The inaugural meeting of the IDB took place in July 1975, and the institution was formally opened on October 20, 1975.³ Between then and the establishment of Malaysia's first Islamic bank in 1983, Tunku was involved in Prince Mohamed Al Faisal Al Saud's Dar Al-Maal Al-Islami, lending his name as a founding shareholder in 1981.

Influence #3: Prince Mohamed Al Faisal Al Saud

The third strand of influence involves the son of the late King Faisal of Saudi Arabia, Prince Mohamed Al Faisal Al Saud, who introduced the idea of an Islamic bank to Tunku Abdul Rahman and Tun Dr Mahathir before 1981. Says Tun Dr Mahathir, “I must say thank you to Prince Mohamed. He came here and we had a chat about Islamic banking. He had this idea of starting an Islamic bank here. I met him even before I was Prime Minister. He came several times and we talked. He had lots of ideas, such as dragging an iceberg to provide fresh water.” (See Chapter 3 on Prince Mohamed Al Faisal Al Saud.)

He adds, “Prince Mohamed wanted to open an Islamic bank in Malaysia. But, you know, Malaysia at that time was very restrictive in of banks opening. We didn't normally allow foreign banks to operate here unless there is some reciprocal arrangement in their own country.”

National Steering Committee and Establishing Bank Islam

Tun Dr Mahathir wanted the national steering committee to explore the possibility of allowing Prince Mohamed to open an Islamic bank in Malaysia, since the prince had provided the original idea. “I was not knowledgeable about it, so I set up this working group headed by Tan Sri Mohar. But they came up with another idea, an idea for a Malaysian Islamic bank. These people had some experience in banking and they were the ones instrumental in setting up Islamic banking in Malaysia.”

The late Tan Sri Mohar Badiozaman was special economic advisor to three prime ministers: Tun Abdul Razak, Tun Hussein Onn, and Tun Dr Mahathir. Under Tan Sri Mohar's leadership, the committee studied the document Model Islamic Bank that was prepared by the International Association of Islamic Banks, and also looked into the operations of the Faisal Islamic Banks in Egypt and Sudan.⁴ They eventually submitted their recommendations, and this “Green Report” led to the Islamic Banking Act of 1983. A new and separate act had to be ed by parliament because the prevailing Banking Act of 1973 would not allow Islamic banking activities since it required the rate of interest to be an important mechanism for banking operations and prohibited banks from trading. The 1983 act paved the way for the country's first Islamic bank, Bank Islam. Tan Sri Mohar served as the bank's inaugural chairman of the board of directors, Dr Abdul Halim Ismail as the managing director, and Mustapha Hamat as head of the ing department. Other pioneering officers included Ahmad Tajudin Abdul Rahman as head of operations, Ismail Mahayudin as head of trade finance and treasury, and Fadzil Yusoff as head of the legal and secretariat department. Tan Sri Datuk Sheikh Abdul Mohsein served as the chairman of the bank's shari'ah supervisory council.⁵

There was much anticipation leading up to the 1983 act, with the development

talked about publicly by cabinet ministers. The finance minister, Tengku Razaleigh (himself a staunch er of Islamic finance), described the Islamic bank as “the first step in the government's efforts to instill Islamic values into the country's economic and financial systems as a replacement for the current Western-base economic system.” Tun Dr Mahathir, however, did not go so far as to consider the Islamic system a replacement for the interest-based one. He described the first Islamic bank as “the first step in the larger concept of an Islamic economy” and “an alternative to the Western banking system.”⁷

Thirty years later Tun Dr Mahathir takes the view that conventional banking cannot be completely uprooted. He says, “Some people think we should totally replace conventional banking with Islamic banking. That disturbs the whole financial business. By leaving the conventional banking in place and introducing Islamic banking, people have a choice. I don't think,” he continues, “that it would ever be a complete Islamic system because conventional banking is very powerful and it's difficult to displace it completely.”

In the meantime, before Bank Islam was incorporated, Mustapha Hamat had been recruited by Dr Halim Ismail, the bank's first managing director (MD) who was also deeply involved in the national steering committee. Dr Halim was instrumental in the establishment of Bank Islam and served as the bank's MD until 1994. Mustapha served as Bank Islam's general manager for 18 years. He describes the months leading up to the opening of Bank Islam: “When I came on board we had six months or so to plan the establishment of Bank Islam. This was before the incorporation of the bank and we were working to develop ideas and policies. We would meet on Thursday nights at Tabung Haji at Jalan Ipoh, normally around 9 p.m., and work past midnight. All of us that Dr Halim had picked to hold management posts with the new bank got together at these meetings.”

With the decision to proceed with the establishment of an Islamic bank coming from the uppermost political office, Dr Halim and his new team had to breathe life into the idea. Mustapha recalls working out of one small office that Tabung

Haji had provided. “First thing I did was look for a secretary. We had to get the memorandum of articles set up, the statement in lieu of prospectus for the public etc. So we worked on all that until we managed to incorporate the company.”

There was a team on the ground in Kuala Lumpur planning the incorporation and operations of the new bank, but others were sent abroad to receive instruction from experts. Wan Rahim was one such new recruit. Hired by Dr Halim, in 1982 he was sent to learn about Islamic banking at the International Institute of Islamic Banking and Economics in the Turkish Republic of Northern Cyprus from the late “godfather of Islamic banking” himself, Dr Ahmad Al Najjar.

Wan Rahim spent almost a year at the institute and in Cairo. When he returned to Kuala Lumpur in September 1983, Bank Islam had already been incorporated, and Wan Rahim was met with a full operations manual that the team had compiled. “It was a commendable manual,” he says. “The team had worked on the SOPs [standard operating procedures] and the manual for the operation of the Islamic bank. That was the first manual of its kind.”

The team was then provided with bigger premises at Klana Jaya in Kuala Lumpur, again with the of Tabung Haji. Mustapha remarked, “When we got the office in Klana Jaya, I was in planning meetings with Dr Halim and meeting Tabung Haji and Bank Negara Malaysia as well. Eventually we became a full-blown small bank. We were one branch, after incorporation on March 1. We started operations on July 1.” (Bank Negara Malaysia is the country's central bank.)

Bank Islam was incorporated with paid-up capital of RM80 million. That capital, according to Mustapha, was hard-earned. “We travelled all around the country to persuade all the religious agencies to the bank and educate them on what it means to invest in Bank Islam.” The bank's major founding shareholders were the Malaysian government, Tabung Haji, Muslim Welfare Organisation of

Malaysia, state religious councils, state religious agencies, and other federal agencies.⁸

Building an Industry Systematically

The lead-up to and formation of Bank Islam was entirely government driven and received full governmental . Tun Dr Mahathir explains why it took that path, revealing that the systematic development of Malaysia's Islamic finance industry mirrors the istrative system the country was built on.

Setting the Pace and Character of Overall National Economic Development

According to Tun Dr Mahathir: “When Malaysia became independent, we adopted the istrative system of the West. We adopted that and we became familiar with having rules for everything. If you want to do something you must have a law for it. So we had to provide a law for Islamic banking. Of course the law was ed by parliament and not ed by some Islamic authority. Islamic authorities in Malaysia do not have the standing to any law, so it has to go back to the parliament.”

He continues: “In this same manner you ister everything. It has to be systematic, for that is the way we are used to.”

In his memoirs, Tun Dr Mahathir wrote about implementing in 1981 a more systematic way of working for the government in order to overcome what he saw as “bureaucratic delays and inefficiency.” The systems and processes he put in place were the same as those adopted by the Bank Islam team. He wrote:

I decided to introduce a few innovations to speed up Government work and render it more productive. The first was for each department to produce a Manual of Procedures to enable every officer to know what steps to follow for each task at hand. The manuals were to include workflow charts for easy reference. Such systems and processes are important to ensure that no necessary steps are left out. It reminded me of the checklist that airplane pilots go through before take-off—if you do not carry out the right actions in the right sequence, you may lose your life.

The Malaysian Islamic banking and finance industry was ready for take-off, built on the framework of systems and processes introduced by the prime minister himself.

Phase 1: 1983 to 1993—Establishment and Entrenchment

During this period, several fundamental questions were being asked: Will the people come? Will the bank survive? How would it make money?

Tun Dr Mahathir addresses the difficulties: “The most important thing about Islamic banking is that it does not charge interest—no riba. You have to avoid charging riba although opinions differ. Some people refer to riba as usury. Usury is excessive interest. But how about if you charge a small interest? Of course, the conventional interpretation of riba is no interest at all. That makes Islamic banking very difficult.”

Referring to the Bank Islam team as well as to the central bank, Bank Negara Malaysia, and the Ministry of Finance, he continues: “I gave the task to these experts and asked them to work out how you can avoid charging interest and yet make money for the bank. They came up with this idea that banks should be a

part of the investment. If there is a loss, the bank will suffer a loss, but if there is a profit, of course the bank is entitled to its share of the profit.” He reckons that the arrangement “was a little bit one-sided” if the bank is at risk and the investor is not at risk. He is referring to mudaraba financing, where the partnership involves the rab al maal (the financier) with the customer as the mudarib (the entrepreneur). In the case of loss, the financier loses capital while the entrepreneur, who did not contribute any financial capital to begin with, loses only time and effort expended on the investment or project.

To distribute risk, the Malaysian Islamic banking machinery met Tun Dr Mahathir's call and presented a range of options. Tun Dr Mahathir acknowledges this. “The injunction on riba makes banking difficult, but they have come up with various ideas and products. I think it is doing quite well, considering the constraints.”

With the benefit of hindsight, Mustapha Hamat sees the establishment of Bank Islam as “unconventional.” He explains, “At that time, what was normal was to conduct feasibility studies if you want to start a business organisation, to make sure there is a market, etc. But we didn't do a feasibility study. I don't know why they didn't come up with a feasibility study. The “Green Report” was to establish an Islamic bank, but there was no study accompanying the decision. So there was no talk of liability or pro forma balance sheet, nothing. It was just structures and regulatory frameworks and governance standards.”

While there was much work to be done by Bank Islam and Bank Negara Malaysia to build a viable system, the bank's performance in 1983 and 1984 was positive, with deposits increasing from $91 million to $274.9 million, and financing grew from $40.7 million to $249.8 million.¹ Figure 5.1 charts Bank Islam's growth in total assets for its first decade and Figure 5.2 shows the bank's net income for the same period.

Figure 5.1 Bank Islam Total Assets (excl contra items) 1 March 1983 to 30

June 1993 in Ringgit Malaysia (RM) millions

Source: Bank Islam Annual Reports 1984–1993.

Figure 5.2 Bank Islam Net Income (after zakat and taxation) 1 March 1983 to 30 June 1993 in Ringgit Malaysia (RM) millions

Source: Bank Islam Annual Reports 1984–1993.

Behind all the numbers, Wan Rahim re the scenes on the ground. “When Bank Islam started, there was a scramble for the Muslims to participate in the nation's financial inclusion drive, that is, they could finally open interestfree s. I when we opened in stages—starting with Kuala Lumpur, and then gradually with the state capitals,where Muslims were dominant, and so on. People came and were very happy that suddenly they had an avenue to do banking. They treated us with great respect. When they knew that we were from Bank Islam, we would have a tough time turning down requests to be the imams [prayer leaders] for congregrational prayers!”

By government design and agenda, Bank Islam remained the sole Islamic bank in Malaysia for a good decade. Tan Sri Nor Mohamed Yakcop, who was responsible for the implementation of Islamic banking at Bank Negara Malaysia until the early 1990s, explains, “It's part of our culture to do things one step at a time, not to take undue risk and to always make sure that we're on firm footing before taking the next step. We agreed from Day 1 that we would establish, over a period of time, an entire ecosystem of Islamic finance consisting of a banking system, a capital market, stock-broking, and takaful.”

On the intention for the first 10 years of Bank Islam, Tan Sri Nor says, “During those 10 years we made sure of two things—firstly that there was a large customer base for the bank. There were, interestingly, not only Malays and Muslims who became customers, but also non-Malays and non-Muslims, which was good. And secondly we made sure that we had as many instruments as possible to meet the requirements of as many people, both investors and borrowers.” (In Malaysia, people of the Malay ethnic background are predominantly Muslim.)

Bank Islam attracted a large customer base. By the end of May 1987, 150,000 depositors had signed up with the bank, depositing a total of $322 million. Besides depositors, there were about 2,500 customers with financing facilities.¹¹

It was also during this first phase that Syarikat Takaful, the country's first Islamic insurance company, was established, by the Takaful Act of 1984. Mustapha Hamat was deeply involved in this. Syarikat Takaful started operations in August 1985 with a paid-up capital of RM10 million. Bank Islam was its majority shareholder, with others being state religious councils and state religious development agencies. In its first year of operations, Syarikat Takaful attracted 6,000 takaful participants, with the number rising to 50,000 by the end of May 1987.¹² The company now goes by the name Takaful Malaysia and is the country's second largest takaful company out of 11 currently operating.

Shari'ah-Compliant Financial Instruments

As for shari'ah-compliant financial instruments, the first that was introduced was the Government Investment Certificate (GIC). Prior to the establishment of Bank Islam, GICs were conceptualized as instruments the bank could use to meet its legal requirements in of holding liquid assets. It would also be an avenue for the bank to invest its excess funds. Bank Islam could not place its funds with conventional interest-based banks in the system, and there were no other Islamic banks in the country to trade with. Bank Islam and other financial institutions could buy GICs from the government. GICs came with different face values and maturity dates, and Bank Negara Malaysia opened a separate section for the buying and selling of these GICs. In essence, GICs worked as interest-free loans to the government, and financial institutions would earn returns from dividends. The dividend rate was determined by a dividend committee comprised of representatives of the Ministry of Finance, Bank Negara Malaysia, the Economic Planning Unit, and the Religious Affairs Section of the Prime Minister's Office.

The idea for the GIC, according to Mustapha, came from Dr Ahmad Al Najjar's five-volume encyclopaedia on Islamic banking that was produced during the time of the International Institute of Islamic Banking and Economics in Northern Cyprus. But even in that compendium, he says, the concept was not entirely

clear, and the mechanics and shari'ah concerns still had to be clarified. The biggest issue with the GIC was that based on qard al hassan, or interest-free loan the papers could not be traded on the secondary market, where previously issued financial instruments can be bought and sold. This problem was cleared up in 1993, when the underlying concept of the GIC was changed to another contract called bai' al inah to allow trading in the secondary market between financial institutions. The name GIC was dropped, and the issue has since been called the Government Investment Issue (GII).

Apart from liquidity management instruments like the GIC, Bank Islam, working with Bank Negara Malaysia, introduced a full suite of Islamic banking products and services for its customers, including current, savings and investment s, financing facilities, and trade financing.

One significant development during this period was the first-ever sukuk, commonly referred to as Islamic bond, that was structured and issued by Bank Islam—the Shell MDS corporate sukuk issue in 1990. Details are presented later in this chapter.

Phase II: 1993 to 2000—Liberalisation and Expansion

BOOM—From one bank and one takaful company to 50 financial institutions offering Islamic banking products and services.

With Bank Islam and Syarikat Takaful in full swing, the next phase of development started in 1993, when the government, in its bid to quickly expand the industry, allowed conventional banks to set up Islamic “windows.” Tan Sri Nor explains, “With a stroke of a pen, and without the government spending any money, we opened up Islamic banking from one bank to a system.”

The Islamic Banking Scheme of 1993 effectively started Malaysia's development as a dual banking system, where the conventional interest-based system and the Islamic system would function alongside each other. The Malaysian government has facilitated the development of the industry by amending its tax regime so as not to penalize any Islamic financial transactions. In fact, several tax incentives, subsidies, and concessions have been put in place to promote Islamic finance in the country.

However effective the scheme proved to be, Tan Sri Nor recalls the criticisms that came with the introduction of the Islamic windows. “Of course, many people were not quite happy with the windows. They said that it was like a hotel with two kitchens—one halal and the other haram.”

The interest-free banking scheme, or Islamic Banking Scheme, allowed conventional interest-based commercial banks, merchant banks, and finance companies to offer Islamic banking products and services on the condition that they keep funds and activities of Islamic banking transactions separate from nonIslamic businesses, hence Tan Sri Nor's analogy to the hotel with two kitchens.

As a further safeguard, all financial institutions offering any Islamic products and services from then on had to have their own shari'ah supervisory boards. Shari'ah matters were further strengthened in 1997 with the formation of the national Shari'ah Advisory Council (SAC) under Bank Negara Malaysia. The SAC is the apex body for all shari'ah matters dealing with Islamic banking and takaful.

The scheme was wildly successful. By 2000, Islamic banking services were offered by 50 financial institutions including commercial banks, finance companies, merchant banks, cooperative banks, and discount houses.¹³ In 1999, the country welcomed its second full-fledged stand-alone Islamic bank: Bank

Muamalat.

To this boom the Islamic Inter-bank Money Market (IIMM) was opened on January 3, 1994, overseen by Bank Negara Malaysia. This was the first Islamic money market in the world, and allowed for financial institutions with Islamic products and services to trade, invest, and clear cheques between banks. Notably the mudaraba interbank investments (MII) were introduced, a scheme that provides a mechanism for deficit Islamic financial institutions to obtain funds from a surplus counterpart by issuing a mudaraba certificate for a fixed period of time, ranging from overnight to 12 months.¹⁴

From the one liquidity management instrument in 1983, the GIC, other instruments were developed to meet the needs of the interbank market, including the mudaraba interbank investment, wadiah acceptance, Bank Negara Monetary Notes-I, and Islamic Negotiable Instruments.

On the capital market side, the government established a new regulatory body in 1993 - the Securities Commission, which Tan Sri Nor was involved in. The Commission regulates and supervises both the conventional capital market and the Islamic capital market (ICM). On the Islamic side, it regulates and supervises all capital market activities and instruments, including sukuk, securities, indices, and warrants. The commission also approves licences and supervises the conduct of stock-broking companies, fund managers, companies, and individuals that provide investment and financial planning advice. Malaysia's ICM is a lively one. While the country's Islamic banking market share is currently about 20 percent of the entire banking sector, Malaysia's ICM was 52 percent of the size of the overall Malaysian capital market in 2010 and was valued at RM1.05 trillion ($345 billion). In 2000, the size of the ICM was RM294 billion.

On Growth and Development

At this juncture we return to Tun Dr Mahathir. How does he feel Malaysia's Islamic banking and finance industry has developed?

“In a way, it has succeeded more than I expected. But also it has not expanded to be accepted generally as a banking system. You see we are emphasising the religious and Islamic part of it. If you stress on not charging interest and not calling it Islamic banking, maybe it will expand much faster.”

Tan Sri Nor (who went from Bank Negara Malaysia to become Tun Dr Mahathir's Special Economic Advisor during the Asian financial crisis in the late 1990s, Minister of Finance II from 2004 to 2009, and Minister in the Economic Planning Unit until May 2013) says that he is “very happy, extremely happy” with the way the country's Islamic finance system has grown.

As former Minister of Finance II, Tan Sri Nor is accustomed to planning and strategizing for the long term, and Malaysia's Islamic finance industry has benefited from formal plans for the industry and its position within the bigger financial and economic context. To this end, Malaysia's Financial Sector Blueprint (2000–2010 and 2011–2020) and Capital Market Masterplans (2001 and 2011) have provided road maps for the country. These fall under the stewardship of the governor of Bank Negara Malaysia and the chairman of the Securities Commission Malaysia.

But while Malaysia has systematically developed its Islamic banking industry and is widely regarded as the most advanced Islamic finance jurisdiction in the world, the reality is that 30 years on, Islamic banking assets still only make up

approximately 20 percent of total banking assets. The target of 20 percent by 2010 was not met. In early 2013, the market share of Islamic banking assets stood just under 20 percent—this after 30 years of a systematic governmentdriven agenda ed by numerous government subsidies and concessions.¹⁵ Addressing this fact, central bank governor Tan Sri Dr Zeti Akhtar Aziz told a press conference in Kuala Lumpur in September 2012, “The market has to be demand driven. We can put the enabling environment, but we can't require banks to offer products and services.” With regulatory reforms under way, the new target is for Islamic banking assets to reach 40 percent share of the market by 2020—a 100 percent growth in the next seven years.¹

Malaysia's Islamic banking sector is not the biggest in the world; a report by financial services company Ernst & Young in December 2012 cites Saudi Arabia's Islamic banking assets at approximately $207 billion in 2011, representing more than 50 percent market share in the kingdom, with Malaysia second at $106 billion, and the United Arab Emirates third at $75 billion. In another report, Malaysia's share of global Islamic banking assets touched 10 percent in 2012, behind Saudi Arabia's 12.2 percent and ahead of the United Arab Emirates' 8 percent.¹⁷(Iran has the biggest share with 42.7 percent, but its isolated market is not considered to be a part of the mainstream.)

Whereas Islamic banking did not meet the government's target, Malaysia is the undisputed world leader in another area of Islamic finance: the sukuk market.

Islamic Capital Market: Malaysia as a Global Sukuk Leader

Sukuk is the most celebrated instrument of the Islamic Capital Market (ICM). With its fame, there has been more interest in the Islamic debt capital market than in the Islamic equity market. Sukuk is most commonly referred to as an Islamic bond, although it does not behave like a conventional bond. A sukuk must be based on or backed by assets, with investors having participation rights in or ownership claims on those underlying assets. Basically, it is not just an IOU like a conventional bond, as the sukuk issue must name the underlying assets that will generate returns for investors. In February 1988, the Fiqh Academy of the OIC legitimized the concept of a sukuk by formally ruling the subject to proper written legal documentation and paving the way for the first sukuk issuance in 1990. This provided a new shari'ah-compliant method to raise funds in the capital market.

Wan Rahim Kamil is widely credited as the Bank Islam official who structured that first sukuk—the 1990 Shell MDS Sdn Bhd RM125 million ($33 million) corporate sukuk. Says Wan Rahim, “In 1990 Bank Islam went into the capital market. In fact, even before that I had consulted Dr Ahmad Al Najjar, who was then visiting Kuala Lumpur, about the possibility of Islamic bonds. Dr Ahmad said, Why not, yes, you can do a bond. In fact, according to Dr Ahmad, a very big Saudi construction company, Al Juffali Group, was considering raising funds by issuing Islamic bonds at that time.”

But the Shell sukuk was the pioneer in the market. Wan Rahim relates the story: “An officer from the Arab Malaysian Bank, I still her, Marcia Kok, called me one day and asked me if we could do a bond. I always say yes to anything challenging, so I said Yes, why not? She said, Are you sure you know what I'm saying? An Islamic bond? I said, Yes, I can do a bond as I have done conventional bonds before, so I believed I could innovate an Islamic bond. So

she got me to call the CFO of Shell, who asked for a proposal to be submitted in five days.” Figure 5.3 is a copy of the sukuk's Promissory Note issued in 1990.

Figure 5.3 Shell MDS (Malaysia) Sdn. Bhd. Promissory Note Issued in 1990

Source: Courtesy of Wan Rahim Kamil.

Having agreed to structure an Islamic version of a bond, Wan Rahim referred to a book entitled The Islamic Law on Contracts issued by the Central Bank of the Islamic Republic of Iran. The book described securities issued by municipalities. Using one of those municipality bonds as an example, Wan Rahim then customized the structure using a contract called bai' bithaman ajil (BBA). The BBA is a contentious contract that is not used by most other Islamic finance jurisdictions (serving as an example that there are different interpretations of shari'ah). Wan Rahim brought the matter to the bank's General Manager, Mustapha Hamat, in order to be sure that the structure would conform to the rulings of the shari'ah and to ing needs. Mustapha checked off on everything, and the proposal was taken to the Managing Director Dr. Halim, who, says Wan Rahim, was more excited about the issue than Wan Rahim and Mustapha put together.

The Shell sukuk, according to Wan Rahim, received a very good response. “It was traded very actively, and it became another liquidity paper apart from the GIC. People were buying because the rates were good, and it was a AAA paper, even though it was not rated.”

Another subsidiary of Shell adopted the same route to raise funds, this time through a musharaka structure (see Figure 5.4 for the Sarawak Shell Berhad sukuk al musharaka issued on 28 March 1991). The success of the Shell sukuk captured the market's imagination, and before long Wan Rahim was structuring another sukuk, this time for the national petroleum company PETRONAS. “In 1993, PETRONAS called me and said that they wanted to float PETRONAS Dagangan, their subsidiary that owed them a lot of money at the time. So we structured a sukuk based on the advances under the concept of qard al hassan, or interest-free financing. But such a structure would not have any returns to the holders, so we had to sweeten the offer. We attached a TSR—a transferable subscription right. So then there was the flexibility to allow the holder to detach the TSR from the main certificate. Most of the buyers and investors detached the two instruments and sold the TSRs as warrants on the stock exchange. That was in fact the first sukuk that was listed on Kuala Lumpur Stock Exchange [now

Bursa Malaysia].”

Figure 5.4 Sarawak Shell Berhad Sukuk al Musharaka Bearer Certificate, 1991

Source: Courtesy of Wan Rahim Kamil.

If you pick up Islamic finance industry literature, you will see words like “exponential growth” describing the global sukuk market. Malaysia is the dominant player in that growth. Many other firsts followed for the Malaysian sukuk market. Kumpulan Guthrie issued the world's first global corporate sukuk in 2001, and in 2002 came the sukuk market game-changer: The government of Malaysia issued the world's first rated US dollar global sovereign sukuk. That sukuk was arranged by HSBC. Says Wan Rahim, “HSBC sold the idea of that sukuk to the Malaysian government. Malaysia decided to experiment, moving away from conventional bonds to using this Islamic instrument.” That was also the first time the ijara structure (a leasing structure) was ever used for a sukuk. The sukuk's returns were benchmarked to the London Interbank Offered Rate (LIBOR), which is the average interest rate estimated by interest-based banks in London that underpins trillions of dollars worth of loans and financial contracts, including those within the Islamic finance industry. LIBOR was affected by a scandal that erupted in 2012 after it was exposed that banks had been rigging, underreporting, and lying about their borrowing costs as far back as 2005.¹⁸

The Malaysia 2002 sovereign sukuk was set at LIBOR + 0.95 percent, which meant it was competitive with and similar to a floating rate note.¹ LIBOR was used as a benchmark, and the sukuk returns themselves do not represent interest payments but rather rents on the underlying assets, which were governmentowned properties and land. The use of LIBOR as a benchmark for Islamic financial products is contentious. As to be expected, it has both ers and detractors who have called for it to be delinked from shari'ah-compliant finance. (For the alternative to LIBOR, see the Islamic Interbank Benchmark Rate in Chapter 10 on Rushdi Siddiqui.)

The Malaysia 2002 sovereign sukuk ijara opened the sukuk floodgates. Except for a dip in 2008, the global sukuk market has been on the rise, with Malaysia continuing to dominate. In 2012, a total of $139.2 billion of sukuk were issued globally, up from $92.7 billion in 2011. Out of the $139.2 billion of sukuk in 2012, Malaysia issued $97.1 billion—making up 70 percent of global aggregate issues.² Sukuk is now used to raise funds for a whole range of assets benefiting

all economic sectors. Apart from government, quasi-government, and corporate issuers, sukuk has also been used by international multilaterals like the IDB and the World Bank to raise funds for various developmental projects.

The Islamic finance ecosystem has benefitted immensely from the everexpanding sukuk pot. Takaful operators and pension funds, for example, can now invest in more shari'ah-compliant instruments, and with longer tenors as well. This was something Wan Rahim and Bank Islam pushed for. “In 1990, takaful was already in existence and takaful had the same problems managing liquidity as Islamic banks. So when we issued the Shell sukuk, we went to see Bank Negara Malaysia and got their permission for sukuk to be part of the prescribed investment product for takaful. That opened up investment opportunities for takaful operators.”

Figure 5.5 charts global aggregate sukuk from January 1996 to September 2012.

Figure 5.5 Global Aggregate Sukuk January 1996 to September 2012

Source: Thomson Reuters Zawya Sukuk Perceptions and Forecast Study 2013, December 2013.

A Model Nation for Islamic Finance

Malaysia has the most comprehensive Islamic financial system in the world, and this system operates parallel to the conventional interest-based system. As Tun Dr Mahathir said earlier, “If you want to do something, you must have a law for it.” As leader of the nation, he set the tone for its growth and development, including that of the Islamic finance industry. But, he says, “I don't have a bloated idea about my own capability. I suppose people recognize that I have done some things, but what they think about me is a little bit beyond my own capacity. I learnt how to ister and develop my own country. That is not difficult. Anybody can do that.”

The country has enacted new and separate laws to establish and govern every aspect of Islamic finance. Its legal and regulatory framework is governed by the Islamic Banking Act, the Takaful Act, the Government Funding Act, and the Capital Market Services Act. On 30 July 2013 the Islamic Financial Services Act (IFSA) came into force marking a new stage for the country's regulatory and supervisory framework. The IFSA consolidates the Islamic Banking Act 1983 and the Takaful Act 1984 and reflects the country's efforts to update and modernize the laws that were enacted in the 1980s.

Malaysia has a national Shari'ah Advisory Council, and financial markets consisting of the IIMM, the ICM, and the Commodity Market (Bursa Suq Al Sila). The country is home to local and foreign Islamic financial institutions including banks, Islamic windows, international currency business units, takaful operators, and fund management companies. In addition, there is also the offshore financial centre option with Labuan, the island off the Borneo coast.

All of the above are ed by a human capital infrastructure that includes education, training, and leadership programmes. Crucially, the country now has a

fully functional professional services sector to the Islamic finance industry; it includes firms from different fields including legal, ing, and consultancy services.

With its dominance in the sukuk market and leadership in Islamic finance overall, Malaysia's expertise travels and attracts the world. People from all over have travelled to Malaysia to learn from its development. Tan Sri Nor re, “I used to receive guests from all over the world, they came to learn from us how to do Islamic banking. Ironically we went to Pakistan in the early years, since Pakistan wanted to be fully Islamic. We sent one of our staff from Bank Negara to Pakistan to learn from them. Many years later the Pakistanis came to us to learn.” (See Chapter 1 on Khurshid Ahmad for information on Pakistan's development.)

Experts like Mustapha and Wan Rahim consult globally. Wan Rahim was involved in the drafting of Egypt's sukuk law in 1992 under the U.S. Agency for International Development (USAID) programme for Egypt, and Mustapha advises on a range of Islamic finance matters. He has lent his expertise to emerging Islamic finance jurisdictions such as Afghanistan (arranged by the USAID programme) and Kyrgyzstan. These are but a few of the numerous international engagements these two have undertaken.

Mustapha and Wan Rahim, though not widely known in the mainstream outside the Islamic finance industry, are two of the leading experts in Islamic finance, foot soldiers who have been on the front line for 30 years and who have built the industry from scratch. Wan Rahim remains at the forefront of ICMs, advising, formulating, and developing regulatory and market frameworks with Securities Commission Malaysia, while Mustapha now teaches Islamic banking and finance at a local university. He still plays an active role in the local and the international scene. As for Tan Sri Nor, he says, “I've done what I needed to do.” He now serves as deputy chairman for Khazanah Nasional Bhd, the government's investment arm.

Mustapha and Wan Rahim speak about the core principles that Malaysia's industry is built on: a proper systematic structure and moving forward gradually. Says Mustapha, “I assist many countries establish Islamic banks. We look at the steps involved, draw up proper budgets for the country, get the ministers to understand it, etc. It's a lot of work, and these new markets, they cannot do it in one or two years. You have to move gradually. That is the key principle.”

Wan Rahim explains Malaysia's strengths, echoing the sentiments of Tun Dr Mahathir and Tan Sri Nor. “What Malaysia has is a very structured example. It has a master plan for the development of the financial sector and the capital market. So Nigeria, for example, at this very moment is developing their financial market based on the Malaysian model, both on the Financial Sector Blueprint and the Capital Market Masterplan.”

But, he says, one size cannot fit all. “They come here, and they decide what they require at their full capacity or at half capacity. But it is still the structured process. They want to see what we do here and fast-track what they can.”

Of course, the country's industry was not built on the backs of just these three men. Many others play their part but, for one reason or another, could not be interviewed. With all due respect to everyone else's contributions, experts like Mustapha and Wan Rahim and central bank officials like Tan Sri Nor stand out.

In recognizing Bank Negara Malaysia leaders in the development of the industry, Tan Sri Andrew Sheng, who was with the central bank from 1976 to 1989, says, “I think all credit in [Bank Negara Malaysia] developing Islamic banking goes to Tan Sri Aziz Taha, Tan Sri Jaffar Hussein, and Tan Sri Nor Mohamed Yakcop, with Tan Sri Dr Zeti taking it to new heights.” Tan Sri Aziz Taha led the central bank in the early days of the country's Islamic finance industry, as governor from 1980 to 1985. Tan Sri Jaffar Hussein succeeded Tan Sri Aziz and served as

governor until 1994. Tan Sri Dr Zeti became governor in 2000. Tan Sri Andrew Sheng himself had a hand in the development of Bank Islam and Islamic finance in general in Malaysia during his time with the central bank.

Tun Dr Mahathir weighs in to all this talk about Malaysia being a model for Islamic finance. “Well, in a way we were pioneers. Although I must it that Prince Mohamed was the one who came up with the idea. We were pioneers in of commercializing the Islamic banking system and we grew it until it became acceptable to people. Now, of course, most Muslim countries want to have this facility, and naturally if they want it, they will have to seek models. And Malaysia proves to be the model.”

Tun Dr Mahathir still gets invited to numerous Islamic finance events and is regularly called on to speak. He had this to say: “People think I was the initiator of this. They think that I should know about things, so they keep on asking me to deliver the keynote addresses. Not only on Islamic banking but on everything else.”

He adds, “People's impression, their expectations of me are much beyond my own capacity.” Is this just him being humble? “I'm not being humble. I'm being very fair to myself because, really, I cannot know all these things that they ask me to talk about. I know some things, I read a lot, I've gone through a long experience, more than 60 years in politics. So I know a lot of things. What I know, I leverage on.”

Phase III: 2000 and Beyond—Internationalisation

From the year 2000, Malaysia's industry started positioning itself as a global player, driven by central bank governor Tan Sri Dr Zeti Akhtar Aziz, who has

been called the “First Lady of Islamic Finance.” The country's banking sector became even more liberalised and diversified, issuing licences to foreign Islamic banks to set up shop and allowing conventional interest-based banks to establish separate Islamic banking subsidiaries from the first step of allowing Islamic windows. This ensured that conventional interest-based banks, such as Maybank, CIMB, Public Bank and AmBank, and foreign banks, such as HSBC, Standard Chartered and OCBC could open completely separate banking units for their Islamic businesses from 2004. With foreign licences approved as well, the Middle Eastern banks Al Rajhi, Kuwait Finance House, and Asian Finance Bank set up shop in Malaysia from 2005.

The country also started welcoming international industry bodies to its shores starting with the Islamic Financial Services Board (IFSB; see Chapter 7 on Rifaat Ahmed Abdel Karim). IFSB was opened by Tun Dr Mahathir in 2002. In the mid-2000s, Bank Negara Malaysia established the International Centre for Education in Islamic Finance and the International Shari'ah Research Academy for Islamic Finance. Both continue to attract the world's best and brightest to Malaysia while exporting Malaysian expertise to the world. The country welcomed its second international industry body, the International Islamic Liquidity Management Corp., in 2010.

Phase III: 2000 and beyond focuses on cross-border linkages and the internationalisation of Malaysia's Islamic finance industry, with Bank Negara Malaysia and the Securities Commission spearheading the charge. Regulatory reviews and the exporting of Malaysia's Islamic finance model and expertise are ongoing, as the country looks beyond its almost saturated market to new developments not only in Southeast Asia (as Malaysian banks expand regionally) but also around the world.

As mentioned earlier, the goal on the banking side of things is to reach 40 percent market share by 2020, up from the current 20 percent. As for the ICM, it stood at RM1.05 trillion at the end of 2010, representing 52 percent of the size of the overall Malaysian capital market. By 2020, the country expects this number

to top RM3 trillion, based on a projected average growth rate of 10.6 percent per annum. This growth projection is based on the widening of the ICM's international base.²¹

The Better System

Tun Dr Mahathir and Tan Sri Nor speak in unison about the Islamic offering being a better, stronger system. Tan Sri Nor starts off. “The importance of Islamic banking and finance will only grow. It's because people realize that this is the system that can last longer and that is less prone to disasters compared to the conventional [system]. Because in the Islamic financial system your financing is based on real assets. You won't have the problem of derivatives and thousand times based on the actual value. Those things can't happen in Islamic finance.”

But he is quick to point out that the Islamic financial system is not perfect. “It's not that Islamic banking is fully shielded from disaster. But, by definition, and by the way it's structured, it's less prone to these regular disasters.”

This link to real assets, as Tan Sri Nor talks about, is a big concern for Malaysia's Islamic finance industry as it develops and becomes more sophisticated. The government and its institutions like Bank Negara Malaysia and Securities Commission, through their Financial Sector Blueprint and Capital Market Masterplan, emphasise the link that Islamic finance must maintain to the real economy and not stray into overfinancialisation that may result in a financial economy far removed from its production base. There are also efforts to move more towards profit and loss sharing products as opposed to debt-based products. Profit and loss sharing products, or risk-sharing products like mudaraba and musharaka, are the ideal in Islamic finance, but they are used sparingly in favour of debt-based structures because of the higher risks involved in risk-sharing products. This has been an ongoing criticism of the Islamic banking and finance industry and is by no means confined to Malaysia. Many within the industry have consistently expressed their dissatisfaction with what they perceive to be compromises the industry has made in order to stay competitive with the conventional interest-based system.

But despite the gap between the ideal and what is practised on the ground, the Islamic system is still viewed as the stronger alternative. Tun Dr Mahathir responds to the question “Is Islamic finance better than the conventional system?” in this way: “At the moment we cannot say that yet. What we do know is that conventional banking is open to a lot of abuses, which have resulted in the current crisis. Today Islamic banking is much more accepted because [people] have seen the abuses of conventional banking. So there is a chance for Islamic banks to play a bigger role. That is competition. You abused the system, we show a system that is better so you should accept this system. You don't have to force them. You can see the performance.”

This is when he reveals his position on the role of government in the market, underlining Malaysia's systematic growth of Islamic finance backed by strong government regulation. He points out the failures of the conventional financial system and implicates the man who became the leader of the United States the same year Tun Dr Mahathir became prime minister. “You can thank [Ronald] Reagan for that [abuses in conventional financial system]. Reagan's idea was to have less government, that the market will regulate itself. We don't think that over here. Here we never say that the market will regulate itself. Government will regulate the market. We oversee the functions of the banks, the things they do, the laws that we provide for them, all these guide them as to what they can do and not beyond that.” Suffice it to say that Tun Dr Mahathir does not agree with much of the Reaganomics that liberalised financial markets and controls over the banking industry. From the very beginning of his premiership Tun Dr Mahathir wanted to demonstrate that Malaysia's growth and development was based on confidence and a new sense of self-esteem that did not involve “paying homage” to the West. In his memoirs, he details what transpired immediately after he took office in 1981:

When it came to the West, I was faced with other foreign policy expectations. The US Ambassador to Malaysia was already planning my visit to Washington DC, immediately after I took office, presumably so I could pay homage to Ronald Reagan, the new President…. However I directed Wisma Putra to inform

the United States Ambassador I was not going to Washington any time soon…. Had I gone to Washington, I would have been just another Third World leader going to beg for aid…. Malaysians had to show that we had self-esteem. I wanted to show the great and powerful nations that as far as I was concerned, Malaysia did not care about their size or importance. So, after visiting the ASEAN countries, instead of the US I went to Fiji, Tonga, Western Samoa, Papua new Guinea and the Maldives.

Tun Dr Mahathir addresses the overfinancialisation of Western economies and their creation of what he considers to be fictitious wealth. “In the West what they said is that the market will regulate itself. But the market is about making money. They don't care about regulation. If you can borrow more than ten times your capital, why not 30 or 40 times. They are basically creating money where there is no money.

“They have abused the system because of the idea that markets can regulate themselves. Markets cannot regulate themselves. Government must regulate.”

With the importance that he and his governments have placed on regulating the markets, he explains the Asian and Islamic values that have informed their position. During his premiership, Tun Dr Mahathir adopted his “Look East” policy, turning to Japan and South Korea instead of looking to the developed West as an example for industrializing and developing Malaysia. Asian values, he says, are mostly compatible with Islamic values, and so his governments have been built on the fusion of these. So with government imbued with both Asian and Islamic values, regulation is designed to protect the good of the many. He explains, “Government is there to serve the people and maintain peace. Islam is about peace. All these things match. Islam doesn't tell you to kill people. No, it's a crime to kill, steal, and be corrupt. So the values are the same, except for one thing—we believe in the welfare of the majority, the community, the ummah. The West believes in the rights of one person, where one person exercises his right and at the same time he undermines the right of the community. They want to tolerate it, but we say no. Even if it's your right but if you take away the rights

of the community, then it's wrong.”

He is well aware that the Muslim world is not a monolithic homo Islamicus. In his memoirs, he writes about Muslims' different interpretations of Islamic principles and injunctions that lead to factions. (This view is perhaps strongly filtered down to the Malaysian Islamic finance framework and could explain the government's preference for a centralized national shari'ah body for the industry.) Even if a Muslim leader were to act in a way that he (and they most often are men) believes is for the good of the many, there will always be dissent. “You cannot have a good leader in any Muslim country, because they will kill him. So if I become a leader in a Muslim country, the first thing that would happen is that they would kill me. You had a good leader like Hariri and they went and killed him. In Malaysia, fortunately, they are not given to assassinating people; otherwise I would have been assassinated.” Tun Dr Mahathir is referring to the late Lebanese prime minister Rafik Hariri, who was assassinated in February 2005. He knew Hariri well and visited Lebanon several times at Hariri's invitation. Both leaders faced the need to build confidence and economic success for their countries. The issue of ethnic divisions was also something both leaders had to deal with albeit in very different ways, with radically different consequences.²²

The home front, then, is a much more conducive environment as race relations are comparatively more harmonious. On the issue of multiracial Malaysia and Islamic finance, he says, “We have to be pragmatic. The world is not peopled by Muslims alone. Even in Malaysia we have non-Muslims, and they have their rights too. We respect their rights. I told the non-Muslims that this [Islamic finance] is the Muslim way. They don't reject it. They even accept it. There has not been any opposition to setting up Islamic banks here from the non-Muslims. If you explain to them what you are doing, I think people will be less hostile.”

According to the last national census conducted in 2010, Malaysia's population is 28,334,135 of which 61.3 percent are Muslim. The large minority of 38.7 percent are mostly Buddhists, Christians, Hindus, and adherents of other Chinese

religions, such as Taoism. Although no hard numbers are available, the industry has trumpeted the non-Muslim take-up rate for Islamic banking products over the years. A report released by PricewaterhouseCoopers in 2008 claimed that more than 50 percent of Islamic banking customers are non-Muslim.²³ In June 2012, the country's biggest banking group, Maybank, told reporters that the demographic of Maybank Islamic's customers is a 50/50 split of Muslims and non-Muslims, citing competitively priced products and government tax incentives as the main drivers.²⁴

While most of the Muslim world outside of Malaysia generally lauds Tun Dr Mahathir as the Muslim leader who has most successfully “stood up to” the West and developed Muslim-majority Malaysia into a thriving economy, the former prime minister's 22 years in power have received criticism from within the country. Over the years, a whole raft of his policies have come under attack, including the continuation of the policy of favouring the majority Bumiputra (native Malays) and the privatisation policy he set in motion in 1983, which is regarded by many to have brought on much of the grievances over cronyism and corruption. These entrenched grievances have persisted beyond Tun Dr Mahathir's premiership, with his party suffering its worst-ever performance in the May 2013 general election, losing the popular vote as the minority Chinese and voters of all races in urban areas abandoned the long-ruling Barisan Nasional coalition, of which Tun Dr Mahathir's United Malays National Organisation dominates. For the most part, the Malaysian Islamic finance fraternity tries to stay clear of politicising Islamic finance, with most choosing to “get on with the job” while keeping as closely as possible on the side of shari'ah. So long as Islam is perceived to be the country's official religion (this has been contested with a growing opposition citing that the Federal Constitution has never stated that Islam should be the official religion) and the Islamic finance industry continues to be the important economic driver that it has been, Islamic finance will most probably continue to enjoy national .

Thirty Years On: And Still Much More to Be Done

Tun Dr Mahathir displays much confidence in Malaysia's Islamic finance position. “I think there is not much that needs to be pushed at the moment. It is taking its own momentum. I am quite happy even though, as I said earlier, that in some ways things are better than I expected, but in other ways it should be able to compete with conventional banks much better.”

He happily shares that he banks Islamically, maintaining fixed deposits with Islamic banks, but that he does not use any Islamic financing facilities because he does not need them.

Tan Sri Nor has said that he is “extremely happy” with the way Islamic finance has developed in the country, but his succinct comments about how the country should move forward indicates his belief that Malaysia, although technically advanced, lacks the substance of the Islamic ideal. “I think we have to emphasise the values of Islam rather than the mechanism. Basically we have to introduce the concept of justice, help the poor, improve banking. We've built banking to make sure that the system is Islamic. But I think we have to look beyond that, and make the system Islamic not only in the mechanical sense but also stress on the values of helping the poor.”

And what about our two experts, Mustapha Hamat and Wan Rahim Kamil? Comparing the early days of Bank Islam and the joy of seeing the first Islamic bank serve the needs of people on the ground, Wan Rahim says, “Today, banks are not doing retail banking anymore, not like what they were doing before. Banking is so sophisticated today. So sophisticated that it has made people confused. It has, more or less, caused some withdrawal from the system by the Muslims. The banks are becoming too forceful. There is no friendliness any more to people.” Wan Rahim feels that Islamic banks now are not fully

addressing their mandate for financial inclusion. Retail Islamic banking has a perception problem and has become disconnected, almost, from its local constituencies. The consequence that he sees is that Malaysian Muslims are beginning to feel that Tabung Haji, the Hajj Pilgrim's Fund, is once again the safest place to keep their money.

A quick look at Tabung Haji's depositor base shows that the number jumped almost 100 percent from 4.743 million in 2008 to 8.17 million in 2012.²⁵ This is beyond the expectations of its founder, Professor Ungku Aziz, who estimated in 1962 that the number of depositors would stabilise at 90,000 from 1982 onwards. In 1963, when Tabung Haji opened its doors, it attracted 1,281 depositors.² Tabung Haji's deposits in 2011 stood at RM31.7 billion, which would place it second in 2011 numbers behind the largest Islamic bank, Maybank Islamic, which held RM59.1 billion.

As for the capital market, Wan Rahim, the man who structured that first sukuk back in 1990, says, “Sukuk today, for me, is a multi-layered product structured under several forms of shari'ah contracts in order to circumvent riba.” He repeats his concerns: “People are so confused about all of these now. They say Islamic financing is too difficult. People are asking today, is it really halal? Is it really Islamic? That is a very dangerous question. I think that we have failed, to some extent, to develop capacities.”

On human capacity development, Wan Rahim feels that the much wider education system in the country lacks academic objectivity and rigour and hence does not sufficiently open students' minds and opportunities to the widest possible interpretations of Islamic banking and finance, resulting in students with narrow and often skewed versions of both theory and practice. He cites an example of one local university: “They teach that fiat money is haram and that only the dinar and the dirham are halal. They teach these skewed examples and avoid teaching the rest of the financial models to the student. Universities must teach everything. When one goes to university, he must learn everything, not just one particular aspect of what the lecturers think is right. Also there is not much

emphasis on practical applications, and this is where the problem starts when the graduate goes for job interviews.” The Ministry of Higher Education, he says, is trying to standardise the curriculum, but standardisization is some way away from being implemented. But even if this new standardised curriculum is rolled out, Wan Rahim fears that it may not be effective if left in the hands of the same faculty currently teaching what he calls their own “skewed versions.”

Malaysians are also questioning the halal-ness and haram-ness of Islamic banking because of the whole “copy and paste” issue—the criticism is that Islamic banking is merely replicating conventional interest-based banking and employing shari'ah gymnastics to get around riba (as is the case of sukuk, as with Wan Rahim's expressed opinion earlier). This has occurred primarily because Islamic banks have had to compete with conventional banks, and this competition, good or bad, has largely been on the as dictated by the more dominant conventional system. Wan Rahim its that there is replication when he says, “Most of the staff at Bank Islam when we started out were from the commercial banks. They were doing credit, corporate loans, hire purchases, etc. Replication has its advantages and disadvantages. One of the advantages being that it enables the shift from the non-Islamic to the Islamic. But on that basis, then we see the problems in replication.” He its that perhaps some replication was needed in the beginning to move towards compliance. This is a global problem, and not confined exclusively to Malaysia's Islamic finance industry.

Tun Dr Mahathir also believes that it has been necessary for Islamic banks to match the range that is offered by interest-based banks but points out that this is only the first step. He implies that more authentically Islamic products must now be created, saying “You have to provide products that are generally products of a conventional bank. We have matched it. The process must be slow, because you have to do things carefully. The journey of a thousand miles begins with the first step.”

Mustapha Hamat reckons that the Islamic banking and finance that we see today

in Malaysia, good, bad, or ugly, makes up about 20 to 30 percent of the entire picture that is the Islamic economy. But where a high level of that composition has integrated with the conventional financial system, this has come at a price. “We are very much integrated [with the conventional system]. But we sacrificed certain shari'ah compliance. But what choice do we have?”

What's been sacrificed?

“I'll give you one example—correspondent banking. You have the letter of credit coming from Malaysia, and this goes to London for settlement to pay off purchases or whatever. So you go and debit this . Sometimes you go over debit, meaning that you borrow from the bank to pay off the settlement. So the likes of Barclays will charge you interest, you go on an overdraft, no problem, they'll charge interest. But for Islamic banks, what do you do? Until today we still have not resolved this sufficiently. Thirty years already, still unresolved.” Islamic banks try to get around this issue by doing several things, including keeping a reasonable amount of cash in current s and correcting debit balances as soon as possible.

Crucially, Mustapha explains that when Bank Islam and the government were working together to establish Islamic banking operations, he had preferred and wanted to propose a different balance sheet model. According to Mustapha, the balance sheets of the Middle Eastern banks in the late 1970s and early 1980s— financial institutions such as Dubai Islamic Bank, Al Baraka banks, the Faisal banks, and Kuwait Finance House—were “like a trader's balance sheet,” meaning that they treated their investments and financing transactions differently from the balance sheet as maintained by a conventional deposit-taking and lending interest-based bank. “Initially,” Mustapha says, “I wanted to propose the same model [as the Middle Eastern Islamic banks], but Bank Negara Malaysia had different views on this so we followed Bank Negara Malaysia.” He points out that the central bank started allowing foreign full-fledged Islamic banks only from 2005, signalling the arrival of Middle Eastern Islamic banks, such as Saudi Arabia's Al Rajhi and Kuwait Finance House. With Malaysia's Islamic finance

industry growing in global prominence from these roots, its methods and substance of Islamic banking, while receiving general plaudits for its strong regulatory and framework, is not met with blanket approval.

Along with the minutiae of banking transactions and balance sheets, we turn back to what Mustapha said earlier—“But what choice do we have?”— in relation to sacrificing some shari'ah compliance. Here is his take on the decision by Malaysian authorities to introduce Islamic banking and finance gradually, and not completely supplanting the conventional system from the outset (including balance sheet models). “In this world, in this reality that is life, we are dealing with real people who have certain preconceived ideas of certain things because they have been brought up in the conventional space, with conventional banks. So if you change that 100 percent, there will be chaos. We're talking about changing human mentality. This is not a small job.”

Echoing Tan Sri Nor's comments about needing to move beyond mere mechanics, Mustapha says, “There are three objectives attached to the Islamic bank: business viability, social, and religious objectives. The normal ordinary man worries about the business viability of the bank, he doesn't worry about the social and religious objectives. To achieve the social and religious objectives would require a big shift in the minds of the bankers in the country.” Does he see any Islamic banker capable of leading the next generation forward on this path? He hesitates and thinks. “Maybe one or two people. Maybe one. Maybe.”

Malaysia already has achieved the business viability of Islamic banking and finance; now is the time to focus on the social and religious objectives. This is reflected in the language of the Financial Sector Blueprint and the Capital Market Masterplan II, calling for a move away from the “shari'ah-compliant approach” to a “shari'ah-based approach.” (By implication, the former is compliance to the technical aspects of shari'ah; the latter embodies more of the substance of shari'ah, such as justice and equity.) The master plan also talks about enhancement and innovation in product development and service and the shift from serving overwhelmingly retail domestic needs to tapping international

investment and corporate transactions. This is what Phase III is all about, and it is the flight plan on which Malaysia's Islamic finance sector is set.

Unlike Wan Rahim, Mustapha sees bright prospects because of the education system and Bank Negara Malaysia's continued commitment to widening and deepening the components making up the entire Islamic economy. He says: “What the Malaysian government is doing at the moment is very good, getting the Islamic religious teaching right from the primary school, secondary school, and the universities. I think most of the younger generation understand the issues at hand. They don't quarrel very much on the differences.” He calls this “market development.” His regular meetings with Bank Negara officials, he says, many of whom are his past or current students, affirm his faith that the central bank is on the right track towards a bigger and better share of the Islamic offering. But, as ever, he reminds us that the process must be a deliberate and gradual one.

This “market development” as Mustapha calls it, should bode well for the future of the development of the Islamic economy as he envisions it. Mustapha confesses, though, that the vision remains difficult to see in its entirety as it involves operationalising the demands and precepts of the Qur'an and Sunna of the Prophet (pbuh) beyond what has been achieved with Islamic banking and finance. “We started from zero, and we didn't know where we were arriving at. But deep in our hearts we wanted to have the Islamic economic system with finance a critical component. We may not be able to fully conceptualise where we are heading to at this stage, but we're trying to move forward, even with a fuzzy picture of that future. Right now we're trying to put together a framework based on the principles. But fitting in the details to move from stage to stage is very difficult. It's still not in full focus.”

The Last Word

With the country's Islamic financial system running in advanced mode, the focus has shifted to the larger Islamic economy; at the governance and regulatory framework level, this would include monetary and fiscal policies and instruments that are based on the shari'ah and that pull together all other aspects to work more harmoniously, including waqf (endowment), zakat (tithes), and even sadaqat (charity). Then there is the development of the inherently shari'ahcompliant business and economic sectors, such as the halal industry to be developed and synthesised with Islamic finance.

As Mustapha let on earlier, Bank Negara Malaysia and other government agencies are actively working on translating into action the principles underpinning the wider Islamic economy. Part of the work involves hammering out the kinks within the current Islamic finance system, ensuring that the base is strong enough to the next stage of development. This next stage is by no means the sole purview and interest of Malaysia. Other more mature Islamic finance jurisdictions, such as Dubai, have also declared their intention to push ahead in the same direction. This matter interests other leaders, such as Professor Khurshid Ahmad, Prince Mohamed Al Faisal Al Saud, and Professor Abbas Mirakhor.

Back in 1983, at the opening of Bank Islam, Tun Dr Mahathir called the Islamic bank “the first step in the larger concept of an Islamic economy.”²⁷ The language and intent remain the same 30 years on—there is the much bigger Islamic economy that remains the final destination. Malaysia may only be able to make out the contours of the Islamic economy at this stage, but the country moves towards it now with 30 years of experience and knowledge of Islamic banking and finance.

Notes

¹ Abdul Rahman, Putra Al-Haj Something to (Selangor:Malaysia: Eastern Universities Press, 1983), p. 144.

² Ibid., p. 146.

³ S. A. Meenai, The Islamic Development Bank: A Case Story of Islamic Cooperation (London: Kegan Paul, 1989).

⁴ Man, “Islamic Banking,” p. 70.

⁵ Bank Islam, Bank Islam Annual Report 1984. [Online]. Available from: http://www.bankislam.com.my/en/Annual%20Reports/Annual%20Report%201984.pdf.

M. H. Kamali, Islamic Law in Malaysia: Issues and Developments (Kuala Lumpur: Ilmiah Publishers, 2000).

⁷ Ibid.

⁸ Man, “Islamic Banking.”

Mahathir Mohamad, A Doctor in the House: The Memoirs of Tun Dr Mahathir Mohamad (Selangor:Malaysia: MPH Publishing, 2011), p. 347.

¹ Sudin Haron and Norafifah Ahmad, “The Islamic Banking System in Malaysia: Some Issues,” in Proceedings of the Fourth Harvard University on Islamic Finance: Islamic Finance: The Task Ahead, pp. 155–163 (Cambridge, MA: Center for Middle Eastern Studies, Harvard University, 2000).

¹¹ Bank Negara Malaysia, Central Banking in an Era of Change: Landmark Speeches: 1959-1988 (Kuala Lumpur: Bank Negara Malaysia, 1989), p. 295.

¹² Ibid., p. 298.

¹³ Haron and Ahmad 2000.

¹⁴ Ausaf Ahmad, “Towards an Islamic Financial Market: A Study of Islamic Banking and Finance in Malaysia,” Research Paper 45 (Jeddah: Islamic Research and Training Institute, Islamic Development Bank, 1997).

¹⁵ Al-Zaquan Amer Hamzah and Bernardo Vizcaino, “Malaysia hopes reforms to spur Islamic banks' growth,” Reuters. 21 Feb 2013. [Online]. Available from: http://www.reuters.com/article/2013/02/21/islamic-finance-malaysiaidUSL5E8KDNNN20130221.

¹ Ibid.

¹⁷ Zawya, “KFH-Research: USD 1.3 trillion assets of Islamic banks by end of 2012,” Zawya, 16 March 2013. [Online]. Available from: http://www.zawya.com/story/KFHResearch_USD_13_trillion_assets_of_Islamic_banks_by_e ZAWYA20130314140832/

¹⁸ BBC News, “Timeline: Libor-fixing scandal,” BBC News: Business, 6 February 2013. [Online]. Available from: http://www.bbc.co.uk/news/business18671255. Rachel Armstrong, “Ex-RBS Trader Says Brevan Howard Sought Libor Rate Change,” Reuters, 31 March 2012. [Online]. Available from: http://uk.reuters.com/article/2012/03/30/uk-brevanhoward-liboridUKBRE82T0J920120330.

¹ Wilson 2010.

² RAM Rating Services Berhad, “Sukuk Focus, 2012: Riding the Momentum,” 2013. [Online]. Available from http://www.ram.com.my/press_Release_View.aspx?ddlid=8ae146fc-cfd7-4860b372-1813d4f69c83&catid=8ae146fc-cfd7-4860-b3721813d4f69c83&returnURL=&id=4f84a9da-fa07-4c64-b857-07d4a725b64c.

²¹ Securities Commission Malaysia, Capital Market Masterplan 2 (Kuala Lumpur: Securities Commission Malaysia, 2011).

²² UN Habitat, “Dr Mahathir Wins 2012 Rafik Hariri UN-Habitat Memorial Award,” 2012. [Online]. Available from: http://www.unhabitat.org/content.asp? cid=11296&catid=5&typeid=6&AllContent=1.

²³ PricewaterhouseCoopers, “Malaysia, Asia's Islamic Finance Hub,” 2008, p. 12. [Online] Available from: http://www.pwc.com/en_my/my/assets/publications/islamic-finance-hub.pdf.

²⁴ I Financial, “Maybank Islamic Reports 50/50 Split of Muslim/Non-Muslim Customers,” 2012. [Online]. Available from: http://www.gulfbase.com/news/maybank-islamic-reports-50-50-split-of-muslimnon-muslim-customers/210132.

²⁵ Tabung Haji, “Statistik 5 Tahun,” 2013. [Online]. Available from: http://www.tabunghaji.gov.my/web/guest/bilanfan-simpanan-pendeposit.

² Murat Cizakca, Islamic Capitalism and Finance: Origins, Evolution and the Future (Cheltenham, UK: Edward Elgar, 2011), p. 223.

²⁷ Kamali, Islamic Law in Malaysia.

Chapter 6

The Islamic Economist

Abbas Mirakhor

And those who are of sound instruction say: We believe therein; the whole is from our Lord; but only men of understanding really heed.

—Al Qur'an, Sura Al Imran, Verse 7

Regarded as a leading Muslim economist and one of the intellectual godfathers of Islamic finance, Professor Abbas Mirakhor received his BA, MA, and PhD in economics from Kansas State University. Apart from a spell at AzZahara University in his native Iran from 1977 to 1980, Professor Abbas has taught in universities in the United States, first at the University of Alabama, Alabama A&M, and then at the Florida Institute of Technology. In 1984 he ed the International Monetary Fund (IMF) as an economist in the research department. He rose to become senior economist in 1987, executive director in 1990, and eventually dean of the IMF's executive board in 1997. After 24 years of service, he retired from the IMF in 2008. In 2010 he ed the Kuala Lumpur–based International Centre for Education in Islamic Finance (INCEIF), the global university of Islamic finance, where he is distinguished scholar and first holder of INCEIF's chair in Islamic finance.

The central objective of Islam for humanity is for its to get to know one another enough to not want to harm each other.

—Professor Abbas Mirakhor

Professor Abbas Mirakhor received his PhD in economics from Kansas State University in the year 1969 when Neil Armstrong became the first human to step onto the Moon. Whether he knew it then or not, several years later he would come into with the man who was perhaps the most instrumental in making that landing happen.

In the year 1975, when the first Islamic commercial bank was established in Dubai, Professor Abbas was teaching economics at the University of Alabama in Huntsville (UAH). Dubbed “the Rocket City,” Huntsville is home to the U.S. Space and Rocket Center and the National Aeronautics and Space istration's (NASA) George C. Marshall Space Flight Center, which was opened in 1960. The center was led for the first decade of its life by the “Father of Rocket Science,” Dr Wernher von Braun, who had been one of Hitler's top rocket scientists. Dr von Braun was taken to the United States after World War II, where he led the development of the Saturn V booster rocket that helped land Neil Armstrong and Buzz Aldrin on the Moon in 1969.

The UAH was established initially to provide higher education opportunities for scientists and technical staff of NASA as well as the U.S. Army's Redstone Arsenal, also located in Huntsville. Accordingly the first programme offered at the UAH was a PhD in physics. By 1968 when Professor Abbas ed the economics faculty, courses in social sciences were being added to supplement the hard sciences. UAH officials were interested in recruiting faculty who could analytically communicate with scientists interested in economics, public istration, and management. Professor Abbas was recruited on the strength of his background in mathematics and operations research. As part of the interview process, he met Dr von Braun, who offered financial for his

research as part of the package. Like the university's hard science departments, its social science departments were closely involved with the space center. The Psychology Department, for example, conducted research on the effects of sensory deprivation, which occurs during space flight. Economics and management programs were involved with both NASA and the Redstone Arsenal, where static testing of space rockets was conducted. Professor Abbas was also involved in a study of the educational applications of space technology in 1974/5, a programme that was initiated by NASA under the leadership of Dr von Braun, and which included Professor Abbas as part of the university's advisory team.

Although at the time Professor Abbas may have been closer to the Moon and farther from the centre of gravity of Islamic banking and finance in the Arab world, the economic and financial concerns of Islam had its pull on him nonetheless. It was during this same period that Professor Abbas started his own research in the field of Islamic economics and finance. His concerns were related to analytically rigorous research to understand the vision of an economy discernible from the Qur'an and Sunna. He widened and deepened his research when, in 1977, he took advantage of a sabbatical year and went to Iran to Farah Pahlavi University as chairman of the Department of Economics and the vice chancellor for Academic Affairs when the university was renamed AzZahara University. During the 1977/80 period, he had opportunity to do further work on Islamic economics, learning the views of ‘Allamah Murtadha Muttahari, Ayatullah Musawi Ardabili, and Professor Sayyid Kazem Sadr an ‘Ulama’ in Iran. After a decade of research, he began writing. From the mid1980s, his intellectual influence began to take off.

The Second Stage of Islamic Economics

It was Albert Einstein who said, “If you can't explain it simply, you don't understand it well enough.” If you ask Abbas Mirakhor today what Islamic finance is, his answer will most probably be, very simply, that Islamic finance is all about risk sharing. A simple enough statement, and one that represents the launch pad as well as the journey and the destination.

In the 1970s, Professor Khurshid Ahmad was pushing for Islamic economics to be adopted widely as an academic subject and social science in its own right. During the 1980s, Muslim economists like Professor Abbas were addressing the second stage of Islamic economics, one that delved more deeply into the theoretical aspects of the system, as compared to the first stage, which was concerned primarily with historical-doctrinal issues and with what the system was and how it could be implemented. The second stage of Islamic economics addressed issues such as the theoretical framework underlying Islamic banking and finance, the stability of the Islamic system, and the effect of the interest-free system on macroeconomic concerns like saving and investment.¹

This second stage complemented the writings of Islamic scholars, explaining in modern economic and financial analytic language what Islam expects of a financial system in a modern economy. Western-trained economists like Professor Abbas are fluent in economics not simply as a social science but also as a discipline steeped in high mathematics and econometrics. In the 1980s, Professor Abbas combined this scientific training and knowledge with what the Qur'an and Sunnah of the Prophet Mohamed (pbuh) say about economy and finance.

This approach followed on from the early days of modern scholarship on Islamic economics, when, starting in the second half of the twentieth century the rhetoric

arguing for an Islamic financial and economic system was essentially propelled by the injunction against interest. As Haj Saeed Lootah and Tun Dr Mahathir Mohamad said, banking and financial services could not offer interest for them to be halal, or permissible, for Muslim use. This was, arguably, the most pragmatic starting point considering the entrenched institution of interest-based finance.

Within the modern Islamic banking and finance community, the Qur'anic ban on interest largely centres around one oft-cited verse (although it is not the only verse speaking against riba, a term that most often is translated as “interest”), verse 275 of Sura Al Baqara: “Those who gorge themselves on riba behave but as he might behave whom Satan has confounded with his touch; for they say, ‘Exchange is but a kind of riba’—the while Allah has made exchange lawful and riba unlawful.”

“wa harrama ar-riba”—Allah has made riba unlawful. This line has been taken and systematically applied to the contemporary interest-based banking and financial services industry, hence leading to the elimination of riba from Islamic banking and financial services.

Professor Abbas considers this most essential of Qur'anic verses to modern Islamic banking, explaining: “Up to the early 1980s most of the literature concentrated on the latter part of the verse—wa harrama ar-riba—but in contemporary finance, it is the first part of this rule prescribed by Allah, that is about the need for exchange to involve complete transfer of property rights titles between the two sides of a transaction that is crucial. However, the focus was placed on the second rule only, ‘no riba.’ Hence at that time, if you asked what Islamic finance was about, the response would have been ‘no riba.’”

He believes that “no riba” as the foundational explication for Islamic finance needs a realignment. “Islamic finance is about bai', or exchange, but the verse says contracts of exchange must not include elements of riba. So in other words,

‘no riba’ is a second, or sufficient, condition on the first part, or the necessary condition of the rule requiring complete transfer of property rights in exchange transactions.”

The first principle, the first impetus of Islamic finance, then, must be to entrench bai' and not immediately reach for the “no riba” card. But this has not been the case. “What has happened is that most people have taken ‘riba’ in isolation. The riba issue is what has come to define the system rather than the bai' defining the system.”

So what does the system defined by bai' look like? This, he says, was why he spent almost a decade in the 1970s and 1980s researching and understanding all the books of fiqh (Islamic jurisprudence) and tafseer (exegesis of the Qur'an) as well as all the relevant Islamic texts and writings of scholars such as Professor Kazem Sadr, Dr Nejatullah Siddiqi, Professor Anas Az Zarqa, and Professor Rafiq Al Masri. It was only after he was convinced of his position that he could start publicly explicating what he believes to be Islamic finance: risk sharing.

His first research task vis-à-vis Islamic finance at the International Monetary Fund (IMF) in the mid-1980s sought to answer the Fund's questions about the workings of an Islamic financial system. By this time, Iran, Pakistan, and Sudan had all declared their intention to adopt Islamic banking and finance systemwide, and the IMF had to be able to advise these member countries on how best to gain stability and growth for their economies. The IMF's concerns primarily stemmed from its understanding of the Islamic system based on an earlier piece of research that wrote about Islamic finance as being based on “zero interest” as opposed to “no interest.” “Zero interest” for the economists at the IMF meant that there will be zero savings, infinite demand for money, no equilibrium in the system, and massive capital flight out of any country adopting such a system. The no-interest concept emphasizes that there is reward for capital willing to share risk; as the Islamic fiqh maxim says: “No risk, no reward.”

The IMF was also well aware of the development of Islamic banking in the Arab Islamic world. By 1981, Saudi Arabia was home to the shari'ah-compliant Islamic Development Bank, established in 1975. In its first year of operations, the bank had sought advice from staff of the IMF, among other multilateral organisations, such as the World Bank and the Asian Development Bank.

In 1985 at the IMF, Dr Mohsin Khan, in consultation with Professor Abbas, published a paper showing that a closed economy—one without international trade or financial flows in which contracts were based on equity rather than debt —was not only viable but stable, adjusting to shocks and quickly returning to equilibrium.

Building on Dr Mohsin's work, Professor Abbas worked in collaboration with him and other IMF colleagues and went on to show, through a series of papers between 1985 and 1990, that an open economy—one with international trade and capital flows without debt where financing was based on risk sharing—had a stable equilibrium with steady-state growth and full employment. This again showed, as Dr Mohsin Khan had in the case of a closed economy, that such an economy would return to equilibrium when shocked even in the presence of trade and capital flows. This research provided the theoretical response to the concerns of the IMF.

As is typical for the IMF, the Fund subjected all this research to extensive review. Professor Abbas believes this helped solidify the research. “Once the Fund allowed the publication and dissemination of this research, not only the institution itself but researchers and practitioners elsewhere started taking Islamic finance seriously; all that created a quantum leap as far as acceptability of the system was concerned.”

According to Dr Zamir Iqbal, an economist with the World Bank who is a longtime academic collaborator of Professor Abbas, it was Professor Abbas who was responsible for providing “the intellectual thinking and rich theoretical

foundation” for the IMF's research on Islamic finance.

Together with his colleagues at the IMF, such as Dr Mohsin Khan, Dr Zubeir Iqbal, Dr Iqbal Zaidi, Dr Nadeem ul Haque, Dr Nuri Erbas, and Dr Zamir Iqbal (at the World Bank), Professor Abbas applied conventional economic tools to analyse the viability of the Islamic system. They showed Western-trained economists what that system was essentially about and, more important, that it was a viable system. At the same time, they also showed other Muslim economists and the Islamic world that standard economic techniques could be used to analyse the issues of Islamic economics, banking, and finance. Hence a very vital bridge had been built.

Risk Transfer and the Global Financial Crisis

In 2002, after the Asian Financial Crisis of the late 1990s and before the start of the global crisis in 2007/8, Professor Abbas pointed out the fragility of a debtbased system and that more financial crises were possibly to come. Speaking at a conference organised by the UK-based Institute of Islamic Banking and Insurance, he warned that “there are no guarantees that the international financial system has witnessed its last crises with their huge domestic costs that, at times, have threatened the very foundation and fabric of societies.”² As it turned out, rather unfortunately in this case, Professor Abbas was spot on. He pointed out how “for each dollar's worth of production there are thousands of dollars of debt claims,” essentially a debt bubble. The Islamic financial system, based as it is on close links to the real economy (i.e., where financial and productive flows are more closely linked) and risk sharing, could prove a viable global financial system.

The global financial system, which is largely interest based, does not share risk as the Islamic system requires but rather transfers it. In a basic conventional loan transaction, for example, risk is transferred or shifted from the financier (e.g., a bank) to the borrower (e.g., you). The bank retains not only the property rights claim to the principal and interest (i.e., the entire amount of the loan you take from the bank) but also that of any collateral that has guaranteed the loan arrangement. This is, by and large, a most basic and typical interest-based loan transaction. In addition, this transaction gives the creditor property rights on the assets of the debtor in the amount of interest on the loan. If you had taken out a loan from an interest-based bank to pay for the costs of running your business, for example, whether your company breaks even or turns a profit or not is of no consequence to the bank. Whether you win or lose, the bank will get all of its money back, plus the collateral and interest if you default on the loan. In other words, you have shouldered all the risk while the bank makes sure it earns its dues (and more). Moreover, as the 2007/8 crisis demonstrated, there is no guarantee that risk transfer does not convert into risk shifting. The latter occurs when a third party to a transaction ends up bearing the financial costs of a

transaction's failure without having been aware that risks are being taken on its behalf. This scenario played out following the 2007/8 global financial crisis, when taxpayers ultimately paid the costs of risk taken by financial institutions; the risk of these institutions' transactions were shifted to the taxpayers.

By prohibiting riba, this practice of risk transfer is stopped. After proving the theoretical viability of a risk-sharing system, Professor Abbas goes back to the source and readdresses risk sharing through the religion itself: “Why risk sharing, how does it serve the objectives of Islam? Well, what are the objectives of Islam? There is only one single objective of Islam for humanity: get together, unite, because there's no other chance except if we unite.”

The Qur'an refers to the responsibilities of the community, or ummah, of the Prophet Mohamed (pbuh) in numerous ways. One oft-cited verse reads: “O humanity, we have created you from one united soul” (Al Qur'an, Sura An Nisa', verse 1) and another: “Neither your creation was nor your resurrection will be other than as one soul” (Al Qur'an, Sura Luqman, verse 28). These verses clearly indicate the need for mankind to strive to remove differences that separate them because ultimately all share one origin. This unity Professor Abbas speaks about also comes through clearly in verse 110 of Sura Al Imran that shows how ening right and forbidding wrong for the good of mankind is a collective obligation. This “en[ing] the doing of what is right and forbid[ding] the doing of what is wrong” is also reflected in other verses, such as the earlier verse 104 within Sura Al Imran, verse 71 of Sura At Tawba, and verse 157 of Sura Al A'raf. Ening what is right means to encourage compliance with the rules prescribed by the Creator and prescribed in the Qur'an, while forbidding means discouraging rule violation. For example, participating in bai' and forbidding what is wrong, such as riba, is presented together in a single continuum— meaning that where discouraging rule violation in oneself as well as in others is in itself a virtue and an act of love. The good of mankind will be ensured only if the first principle—“ening the doing of what is right” (meaning to be in compliance with rules of the Law Giver)—is also acted upon.

“So basically, why would I want to share risk? If you give your money and don't care where it goes, you don't have any opportunity to know who's using your money and why they are using it. But supposing you didn't have that alternative, you didn't have risk transfer. What would you do? You would have to find others who would be using your money for productive purposes. But before that, you have to trust the person which means you have to get to know them or the company in which you would invest your money.”

Directing this back to Islam's moral com, risk sharing strengthens social solidarity by enhancing cooperation among everyone involved in any economic and financial transaction. If you did not have the risk transfer approach, then: “You have to care. You have to find out who wants the money, why, where and how they want to use the money. You get to know the person. That's the objective. The central objective of Islam for humanity is for its to get to know one another enough to not want to harm each other.”

Advancing Risk Sharing for the Benefit of All Humanity

For Professor Abbas, the impetus of Islamic finance goes back to the overarching and central purpose of Islam itself: to be a benefit for all humanity. Economic tools can demonstrate the viability of such a system and present a way to explain to the bigger non-Muslim and conventional economic and financial world that the Islamic system is not a mere normative moral-based one but that its injunctions and maxims are translateable to the modern world. In essence, the Islamic offering is not only relevant to our times; it has the potential to be a genuine alternative global financial system that is inherently more stable than the interest-based system the world has become accustomed to.

Professor Abbas proved the theoretical viability of the risk-sharing system in the second half of the 1980s. By the 1990s, the rapid growth of the Islamic financial system demonstrated its practical viability as well. Most significantly, the crises in the international financial system in the late 1990s and after 2007 brought the Islamic system much international attention. Questions were asked of its potential as a genuine alternative global financial system.

The viability of the risk-sharing system may have been theoretically proven, but adopting and using the system more widely still faces many challenges, chief of which is that the risk-sharing system is a more costly and more risky alternative for banks and financial institutions than the risk transfer model that guarantees them their returns.

A risk-sharing system was used in 1963 when the late Dr Ahmad Al Najjar set up what is widely considered to be the first prototype for an Islamic bank: the Mit Ghamr Savings Bank in Egypt. The bank remained in operation until 1967,

when it was shut down by the government for various political reasons. Operating as a bank that engaged in trade and industry directly in partnership with depositors required bank employees who could understand the individual businesses, not just banking and finance.³ This is the case because if the bank puts up a sum of money into a business and earns returns from the business's profits (the share of profits would be determined in advance), bank employees would need to understand the workings of the company and its business in order for the bank to assess its viability to begin with, as the bank's share of profits will move up and down according to the company's earnings and expenses. If the business dips or fails, then the bank loses money too. This is risk sharing—both parties share in the profits and the losses. In today's world where banks receive bailouts from governments after going on a casino banking spree, risk sharing of the Islamic kind would probably be unattractive.

Another way of practising risk sharing is through the stock market, explains Professor Abbas. The stock market is where businesses and industry can raise capital on a risk-sharing basis and reduce dependence on bank loans and financing. As they stand now, stock markets are not the most accessible or efficient places for smaller companies and individuals.

Hence, there are many cost and accessibility barriers to a more widespread adoption of the risk-sharing system. Economists like Professor Abbas continue to plug away, however, for example, calling for the need to create a level playing field for the tax treatments of equity and debt. At the moment in most jurisdictions of the world, it is cheaper to take on debt than it is to hold equity.

There are other challenges to overcome. For one thing, a fiqh of risk sharing is yet to develop. All Islamic contracts available today were developed centuries ago when all transactions were bilateral, real sector contracts. Financing of economic activities was done in the real sector; there was no separate financial sector. People who engaged in financing knew or could obtain sufficient information about entrepreneurs undertaking an activity or could find third-party guarantors.

While the world moved on to develop financial sectors, financing techniques, and financial instruments employed in financing of multilateral, multicounterparty, arm's-length financing of complex real sector projects, fiqh was still dealing with bilateral real sector contracts. In the absence of appropriate fiqh that could guide shari'ah-compliant financing of large, complex, and multilateral real sector projects, Muslim countries adopted what was available in the conventional system. This process continued even after Islamic finance became a reality. Conventional instruments had to be reengineered, retrofitted, and redesigned to accommodate the “no riba” requirement. As a result of fiqh of risk sharing, “no riba” Islamic finance required complex, opaque, and costly structuring and knitting together deals composed of a number of existing bilateral transactions that were essentially risk transfer contracts.

Another binding constraint on the development of Islamic finance is a lack of efficient instruments of hedging and liquidity that are normally available to conventional finance in the form of government treasury bonds. In Muslim countries, fiscal and monetary policies use interest rate–based debt instruments. Risk-sharing instruments that can help finance government operations and provide tools for monetary policy are yet to be developed. As a result, Islamic financial institutions do not have access to these types of instruments for hedging and liquidity operations.

Professor Abbas continues to argue that the risk-sharing system “has desirable characteristics” that would render it “superior” to the conventional debt-based system, one that is primarily based on risk transfer as opposed to risk sharing. However, the Islamic system is neither completely free of debt nor completely based on risk-sharing modes in practice. In practice within Islamic banks and financial institutions, there is a range of “no riba” but risk transfer contracts. A lot of such contracts have been accused of replicating their conventional counterparts. The nascent Islamic finance industry often proffers the stopgap rationale: An entire financial system cannot be wholly supplanted all at once, most claim, and moving gradually towards a more complete Islamic system is acceptable. Shari'ah, or Islamic law, recognises the permissibility of non–interest

rate debt and shari'ah scholars allow limited ordinary debt, but they acknowledge that excessive debt has detrimental effects on society.

In 2012 in his book Risk Sharing in Finance: The Islamic Finance Alternative, Professor Abbas and his coauthors address the gap between the risk-sharing system and Islamic banks: “The reluctance of Islamic banks to embrace and promote risk-sharing instruments such as musharaka (equity partnership) and mudaraba (principal-agent partnership) is problematic for achieving the true potential and promise of the system.”⁴

This “true potential and promise” of the system is, in Professor Abbas's words “the saving grace for humanity”, for risk sharing brings people together, and makes us work together for each other's and our own sakes at the same time. “Risk sharing is not just the cornerstone or the organising principle of Islamic finance, it is the organising principle of life.

“If I am willing to say to myself that the risk that you are facing is also the risk that I am facing, then why don't we share the risks? So that means when I am down you help, when you are down I help.”

Professor Abbas goes on to reveal what he believes to be the central guiding principle for human relations and humanity.

“In Islam, the ‘Other’ Doesn't Exist”

On that : We ordained for the Children of Israel that if any one slew a person—unless it be for murder or for spreading mischief in the land—it would be as if he slew the whole people: and if any one saved a life, it would be as if he saved the life of the whole people.

—Al Qur'an, Sura Al Ma'idah, Verse 32

Professor Abbas explains: “There is a principle in Islamic philosophy, an axiom that says: from one Creator, one creation. The problem arises the minute one thinks oneself different from others. Economic, political, social discrimination based on race, creed, colour, and other criteria that treat some people differently are at least an important dimension of one's thought that runs counter to the axiom of Unity. In effect, one is saying that my creator is different. That's “shirk” (often translated as “idolatry” or “polytheism,” to associate others with Allah).

It is shirk because if you believe “from one Creator, one creation” (which, in Islam, reflects the doctrine of Oneness, or monotheism, referred to as Tawhid), then you and I, of that one creation, are necessarily one. In other words, you are not an-Other, you are me, and vice versa. Breaking down that unity of one creation goes against the Laws of the Creator. This is why, as it reads in the Qur'an, if anyone kills an innocent person, then it is as if the whole humanity is murdered.

This same principle explains risk sharing: If you and I are one, then essentially if you wanted to transfer risk, you would be pushing it back to yourself. But if you

did not believe in the axiom and you identify “others,” then you could transfer risk to another. But if you and I are one and I have my risks and you have your risks, then those risks too are part of our unity, and hence we share them and are both better off. The economists say that this is welfare enhancing.

One of the concerns of Islamic economics is the set of rules governing property rights. These assert that the Creator has ultimate property rights on all things, that He has created resources for all mankind and no one can be denied access to these resources. Ownership of resources comes about through work or voluntary transfer, and a person can transfer a property rights claim to another via exchange, inheritance, or the redemption of the rights of the less able.⁵

If you participate in an interest-based risk transfer system, the creditor (e.g., the bank) has property rights claim against the debtor (e.g., you) regardless of the outcome of the objective for which you two entered into the contract, and the bank can then obtain this property rights claim without commensurate work.

So riba is considered an injustice—the Qur'anic injunctions against riba are vehement and absolute because of the implications of riba—riba brings on risk transfer, and potentially risk shifting, which violates the unity of creation, and that tears humanity apart.

IMF and Islamic Finance

Between 1985 and 1990 when Professor Abbas was proving the theoretical viability of the Islamic system, the Organisation of Islamic Conference Fiqh Academy (one of the three highest bodies of shari'ah scholarship for the Islamic finance industry) had legitimated sukuk (often referred to as an Islamic bond, although it behaves differently from a conventional bond), and the United States welcomed its first shari'ah-compliant fund, Amana, in 1986, and its first shari'ahcompliant Islamic financial institution, American Finance House LARIBA, in 1987. Unfortunately, the late 1980s also saw the failure of the Islamic money management companies in Egypt. While there was generally growth within the Islamic banking industry in the 1980s, it was not until the 1990s that the industry really took off. And it was at the very start of that decade that Professor Abbas became executive director of the IMF, representing Afghanistan, Algeria, Ghana, Iran, Morocco, Pakistan, and Tunisia.

IMF executive directors represent the Fund's member countries, and the managing director is the chair of the board. Professor Abbas elaborates on his role as executive director and dean of the board. “Basically as an ED [executive director] you facilitate the relationships between countries you represent and the staff, management, and the board of the IMF. During those periods I did not do much research on Islamic finance. That gap was a publication gap, not an actual activity gap.”

Professor Abbas is an illustrious economist in the world of Islamic finance and is renowned for his intellectual prowess. His speedy climb up the IMF ladder reflects the institution's validation of his abilities. Fellow economist and collaborator Professor Hossein Askari, who was with the IMF before Professor Abbas arrived, considers him “one of the intellectual godfathers” of Islamic finance, while Mushtak Parker, the Islamic finance industry's leading journalist, believes Professor Abbas to be “the outstanding Muslim economist of his generation.”⁷

Adding to the acclaim, Dr Zamir Iqbal says, “I have more than 15 years of association with Professor Mirakhor and have worked on the research with him probably more than anyone else. Having worked with several others in this field, I can testify to the rich quality of the intellectual work Professor Mirakhor has offered to the industry. He is very unique in the sense that his knowledge of conventional economics is excellent, and his command of Arabic and shari'ah gives him a unique perspective of the subject matter which I have not seen in any other scholar in this field. In my personal opinion, his work is currently underappreciated, and deserves more recognition.”

With such towering intellect and influence, one wonders if Professor Abbas pushed the agenda of Islamic finance while executive director and dean of the executive board. The answer is no. He explains, “The dean of the board must be conscious of the interest of the entire hip of the IMF; the effectiveness of the office depends on the integrity of the person entrusted with the responsibility. The dean is not only the representative of countries but also someone who is considered objective, credible, and trustworthy to be able to perform the tasks of the office. And that represents a whole set of attributes. Actively pushing a particular set of interests would adversely affect the credibility of the office.”

He continues, “Nevertheless, in my capacity as an executive director representing a constituency with majority-Muslim country , I actively ed the Fund's involvement with Islamic finance. For example, during this period the Fund developed quite active technical assistance programs to help countries that wished to adopt Islamic banking and institution building for adoption of Islamic finance. Fund programs were also cognizant of the special needs of countries that had adopted Islamic finance; Sudan's programs with the Fund were of this nature. Most would probably not know that the initial impetus for creation and establishment of the Islamic Financial Services Board [IFSB] began at the IMF under the initiative of the governors of the central banks of Iran and Malaysia. A number of bright individuals, such as Dr Sundarajan, Dr Shabsigh, and others, were encouraged to work closely not only with countries

but also with international Islamic finance bodies such as the IFSB.”

Professor Hossein Askari, a fellow economist who worked closely with Professor Abbas on four books on Islamic economics and finance, was on the executive board of the IMF before Professor Abbas ed the Fund as an economist in 1984. Professor Hossein served on the board for two and a half years and was special advisor to the Minister of Finance of Saudi Arabia. He assisted in the negotiations of the $10 billion loan the kingdom extended to the IMF in 1981. While recognising the major contributions Professor Abbas made to Islamic finance while he was serving at the IMF, the institution, in his opinion, did not really care about Islamic finance.

Professor Hossein said: “My experience is that the IMF in those days when I was there, didn't really care about Islamic finance. I think that what mattered to them somewhat was to do things that made the government of Saudi Arabia happy. Saudi Arabia was the second largest creditor to the IMF, and it made a very large loan in 1981. The IMF is a political organisation—I think the IMF was interested in the major economies and that the interest in Saudi Arabia arose because of the importance of oil. I mean, you know, one has to be realistic. Saudi Arabia affects the world oil market and through that affects the world economy. But there's very little interest in Islamic finance per se. It's not the mover and the shaker of what happens in the world.”

If the institution itself was not wholly interested in Islamic finance, as Professor Hossein Askari said, it was down to individual drive that kept the flames of Islamic finance shining brightly within the IMF. One particular individual who worked tirelessly within the Islamic finance space, as Professor Abbas mentioned earlier, was the Dr V Sundarajan, who was with the Fund from 1974 to 2004. During the last few years of his time there, Dr Sundarajan, with encouragement from Professor Abbas, worked on establishing the IFSB with Professor Rifaat Ahmed Abdel Karim. Throughout his service with the IMF, he published prolifically, writing on both the conventional and Islamic systems.

As for Professor Abbas, he left the IMF in 2008 but confesses to having thoughts about leaving several years prior to his actual eventual retirement. He would not elaborate on the reasons for deciding to leave the IMF but, looking back at his time as Executive Director, he says rather wistfully, “During that period countries of our constituency fared well. And not because of me but Allah (swt). I was present in most annual consultations of countries with the Fund and in program negotiations. By being present in these negotiations, an executive director can be of enormous help in facilitating communications between the country authorities and the staff and management of the IMF. Having served as a staff member and being familiar with program negotiations is also helpful in ensuring that program conditions are not overly burdensome for countries.”

Forty Years On: The Wood for the Trees

Looking at the state of the Islamic finance industry, Professor Abbas acknowledges the big gap between the ideal and what is practised on the ground. “This is a problem—in a world of imperfect situations and given all the constraints, some of which were mentioned earlier, what we have now in Islamic finance is better than not having it. There are still pockets of the industry that are working according to expectations.”

What are these pockets? “There are institutions that do operate with the principles that, if expanded, might well become the ideal Islamic finance. For example, there are investment companies that are financially oriented towards shari'ah compliance that are doing things right. For instance, I have looked at contracts that are really mudaraba and that are really musharaka [two risksharing contracts]. I have also seen murabaha contracts [cost plus markup] that are basically not organised to merely get around interest rates.”

He continues, “In Iran, for example, there is the Agriculture Development Bank of Iran that runs on pure Islamic contracts, every contract they make with farmers is Islamic. They have insurance for farms, crop insurance, all 100 percent Islamic.” This bank works in partnership with farmers to convert their physical possessions into assets that can generate additional capital for them, in what is called muzarah partnerships in grain production and musaqat partnerships in orchardry.

“So in every country in which Islamic finance exists, there are these pockets that make one hopeful for the future of Islamic finance. To be internationally viable, however, the existing constraints have to be eased.”

Professor Abbas sees it as a matter of choice. Addressing the will of Muslims themselves, he turns to rule compliance: “The Qur'an provides the institutional infrastructure, the rules of the game, the rules governing economic behaviour with which a resilient, sustainable, and growing economy can be designed. The question is whether Muslims will comply with these rules that are prescribed by Allah. In Sura 7, Al A'raf, Verse 96, the Qur'an asserts that if humans were to comply with the rules prescribed by the Creator, prosperity would be guaranteed for them. (‘Yet if the people of those communities had but attained to faith and been conscious of Us, We would indeed have opened up for them blessings out of heaven and earth.’)

“At every decision point, there are rules that point to the most beneficial way forward. Will one comply with the rules and the objectives that He thinks should be followed, or the objectives that some other system, such as one's own whims, is defining?”

The conventional system too is undergoing its own soul-searching, especially following the most recent global financial crisis that has pushed into the conventional economic and financial zeitgest the need for a different way, what with bank and system-wide failures hurting millions of ordinary citizens. Professor Abbas refers to contemporary economic literature that examines the faults of the global financial architecture, which has experienced repeated failures, “You know this famous book by Reinhart and Rogoff⁸ says basically the same thing about risk shifting and risk transfer leading to a range of financial crises. With risk sharing you can never shift the risk back to somebody else. Similarly Kotlikoff has offered his take on the need to change the financial architecture.” The literature in the 2000s that exploded predominantly onto the Western scene following the Asian financial crisis in the late 1990s and the global financial crisis from 2008 underline the thinking of earlier works that found the debt-based financial system inherently prone to periodic instability. These include the works of Hyman Minsky and Joseph Stiglitz.

Professor Abbas himself continues to contribute to this global conversation by

presenting the Islamic perspective. In Risk Sharing in Finance: The Islamic Finance Alternative (2012), Professor Abbas and his academic collaborators Hossein Askari, Zamir Iqbal, and Noureddine Krichene systematically break down the Islamic system based on risk sharing and present it as a viable alternative to the current system. The work received critical review from Kotlikoff himself as well as from Nobel laureates Robert C. Merton and George Akerlof, with Merton stating that the work presents “a thought-provoking approach to address fundamental financial reform.”

Professor Abbas believes that the global environment is ripe for change. “My feeling is that the other system is also learning it cannot operate the financial system and expect stability so long as there is risk transfer. You have to have a risk-sharing system. However, it appears that Islamic finance is waiting for the conventional system to make the transition because those who believe that Islamic finance is only about ‘no riba’ bounce against the limits set by the other system.”

These limits based on the interest-based system are hot potatoes for the global Islamic finance fraternity, but most believe they are needed “for the time being” as the Islamic system itself comes into its own. Again, the general feeling is that the Islamic system cannot sustain itself on its own desert island and sometimes has to get into bed with the conventional system, at least until the industry can command the due weight of its attraction. But this argument does not always hold water, as there may well be viable alternatives.

Professor Abbas gives the example of the use of benchmarks. LIBOR, the London Interbank Offered Rate, is widespread in the Islamic finance industry as a benchmark for pricing many financial products. Its use is contentious, from outright consternation to acceptance based on pragmatism. Professor Abbas contends that a viable alternative can be developed but that the will is lacking mainly because instruments developed by Islamic financial institutions have to be acceptable to the international financial community, which operates with its own accepted benchmarks.

Building the Roads to a Better Economy

When the Kuala Lumpur–based Global University of Islamic Finance (INCEIF) was looking for someone to fill the position of First Holder of the Chair of Islamic finance, Professor Abbas's name was thrown into the hat. INCEIF, says its chief executive Daud Vicary Abdullah, was looking for someone with gravitas to and push the standards of the young university's research projects to ensure impact and usefulness for the global Islamic finance industry. “The thinking went that INCEIF needed to attract a star name, somebody who was recognisable, who was international, who had credibility, and who would, in the role, not only mentor to international standards but actually put a stake in the ground and say, “Hey! This organisation does have international aspirations.”

Professor Abbas was appointed for an initial term of two years, and his contract was renewed in 2012—“a no-brainer,” says Daud.

Professor Abbas explains the move from his home in Colorado, in the United States, to Malaysia. “One of the reasons why I'm here is because the country has established a unique paradigm for development and progress of Islamic finance. The most important element of this paradigm is the top-down commitment of the authorities toward this objective. The paradigm has now a credible track record that allows other countries to leverage on. It is the commitment of the governor of Bank Negara Malaysia, the central bank, and the government of Malaysia that generate the hope that as this paradigm progresses toward full fruition, the constraints mentioned earlier could be removed first in Malaysia. Other countries can then reduce the learning cost of establishing a full-fledged risksharing system leveraging on Malaysia's experience. As part of the commitment of the central bank to the strengthening of Islamic finance, the INCEIF has been established as the only institution of higher education fully dedicated to Islamic finance. Being at INCEIF allows the hope that the young people now studying at INCEIF from many countries in the world can become agents of change. I am grateful to Allah and Malaysia for affording me the opportunity to be part of this

process.”

The role of regulators like central banks and the and actions of government have been crucial to the growth and development of Islamic banking and finance, especially in Malaysia's case.

In order for Islamic banking and finance to grow stably and develop into the full potential of a risk-sharing system, there are many roadblocks to remove, some of which have been enumerated here, and new roads to construct. As alluded to earlier, these changes need to be made:

Equity and debt-based instruments need to be placed, at least, on a level playing field. Stock markets have to be improved to extend financial inclusion based on risk sharing. Ways have to be found to create compatibility between shari'ah legal structures and laws governing transactions and contracts in major international financial markets. Muslim governments must find ways of financing that avoid interest rates. Medium- to long-term risk-sharing instruments of financing government operations will be of enormous help to the Islamic finance industry to facilitate hedging and liquidity operations. It is hoped that leading fuqaha' (jurists) and fiqh institutions like the Kuala Lumpur–based Islamic Shari'ah Research Academy for Islamic Finance (ISRA) could develop the fiqh of risk-sharing finance that would facilitate low-cost and competitive instruments and contracts for multilateral, multicounterparty, and arm's-length financing of large real sector economic activities. of public education to better familiarise citizens with the benefits of risk

sharing and financial inclusion and participation is necessary. All this must be matched by strong oversight.

These are but a few next steps that Professor Abbas is working on in Kuala Lumpur. All of this is to narrow the paradigm gap between what Islam teaches and what actually happens in the markets.

“We have to show that Islamic finance and Islamic economics have a policy component that can render the system workable, stable, and effective. We are working at it. Bank Negara Malaysia is actively working on a number of these issues. And a t INCEIF/ISRA project focused on the design of a shari'ahcompliant macroeconomic policy framework is very much in the works.”

The Last Word

Professor Abbas's last word reflects our starting point, the journey and the destination: “Personally, if our policymakers, students, and industry players as well as all interested parties understand this one principle—risk sharing— according to which Allah ordains that humans must organize their lives, that would be my endgame. That is the singular, most important principle upon which the hope for the future of mankind rests. Anything else is not going to work.”

Notes

¹ Mohsin S. Khan and Abbas Mirakhor (eds.), Theoretical Studies in Islamic Banking and Finance (Houston: Institute for Research and Islamic Studies, 1987).

² Abbas Mirakhor, 2002. “Hopes for the Future of Islamic Finance,” lecture delivered at the conference “Documentation in Islamic Finance”organised by the Institute of Islamic Banking and Insurance (London) and IRTI-Islamic Development Bank, 17–18 July 2002 (London: Institute of Islamic Banking and Insurance, 2002).

³ Ann Elizabeth Mayer, “Islamic Banking and Credit Policies in the Sadat Era: The Social Origins of Islamic Banking in Egypt,” Arab Law Quarterly Vol. 1 No. 1., November 1985. pp. 32-50.

⁴ Hossein Askari, Zamir Iqbal, Noureddine Krichene and Abbas Mirakhor, Risk Sharing in Finance: The Islamic Finance Alternative.(Singapore: John Wiley & Sons) 2012. p. 237.

⁵ Ibid.

Ibid.

⁷ Business Times, “Liquidity Management Challenge,” Business Times, 4

September 2012. [Online]. Available from http://www.btimes.com.my/Current_News/BTIMES/articles/20120903235927/Article/print_h

⁸ Carmen M. Reinhart and Kenneth Rogoff, This Time Is Different: Eight Centuries of Financial Folly, (Princeton University Press, 2009).

Laurence J. Kotlikoff, Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking (New Jersey: John Wiley & Sons, 2010).

Chapter 7

The Global Standard-Setter

Rifaat Ahmed Abdel Karim

…Be not averse to writing down (the contract) whether it be small or great, with (record of) the term thereof. That is more equitable in the sight of Allah and more sure for testimony, and the best way of avoiding doubt between you; save only in the case when it is actual merchandise which ye transfer among yourselves from hand to hand. In that case it is no sin for you if ye write it not. And have witnesses when ye sell one to another, and let no harm be done to scribe or witness…

—Al Qur'an, Sura Al Baqara, Verse 282

Professor Datuk Dr Rifaat Ahmed Abdel Karim has been providing leadership in setting the standards for the Islamic finance industry since 1991. He was the inaugural Secretary-General for two of the industry's international standardsetting bodies—the ing and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board. At AAOIFI from 1991 to 2002 and thereafter at IFSB from March 2003 to April 2011, Professor Rifaat has been at the very heart of strengthening the industry and ensuring its stability. While contributing professionally at the highest global levels, he has also maintained a steady stream of authoritative academic and scholarly works. His contributions to the global Islamic finance industry continues with his leadership of the International Islamic Liquidity Management

Corp., where he assumed the position of chief executive in October 2012.

You have to be over and above everybody in of knowledge. You always have to be on the cutting edge.

—Professor Rifaat Ahmed Abdel Karim

Anybody who has ever worked with Professor Datuk Dr Rifaat Ahmed Abdel Karim will attest to his utmost commitment to his work, whether at the ing and Auditing Organisation for Islamic Financial Institutions (AAOIFI), Islamic Financial Services Board (IFSB), or International Islamic Liquidity Management Corp. (IILM). Abdullah Haron, who was Assistant Secretary-General of IFSB until early 2013 and one of the first people Professor Rifaat brought on board in 2003, re his former boss as a workaholic: “When we were at IFSB, Professor Rifaat would ring me, even at midnight, to ask about work. I would tell him that I was asleep and to ring me in the morning,” he says with a laugh. In the period between working at IFSB and IILM, Professor Rifaat itted to welcoming rest, as he had worked continuously from 1991 to 2011 at the highest level. An industry friend said that Professor Rifaat was looking forward to “getting to know his grandchildren” after so many years of putting work first. Being “married to his work” is something Professor Rifaat himself confesses to. When he left IFSB in 2011, his colleagues joked with his wife about how she could tolerate him being at home so much more. His wife, Datin Dr Iglal, is a qualified medical doctor who gave up her career for her family. She is used to change: Over the years, the family has relocated and lived in several countries, including Bahrain, Malaysia, Kuwait, the United Kingdom, and Sudan, which is perhaps why she and her husband have always cherished the inner sanctity of their home, although their doors are always open to family and friends. Professor Rifaat might have been looking forward to more family time when he left the IFSB in April 2011, but in a year and a half he was summoned to serve as the IILM chief executive officer (CEO) in October 2012.

Professor Rifaat's close associate of many years at AAOIFI and IFSB, Professor Simon Archer, expressed his mixed feelings about Professor Rifaat's appointment as the CEO of IILM: “I am pleased that the Islamic financial services industry would continue to benefit from his talents where they were obviously needed, but sympathetic to his desire to spend more time with his family than he has been able to do for a number of years.”

The IILM was established in 2010 and was facing difficulties in achieving its aim to “introduce and facilitate effective cross-border shari'ah-compliant liquidity management.” The organisation was something Professor Rifaat himself had thought of when he was still at the IFSB. A few months after he assumed the CEO position at IILM, he reflected on his decision to return to the fold of global Islamic finance, “The IILM is my baby, but I didn't want to be involved [in its running] after I brought up the concept. I thought it would work. When I was invited for the job [of IILM CEO two years after its establishment], I thought it was an opportunity to prove that the concept [of IILM] was workable. So I couldn't say no. I thought it warranted the sacrifice.”

ing for a New Paradigm

Professor Rifaat is an ant by academic training. His research and focus on Islamic finance started when he was teaching at Kuwait University in the 1980s. This led to his involvement with AAOIFI.

AAOIFI started life in 1991 in Bahrain as the Financial ing Organisation for Islamic Banks and Financial Institutions (FAOIBFI; hereinafter FAO). Its founding were the Islamic Development Bank (IDB), Dar Al-Maal AlIslami, Kuwait Finance House, Al-Rajhi Banking and Investment Corporation, and Dallah Albaraka.

The organisation came into being when a group of Islamic financial institutions signed the agreement of association on February 26, 1990 in Algiers. The following year, on March 27, FAO was ed in Bahrain. The establishment of FAO was motivated by the need to formulate methods for financial reporting that would be in alignment with Islamic finance's rules and requirements. The general feeling at the time was that if Islamic banking continued to grow, the industry would need some basic infrastructure, which included greater standardisation of products and the development of ing and auditing standards that would enhance the credibility of financial reporting by Islamic financial institutions.¹

With the growth of modern Islamic finance from 1975 to the late 1980s, the industry realised that it was time for its own set of financial reporting standards to more accurately reflect shari'ah-compliant transactions. In the lead-up to the establishment of FAO, according to Professor Rifaat, “People were looking at how to address the issue of noncomparability of the financial statements of Islamic banks, because everyone used their own methods.” At the time, Islamic banks were following either the International ing Standards (IAS) or

their own national ing standards, or a hybrid of the two. Because the phenomenon of Islamic banking was still so new, there were no financial ing standards designed specifically to address the specificities of Islamic financial institutions.

It was also in the 1980s that the wider ing profession and the international community of ants became more engaged in initiatives on the internationalisation of ing standards. This interest correlated with the increasing globalisation of business, liberalisation of capital controls, and greater cross-border flows, and there arose a need for a common body of international financial reporting standards to facilitate cross-border capital flows.

Financial reporting standards, simply put, are a common language for financial transactions and business affairs, a common language used by ants and auditors and understood across national boundaries. Bodies like AAOIFI work to develop standards that most accurately reflect the substance and mechanics of business affairs and financial transactions. Standards achieve comparability and transparency through disclosure. If implemented to the letter, these standards promote transparency and ability of the company and give a faithful representation of its performance.

There are different sets of financial reporting standards, and it is up to each country's financial regulators to prescribe standards for companies within their jurisdiction. For example, the European Union requires all EU companies with publicly listed securities to prepare their consolidated s under the International Financial Reporting Standards (IFRS), as developed by the International ing Standards Board (IASB), which like AAOIFI is an independent international standard-setting body. IFRS are widely used around the world, with most countries fully adopting them, using similar standards, or converging with them.

AAOIFI's standards specifically address financial transactions of Islamic

financial institutions and bring about greater analytical clarity to the ing and auditing treatments of these transactions. AAOIFI, and Professor Rifaat believe that the unique requirements of Islamic financial institutions may not be fully captured by IAS (or their successor, IFRS), which were developed and designed for the conventional financial framework. AAOIFI, then, identifies the gaps and differences between the IAS/IFRS and the specific needs of Islamic financial institutions and transactions. Thereafter, AAOIFI formulates industry specific standards when the equivalent IAS (or IFRS) are not suitable for adoption in whole by Islamic financial institutions or where specific Islamic banking and finance practices (such as mudaraba and musharaka, two profit and loss sharing modes) are not discussed within IAS/IFRS.

ing for Islamic financial institutions, as defined by AAOIFI, explicitly foregrounds the Islamic basis and “determines the rights and obligations of all parties, including those rights and obligations resulting from incomplete transactions and other events, in accordance with the principles of the shari'ah and its concepts of fairness, charity and compliance with Islamic business values.”²

The idea for an organisation like FAO was mooted as early as 1987 by Abdulaziz Al-Rashed, who in the 1980s was one of the external auditors of the IDB who had developed ing standards for the Kingdom of Saudi Arabia. Abdul Gader Banga, who did his PhD under the supervision of Professor Rifaat and two others, and Samir Badawi, then managing partner with Ernst & Young, are also credited for their contributions to the establishment of FAO. After the idea was brought up in 1987 at an IDB meeting in Istanbul, a steering committee was formed to study how best to achieve these standards for Islamic banks. At the time Professor Rifaat, a member of the steering committee was teaching ing at the University of Kuwait after a stint at Gezira University in his native Sudan. Between 1987 and 1990, he became involved in the planning meetings of the steering committee, specifically looking at ing differences among Islamic banks. The timing of the establishment of FAO, in February 1990, was opportune for Professor Rifaat's career.

In early August of the same year, Saddam Hussein invaded Kuwait, where Professor Rifaat had been teaching since 1985. His involvement in the establishment of the new FAO provided him the opportunity to leave Iraqioccupied Kuwait and settle in Bahrain. Professor Rifaat, who had always been academically and personally interested in Islamic finance, leapt at the chance of being a part of the FAO.

His academic interest in Islamic finance peaked after he completed his PhD at Bath University in the United Kingdom in 1981. He did his master's degree in ing at Birmingham University, where Professor Trevor Gambling was head of the ing department. Gambling was an influential ing theorist who wrote the seminal Societal ing and Beyond the Conventions of ing.³ He argued that “ing theory and culture are not readily separable and that ing theory is culture, at least in the anthropological sense.”⁴

After completing his PhD in 1981, Professor Rifaat stopped pursuing conventional ing research, opting to focus on Islamic finance. Paying heed to Gambling's argument that “ing is culture,” Professor Rifaat wrote to his old professor: “I said to him, Trevor, I think when we bring the issue of religion into consideration, the model [which Gambling had promulgated in his 1974 book] may not accommodate it as it is now.” Gambling took up Professor Rifaat on the challenge, and the two first coauthored an academic paper, which was then expanded in their seminal book Business and ing Ethics in Islam.⁵

“The book started out as a journal article which we expanded. Being a young lecturer at the time, I jumped at the opportunity. I wanted to learn. So I would write a chapter, he would write a chapter, and we'd exchange them. At that time there was no email, so we had to print and then send the pages via post or courier.” The book was eventually published in 1991.

In the same year Professor Rifaat was taken on board at FAO as an advisor, and Abdulaziz Al-Rashed was chairman, working part time with the new organisation. “After three to four years, the founding of the Board of Trustees felt that the organisation structure needed to be changed,” said Professor Rifaat. This was, in large part, to speed up the process of developing and issuing standards for an industry impatient for development. It took some four years to move the organisation into full-time mode. “From 1991 to 1995, we were working on a model for the organisation. It took that much time because we wanted to establish the concepts, the objectives, the framework of the standards. It was something completely new for the industry,” explained Professor Rifaat.

AAOIFI: A Landmark in the History of Modern Islamic Finance

In 1995, FAO changed its name to AAOIFI (to reflect its new auditing mandate), and Professor Rifaat was appointed its first full-time secretary-general. AAOIFI is an independent not-for-profit body that develops and prepares ing, auditing, governance, ethics, and shari'ah standards for Islamic financial institutions and the industry. It is ed by that include central banks, Islamic financial institutions, and other participants from the international banking and finance industry worldwide. Building the hip base was one of Professor Rifaat's responsibilities. He says: “I worked hard to increase hip. The more you had the more people will listen to the organisation's message. You may have the founding who are the first movers but the subsequent batch of is equally important because they will help convince other people. Bringing new on board was very hard work.”

Hard work, though, is not something Professor Rifaat shies away from by any means. When he left AAOIFI in March 2003, hip stood at about 100, he said, way up from the five founding the organisation started out with in 1991.

Bringing on board these new institutional was not simply about selling AAOIFI's standards—for Professor Rifaat, and this is also true for his later work at IFSB, it was his opportunity to spread the message of Islamic finance as a viable, stable, and sustainable financial system. Building AAOIFI and later IFSB meant strengthening and developing the global Islamic finance industry one institution at a time.

The Qur'anic verse that opens this chapter basically attests to the need for taking of transactions. This is what the practice of ing is about. The minutiae of bookkeeping is consolidated and built into financial statements— clear, transparent, and reliable financial statements that convey accurate information and financial performance in compliance with the shari'ah and builds trust in Islamic financial institutions. This is the work that Professor Rifaat devoted his years to at both AAOIFI and later, among other things, at the IFSB.

In itself, AAOIFI was a landmark in the history of the modern Islamic finance industry. Up to that point, the International Association of Islamic Banks, established in 1977 by Prince Mohamed Al Faisal Al Saud, had lost its influence, leaving no infrastructure-building organisation for the industry, no organisation to overlook and spearhead the harmonisation or standardisation of industry needs and practices. The industry may have its different opinions on AAOIFI's methods and standards (which results in AAOIFI's standards not being adopted across the board), but the organisation provides a much-needed meeting point for the global industry to converge.

Setting the Standards

To better serve the industry's growing needs with regard to financial reporting, AAOIFI needed to develop high-quality and robust standards. AAOIFI has put in place due process that governs the production of its standards; both the ends and the means to those ends must be equally transparent and rendered able every step of the way. This process involves vetting the juristic suitability of the proposed standards by AAOIFI's shari'ah committee and provides interested parties with the opportunity to express their opinion on the standards before the board finally approves them. This is done through public hearings to discuss the exposure drafts, public hearings meant to increase awareness of AAOIFI's standards amongst the financial community. Professor Rifaat said he became familiar with this process from best practices set by international conventional standard-setting bodies.

However, although AAOIFI has made numerous accomplishments in developing ing and auditing standards, like other standard-setting bodies, it lacks the power de jure to enforce these standards and therefore works with governmental and professional organisations to implement them. This is a reality Professor Rifaat is too well acquainted with. “No one can enforce international standards, you know. You are depending on the sovereignty of the country, the country by itself has to say—we will adopt it, we will implement it. You cannot enforce standards. No standard-setters have the power to do that. So you set up best practices and develop high-quality standards so that they would more likely be adopted.”

With its voluntary adoption ethic, AAOIFI still faces a challenge to convince jurisdictions. It has, however, gained international recognition as its standards have been implemented by Islamic banking and finance centres globally, including Bahrain, Dubai International Financial Centre, Jordan, Lebanon, Qatar, Sudan, and Syria. In other jurisdictions AAOIFI standards are used as guidelines by regulators, including those in Australia, Indonesia, Malaysia, Pakistan, Saudi

Arabia, and South Africa. Although the adoption of its standards is not as widespread as the organisation would like, nonetheless, as Professor Simon Archer puts it, “AAOIFI has set an example in developing financial reporting standards that take full of the specificities of Islamic financial transactions and their results.” This achievement, Professor Archer believes, is entirely Professor Rifaat's doing. “He has earned a considerable international reputation which facilitated the acceptance of AAOIFI's [and later IFSB's] work.”

Professor Rifaat's international peers have acknowledged his standing—he served as a member of the Consultative Advisory Group of the International Auditing and Assurance Standards Board of the International Federation of ants for two consecutive three-year ending April 2011 and on the International Liaison Group of the Basel Committee for Banking Supervision (BCBS). He also served as a member of the Standards Advisory Council of the IASB (the body that develops and approves IFRS) for two consecutive threeyear , ending November 2008.

In addition to the initial ing and auditing considerations of AAOIFI, Professor Rifaat expanded the organisation's mandate to cover governance, ethics, and shari'ah standards as well.

Perhaps what was most notable for AAOIFI under Professor Rifaat's leadership is its shari'ah board, which he established in 1998 and which remains highly influential within the global Islamic finance industry to this day. Professor Rifaat re skeptics aplenty to his idea of the shari'ah board. It took him at least a couple of years to set the board in place, two years of selling the idea to different stakeholders, especially the shari'ah scholars themselves. “Some of the scholars told me that it would never work, that bringing shari'ah scholars together onto a single platform to develop shari'ah standards for the Islamic finance industry was not achievable,” Professor Rifaat said, recounting the period. Today some of those same skeptics still sit on the board.

The idea of a single shari'ah board to develop standards for the Islamic finance industry was met with initial hesitation as, by its very nature, Islam permits and respects differences in opinion. Markets prefer a high degree of standardisation in almost all areas, shari'ah included, in order to facilitate greater ease of doing business and reduce transactional costs, especially for cross-border and international flows and transactions. Shari'ah scholars, though, do not consider a lack of standardisation a hindrance to progress.

According to Professor Rifaat, there was a need for a shari'ah board at the AAOIFI level as there were varying and sometimes inauthentic fatawa (legal rulings) issued by different shari'ah supervisory boards at the financial institution level.⁷ Professor Rifaat considers this dangerous for a young industry working to gain credibility and achieve sustainability.

Professor Rifaat succeeded in winning over industry stakeholders, and in 1998 AAOIFI's shari'ah board was formed. The board was comprised of 15 (now 20) highly respected and reputable shari'ah scholars. While AAOIFI's governance standards have covered issues for shari'ah supervisory boards, specific shari'ah standards include those on trading in currencies; debit, charge, and credit cards; defaults in payment by a debtor; guarantees; and the like. The board's rulings are widely accepted and taken as legal grounds to offer, adopt, and implement permissible products and processes.

With AAOIFI covering the range of standards required for Islamic financial institutions, the next step, according to Professor Rifaat, was regulatory standards. “So we had ing, auditing, governance, and shari'ah standards. Now with that structure, the only thing missing was the regulations, the regulatory standards. In 1996 I published an academic paper arguing the relevance of the Basel Accord [a set of agreements for banking supervision, the first of which was issued in 1988 by the Basel Committee of Banking Supervision (BCBS) headquartered at the Bank for International Settlements

(BIS)] to Islamic banks. That opened my mind, and in 1999, we [AAOIFI] published a capital adequacy statement.”

Capital adequacy is a measure of an institution's capital resources vis-à-vis its current liabilities and to the risks associated with its assets. Regulators require financial institutions to maintain sufficient capital to their activities and to absorb any shocks or changes in the value of assets, without running into financial and operational difficulties.

Islamic banks face risks that are somewhat different from those of their conventional counterparts. AAOIFI's statement on capital adequacy in 1999 touched on the purpose and calculation of the capital adequacy ratio for Islamic banks. The following year, in 2000, AAOIFI held a conference in Manama, Bahrain on the regulation of Islamic banks, which was co-organised with the International Monetary Fund (IMF). During that conference, the establishment of IFSB, as part of AAOIFI, was recommended. However, this recommendation changed, and IFSB was reenvisioned as a stand-alone body. Professor Rifaat explains why there was a need for a separate body from AAOIFI: “The argument was that market players cannot set regulators' standards. This was a fair argument, I think, and was accepted by central bank governors.”

Bahrain, which already had AAOIFI, welcomed the idea of the IFSB and offered to host it in Manama. It had to compete with Malaysia for the honours. “That started two years of tug of war. Bahrain wanted to host it there, Malaysia wanted to host it too. Eventually they agreed that it would be hosted in Malaysia and that Bahrain would host the International Islamic Financial Market.”

“Then I was personally approached separately by the representatives of three governors, each one of them asking me to consider becoming the first secretarygeneral of the IFSB. This matter, too, I think, was resolved in a meeting among the central bank governors at the International Monetary Fund.” The IMF was responsible for coordinating the two-year consultative process, in collaboration

with the IDB and AAOIFI, leading up to the establishment of IFSB. (See Chapter 6 on Abbas Mirakhor for details on the IMF contribution.)

IFSB: Working with the Regulators

In a news brief dated May 1, 2002, the IMF stated that IFSB had been established “in response to the growing significance of the Islamic financial services industry in many countries…with the purpose of promoting, disseminating, and harmonizing best practices in the regulation and supervision of [the] industry.”⁸ International bodies like the IMF are concerned with global economic and financial stability. With the growing significance of Islamic finance in several countries around the world, most particularly in the oilexporting countries of the Gulf Cooperation Council with special focus on Saudi Arabia as the world's largest oil producer and exporter, the IMF cast its eye on the industry to ensure that it grows within the global financial architecture in a transparent and stable way and that its growth does not threaten the stability of the global financial system.

The two-year tug of war between Bahrain and Malaysia to host IFSB is perhaps testament to the international standing the organisation would occupy in view of the IMF's interest and involvement in its establishment. (There have been Chinese whispers, of course, that the IMF was “manoeuvred” into facilitating IFSB's establishment, but history tends to favour the much bigger picture to which such benign intrigues fall victim.) The IMF has considerable international influence, and IFSB would certainly benefit from such influence if it aspired to bask in some of those bright lights shining from Washington (if, at all, it bore this design to begin with).

There were two clear opportunities embedded within that scenario in the early 2000s: First, the global Islamic finance industry had grown to such an extent that it would receive international oversight to ensure its stable integration into the overall global financial architecture, and second, the Islamic industry would be able to more substantially push its own offering into the mainstream.

IFSB was launched in Kuala Lumpur on Sunday, November 3, 2002. “The reason it was launched on a Sunday,” re Professor Rifaat, “was that Tun Dr Mahathir [then Prime Minister of Malaysia] was only available on that day because of his travelling schedule. Despite it being a Sunday, the launch was attended by no less than 2,000 people. It was a huge launch. I really mean huge. On the same day the council of IFSB met and appointed me as the secretarygeneral.”

The of the Malaysian government was not limited to the appearance of its prime minister at the launch—Malaysia enacted a law known as the IFSB Act 2002, which gives the IFSB immunities and privileges that are usually granted to international organisations and diplomatic missions.

From the huge launch, Professor Rifaat moved into the IFSB office provided by Malaysia's central bank, Bank Negara Malaysia (BNM). Moving from Manama to Kuala Lumpur, he received the of BNM to set up shop. “When I walked into IFSB, it was only me. Soon after, two or three istrative staff from BNM were seconded to IFSB. But we didn't have any technical staff. I had to build the team from scratch. I also had to find the financing for all of it.” Financing? “Yes, the operational budget. I had to go out and get others to become so IFSB could build its budget.”

IFSB started out with nine founding : Bahrain Monetary Authority (now Central Bank of Bahrain), Bank Indonesia, Central Bank of the Islamic Republic of Iran, Central Bank of Kuwait, BNM, State Bank of Pakistan, Saudi Arabian Monetary Agency, Bank of Sudan (now Central Bank of Sudan), and the IDB.

The organisation has three types of : full (e.g., central banks and capital market authorities), associate (e.g., central banks and capital market authorities choosing not to become full , and multilaterals like the World Bank and Asian Development Bank), and observer

(market players like banks and professional bodies). Full contribute US$30,000 per year, associates US$20,000, and observers US$10,000. hip fees are the main source of funding that keeps the IFSB afloat.

Just as he increased AAOIFI's hip from five to 100 from 1991 to early 2003, Professor Rifaat expanded IFSB's hip from nine to 195 between March 2003 and March 2011. include 53 regulatory authorities and central banks from 41 jurisdictions.

The raison d'être of IFSB, at its core, is the same as that of AAOIFI's—to promote the financial stability of the Islamic finance industry through the introduction of standards that are consistent with shari'ah. The main difference is that IFSB is the international standard-setting body of regulatory and supervisory agencies whereas AAOIFI's standards serve the needs of market players, such as Islamic banks and other financial institutions. Professor Archer explains, “IFSB has a broader brief than AAOIFI, namely the whole range of prudential standards. Its governing body is composed of financial regulators who have the power to enforce its standards, and who appoint to the working groups which play a major role in developing these standards. These have therefore had much wider international applications than those of AAOIFI.”

IFSB's main mandate is to “promote the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with shari'ah principles, and recommending these for adoption.”¹ Under Professor Rifaat's watch, IFSB issued 15 standards, guiding principles, and technical notes for the Islamic financial services industry.¹¹ On average, each standard takes about two years to develop, as it is put through extensive due process, much like the framework set up by Professor Rifaat at AAOIFI. IFSB's due process and consultation period for each standard lasts for six months before the drafting of the standard begins. This is followed by a draft exposure with public meetings. Only then is the final standard tabled at the IFSB Council for approval and issuance.

With its mandate, the IFSB tackles two of the Islamic finance industry's fundamental challenges: to operate as an integral part of the international financial system and to operate on a sound and stable basis in compliance with the shari'ah.

The first standard, IFSB-1,¹² addressed risk management, and was issued in December 2005. Anthony Travis, an ant familiar with Islamic financial institutions through his work with Dar Al-Maal Al-Islami since the 1980s when he was at Price Waterhouse (renamed PricewaterhouseCoopers in 1998), was the external project consultant on IFSB-1. He explained that the standard (together with another on capital adequacy, IFSB-2,¹³ developed in parallel) was driven by the need for IFSB to come up with an Islamic equivalent to Basel II, which was published by BCBS in June 2004. Basel II was an international standard for banking regulators to control banks' capital adequacy.

“Ironically because Basel II got held up by various different lobby systems, particularly in the U.S., we actually came out with our standard before they did with the final version. This was certainly not expected at that time. We expected we would be lagging behind Basel II. The two correspond well. It is just that the Islamic version, if you like, is geared towards certain aspects of Islamic banking which perhaps are not applicable in detail with the context of what you call conventional banks. So our main focus was actually on the differences between Islamic banking or Islamic financial activities and insurance, and the conventional banking world which was being addressed by Basel II,” explains Travis.

As an external project consultant, Travis worked with full-time IFSB project manager Abdullah Haron (assistant secretary-general of IFSB until early 2013), one of the first of Professor Rifaat's technical team. In the early days of IFSB, Professor Rifaat could only turn to local Malaysian talent—the founding technical team, like Abdullah, was Malaysian—because of the organisation's

limited budget. This was not the only limit, though. Specialised expertise within the Islamic finance space, even in Malaysia where the industry had been developing since the early 1980s, was and is limited. Finding the right mix of indepth technical expertise that covers both the conventional and the Islamic is still an issue for the industry.

Abdullah had the skills within the conventional space, having worked in risk management for the central bank and several local Malaysian financial institutions, but he had no Islamic finance background. He jumped at the chance to work with IFSB—literally jumped, as Professor Rifaat gave him very little time to accept the job offer. Abdullah can laugh about it now, but at the time it was a source of stress for him. “Professor Rifaat told me, if you want this job, you have to resign now, give 24 hours' notice.” The desire to make the switch from the conventional industry to the shari'ah-compliant one made the choice an easy one for Abdullah, “So I resigned immediately, and compensated Maybank for the immediate notice.”

On the capacity building for such a highly specialised job with organisations like AAOIFI and IFSB, Professor Rifaat explains, “The technical team would bring with them the required technical skills and knowledge, but then you'd need to develop the standards-setting knowledge too. People came in with no Islamic finance knowledge. So you have to train them. You have to develop your people and manage them.”

How did he do that from scratch? Laughing heartily, he responded, “Don't ask me. I don't know! I trained the team on the job, in preparing the standards. Supervise them, and put consultants on them.”

Anthony Travis points out that one of Professor Rifaat's skills was his ability to recruit very good people. Professor Rifaat himself its that he was lucky to have brought in the people he did. “They were good people, I must it. And they had the willingness to learn.”

Project managers like Abdullah faced a steep learning curve, but their willingness to learn was met with guidance from Professor Rifaat, as well as consultants like Travis and Professor Archer. By then Professor Archer and Professor Rifaat had become leading authorities in matters relating to ing and auditing for Islamic financial institutions. The two regularly collaborate on academic papers and books on Islamic finance. Together and separately, their research and academic corpus have contributed significantly to Islamic finance as a whole.

Professor Rifaat considers it paramount to be au fait about issues affecting Islamic finance. “You have to be over and above everybody else in of knowledge. You always have to be on the cutting edge. Research keeps you current, and getting to know the ins and outs of the industry is important too. In this way academia and the professional life go hand in hand.” It is also academic and professional research, reminds Professor Rifaat, that provides the intellectual impetus and the basis for his work.

In 2011 a paper he co-authored with Professor Simon Archer and Dr. V. Sundarajan on the supervisory, regulatory, and capital adequacy implications of profit sharing investment s in Islamic finance that was published in the Journal of Islamic ing and Business Research won the Literati Network Awards for Excellence.¹⁴ In addition, Professor Rifaat has coedited four major books on Islamic finance. His research and scholarship, while informing and ing his own professional work, have also opened up dialogue on regulatory and ing issues in Islamic finance and have served to propel the intellectual discourse in the field. By publishing in tier 1 journals, Professor Rifaat's academic rigour, like his professional work, has created a bridge between the Islamic practice and the conventional or “Western” academic community, drawing them into the conversation.

While always striving to be “over and above” everyone else in of

knowledge, Professor Rifaat also needs cross-cultural and management skills in abundance, as he deals with people across the globe who each come to the table with different levels of knowledge regarding Islamic finance. In this case, he explains, “It's all about people too. If you try to be above them, no one will engage. And that I had to bring in new people to the industry. At IFSB we had the central bank of Japan, South Korea, Singapore, Luxembourg, Mauritius, you name it, we had it.”

Professor Rifaat considers the geographical positioning of IFSB—in the heart of Southeast Asia—as an entrepôt for global Islamic finance for East Asia (and hence access to China via Hong Kong Monetary Authority) and the Asia Pacific on the one side and the rest of the world on the other. “With IFSB in Southeast Asia, it opened the region to global Islamic finance, and vice versa. In the past, the likes of Japan and South Korea were not involved in the global discussion on Islamic finance.”

That conversation necessarily carried the same core message about Islamic finance, but as Professor Rifaat points out, “It's how you deliver that message to different people that will convince them. Most of these people had never even heard of Islamic finance. How you take them from zero to ing your organisation and eventually spreading the same message to others, that was the challenge.”

Anthony Travis re Professor Rifaat's management abilities well. “The meetings were well run. Rifaat ran them well, and knew exactly what he was doing and he knew what he wanted.” Professor Rifaat was especially adept at the cross-cultural aspects of the job, for example, dealing with the Arab states, European consultants like Travis and Professor Archer, and Southeast Asian all at once. Travis says, “He knew exactly how to handle these things in a way that I would not have been able to. It is a different approach. It's just a fascinating thing which you live and learn once you go along.”

Professor Rifaat shares his thoughts on building organisations like AAOIFI and IFSB from the ground up. “[T]aking an organisation [like AAOIFI and IFSB] and developing it is not easy. You don't own the organisation. You're not the shareholder. You have to make use of the mission of that organisation and make others own it. I at IFSB, I used to say we only manage the process, we don't own it. The ownership is for others. It is through that managing of the process that we try to bring others into the organisation.”

Was there ever resistance? “Resistance? You'll always get resistance. There were people that took longer to convince than others, of course. There will always be people who resist change.”

Changing the Landscape: Integrating Islamic Finance into the Global Financial Architecture

“You can't have Islamic finance in isolation. It won't grow that way. That's why, for example, at the IFSB when we drafted the Articles of Agreement, the first objective was to adapt existing international standards and then to take into consideration the specificities of shari'ah. In that case, for example, you have to look at what the Basel Committee publishes, take them, and adapt them to Islamic finance. That's how you integrate it into the global finance environment.”

Professor Rifaat often says that there is no need to “reinvent the wheel” vis-à-vis standards for Islamic finance. Hence, the standards as developed by the Basel Committee (and those issued by other international bodies, such as the International Association of Insurance Supervisors and the International Organization of Securities Commissions), which are designed with the conventional system in mind, are taken by IFSB and adapted to become shari'ahcompliant for Islamic financial institutions. This approach is not fully ed by the entire Islamic finance fraternity. Its more vehement critics say that this approach dismisses the Islamic basis as the primary motivation, and will make the Islamic finance system look more like the conventional one. The upshot of this method is that the conventional financial system, which itself is constantly seeking stability, may well learn some things from the Islamic way. If the two systems keep moving in search of stability, they might eventually achieve a degree of convergence. But such convergence is currently far away. For now, “integration” is the key word. It is almost like being a first-generation immigrant living within your very small minority in a new country. In this case, the much bigger and more powerful conventional financial system has acknowledged the presence of Islamic finance and wants to make sure that it will and can live peacefully (and even thrive) alongside the conventional system in the overall universe. Successful integration, though, is necessarily a two-way process of mutual accommodation. For now, the balance of power lies with the majority. Industry estimates show that Islamic finance assets amount to approximately

$1.6 trillion, which is under 2 percent of global financial assets.¹⁵ Its growth year to year, though, has consistently been in double digits. Greater influence, then, will come with time. A lot of time.

So IFSB continues to make sure that the Islamic finance industry can grow and thrive in order for it to have any truly substantial impact on the world's financial system. This has been at the heart of Professor Rifaat's work since 1991.

But developing and issuing standards is only half the battle. Promoting them is also part of the job. In order for IFSB standards to be more widely adopted, the Secretariat also facilitates their implementation. Abdullah Haron explains, “IFSB started this in 2007, working with central banks and of the IFSB to organize workshops wherever needed. This is one of the ways the organisation encourages member countries to adopt the IFSB standards. IFSB develops case studies for the workshops to show how standards are applicable to different jurisdictions. This promotes greater understanding of the implementation and applicability of IFSB standards.”

This “standards selling,” says Abdullah, has to happen for all standard-setters. “The same applies to the Basel Committee. When they start talking about Basel III [introduced in 2010 with stricter regulations following the global financial crisis beginning 2007/8], they have to market it. Of course people will the document, but you know, it's more than 1,000 pages long. The moment people see the 1,000 pages they're put off.”

The setters of Basel III, the BCBS, is located at BIS in Basel, Switzerland. BIS was one of the first international agencies to IFSB and is an associate member alongside other international agencies, such as the IMF and the World Bank.

The Basel Committee housed at BIS provides a forum for regular cooperation on banking supervisory matters, with the objective to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. The committee's standards are adopted globally. The IFSB sits on the Basel Committee as a group in its own right, and it is also a member of the committee's Core Principles Group. In turn, the Basel Committee also speaks and participates in IFSB working groups. In this way the Islamic finance industry, through its hip on the Basel Committee, has input in Basel's standards. Further, IFSB's standards are in the public arena. If standards-setting bodies feel that any of IFSB's standards can benefit their own, they are free to adopt them, even in part. With the ongoing global debate about the regulation of banks and the most appropriate future direction for banking in general, this two-way dialogue between the conventional international standard-setter and its shari'ah-compliant counterpart can only mean the start of a mutually beneficial relationship, even if the starting point for most of IFSB's standards is the work of BCBS.

In these ways, the Islamic finance industry is located right at the heart of the international financial system. Jurisdictions having to deal with emerging Islamic finance markets can turn to IFSB and its to learn how to accommodate, supervise, and regulate Islamic financial institutions.

IFSB has been the most substantive platform for regulators of both the conventional and the Islamic financial industries to meet.

Anthony Travis splashes a bit more colour to this picture. “There was a lot of exchange of information and knowledge between these people [at IFSB] who were present from the various countries about the issues and the problems and the challenges, and I think that it was recognized that there are substantial differences of opinion, which is healthy. These could be dealt with, or were dealt with, and some which weren't necessarily in the document at the beginning [referring to IFSB-1] did end up in the document at the end. So I think sharing knowledge as a process with these representatives from the various supervisory bodies, the central banks, in itself may well have been very helpful in those

banks actually building an understanding of Islamic banking.”

However, like AAOIFI, IFSB does not have enforcement powers and can only recommend its standards for adoption. IFSB, however, has more influence than AAOIFI, as Professor Archer alluded to earlier. IFSB's mandate is with the central bankers, and as central banks are full (or associate) of IFSB, the organisation's standards then have a greater chance of being adopted as central bankers would have a more direct line to their own policymakers.

Twenty Years of Setting Standards for Islamic Finance

Before AAOIFI and IFSB, ants like Anthony Travis had to learn on the job that was completely new to them. “There were no ing standards for Islamic financial institutions. AAOIFI developed them from scratch,” says Travis. “There were some practices in Faisal Islamic Bank of Egypt, for example, but they certainly were not principles in of being generally recognised because there simply weren't enough institutions around to be able to say that they are generally recognised. As we went along, there were things called acceptable ing standards, generally accepted ing standards, and international ing standards. The latter were, I think, either insufficiently well developed or they were insufficiently focused to take into the activities of an Islamic financial institution. I can say that the reaction and the action that was taken by AAOIFI in the first place and IFSB [with its disclosure standard IFSB-4 that sets guidelines for transparency and market discipline for Islamic financial institutions¹ ] have been exemplary in my view. They picked up that challenge and jumped at it—full credit to them.”

AAOIFI standards are industry-specific, meaning that they are designed and developed for Islamic banks and financial institutions. Travis compares this approach with the standards prepared for the conventional sphere. “The interesting thing you can say about the International ing Standards Board [a London-based body] is that their approach to ing in banks still leaves much to be desired. They have not dealt definitively with a number of issues. Particularly in the U.K. there are strong doubts as to whether international ing standards are applicable to banks and whether they should be used in banks at all. It is a big debate.” Professor Archer adds, “Like most IASB standards, those on financial instruments are not industry-specific, although banks are particularly affected by them and have lobbied hard to influence them. This is one reason why they are taking so long to complete.”

As for IFSB, Abdullah Haron says that without the work of such an institution, “Regulators would regulate in different ways. For example, with capital adequacy, jurisdictions would apply risk weights differently. IFSB helps the industry to have a consistent approach to these types of issues. It also provides technical assistance to member countries and to other countries. The organisation provides technical assistance to countries that request advice on Islamic finance from the IMF, the World Bank, and the Islamic Development Bank, for example, because they don't have the necessary specialised expertise.”

Both AAOIFI and IFSB have built up a considerable body of work and unique combinations of skills and expertise. Regardless, Professor Rifaat believes that the two organisations still need to address many issues, as their work is never static due to the pace of global financial needs and innovation. However, he himself was not one to overstay his welcome. “I'm a person who believes that when you think you have delivered, you should leave. I left AAOIFI voluntarily. I left the IFSB voluntarily. I did that as, to me, I had delivered what I thought I could deliver. It's time for someone else to come and take over.”

Could he have done better? “Could I have done better? I doubt it. I was concerned to do my best, to be honest. I think I have done my part. Let others, let the next generation take up the mantle now. I think I was faithful to the job, and I think I tried my best to develop it. In order to do that I had to equip myself with the right knowledge. So part of that development was through research I did, part of that was being very zealous about what I had to do, and, above all, I had to be honest to myself and to others so people can trust me.”

Leaving AAOIFI and IFSB in the hands of new management, Professor Rifaat speaks diplomatically: “Whoever came after me may be better than me, you know.”

Professor Archer, though, rather laments the direction that AAOIFI has taken, “Since Professor Rifaat left AAOIFI, the organisation has made little or no

progress in having its standards more widely adopted internationally. Its work may have been overshadowed by the various controversies over the IASB's IFRS for financial instruments [in the late 2000s, IASB was working to replace its financial instruments standard with an improved and simplified standard]. The fact that Rifaat's successor did not have an ing background could well have been a handicap.” He continues, “Professor Rifaat has a remarkable combination of qualities: scholarly and technical abilities, personal charisma and the ability to lead and inspire his staff, and dedication to his work,” summed up Professor Archer.

“Rifaat was the right man in the right job at the right time,” asserts Anthony Travis.

Moving Forward

Professor Rifaat ed the IILM in October 2012 to better push forward the organisation's process of issuing its maiden sukuk. IILM finally issued its debut sukuk towards the end of August 2013, 10 months after Professor Rifaat became its new CEO, and two months shy of the organisation's third anniversary. The work of the IILM is important for the global Islamic finance industry as its specific mandate is to issue short-term shari'ah compliant financial instruments towards developing a cross-border market in such products; an area that has been a challenge for the industry plagued by a shortage of highly liquid, investment grade financial instruments that can be traded by Islamic financial institutions to manage their liquidity needs. Beyond his immediate concerns of ensuring financial stability for the industry through better liquidity management, Professor Rifaat always has the future of the global industry on his mind. “I would like Islamic finance to grow with its established parameters. I think we have the checks and balances now. The intention is to have Islamic finance everywhere. In 20 years' time we will have a much bigger share [of the market], and everyone, Muslims and non-Muslims, will be a lot more educated about Islamic finance.”

But before the industry can be catapulted 20 years forward, Professor Rifaat points out the challenges that it still must overcome. “I think the industry has done well and I think it could do more, it really could. There are a lot of challenges that need to be addressed within the legal and regulatory spheres. For example, I am not an authority on legal and shari'ah matters, but I can help facilitate the interaction between the two. When I was at the IFSB I started the seminar on legal issues in the Islamic financial industry because I believe that this is the risk that we have neglected tremendously. This needs to be addressed.”

The interaction and sometimes friction between shari'ah and legal matters have slowly crept into the rearview mirror of the global Islamic finance industry. Across jurisdictions, systems of law differ, with different bases used: common

law, civil law, and Islamic law. Several instances of Islamic finance disputes have prompted greater scrutiny of the encounters between legal systems and the shari'ah. When he was at IFSB, Professor Rifaat started the seminar called “Legal Issues in the Islamic Financial Services Industry,” which examined the legal framework to the specificities of shari'ah-compliant financial services offered by banking and financial institutions. The first seminar, held in Kuwait in 2005, was tly organised with the Federal Reserve Bank of New York.

“The industry can go and get shari'ah scholars to get their contracts right. In cases of dispute, the case will land on judges[']” tables. Are judges prepared or even well versed in Islamic finance matters? At one time I proposed something like a Centre for Advanced Legal Studies for Islamic Finance, something to that effect, a centre to do research and training on legal matters in Islamic finance. I always believe that making people knowledgeable and training them is far better than leaving matters to the last.

“Integration—there must be integration between the legal side and the shari'ah. If any jurisdiction wants to call itself an Islamic financial centre, then it must address the gaps between the legal and shari'ah aspects of Islamic finance.”

The Last Word

When Professor Rifaat left IFSB in April 2011, he refused to call it a retirement or even a semiretirement. He was still actively involved in the Islamic finance industry but in no official institutional capacity. With his return to the global fold and his ideas and concerns for the industry still very active, we can perhaps reasonably expect Professor Rifaat to keep powering on for many years to come.

Professor Rifaat himself is more modest and brings the sum of his contributions to the global Islamic finance industry back to his core belief in the Islamic offering itself “To be honest, I am proud of my contribution to the industry in whatever manner that can be, whether it is academic or official. Ever since I finished my PhD in 1981, I've had a love for this industry. I believe in it.”

Notes

¹ Rifaat Ahmed Abdel Karim, “ing and Auditing Standards for Islamic Financial Institutions.” In: Proceedings of the Second Harvard University Forum on Islamic Finance: Islamic Finance into the 21st Century, pp. 239–241 (Cambridge, MA: Centre for Middle Eastern Studies, Harvard University, 1999).

² Shahul Hameed Mohamed Ibrahim, “IFRS vs AAOIFI: The Clash of Standards?,” p. 4. March 2007.[Online]. Available from: http://mpra.ub.unimuenchen.de/12539/1/MPRA_paper_12539.pdf.

³ Trevor Gambling, Societal ing (London: Allen & Unwin, 1974). Trevor Gambling, Beyond the Conventions of ing (London: Macmillan, 1978).

⁴ Bill Maurer, “Anthropological and ing Knowledge in Islamic Banking and Finance: Rethinking Critical s,” Journal of the Royal Anthropological Institute 8, no. 4 (2002): 645–667.

⁵ Trevor Gambling and Rifaat Ahmed Karim, Business and ing Ethics in Islam, (Mansell, 1991).

Karim, “ing and Auditing Standards for Islamic Financial Institutions.”

⁷ Ibid.

⁸ International Monetary Fund, “IMF Facilitates Establishment of Islamic Financial Services Board,” 2002. [News Brief]. Available from: http://www.imf.org/external/np/sec/nb/2002/nb0241.htmIMF 2002.

Islamic Financial Services Board, “Islamic Financial Services Board: March 2003—March 2011,” (Kuala Lumpur: Islamic Financial Services Board, 2011).

¹ Islamic Financial Services Board, “Preparation of Standards,” Islamic Financial Services Board. [Online]. Available from: http://www.ifsb.org/standard.php.

¹¹ Islamic Financial Services Board, “Islamic Financial Services Board: March 2003—March 2011,” (Kuala Lumpur: Islamic Financial Services Board, 2011).

¹² Islamic Financial Services Board, “Guiding Principles of Risk Management for Institutions (Other than Insurance Institutions) Offering Only Islamic Financial Services,” Islamic Financial Services Board, December 2005. [Online]. Available from: http://www.ifsb.org/standard/ifsb1.pdf.

¹³ Islamic Financial Services Board, “Capital Adequacy Standard for Institutions (Other than Insurance Institutions) Offering Only Islamic Financial Services,” Islamic Financial Services Board, December 2005. [Online]. Available from: http://www.ifsb.org/standard/ifsb2.pdf.

¹⁴ Emerald Awards for Excellence: Outstanding Paper Awards—2011. [Online]. Available from: http://www.emeraldinsight.com/authors/literati/awards.htm?

year=2011

¹⁵ Islamic Financial Services Board. Islamic Financial Services Industry Stability Report 2013. Kuala Lumpur: IFSB, 2013.

¹ Islamic Financial Services Board, “Disclosures to Promote Transparency and Market Discipline for Institutions Offering Islamic Financial Services (Excluding Islamic Insurance (Takaful) Institutions and Islamic Mutual Funds),” Islamic Financial Services Board, December 2007. [Online]. Available from: http://www.ifsb.org/standard/ifsb4.pdf.

Chapter 8

The Shari'ah Scholar

Sheikh Nizam Yaquby

Call thou all mankind unto thy Sustainer's path with wisdom and goodly exhortation, and argue with them in the most kindly manner.

—Al Qur'an, Sura An Nahl, Verse 125

Sheikh Nizam Yaquby is one of the most prominent and influential shari'ah scholars practising in the Islamic finance industry today. He is sought for his expertise by Fortune 500 companies as well as small Islamic financial institutions. His first foray into the Islamic finance industry was in 1989 when he ed the shari'ah supervisory board of Bahrain's Arab Islamic Bank. He went on to become chairman and member of many different shari'ah boards worldwide. Sheikh Nizam holds a PhD in Islamic law, an MSc in finance, and a BA in economics and comparative religion. These formal academic qualifications are combined with Islamic education gained primarily in Bahrain and Mecca at the feet of prominent scholars such as Sheikh Abdulla al-Farisi, Sheikh Yusuf al-Siddiqi, Sheikh Muhammed Saleh al-Abasi and Sheikh Muhammed Yasin al-Fadani (Mecca), Sheikh Habib-ur-Rahman A Zaini (India), and Sheikh Abdulla bin Al-Siddiq Al-Ghumar (Morocco).

I don't take no for an answer. I like to find solutions. It is very easy to say no. It is very easy to say haram, full stop. But it is not so easy to say I have another way to make it permissible.

—Sheikh Nizam Yaquby

Shari'ah scholars have always occupied a revered position in Islamic communities. Islam does not practise monasticism and papacy, and no caste or family has authoritative religious powers over the global community of Muslims known as the ummah (at least within the Sunni world). In Islam, religious opinions and rulings are the jurisdiction of ulama' (scholars) or fuqaha' (jurists), the scholars who are the arbiters of shari'ah, or Islamic law.

In the area of banking and finance, the modern Islamic industry almost single handedly plucked these scholars out of their (more traditional) natural domains in mosques and madrasas and moved them onto jet planes into centres of finance across the globe.

The main role of shari'ah scholars in the Islamic finance industry is to align financial structures and transactions to shari'ah. The earliest shari'ah scholars for Islamic financial institutions from the late 1970s were authorities in Islamic knowledge, and they were brought into the fold of the new Islamic financial institutions to provide shari'ah guidance and advice and to legitimize the Islamic offering of the banking and finance business. Islamic finance and economics scholar Dr Monzer Kahf suggests that these earliest shari'ah scholars, unlike other Muslim intellectuals, served as a bridge to the “average-minded businessmen and income earners for whom the clientele of Islamic banks [was] to be derived.”¹ Because they had “more daily s with the Muslim masses than both economic and finance intelligentsia and Islamic movement activists,” these earliest shari'ah scholars were able to provide the credibility and legitimacy needed by the new Islamic banks.

Sheikh Nizam himself says that as a shari'ah scholar, he has the responsibility to his community to take their questions and provide answers to their concerns about everyday life. This helps with his work advising Islamic financial institutions. Interacting with people's needs, he says, has allowed him to understand the financial aspects of daily life and living. “Honestly, half of the questions I hear from people concern finance and money, like zakat [tithes] and inheritance. These are all about numbers and ing. I think scholars who work as shari'ah board have more access to real problems of finance. I would advise scholars and imams who do not have all the answers to their community's concerns about money and finances to please, please, research it first or go to a scholar who is more knowledgeable. It is a specialisation.”

This new specialisation for shari'ah scholars is an evolution of Islamic history, says Sheikh Nizam, who explains that over the 1,400 years of Islamic jurisprudence, scholars have been known to specialise in different areas. “Similarly we have scholars specialising in law and shari'ah for medicine, for example. With modern medicine, scholars have to address many issues. Are we allowed to do autopsies? Are we allowed to do transplants? What types of transplants? How about plastic surgery? To what extent, if I don't like my nose, am I allowed, within the boundaries of shari'ah, to change it? There is no dilution [of shari'ah knowledge] with specialisation. In fact, there is a widening of the scope as shari'ah scholars are called on to keep up to date with modern innovations.”

The first generation of shari'ah scholars in Islamic finance had to learn very quickly how to do this. This first generation of scholars advising the new Islamic financial institutions included such prominent Muslim religious figures as the former Grand Mufti of Egypt, Sheikh Mohamed Khater Mohamed Al Sheikh; the former Mufti of Sudan, Sheikh Professor Al Siddiq Mohamed Al Amin Al Darir; the Saudi Arabian Mufti Sheikh Abdul Aziz bin Baz; and Sheikh Yusuf Al Qaradawi.² Together with Dr Sami Hamoud (whose 1976 dissertation on the use of murabaha had a significant impact on the use of the contract in Islamic financial institutions), who served on the supervisory board of Al Baraka's

Jordan Islamic Bank, these men were responsible for the shari'ah compliance of the earliest Islamic financial institutions.

In the early days of the modern Islamic finance industry, scholars were authorities on Islamic subjects and were not formally educated or trained in finance or related subjects. But a lack of formal education and training in finance did not necessarily preclude them from being knowledgeable. If you ask those who worked closely with Sheikh Mohamed Khater Mohamed Al Sheikh, for example, you will hear about a man with a profound intellect; a thinker who was well informed not only about shari'ah matters but also about economics and the interactions among banking, finance, and society. Sheikh Mohamed Khater served as chairman of the shari'ah advisory board for Dar Al-Maal Al-Islami from its inception until his death in 2004. He was Sheikh Nizam's earliest mentor in the Islamic finance industry.

By the time Sheikh Nizam became involved as a shari'ah advisor to the Arab Islamic Bank in Bahrain in 1989, the position of shari'ah scholars and the shari'ah supervisory board (or shari'ah advisory board, generally used interchangeably) was already deeply entrenched in the operations of Islamic financial institutions. By that time, there were already Islamic banks, Islamic investment houses, and takaful (Islamic insurance) companies not only in the Middle East and North Africa but also in Malaysia, Bangladesh, Pakistan, and even in the United States (with American Finance House LARIBA in 1987).

The Role of Shari'ah Scholars in Islamic Financial Institutions

Shari'ah scholars in the Islamic financial industry give the seal of approval that financial structures and transactions are worthy of the description “Islamic” and “shari'ah compliant.” They play a prominent role in the interpretation and application of the shari'ah to finance and are meant to have end-to-end life cycle oversight.

Sheikh Nizam explains that shari'ah scholars participate in the development of products and their structuring from the very beginning. “When there is product development, we start working together with the financial institution from the start. This allows for more synergy and synchronisation. And from our experience all these banks welcome any suggestions, provided they are practical and within the scope of their work.”

The shari'ah scholar then reviews all relevant paperwork to ensure that everything is aligned with shari'ah. The work does not stop there. They are also responsible for oversight, monitoring, and regular reviewing of any operational variances or changes to circumstances. The board also conducts annual audits of the financial institution's operations and certifies whether everything has been found to be shari'ah compliant; details typically are published in the annual reports of the financial institutions.

Shari'ah scholars sit on boards, which generally consist of at least three , one of whom assumes the position of chairman. Boards are mandated to meet a few times a year. Generally, Islamic financial institutions have internal shari'ah departments (whose levels of competence and standards are uneven, according to Sheikh Nizam). Scholars like Sheikh Nizam act as external and

independent shari'ah advisors, working closely with the internal shari'ah departments as well as the management of the financial institution.

What Is Shari'ah Compliance?

Shari'ah is not coded as articles of law as you would find in legal codes developed by Western legal systems. Shari'ah rulings, or fatawa, are made over time and are found in the writings of scholars. So scholars have more than 1,400 years of scholarship to embrace. Scholars derive fatawa by interpreting the text of the Qur'an and the Sunna of the Prophet Mohamed (pbuh), the two foundational texts of the shari'ah. Scholars follow the principles of jurisprudence, or usul al fiqh, to derive rulings from the foundational texts. Where there are no definitive rulings in the Qur'an or Sunna, scholars use ijtihad, or reasoning. In using ijtihad, scholars can base their rulings on qiyas (consensus), istihsan (juristic preference), istislah (public interest), urf (custom), and darura (necessity). Different scholars have different opinions ing some of these concepts to derive law.

In Islamic finance, “shari'ah compliance” refers to the application of Islamic law to commercial transactions. The principles are interpreted on a case-by-case basis in reference to specific factual situations—this makes shari'ah a process rather than a finished product. For this reason, there are and will be differences in opinions and rulings. In reality, there is more common ground than there are divergences. This has been proven: the General Council of Islamic Banks and Financial Institutions found that out of a sample of 6,000 fatawa issued by shari'ah boards of Islamic banks, 90 percent were consistent across all banks. Over 100 shari'ah scholars were behind these fatawa.³

The work of applying shari'ah to modern commercial transactions cannot be underestimated. It is not an easy enterprise because in most countries, the law underlying financial structures and transactions is not Islamic law. Islamic countries adopted the Western legal frameworks of their former colonial masters, and these frameworks—either common law or civil law—are the basis for interest-based financial structures and transactions. Countries largely abandoned Islamic law during colonial rule, using shari'ah only in family matters in most

instances. Shari'ah scholarship for commercial matters has been rediscovered for contemporary use only since the start of the modern Islamic finance industry.

Sheikh Nizam explains that when a country's national law is the shari'ah, the scholar's job is made much easier, but the shari'ah scholarship still needs updating. “If there is a country where the basic law is Islamic law, then of course this makes my work very easy, like in Saudi Arabia, for example. But in this era you are talking about complicated international trade and sophisticated deals. And even for a country like Saudi Arabia, they feel that they now need to codify and bring their system up to date, that they cannot go on with texts which were written hundreds of years ago. Yes, we can derive principles from them, but going forward, the world is becoming one village and we have to transact with others.”

He adds, “There is no harm if a Muslim wants to transact with a non-Muslim, of course. We encourage trade, and we encourage business provided that it is done in a permissible way. In my opinion, the common law that was left by the British in some Islamic countries is more flexible than civil law which was left by the French in Muslim North Africa.”

Sheikh Nizam continues, taking the example of common law and bringing in the basics of the Islamic law of contracts for Islamic finance. “Common law is a precedent law and implements what has been contracted between the parties. So if you and I do business and sign a contract, it doesn't need to be explicitly stated that it is Islamic or shari'ah. Islamic law of contracts says that everything is permissible unless there is a specific prohibition [found in the Qur'an or the Sunna]. So if you use common law, we have to make sure there are no specific prohibitions involved, and we eliminate three things—riba [interest], maysir [gambling, or speculation akin to gambling], and gharar [uncertainty].”

He clarifies this with an example: “If you want to rent an apartment in Kuala Lumpur, you have to abide by the law that exists on the lease. Let us assume the

law allows you to charge interest for late rental payments but it doesn't say that you must. Then the decision is up to the contracting parties. So if I don't put the clause into my contract, then you cannot say it is not within the law—because it is within the law. At the same time, it is compliant with shari'ah. So this is what we are saying—practical, pragmatic solutions for existing legal systems which are difficult to change. Not impossible, but difficult.”

Until such time that individual countries move towards changing the macro level, Sheikh Nizam says, this is the way shari'ah scholars and lawyers have to work on structuring Islamic finance contracts. “It is very difficult to change the laws that exist. Within this framework, until somebody decides to harmonise legal systems at the higher market level, we have to work with what exists.”

Shari'ah Compliance for an Ethical Society

There is a difference, believes Sheikh Nizam, in matters of finance when you breathe a higher spiritual ethic into them. Although institutional and national frameworks have been put in place, and industry bodies like the ing and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) formulate standards for the global industry, Sheikh Nizam further places emphasis on the internal inculcation of ethics that will lead to more stable and sustainable systems, be they financial or societal. He says, “We must bring back that spiritual ethic. Human activities are very interconnected and we cannot segregate them from each other. And we must teach people this from their childhood. Otherwise you will have all the chaos that we have now.”

He expands and explains what he means. “Islam teaches us that ethics is not an external method, it is an internal method. So your soul must always be in harmony with your body and your actions. When you are transacting, you have to put in mind what harm this transaction will have on society, what the benefits are, and if the benefits outweigh the harm. There are all these balances you have to maintain.”

The spiritual ethic, he believes, will motivate better decisions that are beneficial to society. He gives the example of crime. “Once there is a spiritual foundation, people won't be afraid of the police but of Allah. So I don't violate traffic laws, for example, because it is my shari'ah duty, it is my Islamic duty. Because if I violate a traffic law, I might kill somebody and then I will be both liable in this world and in the hereafter. When you take it to that level, it is more moral, more ethical, it has more impact on society. But if it is just an external framework of fines and punishment by prison sentences, then you have all the chaos we have today.”

Relating this to Islamic finance, he says, “We will be fairly okay if we maintain the ethical and the Islamic identity which we have maintained for the last 40 years. However, there is a lot of pressure to imitate everything [from the conventional system]. Now, imitating good things is okay; we are not against that, because we seek wisdom everywhere. We know conventional banking has a long experience of some 500 years, and there are certain norms and things that we have to learn. However, if we see that any of these is against our principles, we should not be reluctant or hesitant to say so. Take, for example, derivatives— there are some things we might be able to do but not the full-fledged derivatives as in the interest-based system. We don't want to trade in assets which do not exist, which are fictitious. This is dangerous and not good for society. So we must have the courage to say no and to point out when something is haram.”

Derivatives are highly disputed in Islamic finance. Most scholars consider them gambling tools and thus stay well clear of them. As Sheikh Nizam mentions, he believes that some forms of derivatives are acceptable. In the early 2000s, he was one of the first shari'ah scholars to the concept of Islamic hedge funds, an innovation that received both bouquets and brickbats from the Islamic finance industry. These funds were most actively pursued by Eric Meyer of the U.S.-based Shariah Capital Inc., who received Sheikh Nizam's to develop Islamic hedge funds. But an expected launch in 2003 did not materialize. Since then, however, Meyer has succeeded in launching Islamic hedge funds, although as a whole their take-up rate has not been high.

There are numerous shari'ah challenges and considerations in deg Islamic hedge funds or any form of Islamic derivative, one of which is what Sheikh Nizam brought up earlier—that Islamic finance does not trade in assets that do not exist. This is one of the cornerstones of Islamic finance. Shari'ah views money as a medium of exchange and not as the item of trade itself. Islamic finance trades in real assets, and you can trade assets only if you have them in hand and own them. In this way, there is a closer link between the financial market and the real economy. For example, a murabaha financing extended by an Islamic bank involves the bank first purchasing the item required by the client and then selling it to the client at a marked-up price for the bank to earn its profit. Some see this method as one that simply replaces “interest” with “profit”

because the amount is usually competitive. The main difference between this murabaha financing and a loan is that the bank should create inventory to ensure that the financing is backed by the asset instead of handing over the money in the form of a loan to the client and earning interest on that loan. Further, Islamic banks cannot deal in what Islamic teachings deem as haram, such as gambling, consumption of alcohol, and pornography, so the volume of these activities is reduced in society because businesses would not be able to obtain financing for casinos or adult entertainment companies, for example.

However, Sheikh Nizam qualifies, although he believes the Islamic banking system to be better than the volatile interest-based system, Islamic banking itself is not the antidote for all the world's troubles. “We are not claiming that this sector, the Islamic banking sector, is going to solve all the problems in the matters of economics. No, no bank will claim this. No bank says ‘I want to solve the world's poverty problems.’ Nobody says this, although it is one of our goals to help poor people.”

Sheikh Nizam asks that Islamic banking be put in the right perspective: It should be viewed not as the alternative that will solve all economic problems but as part of the larger Islamic financial and economic system that as a whole will have a more positive significant impact. He says, “We should be humble. Islamic banking and finance is only one part of the whole economic system, it is not the entire sector. We would like to develop it in that direction [toward a full Islamic economic system]. But it will only take that scope with more participation by governments and states.” The Islamic banking situation on the ground is still very much a work in progress and an Islamic economic system is even further away from being operationalised.

Sheikh Nizam points out, however, that shari'ah ensures that Islamic banks do give to the poor and distribute wealth from the haves to the have-nots. He refers to the compulsory payment of zakat, or tithes. Zakat is one of the five pillars of Islam. Every year 2.5 percent of wealth, subject to a minimum threshold, must be paid out as zakat. This wealth is not confined to cash but is everything that

you own that has the ability to grow or increase your wealth, so agricultural products and livestock are also zakat-able. Several groups of people can receive zakat, including the poor who have no means to earn a living and the needy who cannot earn enough to cover their basic needs. There are debates as to whether banks as corporations should pay zakat as it is meant to be paid out by individuals. In this case, the banks' shareholders pay their share of zakat.

Beyond the banking sector, Sheikh Nizam identifies areas where Islamic finance currently has very limited visibility and impact. He points out the need to further explore the ethical basis of Islamic finance and its intersections with the ethical movements from the secular, non-Islamic sphere. “We should like-minded people, people of the ethical finance movement, the corporate social responsibility movement, the green movement, all these people we have common causes with. It doesn't mean we can adopt everything they say or that they will adopt everything we say, but I think if we hands with these people, we will be a growing power which politicians would have to deal with in the future.”

There has been an increasing call from within the Muslim world for more concerted and unified efforts to trumpet and put into action Islam's ethical principles as espoused by shari'ah. The goal is both to further efforts for positive change in areas such as finance and the environment and to dispel negative perceptions of shari'ah as archaic. Islamic economics explains the relationship among shari'ah, finance, and the environment: Islam and its shari'ah provides the moral filter and motivation for the allocation and distribution of resources with all resources belonging solely to Allah and humans designated as trustees in their use. Shari'ah is the guide to how humans use and distribute Allah's resources. The challenge remains for Islamic finance and Islamic economics to comprehensively translate shari'ah for actionable use.

Within the environmental and green movement, there has been much positive work, even if these voices have not reached the global mainstream. Perhaps most visible is the 2009 Istanbul Declaration of the Muslim Seven-Year Action Plan

on Climate Change. The plan was endorsed by and involved more than 50 religious scholars from across the Muslim world and a broad alliance of civil society organisations, universities, governments, and religious institutions. Set to be implemented between 2010 and 2017, the plan includes proposals for developing major Muslim cities as green city models and the development of an Islamic label for environmentally friendly goods and services to create best environmental practices for Islamic businesses. All plans are to be managed through an umbrella organisation called MACCA—the Muslim Associations for Climate Change Action.⁴

The declaration “could turn out to be the largest civil society movement in history,” according to Olav Kjorven, assistant secretary-general of the United Nations Development Programme. Kjorven further added, “The role of Islam could be one of the decisive factors tipping the planet towards a sustainable future. This commitment in Istanbul to a low carbon future can be of historic significance in the path to resolving climate change and other pressing environmental issues.”⁵ While these are proclamations whose outcomes are yet to fully materialize, a 2012 explorative survey on eco-Islam conducted by the Netherlands' Leiden University found that “Islamic environmentalism” does exist in both theories and, in several places in the world, also in practices. The survey's report argued, “This colourful world of Islamic environmentalism deserves a wider platform. To date, it appears to have escaped the attention of both the academic world and the general public,” going on to observe that “Environmental research tends to focus on secular movements, whilst studies of religions and Islam tend to focus on the radical, fundamentalist and political movements, Islamic theology and law.”⁷

Sheikh Nizam's call for enhanced cooperation and unity with other ethical movements comes from his belief that it is time for the Islamic world to engage more actively with the wider non-Muslim, non-Islamic world beyond Islamic finance so as to effect positive change. Instinctively, he recognises that the largely growing positive perception and global visibility of Islamic finance could be used as a platform by the Islamic world to strike up new dialogues and forge new relationships with like-minded socially responsible citizens. This he considers a duty of da'wa (call to Islam, or spreading the message of Islam) for

the Muslim and an opportunity to overcome negative perceptions of Islam and Muslims. He says, “Many years ago we started, at Harvard University, a seminar between people of different faiths tackling social responsibility. I think Islamic banks should take a more active role in enhancing such gatherings. Islamic banking conferences should actively invite people of other faiths. After all, what is da'wa? Da'wa is not about forcing people to become Muslims. Obviously this is a hopeless way. Da'wa is that we sit together and we have mutually beneficial dialogue that will help humankind. The time of forcing people is gone.”

Second-Generation Shari'ah Scholars

Unlike his mentor in Islamic banking, Sheikh Mohamed Khater Mohamed Al Sheikh, Sheikh Nizam entered the industry not only with a strong foundation in shari'ah; he also brought to the boardroom academic qualifications in economics and finance. He was invited to sit on the shari'ah board of the Arab Islamic Bank in 1989 by a friend connected to the bank.

The year 1989 was a momentous one in world history—it marked the turning point for the wave of revolutions that swept the communist Eastern Bloc countries, pulling down the hammer and sickle of the Soviet Union two years later. It was also the year Tim Berners Lee invented the World Wide Web, which became the Internet for public use in 1993. During this period of great change in the late 1980s, Sheikh Nizam was teaching fiqh and tafsir in his native Bahrain and giving religious advice on daily issues such as birth, marriage, family disputes, and death. But his life and professional career were about to undergo a change with his appointment as a shari'ah scholar in an Islamic financial institution.

“The Arab Islamic Bank wanted me to be a member of the shari'ah board. So I told them, I have studied shari'ah and I have studied economics, but separately, not combined together. So I have no experience in this field. The bank said to me ‘Consider it a learning experience.’ So I accepted the position.”

At his own request, Sheikh Nizam was made secretary of the shari'ah board. “I didn't want to be a full member of the board because I didn't have any idea how it worked. I thought of myself as being unqualified for the position of a full member, and issuing fatwa is a great responsibility. So I did not want to take that responsibility in the beginning, until I felt comfortable enough that I had gained the required knowledge and experience. So I was secretary for about one year,

and after that the chairman of the board himself requested that I become a full member. I was very lucky—the chairman of the board, Sheikh Mohamed Khater Mohamed Al Sheikh, was a great scholar.

“It was a great learning process. But of course it was a lot of hard work. The sheikh would tell me, for example, to look for this and that issue in this fivevolume book. And you know, in those days there was no Internet or Google, and so when you have to look for something, you are looking for one line or two lines in a five-volume book without a detailed index.”

That meant only one thing: He was forced to read the volumes cover to cover. “I used to stay the whole night and read so that the next day I could tell the sheikh that I had found what he has asked me to look for. And then he would tell me, ‘Yes, I know it is on this page in this volume.’ So I asked him why he made me read through it all. His response was ‘I want you to learn, to read the whole book. How many issues did you stop at and make notes while you were reading?’ He was a great teacher and I benefited a lot from him.”

On Training Shari'ah Scholars for Islamic Finance: Climb the Stairs One by One

Even the second-generation of shari'ah scholars, such as Sheikh Nizam, who started working professionally in the industry from 1990, the specialist prerequisite qualifications and skills encoming both shari'ah and modern dealings and transactions in financial matters had to be gained from practical experience. Although he is confident of on-the-job learning, he believes that the industry is still in short supply of scholars with the right mix of specialist interdisciplinary knowledge. “The shari'ah colleges or the business colleges do not train scholars for the specialist knowledge needed to be a member of a shari'ah board. In addition to this comprehensive knowledge of shari'ah, the scholar also has to understand modern legal systems in addition to ing, auditing, and banking practices. Being multilingual also helps.” Sheikh Nizam himself is fluent in Arabic, English, Farsi, and Urdu.

The required combination of knowledge and skills, he says, is not easily acquired and does not come neatly wrapped in a university degree, even at an advanced PhD level. “It is an accumulative knowledge that you gather gradually,” he reiterates. “It is like when you are cooking meat—it has to be mixed with many different ingredients and then cooked on low heat. If you cook it over intense heat, the meat will be tough. Similarly, this combination of knowledge and skills needs to be acquired over time.”

He likens the process to that adopted by the medical fraternity. “When a student graduates from medical school, do you take him straight to the operating room? If you do, he will be killing people!” He continues, saying that the process is the same for young and new shari'ah scholars. “The scholar has the tools acquired from the classroom, but he has to learn to put these to use in the industry, through practical knowledge. So you have to attach him to senior scholars. The young scholar has to see what the industry norm is, what the etiquette is, what

the ethics are, learn the regulations and standards not only for different financial institutions but also for different countries.”

In other words, an academic foundation can be acquired through university education, but the application of that education and knowledge still requires much on-the-job training. However, Sheikh Nizam says, the situation is improving, with institutions teaching shari'ah now offering courses in Islamic banking and finance as well.

Training young scholars is a responsibility Sheikh Nizam considers incumbent on any shari'ah scholar. This teacher-student tradition is something he says he keeps alive. “Personally I have trained more than 20 or 25 young scholars. Some of them are now full-fledged board .” The short supply of highly qualified and experienced shari'ah scholars is still a major concern for the Islamic finance industry. For this reason, most of the senior scholars, like Sheikh Nizam, continue to be in very high demand. As a consequence, they sit on multiple shari'ah boards simultaneously. Some jurisdictions have gotten around this issue by establishing central shari'ah committees at the national level and restricting board hips for scholars. Malaysia is a prime example of both policies, while Oman has followed suit by limiting board hips (although it faces teething problems). But generally in the Gulf Cooperation Council countries, Europe, North America, and elsewhere, shari'ah boards work at the financial institutional level, relying on the expertise and experience of scholars like Sheikh Nizam.

And this is where the sheikh flies into a firestorm of controversy. Unlike his earliest mentor and teacher Sheikh Khater, who served on only one shari'ah board fearing any “unloyal competition” (according to a former colleague at Dar Al-Maal Al-Islami), Sheikh Nizam sits on numerous boards around the world. In recent years he has been on the receiving end of what feels like a tirade of industry criticism. The concerns started with research that revealed the state of the shari'ah landscape in the Islamic finance industry.

Two Boards, Three Boards, Four Boards, Five. How Many Is Too Many?

So how many shari'ah boards does Sheikh Nizam sit on? “I don't know, I do not count them, really. For me, I don't feel it necessary to sit and count how many boards I sit on.”

In 2011 -based Funds@Work, a strategy consultant for the fund industry, released a report that examined the shari'ah landscape vis-à-vis shari'ah scholars' engagements in Islamic financial institutions. The report revealed that Sheikh Nizam and fellow scholar Sheikh Dr Abdul Sattar Abdul Karim Abu Ghuddah each sits on the most boards: 85. The report further indicated that the top 20 scholars have 621 board hips between them while the remaining 260 scholars held 520 board hips between them.⁸

Unsurprisingly, this first-of-its-kind report created quite a kerfuffle within the Islamic finance industry. Dr Murat Ünal of Funds@Work comments, “A lot of scholars were actually very happy about the thorough research we did, because it was the first time that somebody has come up with tangible empirical data. Before we released our findings, the major assertion was that the Islamic finance industry does not have enough shari'ah scholars. But what we showed was that there are in fact enough scholars but they are not equally distributed. On the other hand, of course, those people that are the subject of that research will be quite annoyed. Interestingly, a lot of the interpretation of our findings was done by the market itself.”

Sheikh Nizam himself considers the research “fairly exaggerated” and “not accurate” (his view is not isolated) and regrets that he was never personally ed to his board hips. Dr. Murat stands by the research

methodology. “We as an independent organisation, the only thing we wanted to do was come up with a level of transparency and get some empirical data to conduct the research. It took us two years to compile the data. We looked at over 2,500 companies across the world, identified well over 400 who had Islamic finance exposure, be they windows or full Islamic exposure. And then we went through the legal documentation one by one and even verified information with the companies themselves. We also took it upon ourselves to throw out some of these companies who were falsely claiming that top scholars were on their boards.”

The industry is divided in its reaction to and opinion on the number of board hips a shari'ah scholar should and can take on. Sheikh Nizam argues that shari'ah scholars in the Islamic finance industry are being unfairly singled out. He considers their work to be consultancy akin to that of other professionals, such as lawyers and ing and auditing firms. These other professionals, he argues, are not scrutinised for how many clients they take on. The issue, he says, should not be about how many boards scholars sit on but the quality of their work and that they meet expectations of all involved. He says, “What is the issue about the number of firms or institutions that somebody serves? The issue is whether that person is competent, if he is doing his job, if he is fulfilling his duty or not. Now, these institutions are not fools. If they find somebody that is not doing what he's supposed to do, they can tell him bye bye, ma'a salaama, and bring in somebody else.”

He adds that the market is free to recruit the level of expertise and competence that it needs and wants to represent its interests. “The financial institutions are looking for people who have shari'ah knowledge, ing and auditing knowledge, legal background in modern law, have language skills, are up to date with what is happening with regards to research and fatwa and standards set by industry bodies.”

The furore over the number of board hips, he believes, perhaps stems from the fact that most people are not sufficiently acquainted with the role of the

shari'ah scholar or the workings of shari'ah boards. “I think it is greatly misunderstood because most of these people have never sat in on one single shari'ah board meeting.” He adds, “I don't know why some people in the industry are always saying that shari'ah scholars are so powerful. Where is our power? I give advice to somebody and I tell them that it is up to them to decide whether to do this or not. I tell them from my professional point of view if this is halal or haram. That is my role.” He may be self-effacing (or facetious, even?) when he says this, because he understands that shari'ah scholars like him are the final arbiters of halal-ness and haram-ness of financial structures and transactions worth millions and billions. This is the reason why the financial press have described shari'ah scholars as the gatekeepers of the Islamic finance industry.

The loudest outcry from the industry concerns the potential conflicts of interest with scholars advising so many competing institutions. Shari'ah scholars normally have to sign confidentiality agreements, but these have not been sufficient to mollify industry anxieties. Sheikh Nizam believes that a conflict of interest could arise only if, as a shari'ah advisor, he also holds executive powers as a director on a bank's board or as a majority shareholder, for example, and influences the shari'ah board to fatawa or sign off on shari'ah audits to the commercial benefit of the institution. Otherwise, he just does not see shari'ah scholars compromising the integrity of their shari'ah opinions and rulings. He explains, “We do not want to be involved in any of the decisions which are taken whether to invest or not to invest commercially. That is not our work. Our work is to give companies proper advice. Our role is only scholarly to tell them whether this is compliant or not compliant, can you invest from a shari'ah point of view or not. After that it is left to the bank's decision.”

A third matter arising from the overconcentration of top scholars is key man risk, succession planning, and ensuring proper training for as wide a base as possible for junior scholars to take the industry forward into the next generation. Dr Murat offers the following scenario: “If five of the most prominent scholars today were on the same plane and it crashes, 30 percent of board hips would be wiped out. That is a huge risk.”

As mentioned earlier, senior scholars like Sheikh Nizam take it upon themselves to work closely with junior scholars and train them on the job. But he stresses that the process cannot be fast-forwarded and the industry must be patient. “Learning is always a gradual process. When you want to move up, you have to climb the stairs one by one. If you jump, you will break somebody's neck and maybe even your own neck. You cannot jump. You have to learn the hard way.”

As to the possibility of shari'ah noncompliance risk arising from a heavy workload, Sheikh Nizam assumes a practical tone. He asserts that it is hard work. “If I get 10, 15 questions a day from different banks, then it's a challenge to manage. But you must be prepared to sacrifice your time, your family time, your private time, and be prepared to travel all around the world with little rest. So it is like any other job which you have to do.” He its to being on the road approximately two-thirds of the year, or “at least 250 days on average each year.” He further explains that shari'ah boards do not do all the heavy lifting themselves and that they are ed by internal teams of shari'ah scholars and s. “Within our boards we are not involved in the day-to-day. And with most of these banks, they have full shari'ah departments with full internal shari'ah auditors and reviewers who report to us. Many of these banks have what they call ‘liaison officers’ who are in direct with us through telephone, through fax, through email, so it's not an issue.”

But it is not only in the shari'ah boardrooms that Sheikh Nizam serves as advisor. He has responsibilities to his community and is always approached for advice. How does he mix his work in Islamic finance with his religious responsibilities to his community? “Time is limited. You have only 24 hours a day, you have to sleep and eat and pray, and you have family obligations. And when the weddings happen you have to go, when death happens you have to go. I think there is a balance that scholars are trained to maintain, because there are certain responsibilities on scholars to their communities. Just by the mere fact that you pray in the mosque, you will be subject to questions. You cannot avoid it. You cannot say that you are not going to answer because people know you know the answer. My telephone is always on, and my number is not a secret.”

On the matter of conflicts of interest, the hue and cry appears to be unfounded, considering there has never been any reported scandal. Regardless, Malaysia and Oman regulate board hips for shari'ah scholars in order to avoid any possibility of conflicts. At the same time, they avert concentration risk by allowing for a more widespread distribution of scholars across all Islamic financial institutions in their jurisdictions.

While there are many who are up in arms about board hips, there are others who believe that this elite group of scholars has been unjustly vilified and that the furore overshadows the significant contributions they have made to the global industry. Additionally, the practitioners in the industry who most closely work with this group of shari'ah scholars attest to their highest level of ethics and confidentiality. Yet the general view held by industry practitioners is that current practices may not prove sustainable as the industry achieves scale. Formalised rules and frameworks would then be necessary. But as Michael McMillen points out (see Chapter 9 on Michael J. T. McMillen), stricter governance measures are one thing; enforcement and review mechanisms are another. This is a multilayered issue that will most probably occupy the Islamic finance industry for some years to come.

Great Strides in Islamic Finance: The Contribution of Shari'ah Scholars

The mid-1990s saw great strides in Islamic finance, and a few of them centred on the contributions of a core group of shari'ah scholars—the elite, according to the Funds@Work report. One of the effects of multiple board hips is the move towards greater harmony in shari'ah rulings. This has given this core group of scholars some latitude to lead the move in changing the form of nominate contracts (i.e., allowing single static contracts, which were the norm before, to be used in combination as building blocks). This harmonising had an immediate impact on the way financial products could be structured, making them comparable to sophisticated international financing structures. As a result bifurcated structures started to be used, structures that allow the incorporation of both interest-based and shari'ah-compliant elements into a single financing structure. These structures had opened up the Islamic finance markets to the much bigger Western interest-based system.

The other great stride was the Dow Jones fatwa.

“Monumental Fatwa”: Dow Jones Islamic Market Index

Whenever I am presented with a new challenge, I take it very seriously and I try to find solutions. I don't accept no for an answer. I believe this is the positive way that all scholars should follow, not just to just say this is haram and khalas, that's where it stops. This is not a positive way. We have to find solutions.

—Sheikh Nizam Yaquby

It would be fair to say that most of the time the work of a shari'ah scholar like Sheikh Nizam is “plain vanilla.” There are, however, times when shari'ah scholars are directly involved in radical innovation. The introduction of Dow Jones' Islamic Market Index (DJIMI) in 1999 was one such time.

In February 1999 Dow Jones launched the DJIMI, the first global index serving as a benchmark for Islamic investing. Dow Jones took on five shari'ah scholars: Sheikh Muhammad Taqi Usmani, Sheikh Dr Mohamed A. Elgari, Sheikh Dr Abdul Sattar Abu Ghudah, Sheikh Nizam Yaquby, and Sheikh Yusuf Talal DeLorenzo. This group of five was largely responsible for the fatwa that facilitated the construction of the screening methodology for equities. Some in the industry consider that fatwa to be nothing short of monumental, for with one flick of the switch, it opened up the world of investing and capital markets for shari'ah-sensitive individual and institutional investors. (See Chapter 10 on Rushdi Siddiqui.)

The work of the scholars took some five years, involving other interested scholars, and going back and forth to the leading fiqh boards in the Muslim world, including the Organisation of the Islamic Conference Fiqh Academy. Sheikh Nizam re the leadup to 1999, “When Rushdi Siddiqui came to me in the early 1990s with the idea of screening equities, actually I was myself in a big dilemma. This was in the early 1990s, and young people were coming to me saying that they want to trade. That was the start of the Internet, of course. So these young people were asking me what stocks and shares are halal and which are haram. I could give them general answers but no definite ones—for example, I couldn't say for sure if IBM was halal or haram and what the criteria would be to decide if the likes of IBM were halal or haram. I had no capability to screen thousands of stocks and shares. So Rushdi came at a very, very important time. I understood that this was a very good idea.

“There would be those scholars who will say that any part of haram is haram,

and there will be scholars who know nothing about this, and then there will be the few scholars who really understand and appreciate the issue.”

The issue was to determine if it was permissible to invest in a company that has any interest income or expense, whether direct or indirect, or that engages in any sort of haram business activity. The shari'ah board had to determine if shari'ah absolutely precluded and was absolutely intolerant of marginal impurities. For example, could you invest in an agricultural company if a portion of its livestock was pigs? Could you invest in an office building if two of its floors housed an interest-based bank? How about the hotel that serves alcohol?

Shari'ah scholars are divided on this, with two main camps standing their ground. In a paper he presented in 2000 to the Harvard University Forum on Islamic Finance, Sheikh Nizam explains, “The scholars who hold that investing in these companies is lawful base their arguments on several legal maxims and argue that since the primary business of the companies is lawful, transacting in their shares is also lawful. Those who hold that it is not lawful to invest in such companies cite texts from the Qur'an and Sunna that prohibit usury and argue that the legal maxims used by those who regard such transactions as lawful do not apply… The position on those who permit the transactions in question is also more beneficial to the development of Islamic finance.”

The Dow Jones shari'ah board issued a fatwa in 1998 that allowed a degree of variance or impurity, thus opening up a whole new world of capital markets for shari'ah-sensitive investors. What they essentially allowed was for some level of haram, or impurity (i.e., that some degree of impermissibility is permitted if certain conditions are met).

This “negative screening,” widely also called “sin screens,” continues till today and has been adopted by all other major global index providers as well as the industry's standard-setting body, the AAOIFI. The fatwa also had a significant impact on private equity investment as scholars began to review the rules for

direct equity investment that were not wholly shari'ah compliant.

It must be noted that the DJIMI delisted Enron, WorldCom, and Tyco months before their downfall because they had become over-leveraged and hence no longer met the shari'ah thresholds. This was a massive boon to shari'ahcompliant portfolios as their exposure to these companies were eliminated. In those times of distress, shari'ah shone through.

The screens consider the core business of companies and filter degrees of impermissibility for level of debt, level of cash and interest-bearing items, s receivables, and total interest and non-shari'ah-compliant activities income. Sheikh Nizam explains that negative screening is the minimum requirement from a shari'ah point of view. For him, the next step is to see positive screening as a condition for shari'ah-compliant stocks. Positive screening is a more proactive approach and would include positive markers, such as environmental sustainability or good workplace practices. But he is well aware that positive screening, if implemented now, would severely de-populate the Islamic indexes.

Forty Years On: The Wood for the Trees

Looking back at the development of modern Islamic banking and finance, Sheikh Nizam sees three main benefits the industry has given to Muslim communities. The first is the opportunity for Muslims to bank according to their religious requirements. “I am very happy to see Islamic banking products and services being offered to people who previously would not use any banking services because of the ban on riba. These banks have changed these people's lives tremendously. Secondly, the mobilization of these funds is very important to society, as productive projects now have a flow of investments and financing. Look at sukuk—if we didn't have all of these liquid deposits how could we trade in sukuk?

“Lastly, we have started to teach people in Muslim communities about saving and investing. This is something very important. It is a culture we need to encourage. Most Islamic countries, till today, are under-banked, in spite of Islamic banks and other financial institutions that exist. Look at Egypt, for example. Look at Pakistan. I think my happiness comes when I see the Islamic banking and finance industry empowering people, by the power of investing, understanding the tools, and safekeeping their livelihood. I believe this is an achievement that the Islamic banks should be proud of and continue to build on.”

But there is still much to be done, including the need for the ethical basis of Islamic finance to more closely engage with the wider non-Islamic community, as discussed earlier in the chapter.

Sheikh Nizam points out other gaps that need to be filled: “I want to see specialised megabanks that would directly help Islamic communities around the world—like a megabank for agriculture and a megabank for alternative energies. Most of our Islamic countries are agriculture based. Why don't we already have

Islamic agricultural banks all over the place?”

He speaks with knowledge on the need for alternative energies. Sheikh Nizam is the chairman of the shari'ah board at Bahrain's First Energy Bank, an Islamic investment bank dedicated not only to processes serving hydrocarbons but that also explores new opportunities to invest in renewable energy technologies. Understanding the need to innovate away from hydrocarbons, he says that his eye will be on the look-out for alternative and renewable energy initiatives.

Looking toward the future, Sheikh Nizam puts a business hat over his keffiyeh (so to speak) and offers a few thoughts on what the next big thing will be. “China,” he believes, “has more than 300 million Muslims, although official figures would not it to such a big number.” The Pew Forum conservatively estimates China's Muslim population at 23.308 million as of 2010.¹ The sheikh reveals that he advised the Bank of China on murabaha contracts and that the bank has been using them for several years. The Chinese authorities have also, he let on, translated many books on Islamic banking and finance from Arabic and English into Chinese. He believes that the Islamic finance industry will have to start paying more attention to China as its rise as an economic power continues. This will include engaging with the Chinese on different levels in order to forge closer business relationships. One of the most important things for him is exposure to the Chinese language as a gateway to its people. “You know, the Chinese pages on the Internet will exceed the number of English pages. That just shows you the strength of China, to add on to the economic power.” He was encouraged and “very happy” to find young Arabs in Abu Dhabi learning Mandarin, he said, and wonders if Malaysia, as a leading Islamic finance centre that is geographically closer to China than the Middle East is, has started teaching Mandarin at the Islamic university. China's financial sector certainly sees merit in improving bilateral trade links with the Middle East and using Islamic finance. The country's largest state-owned bank, Industrial and Commercial Bank of China Ltd, announced in May 2013 its intention to expand its foothold in the Middle East beyond offices in Dubai, Abu Dhabi, and Doha and looking towards Riyadh and Kuwait. The bank has said that it will get Chinese firms to sell sukuk out of Dubai.¹¹

The Last Word

We finish off with the “C” word—it is perhaps an open secret that corruption pervades Islamic countries despite the ethical demands of the religion. Where work introducing corporate governance continues apace within Islamic financial institutions, other levels of ability, says Sheikh Nizam, also have to be addressed, “If the rulers themselves start and set the example, then everyone will follow suit. If the highest person is taking a bribe, this will allow anybody else to take bribes.”

He leaves us with a story from Umar ibn al-Khattab, the second caliph. Umar, says Sheikh Nizam, used to ask all governors under him returning home, “What is the source of your funds?” The governors' wealth was counted for their salary and for their stipend. If there was any excess he would tax them 50 percent, and still demand to know the source of these funds. One day, says the Sheikh, one governor had an extra pair of slippers on him. Umar let the governor keep one side and took the other for the state Treasury.

“We must have ability,” says Sheikh Nizam. “It will take time. It will take time. But for people who have been used to taking such wealth for their own pockets, living such a lifestyle, they will only change when they think there is a threat that will be removed. Only then will they change.”All signs point to a shari'ah scholar who is upbeat (he laughs a lot, is rarely seen without a smile and always looks on the brighter side of life), enthusiastic, and brimming with optimism for Islamic finance.

Notes

¹ Monzer Kahf, “Islamic banks: The rise of a new power alliance of wealth and shari'ah scholarship,” 2001. [Online]. Available from: http://monzer.kahf.com/papers/english/The_rise_of_Islamic_banks_power_alliance_REVISED MESA.pdf.

² John R. Presley, Directory of Islamic Financial Institutions (London: Croom Helm, 1988).

³ Wafik Grais and Matteo Pellegrini, “Corporate Governance and Shariah Compliance in Institutions Offering Islamic Financial Services.” World Bank Policy Research Working Paper No. 4054, 2006.

⁴ Earth-Mates Dialogue Centre, “Istanbul Declaration of the Muslim 7-YearAction Plan on Climate Change 2010–2017.” 2009. [Online]. Available from: http://www.loe.org/images/content/090731/declaration4.pdf.

⁵ Leiden University, “Globalized Eco-Islam: A Survey of Global Islamic Environmentalism,” Leiden Institute for Religious Studies, Leiden University. [Online], 2012. Available from: http://media.leidenuniv.nl/legacy/reportglobalized-eco-islam-a-survey-schwencke-vs-24-february-2012-pdf.pdf.

Ibid.

⁷ Ibid., p. 5.

⁸ Funds@Work, “The Small World of Islamic Finance,” [Online]. Available from: http://www.funds-at-work.com/s/media/ShariaNetwork_by_Funds_at_Work_AG.pdf.pdf.

Yusuf Talal DeLorenzo, “Islamic Finance and the Global Economic Crisis.” National Council on U.S.-Arab Relations, 17 February 2009. [Online]. Available from: http://www.youtube.com/watch?v=0320zXEs2zk.

¹ Pew Forum, “The Future of the Global Muslims Population,” Pew Research— Religion & Public Life Project, Pew Forum, January 2011. [Online]. Available from: http://features.pewforum.org/muslim-population/.

¹¹ Gulf Times, “ICBC Eyes 10% Mideast Asset Growth in 2013,” Gulf Times, 16 May 2013. [Online]. Available from: http://www.gulftimes.com/business/191/details/352824/icbc-eyes-10%25-mideast-asset-growthin-2013.

Chapter 9

The Lawyer

Michael J.T. McMillen

By the soul, and the proportion and order given to it; And its enlightenment as to its wrong and its right; Truly he succeeds that purifies it, And he fails that corrupts it.

—Al Qur'an, Sura Ash Shams, Verses 7–10

Michael McMillen is a lawyer who makes big deals happen. He is the one who brings everything together and ties them up neatly into definitive contracts. But far from being a ive spectator merely called in to ink the legalese, as legal advisor McMillen is part of the active process of structuring deals, at times making significant contributions. McMillen's work in the global Islamic finance industry started in the Kingdom of Saudi Arabia in 1996, where, he says, he learnt all about camels. Today McMillen is a leading and prominent expert in Islamic finance, and a prolific contributor to both the academic and professional sides of the legal profession.

I think I am very fortunate to be able to do what I've done, to be involved in this industry and developmental process. It's been extraordinarily creative and rewarding in many ways. I have met so many people of impeccable integrity and

focused humanitarianism; it has changed my life.

—Michael J.T. McMillen

Michael McMillen is one of those people you would not mind being marooned on a desert island with, something you probably would not say about many lawyers. Not that he is famed for his desert island or wildlife survival skills (are you, Michael?), but he has copious levels and amounts of optimism and positivity—just what you need to keep your spirits up. He is also a qualified medical doctor. McMillen is one of those who always keeps the bigger picture of life in mind even while he revels in its details. If you were looking for a champion of Islamic finance, Michael McMillen must necessarily be in your Top 10 list. And to sweeten the deal, do not forget to print in bold that he is not a Muslim.

McMillen cannot stop saying “fascinating.” A lot of things about Islamic finance fascinate him. Then again, he is an “indefatigably optimistic person,” as he says. So optimistic that it drives his children mad having to put up with his good cheer all the time. His wife, an opera singer in an industry where rejection is commonplace, shares his resilient optimism. His buoyancy really does spike the mercury, and so he was made to explain why.

McMillen grew up Roman Catholic in Eau Claire, Wisconsin, a “little tiny town,” he says, with a population of 34,957 in the 1950s (it stood at 66,000, at last count, according to the 2010 U.S. Census). His family was middle class and not wealthy. He introduces them: “My father was blind from his mid-30s. He was a salesman, and, while blind, won a U.S. Open national bridge championship. My mother was one of the Easter Seal children in the United States. She had polio and was debilitated. She became a professor of speech therapy and studied the acquisition of language in neonates. I have a younger brother who is thought to be the oldest living person in the world with a particular and very extreme and uncommon bone disease. My younger sister,

who was a doctor and professor of medicine and pediatric rheumatology, died in a surgical accident.” He continues, “I grew up thinking of all that as normal, because I didn't know any differently.” His family's challenges taught him “adversity always holds opportunity,” as he puts it, and he has learnt to find advantage and good in any situation. “Don't quit, don't give up, don't get angry, don't blame somebody else, look for the opportunity and benefit” is what he tells his children. “My poor children suffer through this constantly!”

With steely resolve and handfuls of silver linings in his pockets, McMillen went on to receive his business degree from the University of Wisconsin–Madison, his law qualification from the University of Wisconsin Law School, and then a medical degree from the Albert Einstein College of Medicine, which is part of Yeshiva University, an institution that “melds the ancient traditions of Jewish law and life with the heritage of Western civilization.”

McMillen first worked as an assistant district attorney with the Dane County District Attorney's Office in Madison in 1977 before turning to medicine. He then returned to being a lawyer in 1983 and spent approximately seven years with Debevoise & Plimpton in New York City. One of the reasons he left medicine, he says, was that it was not sufficiently creative for him. “It was exceptionally rewarding in humanitarian , but I felt like I was never creating anything. That was not the kind of life I wanted to lead.” He has led “an enormously creatively oriented professional life,” he says, and cannot stress enough how grateful he is for it. “Of course, things haven't gone perfectly, business is up and down, like any other aspect of life. But when people ask me how I am, I really mean it when I say ‘It's another day of bliss!’ I go home every night happy that I get to do this kind of work.” He is currently a partner with the international law firm of Curtis, Mallet-Prevost, Colt & Mosle.

Many Firsts

As a lawyer working in the Islamic finance industry, McMillen's work has primarily been structuring financing transactions and investment funds to the satisfaction of all involved parties, which includes harmonising both shari'ah and non-Islamic legal concepts and frameworks. It has been an immense undertaking, and his success in building bridges between different legal systems has made him an exemplary lawyer in the field. The example of one of his earliest transactions, in Saudi Arabia, illustrates the enterprise.

McMillen's first exposure to Islamic finance was in 1996. After spending some time in Peru and Uzbekistan and a year and a half in India, he was sent to Saudi Arabia by the New York–based law firm White & Chase LLP (where he made partner in 1997). He was a project finance lawyer focusing on electricity, mining, petrochemicals, paper milling and infrastructure projects. He was based in Saudi Arabia in order to help develop transactions in the electricity and infrastructure sectors.

In one of his first transactions, McMillen acted as legal counsel for a group of international banks, led by Chase Manhattan, on a large project financing: the Saudi Chevron petrochemical project. This was the first limited recourse project financing in Saudi Arabia, and a particularly difficult undertaking. Because of the limited recourse nature of the financing, the banks sought a comprehensive collateral security structure to secure their investment. The loan itself was interest-based. McMillen presented the American and English ways of structuring collateral security. He was informed that they could not be implemented in Saudi Arabia because mortgages and security interests cannot be recorded in the country; the relevant ministry prohibited recordation because they were thought to secure interest-bearing obligations that are contrary to the shari'ah. More than a year later McMillen and his team finally sealed the deal with a shari'ah-compliant collateral security structure called rahn-adl (mortgage/pledge-trustee), which would be enforceable in the shari'ah courts. It

was camels, he said, that eventually got them over the finish line.

In order to understand the differences between the American and English legal concepts pertaining to collateral security and those espoused by the shari'ah, McMillen and team had to break down the structure into its constituent elements: some 3,000 of them. Camels then entered the picture. Well, at least figuratively. Camels and everything to do with camels were used as a simple analogy to probe the details of the collateral security structure. Every question pertaining to the camel was explored: Who is responsible for feeding the camel? Who cares for it? Who receives the cash from the sale of the animal's milk? How should that cash be applied? The list goes on.

The process was then repeated on a comparative basis for a financing secured by other types of assets, such as land and equipment. As their understanding of these examples deepened, team expanded their inquiry to other types of collateral. The model became more refined until the lawyers achieved a more precise understanding of the type of structural bridges they would have to construct to satisfy both the shari'ah requirements (so that they could enforce the structure in the Saudi courts) and the relevant Western concepts of import to the banks.¹ They had to satisfy the credit and underwriting policies of Western international banks and their desires for an enforceable structure.

In the end, McMillen explains, “The primary bridge between the shari'ah structure and the Western concepts familiar to the international banks was the incorporation into the collateral security structure of an adl. American and European financings usually involve a trustee that holds collateral on behalf of lenders. Shari'ah does not provide for trustees, at least in a Western sense. However, shari'ah has a long experience with a similar concept, the adl.”

He breaks it down further. “In brief, an adl is a trusted and honorable person selected by both the lender and the borrower, a type of ‘trustee-arbitrator’ having certain fiduciary responsibilities to both parties. In addition to providing the

necessary structural bridge, incorporation of the adl into the structure also solved or minimised numerous difficult issues under Saudi Arabian law.”²

Significantly, as McMillen says, “The structure demonstrated that shari'ah principles could be implemented in legal systems that are interest-based, such as the American and English systems.” A very important bridge had been built. This first shari'ah-compliant collateral security structure in the kingdom paved the way for implementation of other similar billion-dollar secured financings.

McMillen remained in Saudi Arabia for four years, during which time he structured and implemented many other shari'ah-compliant financing transactions. These included the Ghazlan II power project, where he was involved as counsel to the Saudi Consolidated Electric Company. Ghazlan II was a dedicated receivables financing and the first transaction in which the international banking community participated in the Saudi Arabian electricity sector.

He was also responsible for one of the first purely shari'ah-compliant musharaka financings in the Saudi Arabian project and infrastructure sector, then referred to as a sharikat mahassa-murabaha structure. This also involved the Saudi Consolidated Electricity Company and multiple other parties, including three banks that provided the financing, and an engineering, procurement, and construction contractor. That structure is now called a diminishing musharaka.

He did not just take on the big international deals. Many transactions involved local Saudi Arabian companies. For example, McMillen structured an ijara (lease) programme for a Saudi Arabian automobile and bus dealership to finance the purchase of more than 2,000 buses to be used for the hajj, the annual pilgrimage.

Outside of financing structures, McMillen did the legal restructuring of National Commercial Bank's international and Saudi Arabian mutual funds, developed an arabun (the fund implemented a combined put and call options) equities fund, and, for Samba (then Saudi American bank), developed a shari'ah-compliant equivalent of commercial paper based on a mudaraba structure. Ultimately, that mudaraba structure was not implemented because the Saudi Ministry of Finance never acted on it. That exercise included a lot of involvement by prominent shari'ah scholar Sheikh Dr Ali Elgari.

For all of these structures, McMillen worked closely with shari'ah scholars, such as Sheikh Dr Ali Elgari, Justice Muhammad Taqi Usmani, and Sheikh Nizam Yaquby, as both the shari'ah and the non-Islamic legal framework had to come together.

McMillen will be the first to tell you that shari'ah has developed over 1,400 years but fundamental business practices have remained essentially the same. At the core, businesspeople were doing then what we are doing now. “Basically the fundamental business activities really haven't changed much in 1,400 years. The concepts are there and they're the same and they are very much applicable.” Shari'ah, says McMillen, has a complete system to handle all of the sale, partnership, and trading concepts. He cites partnership concepts under shari'ah as an example and characterises them as some of the most advanced in the world. However, application of shari'ah in commercial and financial realms in Muslim countries ceased for centuries. The colonial powers utilized interest-based systems for commercial and financial matters, and the shari'ah that survived was applied only in family and estate and inheritance matters, as evident in Egypt and Malaysia, for example. This resulted in a dearth of legal and shari'ah scholarship pertaining to business, economic, and financial matters. (In such a situation, only a handful of bright young people interested in pure scholarship would immerse themselves in the shari'ah as applied to commerce and finance.) Consequently, financial products and systems lacked a basis in shari'ah; those products were born out of, and responsive to, the interest-based financial system. During this interregnum period, it was the Western legal framework, most predominantly common law or civil law, that governed financial products and structures in the Muslim lands. But with the development of Islamic finance

since the 1970s, and particularly since the mid-1990s, shari'ah principles and concepts are slowly returning to the Islamic consciousness.

By 2000, when McMillen left Saudi Arabia, he had built a considerable reputation within the industry. Back in America and working with a new law firm, King & Spalding and his current firm (Curtis, Mallet-Prevost, Colt & Mosle), he has continued to work in Islamic finance.

“The United States Is Probably the Second Largest Islamic Finance Market in the World”

If you take sukuk out of the equation, says McMillen, “in my view the United States is probably the second largest Islamic finance market in the world. Very few people are aware of it.” (Malaysia is the largest, even without sukuk, says McMillen, although this configuration is changing.)

He describes shari'ah-compliant activity in the United States: “These are private investments from the Middle East in properties and companies. They tend to invest first and foremost in real estate, and secondly in private equity transactions.” He cannot put a number to the shari'ah-compliant private investments and funds that own America's properties and companies but says it is “staggering.” He continues, “For one fund that I've done, that was $3 billion. We've maybe seen 18 to 20 similar real estate funds, and that does not count private equity. As another example, of one country's royal family have a United States real estate fund, which is a very discreet fund. They have investments in every single state and nobody has a clue how much they're really worth.”

There has always been an inflow of investment funds from the Middle East (largely petrodollar-related) into the United States, but these were primarily transacted conventionally until the late 1990s, when the first shari'ah-compliant ijara structures were developed. McMillen notes that he has seen “hundreds, maybe 400 or 500 ijara financings” in the United States.

He adds, “In the early years, from approximately 1999 to 2002, the United States was experiencing a boom in residential real estate. Hurricanes had decimated the condominiums in Florida, and they had to be rebuilt. A lot of that was shari'ah-

compliant funding from the Middle East.”

McMillen speaks with much authority on this. In 2000, he was counsel to Key Global Capital, Inc., and Gulf Investment House, the primary Islamic investor in the Maconda Park Residential Construction financing in Austin, Texas. An istisna–ijara (construction and lease) structure was used, the first such shari'ahcompliant financing of its type in the country. This was followed very soon with the Truman Park Apartments project in Largo, Maryland. The same parties were later involved in other shari'ah-compliant U.S. transactions, including several residential projects in California, such as in White Rock Village in El Dorado Hills, the Galleria in Roseville, and the Cordelia Ranch Apartments outside San Francisco. And there were many others for these and other investors. The istisna–ijara structure has since been used extensively in the United States, although, like similar structures, it has been refined and simplified over time.

McMillen has been legal counsel to many of Gulf Investment House's interests in the United States. The company had such extensive interests in the country that it formed Innovest Capital, Inc. in 2004 to formalize its investments. Other than residential projects, McMillen has worked on transactions for their healthcare projects as well, including ones in Miami, Florida; Detroit; Michigan, Columbia, Cornwall, Erie, and Hudson in New York and Burien, Washington.

On the funds side, there were a few funds in the 1990s in the United States, before shari'ah-compliant financing took hold from 1999. (McMillen was not involved in these funds.) These include the Danah Real Estate Portfolio offered by Kuwait Finance House in 1994; the IIBU Fund II PLC launched by the United Bank of Kuwait and the RBE Ijara Fund PLC (both leasing funds); and Investcorp's U.S. Residential Properties II Portfolio. There are many others, including more homegrown American funds, such as Amana Fund, which was established in 1986. At one time Arcapita was the largest shari'ah-compliant private equity firm in the United States. However, it filed for bankruptcy in March 2012. Unicorn Investment Bank is the other shari'ah-compliant private equity firm.³

McMillen gives a few other examples of investments and funds that have involved shari'ah-compliant structures in the United States:

Cargill's headquarters in Minnetonka, Minnesota (Cargill is the United States' largest privately owned company by revenue.) Sunrise Nursing Homes Prologis warehouses (Prologis is a real estate investment trust, or REIT.) Loehmann's Holdings, the clothing company (owned by Dubai-based Istithmar World, who also include in their portfolio Barney's New York, Fontainebleau Miami, and Mandarin Oriental New York) HSBC Amanah Global Properties Income Fund and the HSBC Amanah Aqar Income Fund (launched in 2002 and 2005 respectively). The former, according to McMillen, was the largest of its kind in the world.

These examples cover construction, real estate, and private equity funds. There are other sectors, including project and equipment financing and trade and manufacturing financing. Most of the project and equipment shari'ah-compliant financing that McMillen has worked on in the United States has involved energy and fuel companies or projects. These include a biodiesel project in Texas.

Suffice it to say, there is a lot of Islamic finance activity in the United States, albeit very much under the radar, so the examples given are probably just the tip of the iceberg. If these shari'ah-compliant financial activities were low key before, they became almost invisible after the terrorist attacks on 9/11. McMillen says, “After September 11, people decided that there was no need to the fact that they were investing Islamically. They don't hide it—the data is publicly available all the time—but why promote it? These people are Muslim investors in the Middle East, and what they want is shari'ah-compliant

investments. They are discreet; they are not seeking attention.”

“The United States Is One of the Easiest Places in the World to Do a Shari'ah-Compliant Deal”

How's that? It's in part the substance over form orientation, particularly as regards taxation, says McMillen.

“This means that the focus of many United States laws (such as tax laws) is the economic substance of the transaction: the economic essence. How the transaction is dressed up is largely irrelevant. Which also means that the law does not really care if the transaction is structured to be compliant with the shari'ah. What U.S. law does care about as a legal matter is the economic substance. So every time we've tried to get a tax ruling in the United States, like New York State or Office of Control of Currency or the Federal Reserve Bank, the regulators have said, in essence: fine, no problem; we don't care if it's structured to be compliant with the shari'ah.”

McMillen cites another example to further illustrate his point: bankruptcy and insolvency. Increasingly, the global Islamic finance industry has been looking at the legal structures and frameworks to accommodate and facilitate insolvency and bankruptcy, with the sophistication of these laws being quite uneven across the different major Islamic finance jurisdictions. The countries of the Gulf Cooperation Council, for example, are only just developing legal frameworks for insolvency and bankruptcy.

“In my view, one of the best things to happen, oddly enough, is that the first formal bankruptcy filing in the Islamic finance field occurred in the United States. That was the East Cameron Oil and Gas bankruptcy.”

The East Cameron Oil and Gas bankruptcy case involved the $165.67 million sukuk musharaka the company issued in 2006. The deal was the first ever Islamic securitization originating in the United States. The sukuk issue was backed by oil and gas assets in the U.S. jurisdiction in the Gulf of Mexico. It defaulted in 2008, and the company filed for bankruptcy protection after its offshore oil and gas wells failed to yield expected returns. McMillen was counsel to the ad hoc committee of sukuk holders, comprising over 95 percent of all sukuk holders in the bankruptcy case.

The bankruptcy judge rejected the company's contention that there had been no real transfer of ownership of production revenues (royalties) into a specialpurpose vehicle formed to issue the sukuk. The company claimed that the transaction was merely a loan secured on the royalties, meaning that sukuk holders would have to share the royalties with other creditors in the event of liquidation.

The judge ruled the transfer of East Cameron's assets to the sukuk holders. McMillen says, “The court honoured the shari'ah structure. That was a great thing: a sensitive and accurate determination. The bankruptcy system recognised the Islamic financing and maintained the structure that was put in place. The court maintained it largely as equity because that was what the sukuk musharaka was supposed to be—equity.

“The reason I like the fact that the first bankruptcy was in the U.S. was because it showed that the U.S. courts are receptive. They basically said: We're going to honour the shari'ah structure and try to figure out how we reorganise this transaction in harmony with the shari'ah and intent of the parties.”

McMillen concludes, “People resist this characterisation, but I believe that the United States is one of the easiest places in the world to do a shari'ah-compliant transaction, for a host of reasons, including the substance-over-form orientation and a range of different types of structural accommodations [such as

“disregarded entities” that are not taxed].” He has pushed this belief, devoting part of his time to spreading knowledge about Islamic finance in the United States to the legal fraternity. In 2007 he became founding chair of the Islamic finance section of the American Bar Association (which boasts 400,000 ) and, since 2006, he has taught Islamic finance at the University of Pennsylvania Law School and the Wharton School of Business.

Consulting and Structuring Deals Worldwide

Beyond the United States and Saudi Arabia, McMillen has advised and structured shari'ah-compliant deals all over the world. The list is long and includes Brazil, Canada, China, Colombia, Egypt, England, Finland, , , India, Kazakhstan, Luxembourg, Oman, Peru, Poland, Portugal, Qatar, Scotland, South Africa, South Korea, Sweden, and Switzerland.

What does he think is his biggest contribution to the Islamic finance industry? “I think the main contribution is to have demonstrated that you can harmonise different legal precepts and structures from disparate jurisdictions, that you can do enforceable, cost-effective shari'ah-compliant deals in jurisdictions like the U.S., the U.K., or . The contribution was to develop structures in secular jurisdictions without forsaking shari'ah principles, while staying within the parameters of those secular systems.”

He notes that his contributions would not have been meaningful if not for the work of shari'ah scholars who have also enabled such structures.

Critical Factors for the Development of Islamic Finance

Post 9/11, shari'ah-compliant financing was kicked up a notch because of the Dow Jones fatwa (legal ruling) that was issued in 1998. That fatwa set standards for shari'ah-compliant equity investing. It institutionalized concepts relating to permissible variance, cleansing and purification, and the focus on “core” business activities of an entity. (See Chapter 8 on Sheikh Nizam Yaquby and Chapter 10 on Rushdi Siddiqui.) What the Dow Jones fatwa meant for investments and financing was that it allowed investments where the company or assets involved were not 100 percent in compliance with strict constructions of the shari'ah. McMillen explains, “The Dow Jones principles got applied in real estate, private equity, and other investments. The determinative focus was on assessing the ‘core’ activity of a business rather than focusing on a relatively insignificant impermissible business activity and allowing that to be preclusive. For example: Can you invest in a shopping mall that has a supermarket in it that sells beer or pork? These types of questions came to the fore only after the Dow Jones fatwa. Before that, you couldn't do the investment: You just couldn't. It's fascinating.”

McMillen takes his hat off to the shari'ah scholars who signed off on the Dow Jones fatwa, the ones who worked for five years to resolve the issues involved. “It was pretty risky stuff. They were being criticised by their peers, and it took that long to convince the global scholarly community. It was so controversial because you are allowing impurity, on a temporary and transitional basis. The Dow Jones fatwa repeatedly states that if you find a better way, then you have to use a better way; but for now we're going to allow impurity and we're going to squeeze it down, squeeze out the impurity over time.”

As an example of the impact of the Dow Jones fatwa and the permissible variance concepts, real estate and private equity investors moved from

investments in the smaller market for single-tenant properties (where strict, nonvariant business activities can be achieved with relative ease) to investments in the much larger, more competitive, and more lucrative markets for multipletenant properties (where the likelihood of some noncompliant activities is much greater). An entirely new set of markets was opened for shari'ah-compliant investors.

“I think the Dow Jones fatwa is one of the most monumental events for the development of the industry and probably the most important, although all factors are synergistic. You wouldn't have a global Islamic finance industry if the Dow Jones fatwa had not been issued in something like the form in which it was issued.” Table 9.1 lists the factors that McMillen believes have been critical in advancing the Islamic finance industry worldwide.

Table 9.1 Critical Factors for the Development of the Islamic Finance Industry

¹. ². ³. ⁴. ⁵. .

Dow Jones fatwa Allowance for use of nominate contracts as building blocks Development of bifurcated structures that incorporate both interest-based elements and sha Malaysian government initiatives in advancing Islamic finance and the international impact Development of sukuk (debt Islamic capital market), especially after ² ² when sukuk really Shari'ah scholars' efforts to achieve ijma (consensus) among the four primary orthodox scho

Another one of the critical developments in the mid-1990s that provided an impetus to the growth of Islamic finance was a shift in the concept of how the nominate contracts can be used in transactional structures. The same scholars involved in the Dow Jones fatwa were involved in leading the change in form of nominate contracts. They were Sheikh Muhammad Taqi Usmani, Sheikh Dr Mohamed A. Elgari, Sheikh Dr Abdul Sattar Abu Ghudah, Sheikh Nizam Yaquby, and Sheikh Yusuf Talal DeLorenzo. Other scholars were involved, of course, but these men had the vision and took the lead, including the criticisms.

McMillen explains what this change meant. “Up until the mid-1990s, let's say you were going to implement a transaction using a nominate contract, say an istisna' or an ijara. Whatever nominate contract you were going to use was like a silo. You had to fit perfectly into that silo, and you could only use one of those nominate contracts for every transaction.” This, obviously, limited the range of structures and transactions. The change in use of the nominate contracts took place gradually, says McMillen, “It didn't happen overnight. The nominate contracts became building blocks instead of silos. Now you could use two of them or three of them in one transaction as long as you didn't defeat the purpose of any nominate contract and didn't violate the principles of any nominate contract—not just in form but in substance as well.”

The allowance for use of nominate contracts as building blocks did not come in one fatwa issued by a collective like the Dow Jones fatwa. The five scholars who led the thinking behind the change are the cream of the shari'ah crop, and together they sit on the greatest number of shari'ah boards of Islamic financial institutions. This has allowed a level of harmony in shari'ah rulings.

This change in the form of nominate contracts had an immediate impact on the way lawyers like McMillen could structure financial products. “Now, all of a sudden, the whole world changed. Potentially, and subject to the constraints regarding the purposes of the nominate contracts involved, you could build

structures that are comparable to the sophisticated international financing structures. Most of the current structures use more than one nominate contract. You can use both an agency contract and a lease in a single transaction, for example. You couldn't do that in 1995. It's fascinating.”

The istisna–ijara structure that he started using in the United States is a prime example of nominate contracts being used together as building blocks. It is also an example of another one of the critical developments: bifurcated structures that allow conventional Western financial institutions to participate in Islamic financing transactions. McMillen explains: “You would build something, like a residential building and then lease it after the construction period. So with these kinds of transactions, the shari'ah scholars said, ‘You can characterize that as two transactions or you could integrate them into one single unified undertaking [which, of course, is how the business parties view the matter: as a single unified undertaking].’ In international finance, the entire transaction will be financed as one single, integrated transaction.”

In addition, bifurcated structures that incorporate both interest-based elements and shari'ah-compliant elements have been developed. Again, this draws in the Western conventional institutions and allows shari'ah-compliant and interestbased financing to be integrated into a single transaction, a change that has opened the industry to more growth. McMillen sees this as a necessary move: “You can't finance everything you want to finance if you're in isolation. There isn't enough money in the Islamic finance realm, standing alone. And you would never expect the Islamic finance industry to absorb that type of risk concentration. It's too small. You can't be that isolated within the markets.”

McMillen cites the Malaysian government initiatives as another critical developmental factor in the development of Islamic finance. (For information on the Malaysian sector see Chapter 5 on Mahathir Mohamad and the Malaysian Story.)

The development of sukuk also comes within his listing of critical factors.

He also includes the efforts of the shari'ah scholars to develop structures that are compliant with the variations among the four primary orthodox schools of Sunni jurisprudence: efforts to achieve ijma (consensus). The scholars have made an effort to approve structures that were in compliance with the shari'ah as interpreted under all four schools. The scholars may not agree on the reasons why a structure works and is acceptable, but the structure would be developed so that it is acceptable.

These moves taken by the shari'ah scholars demonstrate that they are practical and by no means dogmatic, says McMillen. Having looked at “monumental” steps taken by the industry because of the work of shari'ah scholars, McMillen then turns to them directly.

Code of Conduct: Lawyers and Shari'ah Scholars

Lawyers like McMillen can innovate with new structures all they want, but they still need shari'ah scholars to approve them before they can be implemented. This is why McMillen has to work closely with shari'ah scholars, including during the transactional structuring process. The example of the Saudi Chevron rahn-adl structure, the first Islamic finance-related project he oversaw in Saudi Arabia in 1996, is case in point. Not knowing very much about Islamic finance then, McMillen consulted for over a year with shari'ah scholars until together they could develop a structure that met the interests and needs of all parties— Islamic and non-Islamic. McMillen has worked very closely with the industry's shari'ah scholars ever since and has nothing but the highest respect for them.

Referring to the five shari'ah scholars who issued the Dow Jones fatwa, initiated the change in form of nominate contracts and drove the other critical developments, McMillen says: “The scholars had a huge impact because they had to take the tough decisions to allow these changes.”

He has worked most closely with six shari'ah scholars: Sheikh Muhammad Taqi Usmani, Sheikh Dr Mohamed A. Elgari, Sheikh Dr Abdul Sattar Abu Ghudah, Sheikh Nizam Yaquby, Sheikh Yusuf Talal DeLorenzo, and Dr Mohd Daud Abu Bakar. These scholars, more than any others, have received the most criticism from the industry because they took on the tough issues and because they occupy the greatest number of shari'ah board seats in Islamic financial institutions around the world. McMillen defends them, arguing that it will take time for the modern industry to build its human capacity, especially its pool of expert shari'ah scholars. He says, “There is a shortage of scholars, largely because of that interregnum period during which shari'ah was not applied to interact with commerce and finance on any significant scale. There is a downside and an upside to that. When you start building an industry, it's very understandable to me that this group of scholars, and there are maybe eight or ten of them, sit on lots of different boards.”

The industry is often up in arms about how too few scholars sit on too many boards and claim that this opens the door for conflicts of interest. To this McMillen says, “Do you know of a single situation in which there has been a scandal? To my knowledge there have been no scandals. These are people of the highest integrity who are intensely aware of the predicament. In addition, the limited number of scholars has yielded some benefits for the industry: for example, harmonisation and the trend toward ijma.”

McMillen has very strong feelings about and for shari'ah scholars in the Islamic finance industry, and he is not afraid to express them. “You know, when you sit with the scholars talking structures with them all the time, doing their consulting agreements for them and all that sort of thing, you get to know these people. I think these are people that have the highest moral and ethical standards, the highest level of integrity, that I have ever seen. That's a beautiful thing in life.”

He continues, “If one thing moves me more than anything else, it's that moral and ethical strand that flows through a deal. What the scholars talk about, how their decisions would influence people…how they consider the whole Muslim populous and the Islamic finance industry from long-term as well as the shortterm vantages. You can disagree with them on all kinds of things, you know. For example, some disagree with all this permissible variance or permissible impurity that's been allowed in the Dow Jones fatwa. But, as a practical matter, I think they are to be glorified and respected.”

Very strong feelings indeed. Regarding whether stricter governance measures should be imposed to prohibit shari'ah scholars from sitting on many different shari'ah boards, McMillen believes that formalising matters is one thing but the enforcement and review mechanisms are another. “I'm not opposed to some of the shari'ah governance proposals, as a conceptual matter. But if you take that step, how will it be enforced?” He refers to the U.S. legal fraternity experience and example with their Code of Professional Responsibility for U.S. lawyers—a

creation, originally, of the American Bar Association. The code has a whole enforcement section that necessarily comes with a lot of institutional mechanisms. He is not too sure that the Islamic finance industry is ready to take the step towards such rigorous and stringent governance enforcement and review.

Sheikh Muhammad Taqi Usmani Sukuk Pronouncement

As to scandals, McMillen brings up one of the incidents that comes close to being a scandal—the 2007 incident that rattled the global Islamic finance industry and markets, sending confidence levels plunging. A leading shari'ah scholar, Sheikh Muhammad Taqi Usmani, among others, was of the opinion that the majority of a certain type of sukuk were not, in fact, shari'ah compliant. The sheikh is chairman of the shari'ah board of the industry standard-setting body the ing and Auditing Organisation for Islamic Financial Institutions (AAOIFI) and is widely recognized as a leading shari'ah scholar in the industry. AAOIFI issued a March 2008 clarification of some of the sheikh's views, which were adopted by the AAOIFI shari'ah board.

McMillen explains what led to the sheikh's proclamation in 2007. Relating the scandal to the issue of governance, McMillen observes that the scandal showed the scholars policing themselves and the industry and enforcing corrections through a peer pressure mechanism, although in this instance that peer pressure failed to correct all the wrongs. He explains, “More than a year before [the AAOIFI clarification], Sheikh Taqi had alerted the law firms, the bankers, and the industry as a whole, including those directly involved, of what he considered to be matters that were not in compliance with shari'ah principles pertaining to certain sukuk al musharaka structures. The matter was not addressed by the practitioners. So he circulated his memo and conducted open meetings to discuss these matters. And still necessary adjustments were not made. Hence the AAOIFI statement. If you look at the statement, towards the end there is a paragraph directed, rather forcefully, at shari'ah scholars that approve and oversee these structures. It doesn't name anybody, but if you are in the industry

you'd know who it was directed at. It basically said to these scholars that you can't just approve something and then walk away. Scholars have an obligation to monitor how the whole transaction is implemented; it is an ongoing obligation and an ongoing process.”

That, says McMillen, is self-policing, and a governance modality of its own kind. He is uncertain, though, if this is sustainable, especially when the top scholars who have been so influential start to retire and as the industry grows. “I don't think it can work as the industry gets really large. Then you need a different mechanism. Maybe it can stay predominantly as a type of mechanism for a while, but it's got to evolve.” But assuming that the global industry will not go the visionary way and apply uniform governance standards across the board, he sees a tendency toward chaos if each country and each jurisdiction were to apply its own set of governance principles.

On Freely Circulating Fatawa

The other matter that concerns the industry vis-à-vis conflict of interests is the sharing of fatwa with a broad base of industry participants. Many a shari'ah scholar (e.g., Sheikh Dr Ali Elgari) have called for more transparency on this matter, believing that all fatawa should be made publicly available. McMillen says this desire is widely shared among the scholars. This, they believe, would only serve to increase the sharing of key information and knowledge, increase the levels of transparency, increase the degree of harmonisation and consistency in application of the shari'ah, and increase the levels of education for the industry in of the work of shari'ah scholars. This has not happened despite many years of constant calls by shari'ah scholars.

McMillen hears shari'ah scholars speak about this. “I think every shari'ah scholar I've ever talked to would love to see fatawa freely available. But the industry criticises them for this. The scholars would love to circulate all of the fatawa, but

when they get hired by different companies, there's always a confidentiality provision that says they can't circulate the fatawa or anything else. It's the industry that is limiting the transparency, not the scholars.”

He goes on. “It's a fascinating thing because if the scholars had their way, the industry would actually develop more rapidly, quite a bit more rapidly. If you could circulate all the fatawa, we could all study the rationale behind them and learn from them. We would have more harmony in decisions.” But, he laments, that is not the way it works in the industry.

At this point, we look back at all the talk about structuring, what with teams of lawyers and shari'ah scholars having to work together for months on end, and ask McMillen why all this matters to the retail sector that serves the person on the street.

101: On Wholesale and Retail

McMillen says that a lot of the innovative work in product development and sophisticated structuring happens at the wholesale level. It involves institutional investments and institutional players and only subsequently devolves to the retail level. It is the wholesale or “high-finance” level that has the financial resources to allow innovation to happen. What is the relationship between the wholesale and the retail?

First, McMillen sets out to dispel the myth that retail only refers to the hoi polloi, “We have to be careful what we mean by retail. We have a tendency to think of the person on the street, kind of a normal middle-class person. A lot of the time when people classify things in retail, it's retail that involves pretty significant investment. Some of the ‘retail’ investments have large minimum amount requirements: say $250,000. Not a lot of people in the world can walk in with a $250,000 buy-in for an investment.”

That definition clarified, he continues. “There are exceptions to the dominance of wholesale level product development. Deposit-based structures have largely arisen without involvement of the wholesale space. The mudaraba structure that is used in takaful or in different retail aspects of banking is largely confined to insurance and banking.” Once the money is in the bank and the institution has to invest it then those investment structures owe much more to the wholesale space.

McMillen goes on to explain how the wholesale and the retail work together. “Most of the investment world isn't about banking. It's about quiet private investment, and these don't make the general-consumption papers with any frequency. I would guess that the amount of money that goes into private banking is much larger. Putting sukuk aside (because that's a different development altogether), what happens is that financial institutions all over the

Middle East, as well as family offices and similar closely grouped fund arrangements, lead the way. This might also include Middle Eastern financial institutions that make the investments and then parcel them out to their retail investor base. These institutions, offices or groups buy real estate, for example. They put together real estate funds and then either hold them for their own or on-sell those funds at retail to their client base.”

At this point, we all those Middle Eastern funds investing in the United States. McMillen takes them as an example and explains, “So take Kuwait Finance House, Gulf Investment House, or Abu Dhabi Investment Bank. I handled some real estate and some equipment leasing funds for them. Some interests in those funds were resold at retail. So we put the funds together first and the institutions went out to their local retail population in Kuwait or the UAE [United Arab Emirates] and sold portions of that fund. They sold it in different ways. Sometimes it was an investment through the private investor base, other times it was distributed to their ‘depositor’ base, as returns to their rab al maal (assuming the bank operated as a mudaraba). The broader participation in the investments happens in numerous different ways: some direct, some indirect.”

McMillen wants to see an expansion of wholesale investments such as these. He believes that this is where the financial resources for the development of innovative structures will come from, not from retail investors (though he does not reject the development of the retail markets, he is quick to add). “If the wholesale market slows, the rate of progress on retail development also slows, and, it seems to me, with the slowing in growth and focused developmental efforts, there is a greater tendency to copy or mimic conventional products.

“Somebody needs to fund innovation, and do so at the transactional level. This is when the greatest progress is achieved, in part because of the necessity of mastering, on a practical, nontheoretical, level the many constraints and imperatives that are imposed by regulatory and financial systems.” So in the end, the work of high-finance types like McMillen does trickle down to the retail

level. At this point, McMillen has addressed technical and structural matters and recognised the value of shari'ah scholars, granting them a preeminent role in the Islamic finance framework. If we took the two together, is it all about the money and innovation, or have the “highest moral and ethical standards” of the shari'ah scholars rubbed off on him?

Maqasid al Shari'ah and the Non-Muslim Islamic Finance Lawyer

Maqasid al Shari'ah is one of those things the Islamic finance industry debates constantly. The phrase literally means the “goals of shari'ah.” These goals are lofty and include justice and equity for all humanity. They are supplemented by other imperatives of the shari'ah, such as risk sharing or profit and loss contracts, such as mudaraba and musharaka. While people assume and take for granted (at their peril?) that each Muslim understands the maqasid and strive towards it, where does the non-Muslim Islamic finance lawyer stand on the matter?

“I'm a little bit more concerned about it than many of the Muslims I have to deal with. I consider myself as having a smaller margin of error, if you will. I won't take transactions that I think are too far away from the ethical orientation.”

He qualifies that he believes shari'ah-compliant transactions should achieve economic efficiency but certainly not at the expense of ethical imperatives or the ethical orientation. He has a whole range of clients, he says, from the ones who remain true to as strict an interpretation of the shari'ah at all and any cost, to the ones who do not want to pay more for shari'ah compliance than what they would pay for a conventional product. “Quite frankly,” says McMillen, “for some clients, the objective is being more compliant with the shari'ah than they currently are. But other factors take on considerable significance. No factor is always dominant. Often it is about the balance of risk and reward, on the one hand, and the shari'ah principles on the other hand. It boils down to whether or not you want to take the profit and the risk that goes with shari'ah-compliant profit-sharing arrangements. A lot of people don't. This is a very personal and private realm.”

He picks an example from his well-stocked arsenal. “I have had experiences in a number of funds on which I work, where, if returns dip, the investors, very prominent Middle Eastern investors, demand to get their money out at the level of returns they were getting before the returns dropped. That's just contrary to the contracts and is often in conflict with the applicable shari'ah principles. As a practical matter, some of these funds are istered by big international institutions. And these institutions will sometimes accommodate these people. It depends on how ‘important’ they are, and I use that term reluctantly.”

It is not an isolated incident by any means, he says. “I've seen it enough times. It's not a one-off thing.”

As a lawyer bound by client–lawyer privilege, people can be fairly candid when they speak in private, he says, especially if a level of trust has been built between the parties. I have heard, says McMillen, people saying “I want to improve my compliance but I don't necessarily want to be purely compliant because I don't want to take that risk and I don't want to pay the price.” As a lawyer, he has no business, he says, to judge them morally. But he will turn down jobs if he sees that the parties are neglectful of the ethical element or the essential principles of shari'ah.

He then questions that position: “Is that inappropriate of me to make a judgement like that, particularly when I am not a Muslim?” and answers his own question: “I can make that judgement on a number of levels. I believe in the ethical orientation, and I believe my margin of error is small. I know other lawyers who do this too.”

Seventeen Years On: The Woods for the Trees

The industry, says Michael McMillen, has gained a foothold and a degree of legitimacy in the global financial architecture and for its efforts has achieved recognition in the broader markets. From where he stands, the fear of shari'ah has receded—at least, he says, among the financial markets in the United States and Europe. Having said that, he does believe that more needs to be done to show that Islamic financing really is “structured finance” in the sense of structuring risks and cash flows (but not in the derivatives sense) and that it is “ethical finance.” But he qualifies his statement: “I say ‘a degree of legitimacy’ because many, both in and outside of Islamic finance, recognise that the industry is not living up to its own principles in many ways. For example, the unwillingness to use musharaka and mudaraba structures to any appreciable degree; people shy from the risk of loss of principal and return.”

On purely legal matters, he feels that the industry, and the jurisdictions in which the industry operates, faces significant impediments to growth. He cites the lack of published judicial opinions, the underdevelopment of legal infrastructure, and the lack of consistency and predictability in dispute resolution across jurisdictions. The lack of certainty and predictability has a significant impact on actual and potential transactional participants, particularly at the business level. Many businesspeople, he says, do not care what the legal principle is. They want sufficient certainty and predictability to enable them to evaluate risks and to price those risks. One of these legal areas he sees as bearing great risk and uncertainty is bankruptcy and insolvency. It is an example of an area of weakness in Islamic finance, according to McMillen. Simply put, welldeveloped bankruptcy and insolvency laws are absent.

But while he calls for more certainty and predictability in legal processes, he urges restraint in seeking standardisation at this stage in the development of the industry. By saying this he addresses another of the industry's burning issues. “Standardising is effective when the market is sufficiently mature that all parties

have agreed on risk allocations. At this stage in the development of the Islamic finance industry, we should not rush to standardise. It is necessary at the day-today retail level, but only with caution. If you standardise too early in the developmental process, the poor and the disadvantaged will be adversely affected, you will diminish the creative process, and you will impair the process by which permissible variance is minimised. Regarding the first aspect, the weakest party always suffers from premature standardisation because the big institutional players want to reduce their costs, and they have all the leverage. The institutional players have their reasons for standardisation, and many of them are legitimate from both an institutional and a systemic vantage, but you should standardise only if you can take cognisance, including ethical cognisance, of the positions of all the involved parties and their risk exposures. You don't want to oppress people. You also don't want to freeze creativity. And you want to ensure that the developmental process in the Islamic finance industry, including in respect of variance, are not stifled.”

The Last Word

Michael McMillen has been working at the top of the Islamic finance industry for 17 years, as of this writing. His expertise and skills have built bridges between the Islamic and non-Islamic legal systems, enabling new business partnerships and growth opportunities across borders. He has succeeded in harmonising interest-based non-Islamic structures with an evolving Islamic finance industry and the shari'ah principles that underlie that industry, and from this vantage he sees the lay of the land. “One of my criticisms of the development of modern Islamic finance in the global context is that we have done a poor job of conveying to people that, in most areas, such as leases, shari'ah principles as applied, such as through the nominate contract arrangements, are more similar to their Western counterparts (and vice versa) than they are different. It's like the human genome—over 99 percent of the genome of all humans is the same. The amount of the genome that's different is small. Yet too many people focus on differences.”

His cheer returns, and with it his display of gratefulness. He concludes by saying “I think I am very fortunate to be able to do what I've done, to be involved in this industry and developmental process. It's been extraordinarily creative and rewarding in many ways. I have met so many people of impeccable integrity and focused humanitarianism; it has changed my life. I've met so many people that I would never have ever met—all over the world—and I think very highly of the people that I've met in this industry. I'm really impressed. I'm so grateful for being able to have lived a career that has evolved this creatively, and to be able to look forward to even more. That's remarkable.”

Notes

¹ Michael J. T. McMillen, Islamic Shari'ah-Compliant Project Finance: Collateral Security and Financing Structure Case Studies, 2001. [Online]. Available from: http://www.kslaw.com/library/pdf/mcmillenislamic2.pdf.

² Ibid. p. 18.

³ Blake Goud and Kabir Hassan, “Islamic Capital Markets: Products and Strategies,” in Kabir Hassan and Michael Mahlknecht (eds.), Islamic Capital Markets: Products and Strategies (Chichester, UK: John Wiley & Sons, 2001), pp. 279–306.

Chapter 10

The Equity Capital Market Man

Rushdi Siddiqui

And give full measure whenever you measure, and weigh with a balance that is true: this will be [for your own] good, and best in the end.

—Al Qur'an, Sura Al Isra, Verse 35

Rushdi Siddiqui may possibly always be known as the Index Man, and this would be entirely of his own doing. In 1999 Rushdi led a Dow Jones team and five shari'ah scholars to launch the Dow Jones Islamic Market Index, the first Islamic index to be integrated into a global financial platform. He went on to create over 90 Islamic indices with Dow Jones. Rushdi then moved on to Thomson Reuters, where he continued to build pioneering benchmarks for the global Islamic finance and halal industries. He is now focused on the sector he feels most connected to: halal. Rushdi started his career on Wall Street before heading Dow Jones' Islamic Indexes.

The endgame for Islamic finance? For me it's simple—it's financial inclusion and financial empowerment for all of humanity.

—Rushdi Siddiqui

Rushdi Siddiqui was relating a story about how a man once called him a fraud to his face. “I'm not going to engage you in name-calling,” said Rushdi to the man, putting an end to the broadside. Why was he called a fraud? “Maybe because he thought that the index I led a team to launch is nothing important, or nothing laborious, or nothing meaningful. And that you squeeze as much publicity for the company and for yourself out of it, earn all these contracts and deals out of it. I'm just theorising. If it is that, then I don't think that's fair, though.”

So, to be fair, what are Rushdi's contributions to the global Islamic finance industry? “I think, putting it in a box, it's building up the foundation for the Islamic equity capital market. I'm not a debt capital market person. And the basis for anything to do with the Islamic equity capital market is—indexes, by extension a basis for a knowledge-based economy [equities].”

He downplays the significance of the Dow Jones Islamic Market Index (DJIMI) launched in 1999. “It's nothing brilliant, to be honest. It's just—you get the idea, you run with the idea, and you launch it before others. So it was right time, right place, right opportunity, right markets.”

Rushdi realised the need for Islamic indices when he was working for a small brokerage dealer on Wall Street in the early 1990s. He was tasked to oversee alternative investments and realised that it was difficult to measure Islamic fund performance as there was no Islamic index. He consulted with shari'ah scholars in the early 1990s on the shari'ah basis for constructing an index and piqued the interest of a group who then took the lead in researching and working out the screening methodology for a possible Islamic index. The scholars' work took five years and involved not only the group of five but also the Organisation of Islamic Cooperation (OIC) Fiqh Academy and a large number of interested shari'ah scholars from all over the world. These five scholars, according to Rushdi, decided to lend their shari'ah and endorsement to Dow Jones,

and so in 1998 Rushdi received the buy-in from Dow Jones to set up its first Islamic index. The group of scholars—Sheikh Muhammad Taqi Usmani, Sheikh Dr Mohamed A. Elgari, Sheikh Dr Abdul Sattar Abu Ghudah, Sheikh Nizam Yaquby, and Sheikh Yusuf Talal DeLorenzo—issued the fatwa that made the index possible in 1998. That fatwa is still viewed within Islamic finance circles as nothing short of “monumental” for it essentially endorsed shari'ah compliance to a measure of impermissibility and opened up the universe of equities for the global Islamic capital market. The DJIMI screens for shari'ah compliance were officially adopted by the industry standard-setting body, the ing and Auditing Organisation of Islamic Financial Institutions (AAOIFI), on May 19, 2004, as AAOIFI Shari'ah Standard 21. (See Chapter 8 on Sheikh Nizam Yaquby and Chapter 9 on Michael J.T. McMillen for their perspectives on the Dow Jones fatwa.)

Building Indices and Benchmarks for the Global Industry

It was journalist Charles Henry Dow and associate Edward Davis Jones who created the first index, the Dow Jones Industrial Average (DJIA), in 1896. Back then it consisted of 12 of the largest public companies in the United States. Now consisting of 30 companies, the DJIA is a benchmark index tracking targeted stock market activity. Companies listed on the DJIA include General Electric (the only survivor from 1896), 3M, AT&T, Caterpillar, Wal-Mart, Pfizer, ExxonMobil, and Microsoft.

On the Islamic side of things, Malaysia was the first to come up with an index listing shari'ah-compliant equities in 1996. Limited to the local bourse, the RHB Islamic equity index comprises shari'ah-compliant shares of Bursa Malaysia's main board companies.

The DJIMI that Rushdi launched was the first Islamic index by a leading global index provider. Rushdi stresses this lest controversy stirs up again by others claiming first-mover or pioneer index creator status. The DJIMI was launched in February 1999. About a month or so prior to its unveiling, the FTSE Global Islamic Index Series was introduced in December 1998. The FTSE Islamic Index was a collaboration between the International Investor (a Kuwaiti Islamic investment bank), FTSE Group, and the Independent Global Index Company (based in London).

What sets the DJIMI apart from the FTSE's Islamic Index, its forerunner by a whisker, is the visible level of commitment to the Islamic business offering. Dow Jones retained its own shari'ah supervisory board to begin with and also set up a dedicated Islamic index business unit led by Rushdi. This extended the

company's mileage within the global Islamic finance industry, allowing it to present a human face speaking not just about indices and the technicalities of screening methodologies but also about Islamic investing and Islamic finance in general.

And this is really where Rushdi comes into the global picture. Using the DJIMI as a platform and to promote the indices, Rushdi positioned himself front and centre, giving media interviews all over the world, teaching “Principles of Islamic Investing” for the online Dow Jones University, speaking at Islamic finance events and conferences globally, and writing thought-leadership articles on Islamic indices and Islamic capital markets. DJIMI gave Rushdi the platform to introduce Islamic investing and Islamic finance to the much bigger conventional financial architecture while also increasing education and awareness of Islamic investing to the Islamic world. His global visibility and promotion of Islamic finance worldwide continued with his time at Thomson Reuters as global head of Islamic Finance and OIC Countries.

So the index, a standard for measuring stock market performance for Islamic investors on a global basis, is not just an index. It has served as a springboard to introduce Islamic finance to the conventional space and added benchmarking for Islamic finance itself. “It's about building ability in Islamic finance. What I mean by that is benchmarks—whether it's an equity index, a sukuk (Islamic bond) index, it's about building out ability by way of benchmarks. And that's just the starting foundation to build a compliant capital market tower,” explains Rushdi.

But before even speaking about “building out ability,” the Islamic indices themselves serve as a foundation. Until the emergence of Islamic indices in the late 1990s, fund managers used to benchmark fund performance against conventional indices with an adjustment for non-shari'ah-compliant shares and revenues.¹ Islamic indices have given fund managers proper shari'ah-compliant benchmarks. Rushdi likes to say that the DNA for all investing is an appropriate index. The DJIMI was one such appropriate index for Islamic investing.

Global Viability: Outperforming Conventional Indices and Averting Enron

The next logical step was to follow the performance of these Islamic indices and compare them against their conventional peers. Tariq Al Rifai, Rushdi's successor at Dow Jones, points out that the Dow Jones Islamic Market (DJIM) World Index has outperformed the Dow Jones Global Index “by a significant margin” over the long term (up to April 2012).² He wrote: “When compared with other markets and regions, the Islamic indexes still outperform conventional indexes. Across nearly every region, Islamic indexes perform better over the long run.”³ Al Rifai attributes this superior performance to two main factors: firstly, shari'ah-compliant screens remove all highly leveraged companies which tend to be more volatile, and secondly, these screens tend to result in indexes that are heavy in certain industries—such as healthcare, technology, and oil and gas —that tend to perform better than entertainment, media, and hospitality companies, for example.

Because of these shari'ah screens, the DJIMI delisted Enron, WorldCom, and Tyco six to eight months before their failures showed up.⁴ They were delisted because they no longer complied with shari'ah criteria as manifested in the screens. After 2008, Islamic investment portfolios have remained resilient in the global financial crisis because they were not exposed to companies like AIG, Lehman Brothers, and Bear Stearns due to their core interest-based business.

So even if Rushdi considers these indices to be a mere first step in “building out ability” for the Islamic finance industry, as foundations they have proven the merits and market viability of the shari'ah that underlines their construction.

Equally, Islamic indices have made globally and publicly visible shari'ah-

compliant companies, allowing shari'ah-sensitive investors a whole new world of permissible investments. For both the professional fund manager and the individual investor, Islamic indices like DJIMI immediately reduced the information research costs and time and removed concerns over shari'ah compliance.

Further, the birth of global Islamic indices presented a massive boost for the Islamic capital market, with shari'ah compliant becoming a ready option for individual as well as much larger and more influential institutional portfolios globally.

It was perhaps the interest and commitment of a company like Dow Jones, an icon in the global financial space, that immediately raised awareness and visibility globally for the Islamic capital market and shone a light on Islamic finance in general. Under Rushdi's leadership, DJIM indexes launched more than 90 indices, with $7 billion managed against them. They included a total of 54 countries within the DJIM World Index, featuring global, regional, country, fixed income, blue-chip, specialty, and industry indices.

Additionally, Rushdi says, “We also launched the world's first sukuk index, DJCitiGroup Sukuk Index, in 2006, to bring more light into the sukuk space at the time.”

He adds, “I had wanted DJI to become the go to index provider for all faithbased indexes, as it would provide ‘arrival’ for, say, Christian, Jewish, Hindu, etc., indexes. To that end, we launched the DJ Dharma Index in 2008, combining principles of Hinduism, Jain, and Buddhism principles.”

The work of creating indices and other benchmarks continued for Rushdi with his move to Thomson Reuters in 2009, but there his work developed beyond

indices. Two more firsts stand out—the creation of the Socially Acceptable Market Investments (SAMI) Halal Food Index and the Islamic Interbank Benchmark Rate (IIBR).

The IIBR is the Islamic finance industry's answer to the LIBOR (London Interbank Offered Rate). It took Rushdi and the Thomson Reuters team almost two years to ensure that all key elements were in place to launch the benchmark. They worked in collaboration with the Islamic Development Bank, the ing and Auditing Organisation of Islamic Financial Institutions, the Bahrain Association of Banks, Hawkamah Institute for Corporate Governance, and a number of major Islamic banks.

Before the IIBR was launched in 2011, Islamic financial institutions either used or referenced LIBOR, an interest-based benchmark used to calculate the cost of funding for a whole raft of financial products that affect banking products at every level. LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another and is the primary benchmark for short-term interest rates that underpin hundreds of trillions of dollars of contracts around the world. LIBOR was affected by a scandal in 2012 after it was revealed that banks had been rigging, underreporting, and lying about their borrowing costs as far back as 2005.⁵ As of this writing, LIBOR is set to leave the British Bankers' Association and is travelling across the pond to be run by the New York Stock Exchange Euronext from early 2014.

There are opposing opinions on the Islamic finance industry's use of this interestbased benchmark rate, but a general consensus sought an indigenous Islamic benchmark. The IIBR, instead of measuring interest rates, measures profit rates of Islamic banks and is based on the actual rate of return on Islamic assets. IIBR measures everything from overnight to 12-month expected profit rates. However, even though the industry has discussed for some three decades moving away from using conventional interest-based benchmarks, to date only 17 Islamic banks contribute to the IIBR.

IIBR, to Rushdi's mind, is still finding its feet. “IIBR is gaining traction. Change in a risk-averse industry, like the murabaha-centric Islamic banking, takes time. I think it has to go through a few market cycles and some external shocks before we can see to its stability. If after shocks the bandwidth of volatility is more narrow vis-à-vis its conventional counterpart, then we know we're really onto something.”

In 2011 Rushdi and his team at Thomson Reuters and IdealRatings launched the world's first halal food indices, the SAMI Halal Food Index and the SAMI Halal Participation Index. The former index is a collection of food industry companies listed on the bourses of the OIC countries. Rushdi calls this development a “reuniting of twins separated at birth”—that is, bringing Islamic finance and the halal sector together. He considers it a no-brainer that the halal industry should be ed by Islamic finance and that the two should work hand in hand as they occupy points on the same spectrum. The SAMI Halal Food Index, like the DJIMI in 1999, instantly opened up a whole new investible asset class, merging shari'ah compliance and halal consumption with investment. Halal can now be viewed as an investable asset class.

But all the indices that Rushdi has built and that are used globally makes him somewhat uneasy.

Wherefore the Pulse?: Shari'ah-Compliant and Shari'ah-Based Indices

Shari'ah-compliant indices, like the DJIMI, fulfill certain quantitative and qualitative criteria as required by Islamic financial investing principles. The stocks on the DJIMI may be shari'ah compliant but, Rushdi contends, they may not necessarily have much connection or interaction with Islamic finance or Islamic communities, if at all. He elaborates: “You've got these shari'ahcompliant companies—Microsoft, BP, Pfizer, Apple [there's a bias towards energy, healthcare, and technology]. None of them has anything to do with Islamic finance beyond selling to a Muslim country, and some of the contracts may be structured Islamically, but they don't represent the pulse of Islamic finance or the pulse of Islam.

“For example, an investor sees the DJIA or S&P [Standard & Poor's] 500 was up 1 percent, say, today, he has a mental picture on the pulse of U.S. capital markets. Now, if the DJIM US is up 1.5 percent on that same day, yes, it outperformed its conventional counterpart, but there is no shari'ah-compliant capital market in the U.S. (or most Muslim countries), so what pulse has been measured?”

Surrounding Rushdi's viewpoint is an ongoing debate within the Islamic finance industry about being shari'ah compliant versus being shari'ah based. Briefly, the former is taken to imply adherence to the form and technical aspects of shari'ah; the latter encomes more of the substance of shari'ah (i.e., form over substance).

So with regard to the DJIMI, for example, a shari'ah-sensitive investor can invest in Nike Inc., Kia Motors, Nokia, and Microsoft because they are deemed to be

shari'ah compliant. (Components of the indices change as stocks can fall in and out of shari'ah compliance, especially because of levels of leverage and conventional financing incurred.) But, Rushdi wonders, what has Nike Inc. or Kia Motors done to or advance Islamic finance and Islamic communities? So if you consider an Islamic index that lists the likes of these companies, you would not be tapping into the real pulse of Islamic finance.

Rushdi's main contention is: “The shari'ah-compliant index does not necessarily represent the pulse or the health of Islamic finance or represent an economic indicator of Islamic finance in a Muslim country.” He concedes that demonstrating shari'ah compliance is certainly necessary. Referring to DJIMI in 1999, he says, “That step of showing shari'ah compliance had to be done. The screening process on those publicly listed companies basically provides a subuniverse of ethical companies.”

This reveals Rushdi's belief that the shari'ah ing the screening methodology is ethical in itself. But still, there is talk about a difference between shari'ah compliant and shari'ah based, with people within the industry holding different views on the debate.

One argument is that shari'ah is shari'ah, and there are no two ways about it. ers argue that claiming shari'ah based to be somewhat better than being shari'ah compliant would be to dismiss the merits of the results of the screening methodology that the Dow Jones fatwa permitted. This is, then, tantamount to attacking the shari'ah that the fatwa itself is based on. One could also argue that being shari'ah compliant in and of itself is sine qua non of “hip” in the Islamic fold, so if Nike Inc. is shari'ah compliant, then it is a rightful member of the Islamic market. But Rushdi further questions the levels of what is ethical and asks if shari'ah as interpreted by today's shari'ah scholars is, perhaps, limited.

Rushdi feels that after some 15 years of the DJIMI, Islamic investing has not moved forward very much. Even if Islamic investing has created its own

theoretical discourse about its intersections with ethical investing, the Islamic markets have not caught up at all with the levels of socially responsible investing that have been established in the conventional space. For starters, Islamic indices are all based on negative screening (when companies are screened out from investments because of their involvement in certain activities, such as gambling, pornography, alcohol, and pork) as opposed to mixing in elements of positive screening (when companies are screened in because of their positive practices, such as good social or environmental management).

Rushdi says, “Islamic investing is actually about doing good by avoiding bad. Today's way of investing in the conventional space is on environment, sustainability, and governance—ESG. But Islamic investing doesn't push that. We're still focused on financial ratios and permissible revenues and technicalities and mechanisms like that. These things, honestly, don't capture anyone's imagination anymore. It's really high time to talk about positive screening, Islamic ESG—then the wider investment and financial community will pay attention.

“At DJI, we launched an Islamic Sustainability Index in 2006, where we took the negative screened universe of DJIM and the positive screened universe of the Sustainability Index, and, where the two universes overlapped, the DJIM Sustainability Index was created. But we did not get any licensees, which was a personal disappointment.”

There is a vital need to push ESG to the Islamic world, not just to make possible the investment in ESG and shari'ah-compliant Western companies on the DJIMI, Rushdi feels, but also to raise the level of ESG within the Muslim world itself. This line of argument adds more weight to Rushdi's contentions about shari'ahbased indices versus shari'ah-compliant indices. All of this discussion opens the conversation about the need to move the Islamic finance industry from constant talk about structures and technicalities to addressing more substance—more substance over form, where the former implies shari'ah based and the latter shari'ah compliant.

Rushdi suggests that one important way is to start empowering shareholders. “There needs to be, I believe, shareholder activism. That doesn't exist right now. We don't have that in the Muslim world. Maybe because there's fear. It could be a cultural thing, that we don't question authority.” Rushdi describes what he calls “courage hibernation” as a result of colonialism. “We were economically and mentally colonised, and we've been in a space I would describe as courage hibernation. That space is thawing now, since Muslim countries gained independence especially after World War II, and now most recently with the Arab Spring.”

To get closer to the pulse of Islamic communities and their markets, shari'ahbased indices were built following the first-generation shari'ah-compliant indices of the late 1990s and early 2000s. Shari'ah-based indices, such as the ones published by Dow Jones Indexes, collect companies whose primary business is consistent with shari'ah precepts. These are the companies that require shari'ah compliance as part of their modus operandi, as declared by their company constitution, memorandum of association, or shari'ah board. These companies are shari'ah compliant by choice. Most companies that populate the shari'ahbased indices are Islamic financial institutions, including banks, takaful (Islamic insurance) companies, and investment companies. The SAMI Halal Food Index also would be considered shari'ah based.

Rushdi is more satisfied with these shari'ah-based indices. “So now this presents some really interesting dynamics because this is now not only about Islamic finance in a particular country, this is also going to be about inward investing. This is going to be about intra-OIC investments. This, eventually, will not just be about return on capital when money is sourced from Muslim countries and then flies out to non-Muslim countries, but this will begin the process of return of capital because the opportunities are there.

“The challenge with shari'ah-based indexes is small free float of companies and

general illiquidity, but it's a starting point. I hope once these become more liquid indexes, it will encourage privately held shari'ah-based companies, beyond the financial sector, to list on exchanges, hence adding depth, liquidity, and breadth.”

But while shari'ah-based indices are more in tune with the pulse of Islamic finance and Islamic communities, Islamic investing overall, says Rushdi, is still disconnected from two groups of important stakeholders who make up the majority of the Muslim world: the have-nots and the youth.

Gaps and Disconnects

Unfortunately, most people think about Islamic finance in isolation. They don't understand the external environment of perceptions. We think that what we have is so great that we forget about the environment that it operates in. If that external environment isn't lobbied correctly then your idea remains in the ivory tower.

—Rushdi Siddiqui

You could quite easily exist in your own Islamic finance bubble as the industry has become big enough to serve its own kind for the most part. But if you stick your head above the parapet, you will encounter questions such as “Islamic finance? What's that?” Rushdi is interested in answering these types of questions from the overwhelming majority who know very little about conventional finance to begin with and who know absolutely nothing about Islamic finance.

Rushdi is one of those very rare Islamic finance practitioners who regularly writes columns in the popular press. But as he works predominantly within the Islamic finance space, his opportunities are skewed towards those countries and regions that already have a more natural affinity to all things Islamic to begin with. What he probably would relish is a regular column about Islamic finance in a global mainstream publication like The Economist or a b the New York Times. Regardless, he has kept up regular columns with Dubai-based Gulf News and Khaleej Times and Malaysia's The Edge and Malaysian Insider. He uses his columns, he says, to connect with the person on the street about Islamic finance. “If you notice in my articles I don't talk about screening and structures. I don't write about whether or not you can reverse tawarruq or the details of the Goldman Sachs sukuk that never happened. I talk about everyday issues, the things that the man on the street will connect to.”

Rushdi tries to hammer home his point that all the talk in the press about Islamic finance is about technicalities—structures, regulatory requirements, compliance standards, and the like. The man on the street, he says, does not care about all that. “The question I have is, what has Islamic finance financed? This is what the man on the street wants to know. They don't want to know about the process because it's too complicated. They want to know about the end result. The industry seems to be focusing on the technicalities and because of that there is this disconnect. Therefore, there is very little take up of Islamic finance, let's just be realistic about it. What Muslim country has Islamizied its economy and capital markets, as Islamic economists have been talking about for decades? This is the question that is often asked of me in Western markets!”

One of the issues he consistently writes about is the relevance of Islamic finance to the average person. “If you look at Islamic investment products, what's the minimum buy-in? $10,000? $15,000? Is the man and woman on the street interested in investing, or is he or she more interested in things that will directly help them and their families? So, for example, look at sub-Saharan Africa, look at venture capital, microfinance, SME [small- and medium-size enterprise] financing. How much exposure do we have in Islamic finance to those areas? Insignificant.”

Islamic microfinance has reached the $1 billion mark, according to latest estimates. The sector is made up of about 300 Islamic microfinance institutions in almost 32 countries.⁷ That $1 billion is less than 1 percent of the Islamic finance industry's total global assets, which stand at approximately $1.6 trillion. The lion's share of total industry assets lies in Islamic banks. With microfinance largely considered an enabler of poverty reduction, $1 billion is woeful, especially considering that Muslim-majority countries overall are the poorest in the world (as measured by gross domestic product). To put $1 billion into perspective: Saudi Arabia's largest Islamic bank, Al Rajhi, held 221 billion Saudi Riyals (US$59 billion) in total assets as at end 2011⁸ and Malaysia's largest standalone Islamic bank, Bank Islam, held RM37.5 billion (US$11.6 billion) in assets at year-end 2012.

Rushdi continues along this line, addressing the disenfranchised whom Islamic finance has not reached out to. “We are missing out on 800 million Muslims, if not more. You may have to do a reset, or control-alternate-delete, whatever you want to call it.” But, he says, it is not the responsibility of a deposit-taking Islamic bank to eliminate poverty in the Muslim world, at least not the way Islamic finance has developed. Without mincing his words he adds, “Islamic finance today is about the bankable. It's about addressing the fiduciary duties to the shareholders, which means ringing in the returns. But there's a higher fiduciary duty to the stakeholders which we have not arrived at. Hopefully, whoever is at the top of these institutions realises that returns to the shareholders is not the end goal. It's the stakeholders that really matter.”

Young people are the other group of stakeholders he sees as being underserved by Islamic finance. Muslim-majority countries have what is called a youth bulge —about 60 percent of the total Muslim population of Muslim-majority countries are under the age of 30.¹ Unemployment among the youth, however, is at very high levels in the Middle East, reaching 25 percent in 2010 and 24 percent for North Africa.¹¹ Rushdi says, “We have millions of kids in the Muslim world who have ideas but who don't have money. They're each not asking for millions. They're asking for $5,000, $10,000 to be able to push through whatever entrepreneurial projects they have in mind.”

To this end, Rushdi is a cofounder of an Islamic crowd funding organisation called www.shekra.com. “It's a beginning, but people's capitalism, money from the community, by the community, and for the community, may take Islamic finance to meet one of its end goal: financial inclusion for the masses.”

The challenge for any banking and financial system is to mobilise capital and liquidity productively. But, as Rushdi brought up earlier, deposit-taking Islamic banks are not the panacea to the world's ills. “Allegedly there is this mountain of liquidity in Islamic finance. So you have these non-Muslim countries wanting to

be the hub of Islamic finance to be magnets for all that liquidity. What about the kid with the ideas, the man on the street? How do they get money for their ideas?” He suggests that perhaps the asset management industry has to take up this gauntlet. “Maybe an asset management entity that has got seed money, and who have got the right people, with the right objectives, maybe they can see to the needs of the disenfranchised.”

Partnering with nongovernmental organisations working on the ground is one thing that Rushdi feels the Islamic finance space must turn to. “Islamic finance has the money but we are not the bridge because we don't have a history of operations to address the disenfranchised. We don't have the core competence as yet. But all that can be learnt. For example, the Bill and Melinda Gates Foundation are a good role model because of their work in, say, Africa.”

The situation for young people who want to work within and for the Islamic finance industry is no better. In fact, it may actually be worse. Gaining academic and professional qualifications for Islamic finance is not cheap. Students who cannot gain access to bursaries and scholarships must depend on family for financial or borrow money from banks and other financial institutions. Once they earn their diploma or degree, they find that jobs in the Islamic finance industry are actually difficult to come by. “So the irony of the whole situation is that you have these institutions offering Islamic finance courses. What typically happens is that the student becomes overleveraged, finding themselves in debt with ‘no appropriate’ job in the industry to go to. What an irony. There's a disconnect. The industry has to work better with academic and educational institutions to say, you know what, you can't be giving certificates to so many people because most of them will end up disappointed, and in debt, and most of the time they're indebted to conventional banks!”

The different parts of the Islamic finance ecosystem do not work in tandem and so gaps appear. “To some extent Islamic financial institutions need to finance Islamic finance education. And while they're financing that education, there should be an internship or some other position available for these young people.

It has to be thought through. Institutions like the International Centre for Education in Islamic Finance (the Kuala Lumpur–based global university for Islamic finance) should be working with Islamic financial institutions to provide financing, to provide scholarships for these young people. These kids have Islam in their hearts, and they want to do something.”

Further, Rushdi contends that the younger generations who cannot find jobs in Islamic finance are victims of their own parents' ignorance and lack of for Islamic finance in general. This highlights the need to build a more virtuous cycle of demand and growing responsive supply. He cites an example in the United Kingdom, where there are four wholesale Islamic financial institutions and one retail Islamic bank that has not lived up to initial demand projections since it opened in 2004. “Someone in my family has been trying to get a job in Islamic finance in the U.K. for the longest time and has not been successful. I told him that it's his parents' fault. This is a generation that came from India and Pakistan where Islamic finance does not exist. So now in the U.K. there are wholesale and retail Islamic banks. But these economic immigrants are not familiar with them. The very low uptake for retail Islamic banking in the U.K. disproves earlier market demand studies. So revenues didn't pan out. When revenues don't pan out, then budgets are cut back and these banks downsize.”

The situation for the younger generation would be vastly different if their parents had caught on to Islamic banking to begin with, Rushdi believes. “If the parents and other such people took the Islamic home mortgages, took the Islamic investment products and all these other Islamic banking and finance offerings, all of these would add to the banks' bottom line. The underlying assumption is these offerings are market ‘price and return’ competitive. So from my point of view, the older generations have not allowed their children and grandchildren to get jobs in Islamic finance.”

The situation is not dissimilar in other countries with Islamic banks and financial institutions. You often hear pockets of the industry complaining about the lack of talent in the industry while at the same time Islamic finance college and

university graduates report a dearth of professional opportunities.

Major Disconnect: On Information

What is preventing the cross-sell of Islamic finance is information. Information is the most valuable commodity. That's why almost all credible jurisdictions have laws against insider trading.

—Rushdi Siddiqui

A lot of what Rushdi worked on with Dow Jones and Thomson Reuters has been to establish a level of conventional efficiency in the Islamic finance space. This has two benefits: It enables Islamic finance to gain a global level of professionalism and efficiency and presents Islamic finance through data and news at par with its conventional counterpart. Business and finance professionals on the world's trading floors and markets are used to a certain level of professional efficiency. For Islamic finance to successfully court the conventional practitioner, it must provide at least the same level of information and data.

“The non-Islamic participants coming in, they are used to a certain level of efficiency in their world. In Islamic finance we don't have conventional efficiency on information intermediation. Once you have that then you have eyeballs looking at this as an alternative, and then more institutions will come into the space, and behind all those eyeballs is the liquidity.”

Rushdi points out three main characteristics of the state of information intermediation within the Islamic finance space: data is stale, documentation is not standardised, and news is not time-sensitive. He firmly believes that the presence and commitment of global multinational companies like Thomson

Reuters and Bloomberg only serves to improve information intermediation for the industry, as these companies practise a certain level of global professionalism and efficiency. Both companies provide data and intelligence for businesses and professionals, and both have integrated Islamic finance data, news, and information into their global platforms so that Islamic finance is readily accessible to all their s. This is, quite literally, globally integrating Islamic finance into the conventional financial system. “It is a terminal-based approach to the gatekeepers and their clients. The conversation here is no longer about Islamic economics in the ivory tower. It is about real-time data in real-time situations in the hands of many,” says Rushdi.

Pushing for conventional efficiency for the industry, Rushdi conceptualised and led his Thomson Reuters team to establish a comprehensive pretrade multi-asset Islamic finance platform. That platform is in addition to the Islamic Finance Gateway, a free platform that provides Islamic financial information to the industry at large.

The United States of America, Islam, and Islamic Finance

Islam is the fastest-growing religion in America, with approximately 2.6 million Muslims living in the country today, up from 1 million in 2000, according to data from the 2010 U.S. Religion Census.¹² There is no mainstream visible Islamic finance industry in America to speak of per se, with the more obvious pockets of shari'ah-compliant activities being Amana funds (set up in 1986 because a group of American Muslims wanted to invest their money Islamically) and LARIBA American Finance House (established in 1987 by Dr Yahia Abdul Rahman; it continues to provide various types of shari'ah-compliant financing). In 2001 Guidance Residential Finance was established, and it has been providing shari'ah-compliant home mortgage financing. Fannie Mae and Freddie Mac have been offering shari'ah-compliant home financing through such companies as LARIBA since 2001. On the academic side, the Harvard University Islamic Finance Program was started in 1995, and its annual conference remains a draw for the global Islamic finance fraternity.

Shari'ah-compliant financial activity is found under the radar in the United States. Lawyer Michael McMillen reckons the United States is the world's second largest market for Islamic finance, on the strength of direct inflows coming in from Middle Eastern investors who demand their investments be structured Islamically. (See Chapter 9 on Michael J. T. McMillen.)

Rushdi is a second-generation American Muslim whose family came from India to settle in the United States. He grew up, went to university, and works on the East Coast of the country. On September 11, 2001, he got into work late. “I used to take the train from Penn Station to the last stop, the World Trade Center, and then walk to my office, which was just across the World Trade Center, at the World Financial Center. Had I been on time that day, you and I would not be having this conversation now.”

“People living in the Muslim world involved in Islamic finance have a disconnect with the Muslims living in America and the pressures they're going through post-9/11. They don't know because most of the Muslim world, to be honest, have not been to the States and they've not had a conversation with someone whose family was killed in 9/11.”

Because of the negative press and Islamophobia that ensued, Rushdi resolved to present the best face of Islam he could. “Whoever blew up those towers… I would have been collateral damage. I don't like that feeling at all. So I resolved to do whatever I can in my power so that Muslims and Islam are not ed for that fiasco and catastrophe but instead for kindness and goodness. And if my vehicle and platform happens to be Islamic finance, so be it.”

Islamic finance in the United States, he says, was moving forward until 9/11. “Things were going nicely, and then 9/11 happened. A lot of lives were affected, and it impacted the psyche of a country. You don't recover in five years or ten years. It would take a generation. But it doesn't mean you stop entirely doing what you do.”

For Islamic banking and finance to happen in the country, Rushdi believes it would have to be demand driven. “If a million, two million people ask for it, then the demand can make it happen. Institutions are not interested in theories. They're not interested in great ideas of equality and all that. That, for them, is a civil rights issue. They want ideas they can monetize that they don't have to spend a lot of money to get approvals for, but above all they want good business. They don't want to promote religion because of the establishment clause [of the First Amendment]. It's about business. It's about business based primarily upon financial inclusion and then social justice and equity. When it's presented in that light, you'll have less resistance and fear to it.”

(The establishment clause, one of two “religion clauses” of the First Amendment, states: “Congress shall make no law respecting an establishment of religion or prohibiting the free exercise thereof.” It is taken to imply that the U.S. government is not to prefer one religion over another.)

Rushdi's acid test for Islamic finance, he says, is its agnosticism. “It has to sell on its merits. In a Muslim country, there is a perceived bias because Muslims demand it and they want to be able to sleep at night knowing they're following shari'ah. But when it is in the non-Muslim world, which at times may be hostile to Islam and Muslims, then it becomes significant.”

But it is not Islamic finance that Rushdi believes is the low-hanging fruit for America. “The lower-hanging fruit, actually, is halal. It's available, it's neutral, and the anti-shari'ah movement hasn't started the warmongering against it yet. Plus it's highly demand based.” He throws in an interesting statistic: There are 86 kosher products, he says, to every one halal product. Muslims in America consume more kosher than halal; Muslims in America consume more kosher than Jewish people in America do. This, he says, is due to the lack of availability of halal products. A number of companies in the United States have sprung up to offer halal products, but halal is not mainstream. “It would be interesting,” Rushdi ruminates, “if a lot of Muslim businessmen got together and said, Let's have a supermarket for halal products. Because right now we have shelves or an aisle of halal products. Why not a supermarket? We wouldn't have to call it halal, obviously.”

The Halal Industry

You can eat the food because it's halal but you can't invest in the company because it's not shari'ah compliant. What an irony.

—Rushdi Siddiqui

Rushdi's long-held observation and opinion of the halal and Islamic finance industries is that they're “twins separated at birth” and that it is high time the two reunited. He believes that the SAMI Halal Food Index that he launched with Thomson Reuters and IdealRatings in 2011, was the first concrete step towards bridging that gap between the halal industry and the Islamic finance industry. And it is about time the latter sat up and started investing in halal as an asset class to its development financially.

But the halal industry itself has numerous challenges to overcome. “Right now, the default thinking of halal by the man on the street has to do with food. It's not logistics, pharmaceuticals, cosmetics, etc. It's focused on stunning or not stunning animals before slaughtering them, certification, and everything foodrelated. The halal industry has failed miserably, frankly speaking, in conveying its value proposition. Islamic finance is ahead in that respect.”

The halal industry, he feels, would benefit from looking to the Islamic finance industry in the ways that have proved fruitful, “The halal industry needs industry bodies like AAOIFI and IFSB [Islamic Financial Services Board] in Islamic finance, organisations to serve as warehouses for all the information about halal. So, for example, certification documentation for South Africa, or Nigeria, or United Arab Emirates all in one place.”

Unfortunately, he says, “Halal is not sexy like finance is sexy. This is unfortunate because the value proposition of halal is more solid and deeper than Islamic finance. That's what gets me excited about the halal sector because it's real, it's connected to the real economy.

“The challenge in Islamic finance for me was I could not touch, feel, or grab it, hence, a sense of accomplishment was lacking, notwithstanding numerous awards over the years. The first exposure to the halal industry was several years ago in Brunei and Malaysia whilst walking through a halal fair. I saw real people with real products, real problems (financing) requiring real solutions.”

Where he sees the need for farm-to-fork shari'ah compliance, the halal–Islamic finance dichotomy will take some time to converge. Several main kinks need to be ironed out. “Halal doesn't think about financing. They think about these other issues related to their core offering—ingredients certification, for example. With respect to halal publicly listed companies and applying the shari'ah screens like for the SAMI Halal Food Index, many of these companies fail because they're conventionally financed by bank loans.” (See Chapter 4 on Saleh Abdullah Kamel for another angle on the halal industry.)

The other side of the picture is not any rosier. “In Islamic finance, the corporate side isn't interested in halal because they don't understand the business model. And this is where halal has failed to convey the business aspect and its own value proposition.”

More recently Rushdi has founded a private equity company that is building a multimillion-dollar war chest to invest in global halal opportunities. The work involves implementing a consolidated strategy at midstream level that would benefit the highly fragmented nature of the global halal industry.

“Today, there are many challenges unique to the Muslim world, be it on finance, fashion, or food, and, as a whole, we do not control our own destiny in many areas.

“The halal food supply chain,” Rushdi adds, “is neither owned nor controlled by Muslims, unlike Islamic banking, hence an integrity-cum-systemic risk is beginning to appear: pork DNA found in halal products in Europe. We need a Muslim-owned global halal sector financed Islamically, and it will only happen inorganically, we in the industry have got to push it forward.”

The Last Word

Harnessing all his experiences and lessons learnt within the Islamic finance space since the 1990s, Rushdi is now addressing the various gaps and disconnects within the global halal industry through his private equity firm, Azka Capital. The firm has a global remit and is based in Kuala Lumpur, the jurisdiction that has both a strong halal and Islamic finance infrastructure. From this Kuala Lumpur vantage Rushdi looks out to the global Islamic finance arena and considers its future prospects, starting with what Malaysia's Islamic finance expertise can offer the world.

“Malaysia's Islamic finance model is not completely exportable because it is based on a top-down approach. It's had prime ministers ing it, a central bank ing it, and stakeholders being forced to it. The industry was built on subsidies and concessions. That mix has taken 30 years to get to 20 percent share of banking assets. Emerging Islamic finance countries— Kazakhstan, Azerbaijan, Nigeria—they're all in a hurry. So what percentage of Malaysia's Islamic finance model is exportable? Those parts that are exportable have to be customized because the Islamic finance regulatory infrastructure in countries like Kenya or Nigeria or Kazakhstan, they don't exist.”

Malaysia, to Rushdi's mind, will still need more “suckling from the government” beyond 2015, when some of those industry subsidies expire. “I think that it [the subsidies] needs to be extended to 2020. And the reason it needs to be extended towards 2020 is because we are entering the phase of Islamic finance 2.0 —from the view of new players and new geographies. These new players and new geographies have to look at models, and Malaysia is one of those models.”

He then turns to Egypt—a country that is not unfamiliar with Islamic finance but that is now hurrying to get more reacquainted with it. “The taxi driver test in

Egypt points to Islamic finance being offered today as smoke and mirrors; it is not authentic. And when you have been scammed like the Egyptians were scammed in the 1980s, then you need a new way to approach it.” (For more on Egypt in the 1980s, see Chapter 3 on Prince Mohamed Al Faisal Al Saud.)

At the end of the day, “Build it and they will come” does not work for Islamic finance, says Rushdi. He points to all the gaps and disconnects that he has talked about and hopes that the Islamic finance industry will work to better connect its strategy and offerings to the person on the street.

“For example, at Azka, we will apply the DJIM financial ratios to targeted companies in the portfolio, an interesting closure of the circle from 1999!”

So what's his endgame? “The endgame for Islamic finance? For me it's simple: It's financial inclusion and financial empowerment for all of humanity. And then you move up the socioeconomic ladder. We have not got to that stage. We are still saying ‘Islamic finance is for everyone,’ but our marketing materials are still stuck on contract names and lists of shari'ah scholars.”

Notes

¹ Natalie Schoon, Islamic Asset Management: An Asset Class on Its Own (Edinburgh: Edinburgh University Press, 2011).

² Tariq Al Rifai, “The Evolution of Shari'ah-Compliant Indexes and Why They Outperform Conventional Indexes over the Long Term,” in Karen Hunt-Ahmed (ed.), Contemporary Islamic Finance: Innovations, Applications and Best Practices, pp. 199–200 (Hoboken, NJ: John Wiley & Sons, 2013).

³ Ibid., p. 199.

⁴ Yusuf Talal DeLorenzo, 17 February 2009, Islamic Finance and the Global Economic Crisis. National Council on U.S.-Arab Relations. [Online]. Available from: http://www.youtube.com/watch?v=0320zXEs2zk.

⁵ BBC News, “Timeline: LIBOR-fixing scandal,” BBC News: Business, 6 February 2013. [Online]. Available from: http://www.bbc.co.uk/news/business18671255; Rachel Armstrong, “Ex-RBS Trader Says Brevan Howard Sought LIBOR Rate Change,” Reuters, 30 March 2012. [Online]. Available from: http://uk.reuters.com/article/2012/03/30/uk-brevanhoward-liboridUKBRE82T0J920120330.

Kirstin Ridley, “NYSE Euronext to take over scandal-hit Libor,” Reuters, 9 July 2013. [Online]. Available from: http://www.reuters.com/article/2013/07/09/us-libor-nyse-

idUSBRE9680FD20130709.

⁷ Zawya, “Islamic Microfinance Market Size Touches $1 Billion,” Zawya, 16 April 2013, [Online]. Available from: http://www.zawya.com/story/Islamic_Microfinance_Market_size_touches_1_billionZAWYA20130416144810/.

⁸ Al Rajhi Bank and Investment Corporation, “Interim Condensed Consolidated Financial Statements for the Three-Month Period Ended March 31, 2012,” Al Rajhi. [Online]. Available from: http://www.alrajhibank.com.sa/en/mediacentre/reports/Documents/financial-report-2012-qr1.pdf.

Bank Islam Malaysia Berhad, “Reports and Financial Statements for the Financial Year Ended 31 December 2012,” Bank Islam. [Online]. Available from: http://www.bankislam.com.my/en/Financial%20Result/Financial%20Year%20Ended%2031%

¹ Pew Forum, 2011, “The Future of the Global Muslim Population: Projections for 2010–2030,” Pew Forum on Religion and Public Life. [Online]. Available from: http://www.pewforum.org/future-of-the-global-muslim-population-mainfactors-age-structure.aspx.

¹¹ Imed Drine, “Youth Unemployment in the Arab World: What Do We Know? What Is the Way Forward?” United Nations University-World Institute for Development Economics Research. 2012. [Online]. Available from: http://www.wider.unu.edu/publications/newsletter/articles-2012/en_GB/06-072012-Drine/.

¹² Meghan Neal, “Number of Muslims in the U.S. doubles since 9/11,” New York Daily News, 3 May 2012. [Online]. Available from: http://www.nydailynews.com/news/national/number-muslims-u-s-doubles-9-11article-1.1071895.

Chapter 11

More than the Sum of Its Parts: Forty Years of Islamic Finance

Across the timeline of the modern Islamic finance industry as explored through these ten chapters a few issues stand out. This concluding chapter pulls together the threads into a bigger picture.

On May 15, 2013, Jaseem Ahmed, the secretary-general of the Islamic Financial Services Board (IFSB), the global Islamic finance industry's standard-setter said: “We are witnessing a transformation of the global economy since the crisis in 2007–2008 which changed the rules. Had the Islamic finance industry been bigger, it would have helped the world in providing stability during the financial crisis.”¹

Jaseem Ahmed has a point, for the Islamic finance industry was not hit as hard by the global financial crisis as its interest-based conventional counterpart. Islamic financial institutions were not directly affected by the crisis as they were not exposed to the toxic securities that caused the crisis in the first instance. Within these chapters, for example, we read about Enron, Tyco, and WorldCom being booted from the Dow Jones Islamic Market Index months before their collapse as the companies had breached shari'ah restrictions. Additionally, at the time, impermissibility of toxic financial derivatives such as collateralised debt obligations (CDOs) and credit default swaps (CDS) further shielded the shari'ahcompliant industry.

Yet Jaseem Ahmed's sound bite has a hollow ring to it, for time and again industry practitioners and scholars alike question the extent of the “Islamicity” of contemporary Islamic finance. Islamic economist Dr Umer Chapra wrote in 2009: “The problem is that Islamic finance is still in its infancy and shares a very small proportion of international finance. In addition, it does not genuinely reflect the ethos of Islamic teachings. The use of equity and PLS [profit and loss sharing contracts] is still very small while that of debt-creating modes is preponderant. Moreover, even in the case of debt-creating modes, all the conditions laid down by the Shari'ah are not being faithfully observed by the use of legal strategems (hiyal).”²

Dr Umer is ed by Professor Habib Ahmed who, also in 2009, warned: “While following the principles of Islamic finance would have prevented the occurrence of the crisis, the practice of Islamic finance of mimicking its conventional counterpart can make the industry vulnerable to similar crises.”³

Further, Professor Abbas Mirakhor wrote in 2010: “Abstinence from riba (interest) and interest-rate-debt-based instruments by Islamic financial institutions are reasons why the global financial crisis had limited effect on IFI (Islamic financial institutions).” But he nevertheless lays down that: “The most important lesson of this financial crisis for IFI is to reduce over-reliance on debtbased instruments and to introduce more risk-sharing instruments.”⁴

It is clear, then, that in the aftermath of the global financial crisis there is opportunity for the Islamic finance industry to conduct some serious soulsearching, and take stock of industry practices in order to correct weaknesses to move forward into the next lap of development. Otherwise there is the potential for the Islamic finance industry, too, to go bust.

Returning to Jaseem Ahmed's wish for a bigger Islamic finance industry, we the words of our pioneers Prince Mohamed Al Faisal Al Saud, Saleh Abdullah Kamel, and Tun Dr Mahathir Mohamad: The growth of the Islamic

finance industry has been beyond their expectations.

Growth beyond Expectations

It has grown faster than I thought it would.

—Prince Mohamed Al Faisal Al Saud

It has been beyond our dreams to have Islamic banks all over the world, holding this amount of money.

—Saleh Abdullah Kamel

In a way, it has succeeded more than I expected.

—Tun Dr Mahathir Mohamad

As Jaseem Ahmed alluded to in his statement at the top of this chapter and as stated by Islamic economist Dr Umer Chapra, Islamic finance is still a small industry—IFSB reported in May 2013 that global assets of Islamic finance as at the end of 2012 was estimated at $1.6 trillion, which is less than 2 percent of the world's total financial assets.⁵ Globally, the industry is concentrated in the Middle East within the Gulf Cooperation Council countries and Southeast Asia, predominantly in Malaysia but these are not the only places where Islamic finance is practised. There are varying levels of activity and in the northern hemisphere most visibly in the United States, the United Kingdom, Ireland, and Luxembourg while in other parts of the world Africa and Central

Asia are seen as exciting untapped markets, considering their large Muslim populations.

Yet despite being very small relative to the interest-based banking and financial system, the Islamic finance industry has grown big enough for some of its practitioners and proponents to forget that the world does not revolve around Islamic finance. In Prince Mohamed's words in Chapter 3: “The aura is much bigger than the reality.” This is why, time and again, leader after leader, chapter after chapter, you read that there is still much work to be done. Islamic finance by its own absolute measurement (as perceived through maqasid al shari'ah, or goals of the shari'ah that benefit mankind), has a long way to go, especially if it wants to stay true to its most fundamental ethical principles of equity and social justice. By relative measurements, those who envision a complete changeover to the Islamic financial system still have to overcome the interest-based system's 98 percent dominance.

For our pioneers to say that getting to this stage has been faster than they expected reflects just how low expectations were when they first opened Islamic financial institutions in the 1970s and early 1980s. Prince Mohamed's and Sheikh Saleh's low expectations were partly shaped by the resistance and criticisms they faced, primarily at the hands of fellow Muslims. Hajj Saeed Lootah faced similar problems, although his exposure to opposition was more contained, given the comparative regional and international ambitions of Prince Mohamed and Sheikh Saleh. The experience for Malaysia was markedly different, with Tun Dr Mahathir himself driving the process of building the country's industry. Even he was a later convert to the idea of Islamic banking, having mulled it over for some years after being introduced to it by Prince Mohamed.

These low expectations were also a result of coming up against the deeply entrenched conventional interest-based system. As Prince Mohamed pointed out: “There was a lot of resistance, a lot of resistance because we were challenging a lot of interests. You must , the whole Muslim world had banks, and all

of them were interest-based, or riba, banks. I was going there and saying that all of them are haram [forbidden]. So immediately there was a clash.”

But where Prince Mohamed was called “crazy” and Sheikh Saleh was labelled a “man” by the Muslim “elites,” the Muslims on the ground welcomed the first shari'ah-compliant banks, and ing Dubai Islamic Bank, the Faisal Islamic banks, and Sheikh Saleh's Al Baraka banks.

In Malaysia, Wan Rahim will never forget the treatment he and other Bank Islam officials received from the community: “They treated us with great respect. When they knew that we were from Bank Islam, we would have a tough time turning down requests to be the imams [prayer leaders] for congregational prayers!”

Religiosity, the desire to live by Islam's injunction against riba, was what drove the pioneers, so much so that, as Mustapha Hamat revealed, no feasibility studies were conducted to determine levels of demand for Islamic banking and finance in Malaysia. Demand from Muslims was assumed as inherent and captive; it was considered a given. Malaysia already had the successful example of Tabung Haji, or the Hajj Pilgrim's Fund, as its first interest-free savings institution. All other countries really did set up their first Islamic banks on a leap of faith. Beyond the circle of trailblazers presented in this book, other early movers include the Kuwait Finance House (1977) and Bahrain Islamic Bank (1979).

Islamic banking, and to a much lesser extent takaful (Islamic insurance), dominated the landscape of Islamic finance in the 1970s and 1980s. It was only from the middle to late 1990s—that is, twenty years after the opening of the pioneering banks—that the Islamic equity and debt capital market started to take off, driven by enabling shari'ah and legal developments (as explained by Islamic finance lawyer Michael McMillen in Chapter 9).

The case of Pakistan, however, is unlike the experience in the Middle East, and Malaysia. Professor Khurshid Ahmad, who has been intimately involved in the country's Islamisation process, explains. Where the Pakistani government had called for the full Islamisation of its economy (alongside Sudan and Iran), ironically it has been a lack of political will that has been the main stumbling block. Even today, Pakistan's Islamic finance industry struggles to penetrate the dominant interest-based financial sector. Professor Khurshid reckons that the Islamic industry s for only 10 percent of the country's financial market share. The countries with the largest Islamic banking market shares, Iran's isolated markets notwithstanding, are Saudi Arabia, Malaysia, and the United Arab Emirates respectively.

While growth of the industry has been beyond the expectations of its pioneers, 40 years on Islamic finance has not entirely captured the attention or imagination of its most natural captive market-Muslims themselves. Yet while the industry continues to work at convincing more Muslims to switch to Islamic finance there is already a call to move away from the ‘Islamic’ label in order to attract a wider market. Second and third generation Islamic finance scholars and industry practitioners have started weighing the merits of re-labelling it ‘participation finance’ (as it is called in secular Turkey) or something else that will appeal to groups of individuals seeking an alternative financial system to the interestbased one. The point is to market Islamic finance as one that is for all and not just for Muslims, and that the Islamic financial system is a stronger and better alternative. Ironically, shedding the ‘Islamic’ label and Arabic used to describe financial instruments might actually be the push the industry needs to really differentiate its offering and dig deeper to produce more authentically shari'ah based products and services based on their own worth. For if it is relabelled participation finance the system must necessarily prove its inclusivity, which many believe is currently deficient. If it is re-labelled ‘ethical’ it must at least match up to current ethical movements predominant in the West that are concerned with social and environmental responsibility and impacts. This is also sorely deficient in contemporary Islamic finance. This takes us to our next issueauthenticity, or what the Islamic finance industry is working towards in order to truly differentiate its identity and characteristics from conventional finance in order to prove its benefits for all of humanity.

My Shari'ah, Your Shari'ah: What Is So Authentically Islamic about This System?

At the Eighth Harvard University Forum on Islamic Finance in 2008, Dr Umer Chapra summed up the issue of authenticity:

The way the Islamic financial system has progressed so far is only partly, but not fully, in harmony with the Islamic vision. It has not been able to come out of the straitjacket of conventional finance. The use of equity and PLS (profit and loss sharing) modes has been scant, while that of the debt-creating sales- and leasebased modes has been predominant. The result is that the Islamic financial system, as it is being practised, does not appear to a number of its critics to be a genuine reflection of Islamic finance. If the system does not make significant progress in of authenticity, it will lose credibility in the eyes of the Muslim masses and the rapid progress that it has been making may not be sustainable.

Authenticity, or rather the lack thereof, is the crime de la crème of the Islamic finance industry. In industry argot, “authenticity” refers to how Islamic a product is vis-à-vis maqasid al shari'ah. The industry speaks about products being shari'ah compliant or shari'ah based; generally the latter is considered more desirable than the former, which only meets technical shari'ah requirements without fulfilling the bigger Islamic vision. The industry has been accused of actively replicating interest-based financial products and instruments at the expense of innovating more authentic Islamic products along the risk-sharing mode, in large part to stay competitive with the dominant conventional system. This is a concern for most of our leaders in this book.

However, what “authentic” means vis-à-vis Islamic finance has not actually been sufficiently philosophised and explored by the Islamic finance industry. Rather,

one gets the feeling that industry practitioners are either uncomfortable or not informed enough (or both) to address the multiple layers and issues that would need to be tackled in order to gain the biggest possible picture of what being “authentically Islamic” means for shari'ah-compliant finance, beyond the mainstream framework of what constitutes a ‘financial’ industry as we know of it in the Western conventional sense that has been adopted worldwide. Instead, for the most part, industry practitioners turn to finance speak, which limits the discourse mainly to technical-ese, and most have become highly technically competent addressing, dealing with, and analysing market movements and financial structures. One may also get the impression that these industry practitioners—the dealers, traders, underwriters, arrangers, bookrunners, ants, risk analysts, etc.—are so bogged down with the devil in the details that there is no time to stop and think about how “authentic” everything really is, how the sum of their work and actions add up to the whole “Islamic” picture. This is where leaders come in, and in this book our Islamic finance pioneers and leaders have different views on the state of Islamic finance.

Tun Dr Mahathir, Professor Rifaat and Sheikh Nizam are probably the most content with the state of the industry. Tun Dr Mahathir said: “I think there is not much that needs to be pushed at the moment. It is taking its own momentum.” Professor Rifaat believes that the industry already has “the checks and balances,” and so he “would like Islamic finance to grow with its established parameters.” In Chapter 8 Sheikh Nizam is fairly confident that the industry “will be fairly okay if we maintain the ethical and the Islamic identity which we have maintained for the last 40 years,” although he its that “there is a lot of pressure to imitate everything [from the conventional system].”

So who, then, is concerned about this lack of authenticity?

Economists take the lead. Islamic economists like Professor Abbas Mirakhor make a strong case for risk sharing to be the fundamental basis of Islamic finance. Risk sharing, as Professor Abbas took lengths to explain in Chapter 6, is both technically and ethically sound, and “is not just the cornerstone or the

organising principle of Islamic finance, it is the organising principle of life.” In its depths and entirety of meaning, this perspective has implications far beyond what the current Islamic finance industry, within its limited paradigm, is capable of taking on. But it could start by focussing on what is most relevant to the industry—risk sharing, or profit and loss sharing financial products. Beyond these, the extrapolation of risk sharing as the organising principle for business and the wider economy would have to be tackled by economists working closely with other scholars and policymakers.

However, the Islamic finance industry itself is not entirely guilty of this lack of authenticity. There are stakeholders beyond Islamic financial institutions, and it all depends on where you are situated on the Islamic finance value chain. Some leaders in this book address the responsibility of the individual as the final consumer of Islamic financial products and services. Within the personal (Muslim) realm, Sheikh Nizam emphasises the internal inculcation of ethics that he says will lead to more stable and sustainable systems, be they financial or societal. “When you are transacting,” he says, “you have to put in mind what harm this transaction will have on society, what the benefits are, and if the benefits outweigh the harm.” Professor Abbas reminds Muslims of the bigger benefits and opportunities that Islam's moral com offers if only Muslims would adhere to the religion's principles. As he explained in Chapter 6, if you did not have the risk transfer approach and used only the risk-sharing approach, then: “You have to care. You have to find out who wants the money, why, where and how they want to use the money. You get to know the person. That's the objective. The central objective of Islam for humanity is for its to get to know one another enough to not want to harm each other.”

In practice, however, as Michael McMillen's experiences tell us: “It all boils down to whether or not you want to take the profit and the risk that goes with shari'ah-compliant profit-sharing arrangements. A lot of people don't. This is a very personal and private realm.” If demand from the ground is low, then this has negative implications for the entire business of Islamic finance. Rushdi Siddiqui gave the example of the situation in the United Kingdom where there is a very low uptake for Islamic retail banking, leading to revenues falling, budgets being cut back and the retail bank downsizing.

It is a basic business principle–market development. If nobody wants to buy your products and/or if you cannot sell them to the market then you will run out of business. In Malaysia, Mustapha Hamat has expressed his satisfaction with what he considers to be the country's extensive market development—Islamic education in schools today, he believes, will bear fruit for the future of Islamic finance. But not everyone in Malaysia agrees. Wan Rahim laments the quality of education in the country. The lack of academic objectivity and rigour, he believes, may actually stifle domestic capacity to produce independent and innovative future industry leaders. However, a national level of Islamic indoctrination would, no doubt, produce more pro-Islamic citizens more likely to buy into the bigger Islamic vision and choose Islamic finance.

Prince Mohamed takes a much broader view. Muslims, he says, have become fractured from Islamic sources, and are not confident that Islam has the right answers for a better financial system (or a better way of living overall). Scores of generations of modern Muslims have been weaned on the dominant Western and non-Islamic worldview, hence they look to the developed and affluent West as role models. “,” said the prince, “the resources of the real thinking, the real philosophies in the Muslim world as a whole are 500 years old. We have to renew our knowledge of these sources, our interpretation of them for the modern world. We are retrograde and unfortunately we blame Islam for it, not ourselves.”

Along this same line of thinking, the prince's Dar Al-Maal Al-Islami's group chief executive Khalid Abdulla-Janahi said that if financial regulators in Islamic countries in the 1970s and 1980s had been more confident and ive of an authentic Islamic finance based on risk sharing, instead of choosing to follow the Western interest-based system, the industry would by now be a leading player in asset management, rather than the situation today, where it is a deposit-taking and lending bank-dominated sector trying to keep up with the interest-based system.

All these matters considered, market development, for the sake of authenticity in Islamic finance, has to take a multi-pronged and multi-level approach—for apparently, everybody still needs to buy into the idea of risk sharing and commit to its advancement. People in the industry may not express their discontent openly in public and to the press but you do hear gripes and there is fingerpointing going on behind the scenes and “off the record”. Economists blame industry practitioners, regulators blame the banks⁷, bankers blame regulators, standard-setters, shari'ah scholars and the lack of demand from the ground, and consumers still do not know very much at all about Islamic finance to begin with.

All this cacophony is probably why Daud Vicary Abdullah, the president and chief executive officer of Kuala Lumpur-based INCEIF The Global University of Islamic Finance always signs off his emails, blog entries and articles with the line: “Much to do and not a moment to lose!” For indeed, although it has been 40 years and growth has been impressive, there is still so much more market development to be done in order to get all Islamic finance stakeholders onto the same page and reading from the same book.

As the industry stands now, Rushdi Siddiqui reminds us: “Unfortunately, most people think about Islamic finance in isolation. They don't understand the external environment of perceptions. We think that what we have is so great that we forget about the environment that it operates. If that external environment isn't lobbied correctly then your idea remains in the ivory tower.”

The issue of authenticity, then, impacts other related Islamic concerns beyond Islamic finance—within this book it affects the halal industry and the wider Islamic economy (discussion below).

If some of our leaders believe and think that Islamic finance today lacks authenticity and all sides appear to be blameworthy to some extent for the lack of maqasid al shari'ah, what is the good of Islamic finance as it stands today?

Sheikh Nizam Yaquby is perhaps the most satisfied of the lot.

A Viable Business Model

“I am very happy,” said Sheikh Nizam, “to see Islamic banking products and services being offered to people who previously would not use any banking services because of the ban on riba. These banks have changed these people's lives tremendously. Secondly, the mobilization of these funds is very important to society, as productive projects now have a flow of investments and financing.”

The sheikh is right. Islamic banking has provided Muslims permissible avenues and channels to bank with peace of mind knowing that they are adhering to Islam's ban on riba. But Sheikh Nizam qualifies: “We are not claiming that this sector, the Islamic banking sector, is going to solve all the problems in the matters of economics. No, no bank will claim this. No bank says ‘I want to solve the world's poverty problems.’ Nobody says this, although it is one of our goals to help poor people.”

Rushdi Siddiqui agrees with Sheikh Nizam that it is not the responsibility of a deposit-taking Islamic bank to eliminate poverty in the Muslim world but qualifies that this is because of the way Islamic finance has developed. “Islamic finance today is about the bankable. It's about addressing the fiduciary duties to the shareholders, which means ringing in the returns. But there's a higher fiduciary duty to the stakeholders, which we have not arrived at.” Rushdi always insists that he does not cheerlead Islamic finance, and he certainly does not do this when he adds: “We are missing out on 800 million Muslims, if not more. You may have to do a reset, or control-alternate-delete, whatever you want to call it.” So while the business model s the haves, it does not actually reach the have-nots. Rushdi calls for more Islamic microfinance institutions to help the poorest in society, saying that the level of exposure that Islamic finance has to microfinance is currently “insignificant.”

Overall, there has been much growth and development in the Islamic banking sector. Reflecting on the Malaysian situation, however, Wan Rahim observes that the increasing sophistication of the banking sector has marginalised some customers causing them to withdraw from the system: “Today banks are not doing retail banking anymore, not like what they were doing before. Banking is so sophisticated today. So sophisticated that it has made people confused. It has, more or less, caused some withdrawal from the system by the Muslims.”

From these we deduce two main points: While Islamic finance has finally provided Muslims with permissible banking channels, the system itself has not met its maqasid al shari'ah mandate and so falls short of truly helping the poor and others who are disenfranchised. Yet Islamic finance today, as Mustapha Hamat puts it, has demonstrated its business viability. This view is also ed by Prince Mohamed when he says that the industry now has an operable system and that even the riba-based banks are offering shari'ahcompliant products.

However, Islamic finance's other objectives have not been met. Mustapha said: “There are three objectives attached to the Islamic bank: business viability, social and religious objectives. The normal ordinary man worries about the business viability of the bank, he doesn't worry about the social and religious objectives. To achieve the social and religious objectives would require a big shift in the minds of the bankers in the country.”

Although there is widespread agreement that Islamic banking and finance today does not fully meet its maqasid, the industry also agrees that there is no merit in throwing the baby out with the bathwater (despite Rushdi Siddiqui wanting to reset the system). The industry displayed its resilience through the global financial crisis and should be rightly proud of this achievement.

What the shari'ah-compliant system demands is much closer links to the real economy, where financial and productive flows are more tied together or at least

more closely linked. So if you want to raise funds through the Islamic debt capital market, your sukuk (Islamic bond), for example, must be backed or based on assets, with these assets generating productive returns that will form the cash flow for you to repay your investors. In this way as well shari'ah has demanded increased transparency for investors who must be informed what their money is going into and how they will be repaid.

But even these asset-based or asset-backed debt structures have their problems in Islamic finance today. Wan Rahim, the man who structured the first sukuk in 1990, says: “Sukuk today, for me, is a multi-layered product structured under several forms of shari'ah contracts in order to circumvent riba.” Financial and shari'ah gymnastics can propel you to reach high finance but you have to make sure the ground you fall back to is well ed to begin with.

Over-financialisation has become a real concern for Islamic finance regulators; at least Malaysia's regulators have publicly expressed their concerns about this. Malaysia's formal Financial Sector Blueprints and Capital Market Masterplans address the need to link the financial market as closely as possible to the real economy as the country's Islamic finance industry grows more mature and international. This, again, goes back to authenticity, as the language of the master plan talks about moving away from shari'ah compliance to being more shari'ah based.

Table 11.1 lists the achievements for Islamic economics, banking, and finance since the 1970s according to Islamic economist Professor Khurshid Ahamad and Table 11.2 shows what more needs to be addressed, according to Professor Abbas Mirakhor.

Table 11.1 Achievements for Islamic Economics, Banking and Finance since the 1970s

¹. A well-thought-out critique of an interest-based economy in particular, and of conventional

². A clear exposition of the main features of an interest-free economy, Islamic banking and ma ³. The introduction of Islamic economics, banking and finance as taught subjects in academic ⁴. The establishment of Islamic banking and financial institutions, which have been increasing

Source: Chapter 1: The Islamic Economist/Activist: Khurshid Ahmad.

Table 11.2 Areas That Need to Be Addressed for Stable Growth of Islamic Banking and Finance

¹. ². ³. ⁴. ⁵. . ⁷. ⁸.

Equity and debt-based instruments need to be placed, at least, on a level playing field. Stock markets have to be improved to extend financial inclusion based on risk sharing. Ways have to be found to create compatibility between shari'ah legal structures and laws go Muslim governments must find ways of financing that avoid interest rates. Medium- to long-term risk-sharing instruments of financing government operations will be It is hoped that leading fuqaha' (jurists) and fiqh institutions like the Kuala Lumpur–based I of public education to better familiarise citizens with the benefits of risk sharing an All this must be matched by strong oversight.

Source: Chapter 6: The Islamic Economist: Abbas Mirakhor.

Beyond Banking and Finance: The Islamic Economy

When it comes to other elements of the Islamic system, especially the halal industry, the picture becomes even more challenging.

Sheikh Saleh has observed that Muslim countries chase national glory over the needs of the entire global Muslim community, to the detriment of the good of the many: “Halal is very important for all Muslims. But Malaysia wants to be the centre, and Turkey wants to be the centre, and Iran wants to be the centre. For such matters, one state cannot serve the entire Muslim world.” His contemporary Prince Mohamed echoes his underlying sentiment, saying: “[U]nfortunately, we Muslims don't like to cooperate with each other.” Sheikh Saleh is a lot more vehement and candid, outrightly saying that the Organisation of Islamic Cooperation, the 57-member body that represents Islamic-majority countries, has done nothing much to help the economies of Muslim countries.

The global halal sector is far and away much bigger than the global Islamic finance sector. Estimates point to the global halal market being worth more than US$2.3 trillion, with the value of the halal food sector reaching US$700 billion annually. There is now a growing understanding and appreciation of the global halal sector encoming more than just halal food and including such sectors as healthcare, cosmetics, travel, and pharmaceuticals.⁸ But for the Islamic consumer, as Rushdi Siddiqui pointed out, there is a glaring disconnect: “You can eat the food because it's halal but you can't invest in the company because it's not shari'ah compliant. What an irony.” The halal sector, said Rushdi, “doesn't think about financing”; rather it is more concerned with issues related to its core offering, for example, ingredients certification. His opinion is that the sector has failed to convey its value proposition and badly needs industry bodies to unify its focus. Synthesis between the global Islamic finance sector and the global halal sector is seen as an explosive mix that could easily be worth up to US$5 trillion. The lucrative business and financial opportunities and potential of both sectors together has put the “Islamic economy” under the spotlight, with

Dubai first onto the global stage. Dubai announced in January 2013 grand plans and ambitions to be the world's capital of Islamic economy. As of this writing the emirate has launched the Dubai Islamic Banking and Finance Centre, and is working on other initiatives including: a shari'ah council to oversee standards in Islamic finance, an arbitration centre to resolve disputes in Islamic contracts, and a drive to boost production of halal food within the emirate.¹

The eventual convergence of Islamic finance and the halal sector would be the next step in the development of the overall global Islamic business offering, and with it will come new synergies, innovations, and opportunities for each subsector as well as for the sum of all their parts. This may perhaps start healing the wounds within Islamic lands formed when Muslims slowly started the process of fracturing (as Prince Mohamed puts it) themselves from Islamic sources and shari'ah.

The Last Word: Commitment to the Islamic Basis as a Better Way

In making the connection between the ideal of risk sharing in Islamic finance and the Islamic basis as a better way for all humanity, Professor Abbas Mirakhor put it succinctly (we cited his quote earlier in the chapter but repeat it for emphasis here): “The central objective of Islam for humanity is for its to get to know one another enough to not want to harm each other.” Risk sharing, explains Professor Abbas, “is not just the cornerstone or the organising principle of Islamic finance, it is the organising principle of life. If I am willing to say to myself that the risk that you are facing is also the risk that I am facing, then why don't we share the risks? So that means when I am down you help, when you are down I help.”

If, as our leaders believe, the Islamic way is a better way for all of humanity, then change must first start with Muslims. Sheikh Saleh and Prince Mohamed are perhaps the most critical of the global Muslim community. Prince Mohamed reminds readers that Muslims themselves are to blame for negative non-Muslim and Western perceptions of Islam. Hajj Saeed, too, understands this and has devoted his life to uplifting the quality of life and status of Muslims in the United Arab Emirates through business and education. All point out that Muslims must not mindlessly equate Islam merely to the performance of rituals, such as prayer and fasting, but must recognise that Islamic values are universally good, positive, and ethical. As Sheikh Saleh says: “There are very few Muslims who really live Islam. Many Muslims merely trade in the name of Islam. If you are only practising Islam in your five daily prayers and that's it, then you are not a real Muslim. You have to practise Islam for your whole life, especially in mu'amalat (or financial transactions). Because if you pray or you don't pray, that's between you and your God. But if you cheat people, if you treat them badly, if you are dirty, if you don't take care of your own house or your street, then you give a bad example of Islam.”

What these leaders all know (and have stated in their different ways) is that the highly fractured and economically lagging Muslim world has to start getting its act together. A main challenge from within arises from Muslims' different interpretations and understanding of the Qur'an and Sunna of the Prophet (pbuh) that results in differing fatawa (religious rulings) and practices. Further, as Professor Khurshid Ahmad offered in Chapter 1, governments in Islamic countries are incompetent and have not furthered more concerted efforts to implement what Islam offers in the way of an economic system to better use and distribute the abundance of resources found in Muslim lands.

In 2010, Professor Hossein Askari and Professor Scheherazade S. Rehman produced “An Economic IslamicityIndex,”¹¹ a study, on a preliminary basis, that measured 208 countries' adherence to Islamic economic principles using as proxies 113 measurable variables. Their findings make for very interesting reading. According to their Economic Islamicity Index, only two member countries of the Organisation of Islamic Cooperation make the top 50—Malaysia the higher at number 33 and Kuwait at number 42. The top 10 countries that adhere to Islamic Economic principles were (in order of ranking): Ireland, Denmark, Luxembourg, Sweden, United Kingdom, New Zealand, Singapore, Finland, Norway, and Belgium. Islamic finance strongholds Saudi Arabia and United Arab Emirates come in at number 91 and number 65, respectively. The study's findings conclude that Islamic countries have not, by and large, adhered to Islamic principles. ing Professor Khurshid's statement in the previous paragraph, the study stated: “It is, in fact, the shortcoming of the governments, not the religion, that for the dismal economic development in the Middle East (even those blessed, or cursed, with oil). This is further reinforced by the content of the twelve Islamic economic principles represented by 113 economic proxies. If examined closely, all twelve Islamic economic principles promote good governance and good economic and social policies.”¹²

So maybe it is Muslims themselves who are actually the biggest impediments to the advancement of Islamic values and principles as a benefit to all mankind. If so, then a market share of under 2 percent of global financial assets in 40 years is, as our pioneers say, indeed a great achievement.

Conversations with our leaders all point to one understanding: that in spite of its shortcomings, the growth and development of the Islamic financial system has relied thus far on the successful operationalising of shari'ah. This has, at least, given Muslim leaders cause for optimism, as there now exists the foundational building blocks to advance the wider economy. Every single person interviewed for this book agrees that the global Islamic banking and finance industry will keep on growing, with a few explicitly expressing their view that the Islamic system eventually will emerge the dominant one, first in Muslim countries, then, as Professor Khurshid says: “[T]his movement will gain strength in the Muslim world, and then hopefully this may become a model to influence the rest of the world.” However, a majority also agree that continued growth and development of the industry cannot be at the expense of maqasid al shari'ah.

Leaders such as Hajj Saeed, Prince Mohamed, and Sheikh Saleh focus on their Muslim communities. Americans Rushdi Siddiqui and Michael McMillen have broadened the base and point to the need to practically demonstrate the Islamic system as a truly universal and ethical one, in order to gain ers based on its agnostic merits.

Malaysia, with its most advanced Islamic finance regulatory and supervisory framework, will, with Professor Abbas's contributions, probably start systematically expanding its Islamic offering before other nations. As Professor Abbas says: “Other countries can then reduce the learning cost of establishing a full-fledged risk sharing system leveraging on Malaysia's experience.”

The mood in the Islamic finance camp is one of optimism moving forward. Overall, the industry is moving farther away from navel gazing as more and more industry practitioners realise the opportunity to positively impact societies and economies beyond banking and finance and as the wider financial community grows more familiar with Islamic finance. If the past four decades have yielded more positive results than industry pioneers could have anticipated

or imagined, then the next 40 years of Islamic finance may perhaps bring the world more and better surprises, God willing.

Notes

¹ Malaysian Reserve, “IFSB: Global Crisis Changed Rules,” Malaysian Reserve, 15 May 2013. [Online]. Available from: http://themalaysianreserve.com/main/news/corporate-malaysia/3742-ifsb-globalcrisis-changed-rules.

² Umer Chapra, “The global financial crisis: can Islamic finance help?” New Horizon Issue No. 170, January-March 2009. p. 22. [Online]. Available from: http://www.islamicbanking.com/resources/7/NewHorizon%20Previouse%20Issues/NewHorizon_JanMar09.pdf.

³ Habib Ahmed, “Financial Crisis: Risks and Lessons for Islamic Finance,” ISRA International Journal of Islamic Finance, Vol. 1 Issue 1, 2009. p. 7. [Online]. Available from: http://www.kantakji.com/fiqh/Files/Markets/c47.pdf.

⁴ Edib Smolo and Abbas Mirakhor, “The global financial crisis and its implications for the Islamic financial industry,” International Journal of Islamic and Middle Eastern Finance and Management, Vol. 3 No. 4, 2010. p. 378.

⁵ Islamic Financial Services Board. Islamic Financial Services Industry Stability Report 2013. Kuala Lumpur: IFSB, 2013.

Muhammad Umer Chapra, “Innovation and Authenticity in Islamic Finance,” in Eighth Harvard University Forum on Islamic Finance: Innovation and Authenticity, held on 19–20 April 2008. Harvard Law School, Islamic Legal

Studies Program Islamic Finance Project, pp.1–21. 2009. [Online]. Available from: http://www.perpustakaan.depkeu.go.id/FOLDERJURNAL/Harvard%20Ummer_Chapra.pdf.

⁷ As an example, on 12 September 2012 Bank Negara Malaysia governor Tan Sri Dr Zeti Akhtar Aziz told reporters:” “The market has to be demand driven. We can put the enabling environment, but we can't require banks to offer products and services,” from: Al-Zaquan Amer Hamzah and Bernardo Vizcaino, “Malaysia hopes reforms to spur Islamic banks' growth,” Reuters. 21 Feb 2013. [Online]. Available from: http://www.reuters.com/article/2013/02/21/islamicfinance-malaysia-idUSL5E8KDNNN20130221.

⁸ World Halal Forum, 2013. [Online]. Available from: http://www.worldhalalforum.org/whf_intro.html.

Gulf News, “Hamdan launches Dubai Islamic Banking and Finance Centre,” Gulf News, 24 July 2013. [Online]. Available from: http://gulfnews.com/business/economy/hamdan-launches-dubai-islamicbanking-and-finance-centre-1.1212949.

¹ Mustafa Alrawi and Gregor Stuart Hunter, “Dubai aims to be hub of Islamic economy,” The National, 9 January 2013. [Online]. Available from: http://www.thenational.ae/business/industry-insights/economics/dubai-aims-tobe-hub-of-islamic-economy.

¹¹ Scheherazade S. Rehman and Hossein Askari, “An Economic IslamicityIndex,” Global Economy Journal Vol. 10 Issue 3, 2010. Berkeley Electronic Press. [Online]. Available from: http://www.relooney.info/0_NS4053_1106.pdf.

¹² Ibid. p.24.

Glossary

A

Alim, ulama' (plural).

Scholar in the Islamic studies and sciences.

Arbun.

Down payment with revocation option, similar to call option.

B

Bai' al inah.

Sale with immediate repurchase. In bai' al inah, a lender sells an asset to a buyer/borrower on credit for a fixed price (the financing amount) plus a profit element. The lender than immediately repurchases the asset from the borrower in cash for the fixed price.

Bai' bithaman ajil.

A sale and purchase transaction for the financing of assets on a deferred and instalment basis with a pre-agreed payment period. In bai' bithama ajil, a financier buys an asset as outlined by the borrower and sells that asset to the borrower for the original price plus a profit element. The deferred payment can be made in a lump sum.

C

Commodity murabaha.

A purchase and sale transaction of shari'ah-compliant commodities, whereby the buyer purchases the commodities on a deferred payment basis and subsequently sells them to a third party on a cash payment basis.

D

Darura.

Necessity.

F

Faqih, fuqaha' (plural).

Jurist.

Fatwa, fatawa (plural).

Religious ruling.

Fiqh.

Islamic jurisprudence.

G

Gharar.

Uncertainty.

H

Haj.

One of the five pillars of Islam. Annual pilgrimage to Muslim holy sites in Saudi Arabia that must be performed at least once in the lifetime of able-bodied Muslims who can afford the journey.

Halal.

Lawful or permissible.

Haram.

Unlawful or forbidden or impermissible.

I

Ijara.

Leasing.

Ijara wa iqtina'.

Buy-back leasing where the client purchases the item at the end of the leasing

contract.

Ijma'.

Consensus.

Ijtihad.

In Islamic jurisprudence, ijtihad refers to independent reasoning.

Istisna'.

Contract specific to made-to-order items, such as construction and manufacturing.

M

Maysir.

Gambling, or speculation akin to gambling.

Maqasid al shari'ah.

Literally goals of the shari'ah. Shari'ah aims to promote welfare or benefit for mankind and prevent harm. Maqasid, hence, safeguard and advance the faith, self, intellect, posterity, and wealth. In Islamic finance over-arching goals demand the industry promote equity and social justice.

Mudaraba.

Trust financing, profit and loss sharing, or risk-sharing contract.

Mudarib.

The entrepreneur in a mudaraba arrangement. The mudarib receives the capital to be undertaken in business or investment activity to generate returns.

Murabaha.

Cost plus profit markup. In a murabaha contract, the financier buys an item as specified by the customer and sells it to the customer with a profit margin on a deferred basis. Repayment is usually in instalments.

Musharaka.

t venture, profit and loss, or risk-sharing contract. Unlike mudaraba, where only the rab al maal contributes funds, in a musharaka all parties contribute funds, and losses are shared in proportion to funds invested. Profits are shared according to mutually agreed ratio.

P

PBUH.

Acronym for peace be upon him (i.e., sending prayers and blessings to the Prophet Mohamed).

Q

Qard al hassan.

Interest-free loan, sometimes called a benevolent loan.

Qiyas.

Reasoning by analogy. One of the tools used to extract rulings and opinions in Islamic jurisprudence, or fiqh.

R

Rab al maal.

The capital provider in a mudaraba contract.

Rahn.

Collateral.

Riba.

Interest, or usury.

S

Sadaqat.

Voluntary charity.

Shari'ah.

Law of Islam based on two primary texts: Al Qur'an and Sunna of the Prophet Mohamed (peace be upon him); also used as a synonym for fiqh.

Sukuk.

Commonly referred to as an Islamic bond. Unlike a conventional bond, sukuk must be asset backed or asset based.

Sunna.

Of the Prophet Mohamed (peace be upon him) refers to the examples set by the Prophet via his actions, sayings and tacit approvals, as well as reports that describe his physical attributes and character.

T

Takaful.

Commonly defined as Islamic insurance. Takaful is based on the principle of mutual cooperation or assistance, offering t risk sharing for a pool of participants.

Tawarruq.

Purchasing an asset with deferred price, either on the basis of musawamah (sale contract without the disclosure of the asset cost price and profit margin to the buyer) or murabaha, then selling it to a third party to obtain cash.

W

Wa'ad.

Promise.

Wakalah.

An agency contract where the customer (principal) appoints the institution offering Islamic financial services as an agent to carry out business on their behalf.

Wakil.

An agent.

Waqf, awqaf (plural).

Islamic endowment or charitable trust.

Z

Zakat.

Tithes, or religious taxes. It is one of the five pillars of Islam. Unlike sadaqat, which is voluntary, zakat is compulsory.

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About the Author

Emmy Abdul Alim is editor for Thomson Reuters Islamic Finance Gateway. She has been writing independently about Islamic finance since 2010. She has an MBA in finance from the University of Aberdeen, a BA (Hons) in Arabic and Islamic studies from the School of Oriental and African Studies, University of London, and a BA in English and European Studies from the National University of Singapore. Before making the switch to editing and writing about business and Islamic finance, Emmy worked professionally in the performing arts primarily in her native Singapore. Since then she has lived and worked in the United Kingdom, Egypt, the Netherlands, and Malaysia.

Index

A

Abdul Basit, Badr Al Mutawalli

Abdulla-Janahi, Khalid

Abdullah Kamel, Saleh (Sheikh Saleh)

Abu Dhabi

Abu Dhabi Islamic Bank

Abu Ghuddah, Abdul Sattar Abdul Karim

ing and Auditing Organisation for Islamic Financial Institutions (AAOIFI)

Adl,

Ahmad Badawi, Abdullah

Ahmad, Khurshid

Ahmed Abdel Karim, Rifaat

Akhtar Aziz, Zeti

Al Afghani, Jamal Al Din

Al Azhar University

Al Baraka International Bank

Al Darir, Al Siddiq Muhammad Al Amin

Al Ikhwan Al Muslimun (Muslim Brotherhood)

Al Madani, Ahmed Mohamed Ali

Al Najjar, Ahmed

Al Qaradawi, Yusuf

Al Rajhi

Al Saud, HRH Prince Amr Mohamed Al Faisal

Al Saud, HRH Prince Mohamed Al Faisal

Al Saud, King Faisal Abd al Aziz (King Faisal)

Al Sha'raawi, Muhammad Mutawalli

Al Yaseen, Ahmad Bazie

Amana Income Fund

American Finance House LARIBA

Arab Islamic Bank

Arab Spring

Archer, Simon

Askari, Hossein

Asset-backed

Asset-based

Authenticity

Azka Capital

B

Badiozaman, Mohar

Bahrain

Bahrain Islamic Bank

Bai’

Bai’ al inah

Bai’ bithaman ajil (BBA)

Bank for International Settlements (BIS)

Bank Islam

Bank Negara Malaysia (BNM, the Malaysian central bank)

Bank of Credit and Commerce International (BCCI)

Bank of England (BoE)

Bankruptcy

Barclays

Basel Committee on Banking Supervision (BCBS)

Basel III

bin Ahmed Al Lootah, Saeed (Hajj Saeed)

bin Baz, Abdul Aziz

bin Rashid Al Maktoum, Mohammed

bin Saeed Al Maktoum, Rashid

bin Ungku Abdul Hamid, Ungku Abdul Aziz

Bursa Malaysia

C

Cairo

Caliph, caliphate, caliphates

Chapra, Umer

Citi, Citibank, Citigroup

Committee for Economic and Commercial Cooperation of the Organisation of the Islamic Cooperation (COMCEC)

Commodity murabaha

Conventional

Corruption

Crisis, cries

Cronyism

D

Dallah Al Baraka

Dar Al-Maal Al-Islami (DMI)

Debt, debtor

Default

DeLorenzo, Yusuf Talal

Demand, demands

Deposit, deposits, depositor, depositors

Derivatives

DMI Call to Ummat Al Islam

Dow Jones, and Dow Jones Islamic Market Indexes (DJIMI)

Dubai

Dubai Islamic Bank (DIB)

E

East Cameron Oil and Gas

Egypt

Elgari, Mohamed Ali

Enron

Environmental, social and corporate governance (ESG)

Equity

Ethical, ethically

F

Faisal Islamic Bank of Egypt (FIBE)

Faisal Islamic Bank of Sudan

Faisal Private Bank

Fatwa (pl. fatawa)

Financial centre(s)

Financial crisis

Fiqh

First Islamic Banking Conference, May 1979, Dubai

First Islamic Economics Conference, Mecca

G

Gambling

Gambling, Trevor

General Council for Islamic Banks and Financial Institutions (CIBAFI)

Gharar

Globalisation

Goldman Sachs

Governance

Government Investment Certificate (GIC)

Government Investment Issue (GII)

Gul, Abdullah

Gulf Cooperation Council (GCC)

H

Hajj

Halal

Hamat, Mustapha

Hamoud, Sami

Haram

Haron, Abdullah

Harvard, Harvard Islamic Finance Project

HSBC

Husain, Saiyid Akbar (Akbar Allahabadi)

I

Iceberg

Ijara

Ijma

Ijtihad

Indonesia

Institute of Islamic Banking and Insurance, United Kingdom

Institutional

Insurance

Integration

Interest

International ing Standards Board (IASB)

International Association of Deposit Insurers

International Association of Islamic Banks (IAIB)

International Centre for Education in Islamic Finance (INCEIF)

International Financial Reporting Standards (IFRS)

International Institute of Islamic Banking and Economics, Turkish Republic of Northern Cyprus

International Islamic Financial Market (IIFM)

International Islamic Liquidity Management Corporation (IILM)

International Islamic University in Islamabad (IIUI)

International Monetary Fund (IMF)

International Shari'ah Research Academy for Islamic Finance (ISRA)

International Zakat Organisation (IZO)

Investment, investments

Investor, investors

Iqbal, Muhammad

Iqbal, Zamir

Iran, Islamic Republic of

Islam

Islamic bank, Islamic banking

Islamic economics

Islamic economist(s)

Islamic economy

Islamic finance

Islamic financial institution(s)

Islamic Bank of Britain (IBB)

Islamic Banking Act

Islamic Banking Scheme

Islamic Capital Market (ICM)

Islamic Chamber of Commerce and Industry (ICCI)

Islamic Development Bank (IDB)

Islamic Economic Research Centre, King Abdulaziz University

Islamic Financial Services Act (IFSA), Malaysia

Islamic Financial Services Board (IFSB)

Islamic Foundation

Islamic hedge funds

Islamic Interbank Benchmark Rate (IIBR)

Islamic Interbank Money Market (IIMM)

Islamic Investment Company of the Gulf (IICG)

Islamic law

Islamic megabank

Islamic money management companies in Egypt

Islamic Research and Training Institute (IRTI)

Islamic revival, Islamic revivalism

Ismail, Halim

Istihsan

Istikhlaf

Istisna’

Ithmaar Bank

J

Jordan Islamic Bank

K

Kamel, Ibrahim

Kamil, Wan Abdul Rahim

Kazakhstan

Khan, Mohsin

Kuala Lumpur

Kuwait Finance House (KFH)

L

Liquidity

London

London Interbank Offered Rate (LIBOR)

London Metal Exchange (LME)

M

Malaysia

Maqasid al shari'ah

Mawdudi, Sayyid Abul A'la

Maysir

McMillen, Michael J.T.

Microfinance

Middle East, Middle Eastern

Middle East and North Africa (MENA)

Mirakhor, Abbas (including Professor Abbas)

Mit Ghamr Savings Bank

Mohamad, Mahathir

Mohamed Al Sheikh, Mohamed Al Khater

Mohamed Yakcop, Nor

Money

Mudarib

Mudaraba

Muhammad Asad

Murabaha

Musharaka

Muslim(s)

Muslim Welfare Organisation of Malaysia

N

Nation-state

National Aeronautics and Space istration (NASA)

Naqvi, Syed Nawab Haider

Negative screening

New Horizon (magazine)

New York Times (NYT)

O

Oman

Organisation of the Islamic Conference Fiqh Academy

Organisation of the Islamic Conference, or Organisation of Islamic Cooperation (from 2001)

P

Pakistan, Islamic Republic of

Poverty

PricewaterhouseCoopers (PwC)

Profit sharing, including profit and loss sharing

Prophet Mohamed (pbuh)

Putra Al Haj, Abdul Rahman (Tunku Abdul Rahman)

Q

Qard al Hassan

Qatar

Qiyas

Qur'an, also al-Qur'anic

R

Rabb al maal

Rahn

Reagan, Ronald

Regulator(s)

Regulatory

Riba

Risk sharing

Risk shifting

Risk transfer

S

Sadaqat

Salafi, Salafism

SAMI Halal Food Index

Saudi Arabia, Kingdom of

Sayed Tantawi, Mohammed

Securities Commission Malaysia

September

Shareholders

Shari'ah

Shari'ah Advisory Council (Malaysia SAC)

Shari'ah based

Shari'ah board(s)

Shari'ah compliance

Shari'ah compliant

Shari'ah scholar(s)

Shell MDS Sukuk

Shirk (polytheism)

Siddiqi, Nejatullah

Siddiqui, Rushdi

Singapore

Social justice

Speculation

Stability

Standard Chartered

Standardising, standardization

Stock, stocks

Sudan

Sukuk

Sunna

Sura,xiii

Syarikat Takaful

T

Tabung Haji

Tadamon Islamic Bank Sudan

Takaful

Takaful Act

Tawarruq

Tawhid

Thomson Reuters, Reuters

Transparency

Travis, Anthony

Turkey

U

Unal, Murat

United Arab Emirates (UAE)

United Kingdom

United States of America

Usmani, Muhammad Taqi

Usury

Sundarajan

W

Wadiah

Wall Street

Wall Street Journal (WSJ)

Waqf (pl. awqaf)

Wilson, Rodney

World Assembly of Muslim Youth

World Bank

World Zakat Fund

Y

Yaquby, Nizam

Z

Zakat

Zubair, Muhammad Omar