Islamic Banking & FinanceIn the West

with Concentrated Focus on the

The United Kingdom

Dr Mohammad Javad Gohari (PhD Law)Vice-President OIIL

Senior Advisor OIIBF

Islamic Finance 101Hosted by the

U.S. Department of Treasury

In association with theIslamic Finance Project – Harvard Law School

November 6, 20081:00 p.m. to 5:00 p.m.

1500 Pennsylvania Avenue NW, Washington D.C

US Official Position

FINANCIALINSTITUTION GEOGRAPHICPRESENCE COMPANYSTRUCTURE/

FUNDINGSOURCEPRODUCTSOFFERED

STRUCTURESUSED

BANKS

UniversityBank

•Headquarters:Detroit,Michigan•Shari’ah-compliantproductsofferedin:California,Connecticut,Idaho,Illinois,Maryland,Michigan,NewJersey,NewYork,Ohio,Pennsylvania,Virginia

•Statecharteredbank•Financingproductsareofferedthroughitswhollyownedsubsidiary,UniversityIslamicFinancial

•Residentialrealestatefinancing•Depositproduct•Moneymarketproduct•Mutualfunds

•Murabahaandijara•Profitsharingdeposits•MutualfundsofferedbyHSBCAmanah

DevonBank

•Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferedin:Alaska,Alabama,Arizona,Arkansas,California,Colorado,Connecticut,Florida,Georgia,Idaho,Indiana,Kansas,Kentucky,Louisiana,Massachusetts,Michigan,Minnesota,Missouri,Nebraska,NorthCarolina,NorthDakota,NewHampshire,NewYork,Ohio,Oklahoma,Oregon,Pennsylvania,RhodeIsland,SouthCarolina,SouthDakota,Tennessee,Texas,Utah,Virginia,WashingtonDC,Wisconsin,Wyoming

•Statecharteredbank•Financingproductsareofferedthroughitswhollyownedsubsidiary

•Residentialrealestatefinancing•Commercialrealestatefinancing•Realestateconstructionfinancing•Linesofcredit•Cashmanagement•Business&tradefinancing•Institutionaldepositproducts•Investmentproducts•Trustandadvisoryservices

•Murabahaandijara•Musharakah•Profitsharingdeposits•Mutualfundsofferedbythirdpartyproviders(Amana,Azzad,Iman,seebelow)

BroadwayBankofChicago

•Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferedinIllinoisonly Communitybank •Residentialrealestatefinancing

•Commercialrealestatefinancing Ijara

RomAsiaBank Headquarters:MonmouthJunction,NewJersey Statecharteredbank Tobedetermined Tobedetermined

LincolnStateBank

•Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferedinIllinoisonly Statecharteredbank Residentialrealestatefinancing Ijara

MutualBank •Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferedinIllinoisonly

StatecharteredbankCommercialrealestatefinancing Murabaha

ColeTaylorBank

•Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferedinIllinoisonly Statecharteredbank Commercialrealestatefinancing Murabahaandijara

MORTGAGECOMPANIES

ZayanFinance •Headquarters:Chicago,Illinois•Shari’ah-compliantproductsofferednationwide

•Non-bankmortgagecompany•Fundingprovidedbyforeigninvestors

Commercialrealestatefinancing Diminishingmusharakahandijara

GuidanceResidential

•Headquarters:WestFallsChurch,Virginia•Shari’ah-compliantproductsofferedin:California,Connecticut,WashingtonDC,Florida,Georgia,Illinois,Indiana,Massachusetts,Maryland,Michigan,Minnesota,Missouri,NorthCarolina,NewJersey,NewYork,Ohio,Oregon,Pennsylvania,SouthCarolina,Tennessee,Texas,Washington

•Non-bankmortgagecompany•FundingprovidedbyFreddieMacand/orforeigninvestors

Residentialrealestatefinancing Diminishingmusharakah

Lariba–AmericanFinance

House/BankofWhittier

•Headquarters:Pasadena,California•Shari’ah-compliantproductsofferednationwide

•Non-bankmortgagecompany•Brokers/offersitsfinancingproductsinsomestatesthroughitsaffiliate,BankofWhittier•FundingprovidedbyFreddieMac,FannieMaeand/orBankofWhittier

•Residentialrealestatefinancing•Commercialrealestatefinancing•Homeconstruction•Business&tradefinance•Currentaccount/depositproduct

Ijaraplusdiminishingmusharakah,musharakahandmurabaha

SamadGroup•Headquarters:Ypsilasti,Michigan•Shari’ah-compliantproductsofferedinMichiganonly

Non-bankmortgagecompany Residentialrealestatefinancing Ijara

NEWHORIZON April–June 2009

www.newhorizon-islamicbanking.com

ANALYSIS

3 IIBI

FINANCIALINSTITUTION GEOGRAPHICPRESENCE COMPANYSTRUCTURE/

FUNDINGSOURCEPRODUCTSOFFERED

STRUCTURESUSED

COMMUNITY-BASEDFINANCINGPROGRAMMES/ORGANISATIONS

CityofMinneapolis–AlternativeFinancingProgramme

Headquarters:Minneapolis,Minnesota

•Governmentsponsoredprogrammeforsmallbusinessowners•Co-financingarrangementswithothercommunityproviders(i.e.AfricanDevelopmentCenter,orotherbanks)

•Realestateconstructionfinancing•Microfinancing

Murabaha

MinnesotaHousingFinanceAgency,StateofMinnesota

Headquarters:Minneapolis,Minnesota•Governmentsponsoredprogrammeforlowincomeparticipants•FundingprovidedbyStateofMinnesota

•Low-incomeresidentialrealestatefinancing;wholesaleprovidertoDevonBank’sresidentialrealestatefinancingproducts

Murabaha

AfricanDevelopmentCenter

Headquarters:Minneapolis,Minnesota Non-profitcommunitydevelopmentcorporation

•Microfinancing•Residentialrealestatefinancing•ResidentialmortgagebrokerforDevon-MinnesotaHousingFinanceAgencyProject

Murabaha

NeighborhoodDevelopmentCenter–RibaFreeProgramme

Headquarters:Minneapolis/St.Paul,Minnesota Non-profitcommunitydevelopment

corporation Microfinancing Murabahaandmusharakah

WorldRelief Headquarters:Nashville,Tennessee

•Non-profitcommunitydevelopmentcorporation•FundingprovidedbyOfficeofRefugeeResettlementintheUSDepartmentofHealthandHumanServices

Microfinancing Murabaha

AmeenHousingCo-operative

Headquarters:PaloAlto,California

•Fundingprovidedbyco-opandinvestors

Co-opresidentialfinancingprogramme

Co-operativefinancingstructurewithincomedistributedasdividends

INVESTMENTADVISORS/MUTUALFUNDCOMPANIES

SaturnaCapital Headquarters:Bellingham,Washington Investmentadvisor,assetmanager Publicinvestmentfunds(AmanaMutualFunds)

AzzadAssetManagement Headquarters:FallsChurch,Virginia Investmentadvisor,assetmanager Publicinvestmentfunds

(AzzadMutualFunds)

NorthAmericanIslamicTrust/AlliedAssetAdvisors

Headquarters:BurrRidge,Illinois Investmentadvisor,assetmanager Publicinvestmentfunds(TheImanFund)

INVESTMENTBANKS

Arcapita Headquarters:Atlanta,Georgia SubsidiaryofArcapitaBank(Bahrain)•Privateequity•Realestatefocusedinvestments•Venturecapital

InnovestCapital Headquarters:Cleveland,Ohio SubsidiaryofGulfInvestmentHouse(Kuwait) Realestatefocusedinvestments

TransOceanGroup Headquarters:Boston,Massachusetts SubsidiaryofGulfInvestmentHouse(Kuwait) Privateequity

UIBCapital–Chicago

Headquarters:Chicago,Illinois SubsidiaryofUnicornInvestmentBank(Bahrain)

Privateequity

OverlandCapitalGroup Headquarters:Boston,Massachusetts InvestorsincludeGulf-basedfinancial

institutionsandinvestors•Realestatefocusedinvestments•Equipmentleasing•Assetmanagement

NEWHORIZON Rabi Al Thani–Jumada Al Thani 1430

www.newhorizon-islamicbanking.com

ANALYSIS

IIBI 4

ISLAMIC FINANCE, SMEs AND THE RECENT GLOBAL SHOCKWAVES IN EUROPE

CRIS

IS

Profit of conventional banks fell from US $ 116 billion in 2006 to a net loss of US $ 42 billion in 2008.In France , the balance of trade deficit reached EUR 53 billion in 2008.

Downgrade of the credit rating of France in 2012.

SMEs

Corporate loan fell :−2,3% Nov 2009One in every two new business fails in the long run.Persistence of difficulties for SMEs to obtain loan Banks require more collateral and grant amounts lower than those released before the crisis

ISLA

MIC

FIN

ANCE

Islamic financial industry has crossed its $ 1 trillion mark in 2009.

Islamic bank net profits increased 9% from 2006 to 2008. From US $ 4.2 billion to 4.6 billion.

Growth in total equity was 36% for Islamic banks in 2009.

Dorsaf, Islamic Banking Finance and Commerce Conference Oxford 2012

5

FRENCH INITIATIVES FOR ISLAMIC FINANCE

First approach since 2007

-Launch of Paris Europlace Islamic Finance Commission -Set up of French Shariah boards -Creation of several certificates courses in Islamic Finance -AAOIFI-Paris Europlace MOU for the translation of AAOIFI standards in French.

Tax Instructions for Islamic finance Products: 2010-Fiscal instructions for sukuk , murabaha, ijara and istisna published in August 2010. -Qualification as banking operations for Islamic finance products -Benefit of the usual tax treatment of banking operations.

Going forward

-Islamic financial institutions projects for a banking license in France .-Fiscal instructions for mudaraba, musharaka, salam, wakala .-Development of French banks’ activity in Islamic Finance in France.

Dorsaf, Islamic Banking Finance and Commerce Conference Oxford 2012 6

British Prime Minister

Speaking at the Islamic Finance and Trade Conference the chancellor said he wanted to make the UK "the gateway for Islamic finance".He pointed to reforms of the tax system to make Sharia compliance easier. "It is the vibrancy and dynamism of Britain's Muslims, combined with Britain's openness to the world and our historic ties with Muslim countries, that means the ambition you have set for yourselves - to make Britain the gateway to Islamic finance and trade - is one I believe Britain is well placed to achieve," Brown told a conference on Islamic banking in London.

Size of the market in the UK and globally

There are thought to be about 1.8 million Muslims in the UK or 3 per cent of the population. 50% of these are estimated to reside in the London area. There are also estimated to be about half a million regular Muslim visitors to the UK and approximately 12 million Muslims living in the EU, principally in France & Germany.

The main centres for Islamic banking still tend to be concentrated in the Middle East and Gulf region. Assets controlled by Islamic banks at the global level are estimated to be $200-500bn and are growing at a pace of 10-15% per year.

The Financial Services Authority is the regulator of the financial services industry in the UK

The FSA's policy towards Islamic banks, and indeed any new or innovative financial services company, can be summed up simply as "no obstacles, no special favours". We are keen to promote a level playing field between conventional and Islamic providers. One thing we are clear about is that we are a financial, not a religious, regulator.

UK Government & Its Claims For Islamic Finance Growth in London

• Markets and skills base: It has a tradition going back to the seventeenth century, if not before, of being willing to innovate and respond flexibly to new ideas. London has deep and liquid markets and the exchanges are among the most frequently used venues for listing and trading financial instruments globally. The London Metal Exchange has already been mentioned. The UK financial services industry has a proven record of developing and delivering new products and a large pool of legal, accounting and financial engineering skills on which to draw. Several of these firms have now established or expanded offices in other Islamic centres. English law is already the preferred legal jurisdiction for many Islamic finance transactions.

• Islamic windows: Several major international institutions such as Citi, Deutsche, and HSBC have had a presence in the Middle East and South East Asia for several years. As a result, they have developed considerable knowledge and experience of local markets, including Islamic ones. To accommodate the new and growing demand for Islamic products, they have established business lines known as ‘Islamic windows’, some of which are based in the UK and others in the Middle East and South East Asia. These windows have contributed significantly to the development of Islamic finance because of the institutions’ global experience in product development and their access to far greater resources than those available to local institutions in the Middle East and South East Asia.1

UK Government & Its Claims For Islamic Finance Growth in London

• Excess liquidity in the Middle East: The sharp rise in oil prices since 2003 has resulted in huge liquidity surpluses and a surge in demand for Islamic as well as conventional assets in the countries of the Gulf region. The capacity of the local financial markets has not, however, been able to develop at the same speed. As a result, demand for assets has considerably outpaced supply and Middle Eastern investors have been looking, in large numbers, for suitable alternatives. This demand was quickly identified by Islamic and conventional 8 Islamic Finance in the UK (November 2007) Sukuk are trust certificates representing individual ownership of the underlying assets. Sukuk are comparable to bonds. institutions that now provide a channel through which assets within other markets are sold to these investors, often by way of Sharia- compliant transactions. This has been particularly notable in the UK. A recent example is the acquisition of Aston Martin by two Kuwaiti financial institutions, using Sharia-compliant financing.

• Public policy and taxation: Since the early 2000s the government, for reasons of wider public policy, has• introduced a series of tax and legislative changes specifically designed to remove obstacles to the development

of Islamic finance. The first significant change came in the Finance Act 2003 which introduced relief to prevent multiple payment of Stamp Duty Land Tax on Islamic mortgages (see below).13 The Finance Acts 2005 and 2006 contained further measures aimed at putting other Islamic products on the same tax footing as their conventional counterparts. Most recently, the Finance Act 2007 clarified the tax framework further, in the case of Sukuk. This is very much work in progress.

• Single financial regulator: Another contributory factor is institutional. The establishment of the FSA in 1997 combined 11 different regulators into a single body under a single piece of legislation. This has done much to resolve several of complications and conflicting views stemming from the previous regulatory regime where functions were divided. In particular, the FSA is able to look across the system as a whole, to assess Islamic financial institutions and products.

Islamic Bank of Britain

UK's first FSA (Financial Services Authority) approved Islamic bank established Sept 2004First standalone Islamic retail bank in the Western worldAs the first stand-alone, Sharia compliant, retail bank in the UK to be authorised by the Financial Services Authority we aim to provide a friendly, inclusive and personal service for all our customers.Islamic Bank of Britain plc is incorporated and registered in England and Wales with Registration No. 4483430. Registered Office: Edgbaston House, 3 Duchess Place, Hagley Road, Birmingham, B16 8NHIslamic Bank of Britain plc is authorised and regulated by the Financial Services Authority under Registration No. 229148. Islamic Bank of Britain plc is a member of the Financial Ombudsman Service.

The European Islamic Investment Bank

EIIB was incorporated in January 2005 and received authorisation by the FSA in March 2006.Headquartered in London, EIIB's range of products and services include the following Sharia’a compliant investment banking activities:- Islamic Treasury and Capital Markets- Sharia’a Advisory.- Private Equity.- Asset ManagementEIIB seeks to service a market for Sharia’a compliant investment banking services in Europe, the Middle East and Asia that it believes has been under-exploited by conventional and Islamic banks, and by non-banking institutions. The founding shareholders of EIIB include Gulf based individuals and institutions, including a number of Islamic banks, as well as individuals and companies based in Europe.

BLME

Bank of London and The Middle East plc (BLME) was first incorporated in London on 7th August 2006 under the name House of London and The Middle East.BLME believes that the future of Islamic finance depends on its ability to innovate and evolve. The UK and in particular the City of London provides direct access to a highly skilled and experienced workforce. The key areas of business are Private Banking, Asset Management, Corporate Banking, Corporate Advisory and Markets.

HSBC AmanaFinancial Instruments

HSBC Amanah applies a variety of Islamic financial instruments to develop its products. Often the same instrument is used in a variety of products, each product meeting the needs of a different type of customer. This section presents the three most common Islamic financial instruments and illustrates their uses in representative products offered by HSBC Amanah.Each instrument is explained with a definition, an overview of the transaction process and its illustration in a representative HSBC Amanah product.MusharakaMusharaka is a partnership or co-ownership with profit and loss sharing. It allows each party involved to share risk and reward to achieve a return in the form of a share of the actual profits earned according to a predetermined ratio.

HSBC AmanaFinancial Instruments

MudarabaA Mudaraba transaction is an investment partnership. In a mudaraba arrangement, the contract is between an investor (or financier) and an entrepreneur or investment manager known as the mudarib. Risk and rewards are shared. In the case of a profit, both parties receive their agreed-upon share of the profit. In the case of a loss, the investor bears any loss of capital while the mudarib loses his time and effort.MurabahaA Murabaha transaction is a sale at a stated profit. In a Murabaha transaction, the bank purchases something from a third party and sells it to the client at a stated profit on a deferred payment basis. In this way, the client can buy something without taking an interest-based loan.WakalaWakala refers to an agency appointment to act on behalf of the principal. In Wakala, the bank acts as an agent to the client to buy the asset according to the specific terms and conditions.IjarahAn ijarah is an Islamic lease. The bank purchases an asset and leases it to a client for fixed monthly payments. An ijarah may include an option for the lessee to buy the asset at the end of the lease, though such a provision is not required.

Shariah Supervision

HSBC Amanah stataes that “Shariah compliance of its business operations as its most important and strategic priority. This is reflected in its Corporate Values. In developing our products and services, we are committed to the highest Shariah standards in the Islamic banking industry. HSBC Amanah employs a team of qualified professionals to ensure that the guidance and advice received from the Shariah Committees is implemented in letter and spirit.”

Sheikh Nizam Yaquby

A Bahraini, he holds a Ph.D in Islamic Law from the University of Wales in the United Kingdom and a BA in Economics and Comparative Religion from the McGill University in Canada, he sits on the boards of various banks as a respected Shari'ah advisor.He is a member of 46 Sharia Boards including Abu Dhabi Islamic Bank, Barclays, BNP Paribas, Credit Agricole CIB, Dow Jones Islamic Index, HSBC Amanah, Lloyds TSB, and Citi Islamic.

Islamic Investment

In response to the rising demand for Shariah-compliant investment opportunities, FTSE has developed a range of Shariah indices that provide a broader Shariah index solution for Islamic investors.

The FTSE Shariah Global Equity index series is based on the Large and Mid Cap stocks in the FTSE Global Equity Index Series universe. Screening is then undertaken by Shariah consultants, Yasaar Research Inc., against a clear set of guiding principles.These indices exclude businesses that offer products and services that are considered non- Shariah-law compliant, such as stocks of companies that operate in alcohol, entertainment, financial services, pork-related products and tobacco, as well as companies where debt is more than 33% of the total assets. Yasaar scholars, who apply the Shariah screening to the FTSE Global Equity Index Series, represent all of the major Shariah schools of thought, creating a best practice approach that has credibility across all regions of the Islamic world.In addition to the FTSE Shariah Global Equity Index Series, FTSE works with a range of stock exchanges around the world to offer domestic Shariah-compliant solutions. These include the FTSE Bursa Malaysia EMAS Shariah Index Series, FTSE NASDAQ Dubai Shariah Index Series, FTSE SET Shariah Index and FTSE SGX Shariah Index Series. More recently FTSE has extended its Shariah investment opportunities to include other asset classes such as commodities; with the world's first Shariah-compliant FTSE Physical Industrial Metals Index Series.

Arguments against Promotion of Islamic Finance in the WestSpread of sharia banking in Britain and America is a significant part of the attempt to Islamise Britain and America.Acceptance of sharia finance furthers the Islamist objective of gradually legitimising Islamic sharia law more generally in the west.The most important point to grasp is that Islam recognises no authority superior to sharia. Sharia banks will therefore not recognise the superior authority of the law of the land. When trillions of pounds and dollars are locked into them, who will argue with them?

Christopher HoltonVice PresidentCentre for Security PolicyUSA

America is losing the financial war on terror because Wall Street is embracing a subversive enemy ideology on one hand and providing corporate life support to state sponsors of terrorism on the other hand.

1- Shortage of Expertise in Industry2- Lack of Regulatory Harmonisation (v standardisation)

3- Lack of Demand among Muslims (Some Muslim Scholars Opposition and Conceptual Perplexity = Falafel Syndrome)4- Limited Choice for Customers

5- Poor Performance of Funds (Lack of all inclusive marriage of state backed and meticulously planned products and instruments)

6- Insufficient Profitability of Business Model7- Shortage of Scholars to Approve Products

8- Inconsistent Religious Interpretation9- Lack of Sophistication in Risk Management

10- Reluctance of Regulators to Grant Licences11- Fragmented Nature of Industry

12- Negative Perception of Islamic Financial Products and Services13-Lack of Product Diversification

(Islamic Finance, Challenges & Opportunities, BDO)

Challenges to the Growth of Islamic Banking &Finance

Iran Challenges

• International Strategic Initiatives• Publicity of Systems and Products• Engagement internationally• Also works towards reemphasising the

underlying jurisprudential and rational arguments and reasoning in order to remove stigma often attached to the Jafari school of law.

• Rethinking the Size of Engagement of the private sector

• Plans Aimed at Redeployment of the Domestic and International Liquidity

Advantages• Abundantly existing expertise to make

international contributions• Constitutional Integrity of Islamic Law• Contribution towards harmonisation of

regulatory systems• Introduction of Assurances that Iran as an

Islamic state can provide to financial markets both inside and outside Iran

• Dissemination of the diversity of the Islamic financial products, instruments and schemes developed in Iran

• Dissemination of knowledge about the wealth of literature generated in the country addressing the interpretative foundations of law allowing for the recruitment of instruments and products. Also works towards reemphasising the underlying jurisprudential and rational arguments and reasoning in order to remove stigma often attached to the Jafari school of law.