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Innovation and invention in modern Muslim world Innovation and invention in modern Muslim world(0)

By Rushdi Siddiqui,

The Islamic Development Bank, held their 24th Annual Symposium in beautiful Dushanbe, Tajikistan, invited me to chair a session on ‘Innovating for Economic Development in IDB Member Countries’.

At first glance, the words ‘invention’ and ‘innovation’ are not typically associated with the Muslim world.

The word ‘imitation’ (or reverse engineering) often is linked to the third world, Muslim majority countries. Yes, there is some element of innovation involved in reverse engineering, from pharmaceuticals to electronics, but it’s not something to be proud about to entice, say, foreign direct investment. The bigger question is, how much longer should the Muslim world continue to flatter via imitation, i.e., a ‘Xerox’ society.

Innovation and invention have been traditionally linked to Islam/Arab/Muslims since the birth of the religion, but something happened along the way. We have become a society of buyers over builders, consumers over savers, exporters of capital and importers returns, hence, an unsustainable situation.

The first revelation to the Prophet Muhammad (peace be upon him) was about reading:

Translation: In the name of Allah, the Most Beneficent, the Most Merciful.

Read: In the name of your Lord Who created.

Quran: 96:1

Created man from a clot of blood

Quran: 96:2

Read: And your Lord is the Most generous

Quran: 96:3

Who taught [man the use of] the pen

Quran: 96:4

and taught man that which he did not know

Quran: 96:5

Reading implies searching and seeking information to the far corners of the world, from Arabia to China and beyond, that yields knowledge, which eventually becomes wisdom. A wisdom that gets applied for betterment of man (individually), society (collectively) and the stewardship for future generations.

Thus, our predecessors have contributed to sciences, humanities, culture, arts, mathematics (algebra, logarithm, system of numbers), etc., and acknowledged by the likes of Prof Carole Hillenbrand’s book, ‘What the East taught the West.’

Furthermore, there is a ‘mobile’ museum, 1001 Inventions: The Enduring Legacy of Muslim Civilisation, .. ‘…1001 Inventions uncovers a thousand years of scientific and cultural achievements from Muslim Civilisation from the 7th century onwards, and how those contributions helped create the foundations of our modern world.’ It has been showcased in the GCC: Abu Dhabi, Doha, and Dhahran.

There are number of theories, from conspiracy to self destruction, on what happened along the way for the Muslim world, as a whole, to become a ‘knowledge deficient society.’ We only have to look at the small number of patents filed form the Muslim world to the US Patent/Trademark Office, countries aspiring to become knowledge based economies in their 2020/2030 vision planning, countries establishing entities, like Malaysia’s Talent Corporation, to bring back the emigrated human capital, and so on.

Innovation formula?

There is neither an exact formula for innovation nor a firm timetable with milestones. Instead, innovation is about establishing a fluid enabling infrastructure, with accountable benchmarks, customised to the local situation. Some of the elements of enabling include:

Initially government leads but removes itself from being a market participant to avoid crowding out affect, hence, a sunset privatisation of innovation

Availability and accessibility of risk capital PLUS mentoring, Muslim majority countries are about collateral based finance, including Islamic banking. Therefore, funds alone will not result in success, but MUST include mentoring to include, say, opening doors to suppliers/customers, legal documentation, etc.

Culture and cluster that is focused addressing national/regional needs, hence, one size fits all becomes a ‘white elephant’ project.

Education both university oriented (reverse linkage) and harnesses power of street smarts via inclusion to offer market demand, not just based, solutions.

First step

The IDB has the credibility and financial muscle to possibly fast track innovation in selected Muslim countries like the UAE, Malaysia, Turkey, Saudi Arabia, etc., however, it must take a stakeholder approach.

It must understand that the constraints of a country and work within those challenges to offer a market based solution as innovation is not only about economic development, but, as important, economic diversification.

The benchmarks must be reasonable and measurable with two important milestones: employment generation and raising the gross national income (GNI).

Thus, as a first step, IDB should create an Innovation Council (IC) for several selected member country as pilot programmes. The members of the IC may include financiers, regulators, businessmen, academics, etc., to give 360 degree review of the landscape and a pathway forward towards leading instead of following.

The writer is co-founder and MD of Azka Capital, private equity advisory firm focused on halal industry initiatives, and he is an advisor to Thomson Reuters on Islamic finance and Halal industry. Views expressed by the author are his own

Rushdi Siddiqui: Is the Islamic finance industry ready for social media? Rushdi Siddiqui: Is the Islamic finance industry ready for social media?(0)

By Rushdi Siddiqui, co-founder and managing director of Azka Capital

Social marketing eliminates the middlemen, providing brands the unique opportunity to have a direct relationship with their customers. — Bryan Weiner.

Today, it seems Islamic finance is still stuck at a hard-copy of stage communication (faxes) when the financial world has moved on to Facebook, Twitter, blogging, etc.

Many Islamic financial institutions have Web sites, but how often is it updated beyond awards won? How many Islamic banks, takaful operators, Shariah consulting firms, industry bodies, etc, are on Facebook? Yet, the youth — its future clients — in many Muslim countries with Islamic finance are on Facebook.

What about the cross-sell of Islamic finance to non-Muslims as an ethical alternative? These potential customers are an important cluster of social media and they are continuously looking for offerings aligned with their values.

Several Islamic financial institutions have Twitter accounts, unsure how many of their (retail) clients are on Twitter. Do these institutions believe SMS, Internet and mobile banking is the “social media” connection to their clients?

Maybe the culture of social media is lacking in, say, the GCC. But we saw how effectively social media was utilised during the Arab Spring.

Fear

Is there a fear of technology among Islamic financial institutions? The fear of hackers stealing from customer accounts and identity theft? They have heard about horror stories on hacking from US- and EU-based banks with allegedly better (read, more expensive) firewalls.

Is there fear that social media connectivity will raise the level of transparency to conventional benchmarks standards and with accountability to follow? Put differently, will social media result in enhanced governance? It is not a bad thing in this post-credit crisis environment where companies are rewarded via a stable stock price and rave reviews for transparency and governance.

Is there fear that “bad news” concerning Islamic financial institutions will spread like wildfire if (deeply) connected to social media? It will spread anyway as news organisation coverage is supplemented by bloggers and tweeters in real time.

Resources

Is it a lack of resource issue in having, say, a “chief social media officer”? It would appear that Islamic financial institutions have not looked at public relations and outreach as an investment in their brand, but, rather, a cost of doing business.

Brand-building goes towards commitment to not only clients and staff, but long-term growth of the institution, including eventual cross-border expansion and future clients. Furthermore, during challenging market cycles, the message to the community, whose attention has become shorter, is the confidence inspiring “business as usual”.

Guidance

The Thomson Reuters Islamic Finance Gateway, or IFG, may just provide a guidance for Islamic financial institutions on understanding about the benefits of social media connectivity. It comes down to market intelligence, and the market place is the best source of “knowledge that powers” market movements. The community connectivity function of the IFG comes down to insights by industry experts making sense of the information overload, communicating about important sign posts on the road ahead and allowing community to interface with experts on a secure platform.

LinkedIn, Twitter

At the behest of colleagues, I joined LinkedIn about a year ago to connect with like-minded colleagues globally to share ideas and articles. Outside of unsolicited endorsement of people I have connected with, but, not worked with, it has been a pleasant experience, especially reading leadership articles.

Furthermore, I started tweeting a few months ago, initially on Islamic finance and the halal industry, but have expanded to issues related to Muslims, Islam, Muslim countries, etc. It has been a fulfilling experience and I should have joined much earlier. Why?

1. Tweeting forces one to convey their message in 140 characters, becomes very important in today’s world of short-attention span and information overload. Islamic financial institutions should be able to convey thought leadership within these constraints.

2. Twitter brings news in real time from multiple eyes, hence, it’s a multiple “op-ed” of the market place on the subject matter. The raw news provides more colour than polished sound-bites.

3. Twitter has allowed me to follow the likes of global leaders like His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, and his comments in real time. He first tweeted about Dubai being a hub for an Islamic economy a few months ago.

Conclusion

Shaikh Mohammed’s tweets, at the time of writing this, on the performance of UAE government standards should encourage Islamic financial institutions to engage and embrace the social media to not only connect, but also to report developments.

Rushdi Siddiqui is co-founder and managing director of Azka Capital, a private equity advisory firm focused on halal industry initiatives, and an advisor to Thomson Reuters on Islamic finance and the halal industry.

Rushdi Siddiqui on Dubai’s timely Islamic finance strategy Rushdi Siddiqui on Dubai’s timely Islamic finance strategy(0)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

As I was on DIFC’s Islamic Finance Advisory Council (2007) and presently on Malaysia’s Securities Commission International Islamic Advisory Council, hence, a number of colleagues have asked me about the recent announcement by His Highness Shaikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.

Shaikh Mohammed, stated: “Our cosmopolitan outlook to doing business continues to be our economy’s driving force. Adopting a modern and scientific framework for Islamic economies worldwide, here in Dubai, meets the demand from local, regional and international investors for a central hub to invest, grow and do business.”
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Back to the future of Islamic finance Back to the future of Islamic finance(0)

By Rushdi Siddiqui

When a person, company or ‘movement’ hit their glass ceiling of growth, then its time to go back to the future and review, reassess, and respond or ‘retire’.

At the recently concluded 19th World Islamic Banking Conference (WIBC), I spoke on ‘Global Strategies for Global Markets.’ For this niche market to have mainstream acceptance, its about the ‘4Ps.’

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The Weakest Link: Short-Term Liquidity & How It Impacts Islamic Finance The Weakest Link: Short-Term Liquidity & How It Impacts Islamic Finance(0)

By Rusdhi Siddiqui, Global Head of Islamic Finance at Thomson Reuters

Let me start off with a loaded question, what one word in Islamic finance is as important as Shari’ah, tax, accounting, regulation, and standardisation (STARS)?

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Mushtak Parker Interview Part III: Liquidity Management Challenge Mushtak Parker Interview Part III: Liquidity Management Challenge(0)

By Rushdi Siddiqui is the global head of Islamic finance at Thomson Reuters

In the last instalment of a three-part interview, Mushtak Parker, the leading journalistic voice on Islamic finance,   shares his   views on the  International Islamic Liquidity Management Corporation (IILM), education in Islamic finance, moving the industry to US$2 trillion (RM6.22 trillion), scholars on multiple boards, the late Dr Zaki Badawi and, finally, how he would like to be remembered. The following are excerpts from the interview.
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Mushtak Parker Speaks His Mind Mushtak Parker Speaks His Mind(0)

Leading journalist on Islamic finance tells why he is often ‘harsh’ on the industry and his other views

“To be persuasive we must be believable; to be believable we must be credible; (to be) credible we must be truthful.” Edward Murrow.
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SPECIAL COMMENT: Eliminating the disconnects in Islamic Finance SPECIAL COMMENT: Eliminating the disconnects in Islamic Finance(0)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

IF ISLAMIC finance (IF) is about business, then, logically, the product offering must primarily be about business and syariah compliance second, correct?  Read More

Islamic finance: Fitting In & Standing Out Islamic finance: Fitting In & Standing Out(1)

By Rushdi Siddiqui

A Sharia-compliant equivalent of the popular UK and US reality show The Apprentice has recently been announced by a UK-based organisation.

This follows the news of an ‘Islamic Facebook’ and ‘Halal-Tube.’ The Muslim world also has superheroes, like The 99, Muslim dolls (Dara and Sara), Muslim Cola (Mecca Cola), Islamic car, and so on.
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Special Comment: Hitting the glass ceiling? Special Comment: Hitting the glass ceiling?(0)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

To grow, Islamic banks must compete with conventional lenders

Dedicated Islamic banks are generally national in nature and in certain markets have reached their ‘natural market share’ for Islamic banking, according to an A.T. Kearney study.

A recent report by the consulting firm A.T. Kearney, The Future of Islamic Banking, and a Reuters article, ‘No windfall from Qatar ban on Islamic windows’, have generated much productive chatter globally.
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Open Letter to IDB President: Mega Islamic Trading Platform Open Letter to IDB President: Mega Islamic Trading Platform(0)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Dear Dr. Ahmad Mohamed Ali, President, Islamic Development Bank (IDB) Group:

Asalaam Alaikum:

The Islamic finance world welcomes your comments on the ‘Mega’ Islamic Bank to effectively compete against well capitalized conventional financial institutions.

“…The ‘Mega Islamic Bank’ comes as an initiative of the Islamic Development Bank in its efforts to address the dearth of senior financiers, the absence of the Islamic tools of stock exchange and the absence of market liquidity between Islamic banks.”

However, $1 billion, with $500 million in paid capital by the three founders (IDB, Dallah Albaraka and Qatar Government), is smaller than three existing Islamic banks, which have never addressed themselves as ‘mega.’ The three include Saudi Arabia’s Al Rajhi, Qatar’s Mashraf Al Rayan and Kuwait’s Kuwait Finance House (KFH). Furthermore, it seems the ‘mega’ story may be incomplete without Malaysia’s participation.

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Rushdi Siddiqui: Interview with Daud Vicary Abdullah, CEO of Inceif Rushdi Siddiqui: Interview with Daud Vicary Abdullah, CEO of Inceif(0)

By Rushdi Siddiqui

Daud Vicary Abdullah is an authority on Islamic banking and has contributed to a number of books on the subject.

He has been in the finance and consulting industry for more than 38 years, with significant experience in Asia, Europe, Latin America and the Middle East. Meet Daud Vicary Abdullah, the president and CEO of International Centre of Education in Islamic Finance (Inceif), the global university of Islamic finance.
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Special Comment: Key-Person Risk in Islamic Finance Special Comment: Key-Person Risk in Islamic Finance(0)

By Rushdi Siddiqui, Global Head of Islamic Finance at Thomson Reuters

We already know about displaced commercial risk, credit, liquidity, operational, Shariah non-compliant, and markets risks in Islamic finance. What about ‘key-person’ risk in Islamic finance?

What does a former Minister of Economy of France (Christine Lagarde), former Prime Minister of United Kingdom (Gordon Brown) and former under Secretary for International Affairs, US Treasury (John Taylor) have in common? They were all high profile public sector personalities pushing Islamic finance in their respective jurisdictions, and, upon leaving office, the movement’s momentum has been meandering or has stop ‘cold’ in the tracks.
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Rushdi Siddiqui: May Be Islamic Finance Is Only For Muslims? Rushdi Siddiqui: May Be Islamic Finance Is Only For Muslims?(0)

March 14, 2012

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Provocative statements are commonplace in the world of politics, academia, business and finance. They serve a ‘perception of purpose’, from distraction to direction and denial to dissatisfaction.

Put differently, such comments are viewed as ‘info-tainment’ to stand out in a competitive market environment.
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Media and public relations — the missing link in Islamic finance Media and public relations — the missing link in Islamic finance(0)

By Rushdi Siddiqui, Global Head of Islamic Finance

NEED FOR CONTROL ROOM: The industry has alphabet bodies that deal with various issues but when it comes to public relations and marketing, there seems to be a gaping hole that is getting larger

Is there a media and public relations (PR) “control room” for Islamic finance that educates, creates awareness, undertakes damage control, etc, so that the industry is “conventionally efficient” media-savvy?

Some recent headlines, by-lined articles, blogs and press releases from Islamic finance provide the answer:

* Is Islamic Finance a Failure? Reuters (Guest Columnist)

* KFH: Banking Products that Cement Value of Savings in Society, press release

* Islamic Banks Misleading: Clients Emirates 24/7 (Dubai, UAE)

* Reporters Notebook: The Ethical Aspects of Islamic Banks, www.greenprophet.com

* Most Trusted Middle East Banks, www.Alifarabia.com

* Questionable Islamic Banking Principles, www.freemalaysiatoday.com

* Shining Star of the Middle East, Financial News

* The Trillion Dollar Hoax, The Islamic Globe

* The Lessons from the Goldman Sachs Proposed US$2 Billion Sukuk Saga, Arab News

* Mega Islamic Bank Plans Cancelled, Gulf Daily News (Bahrain).

Let’s put aside those writers seeking publicity, cheerleaders of the industry, the anti-syariah movement and the well-meaning purest, and those who, unfortunately, have had a bad experience, from inappropriate products to fraud to customer service, in Islamic finance. The truth about Islamic finance is somewhere between “today’s offering and where we eventually want it to be tomorrow”.

The continued “conflicting” headlines should be the “cold water” wake-up call for the industry on two fronts:

ADDRESSING the substance, over form, of the Islamic finance, and;

CONVEYING its message, as the perception of the industry is not aligned to the objectives of movement, including raising/writing comments after “unbalanced, out-of-context, exaggerated, or untrue” articles in the media circles.

Industry body

Usually, industries, from finance and healthcare to technology, have financed a designated company/industry body to educate, lobby, promote to new customers and market, undertake damage control, and so on. Their broad message is supplemented and complimented by local institutions with customised local message.

For example, in many of non-Muslim countries with an established Muslim population, there are Muslim organisations, like Council of American Islamic Relations in the US or Muslim Council of Britain and so on, that, in effect, act as the “PR” arm for “righting wrongs, damage control, or addressing media/political errors of omission and commission”.

In Islamic finance, we have alphabet industry bodies: for accounting and auditing (Bahrain-based AAOIFI), for prudential regulations and governance (Malaysia-based IFSB), for Islamic capital and money market (Bahrain-based IIFM), etc.

Although, they have some common shareholders, let’s put aside the inability of these industry bodies to host one Islamic finance event that is supported by all of them. Let’s put aside lack of speaker invitation of one industry body to the head of its sister industry body for a presentation slot.

Notwithstanding present “turf” challenges, these industry bodies have done a commendable job of raising awareness and educating the wholesale stakeholders of the technical aspects of Islamic finance, in Muslim and non-Muslim countries, on standards, governance, and regulations. However, when it comes to the public relations and marketing of Islamic financial institutions or even damage control, there is a gaping hole and it is getting larger.

In fairness to the above-mentioned industry bodies, they have resource constraints, from manpower to finance, and, furthermore, expanding their mandate to include marketing and public relations for a geographically- dispersed and fragmented industry at various stages of development is unreasonable. However, something more needs to be done as Islamic finance is only strong as the weakest link.

The continued negative headlines will not go away even if we continue to ignore them or convince ourselves that it’s the growing pains of an emerging industry. They should be seen as the tip of the iceberg of issues and feedback on the industry’s perception/message.

Funding of body

The time has arrived for the majority to conclude there is need for an industry body that is tasked with public relations and marketing of Islamic finance at, say, the “wholesale level” – governments, regulators, financial institutions, law firms, western media, and so on. It allows for a universal message, a necessary pre-requisite to achieve harmonisation-cum-standardisation, that builds the foundation for local Islamic financial institutions to customise and add local content.

After determining a need for an industry body to promote and educate Islamic finance, the funding question must be addressed. Fortunately, the experience of AAOFI, IFSB, IIFM, etc, suggests the stakeholders could include the Islamic Development Bank (IDB), Islamic financial institutions (possibly one from every country that has declared itself an Islamic finance hub), forward-looking governments like Malaysia, the United Arab Emirates, and possibly the existing industry bodies (to include their technical message).

One of the lessons learned from the existing industry bodies is the need for adequate capitalisation and annual budget (adjusted for demand). It makes no sense to provide a shoestring budget when the objectives are global and the awareness and education is on-going and expanding.

Location of industry body

One of the takeaways about an industry body’s location is that it raises the profile of the country and the country raises the profile of the industry body, as there is now a “go to” place on the global map. Thus, bodies like the AAOIFI, IIFM and IIRA have raised the profile of Bahrain, while the IFSB, ISRA, and INCIEF have raised that of Malaysia.

Therefore, Dubai (UAE), Qatar, Pakistan, Indonesia, Brunei or even London, Paris, or Luxembourg have an opportunity to host an industry body that promotes awareness and information about Islamic finance and shows their commitment to the industry. Furthermore, much like the phrase “think global, act local”, it makes to have geographically situated satellite offices to address local time zone challenges.

Mandates

Beyond awareness, education, damage control, etc, one of the areas that require immediate attention is a more robust investor relations depart of Islamic financial institution, including addressing media training for executives. The media, especially western, wants access to senior executives, which implies challenging questions, and, it is here that the industry can best utilise them to send its message to the masses globally.

Additional responsibilities could include establishing and hosting a Davos-type event, including the US$640 billion (RM1.9 trillion) halal industry, in Europe, the Gulf and Southeast Asia. Thus, not Islamic finance per se, but the link of Islamic finance and funding education, healthcare, infrastructure, know-ledge-based economy, etc.

Some examples where the proposed PR Islamic body could have provided guidance for clear, coherent and concise clarifications:

SCHOLARS (confusion as to their role in the West), purification and zakat (not funnelling money to financing extremists), money exchange places in Muslim countries are not Islamic financial institutions, etc.

COORDINATE with other industry bodies for job openings, direct inquiries to appropriate industry bodies and Islamic financial institutions (reduce information cost for existing/potential users)

PRODUCT launches, new bank/takaful launched, etc. I’m not convinced that a general or financial PR firm can provide the needed specialised message and follow-ups that a dedicated body can direct.

DAMAGE control includes recent media frenzy on Islamic banking in Nigeria, Goldman Sachs’ US$2 billion sukuk, sukuk defaults, Islamic funds closing, Islamic bank (Dubai Bank and Islamic Bank of Britain) rescue, etc.

BRANDING of Islamic finance. Has time arrived to survey the stakeholders on the naming? In Turkey, its called Participation Banking and it conveys the essence and objective of the movement and is less politically charged, especially if Islamic finance is for all mankind.

Continuing to call it “Islamic”, combined with marketing materials emphasising syariah board and adherence, may not convey its universality.

Many of these issues also go to trust and confidence of Islamic finance by depositors, investors, shareholders, etc.

Conclusion

Although Islamic finance is less than 40 years old, the time has arrived for the industry to have a dedicated well-financed body to send a coherent and consistent message about the industry. This is an investment and not a cost, and not having such a body is to have continued schizophrenia headlines and resulting systemic brand risk.

Rushdi Siddiqui is the global head of Islamic finance at Thomson Reuters

Shiekh Yusuf Talal Delorenzo: ‘We guide and let the markets decide’ Shiekh Yusuf Talal Delorenzo: ‘We guide and let the markets decide’(0)

Feb 17, 2012
By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Q: We are hearing more comments from Islamic bankers who are saying Sukuk are bonds with an Islamic wrapper, and the industry needs equity/investment sukuk, what are your comments?

YTD: Let’s consider the question and its source and then boil it down to a statement. Islamic investment bankers say they (when they say “the industry” I have to assume they are speaking of themselves) need equity/investment sukuk. Simple answer? AAOIFI has developed them. I have always maintained that the market will determine the direction of Islamic finance. It may well be at the present time that the market for sukuk is driven by the needs of Islamic bankers in treasury departments. These needs include predictable pricing. Thus, they have their own preferences for certain types of sukuk, maybe not the same types as Islamic investment bankers. And when the saturation point is reached, by which I mean when the treasuries of Islamic banks have sukuk holdings sufficient for their needs, regulatory and otherwise, the secondary market that everyone is hoping for will develop. It’s beginning already in a limited way. And I share the frustration of our bankers. But we need to keep working.

Q: A large number of Sukuk defaulted in last several years, about 30 from Malaysia with 10 BBA and 16 Murabaha structure, are defaults a cause for concern or actually beneficial for the industry?

YTD: At the 2005 IFSB conference in London on the subject of law and sukuk the subject of defaults, then only a possibility, was discussed often and widely. After all, until there are defaults, it is next to impossible to know how judges will view sukuk. The problem is multiplied when different jurisdictions and legal systems are involved. We are now, therefore, in discovery mode. And while it is indeed lamentable that sukuk have failed and investors have suffered losses, it is now the responsibility of all involved to study the cases to see what might be done better in the future.
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Mum, why Islamic finance? Mum, why Islamic finance?(0)

Jan 30, 2012

By Rushdi Siddiqui, Global Head of Islamic Finance at Thomson Reuters

There are two lasting bequests we can give our children. One is roots. The other is wings. — Hodding Carter

LET’S take a break from sukuk structuring and stock screening, and talk about the children of parents in Islamic finance. They may well be the industry’s future. I suspect many of us in Islamic finance do not come from Islamic banking parents or banking family dynasties.

We come from parents that were traditional bankers, engineers, physicians, scientists, journalists, merchants, civil servants, politicians, regulators, academics, and so on. And growing up, Islamic finance was probably not on our radar screen as a career.
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2011: Year of Shariah Compliant Index Out Performance 2011: Year of Shariah Compliant Index Out Performance(0)

January 17, 2012

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

“The proper man understands equity, the small man profits.” Confucius.

The year 2011 was the year for [Malaysia] Shariah compliant index out-performance against all conventional developed and emerging market country indicies and almost all frontier countries.

The Islamic finance industry has not talked up the Islamic equity capital market story, as the Islamic debt capital market poster child, ‘Sukuk,’ has become the alter-ego of Islamic finance. But, does that amount to concentration brand and business risk for a $1 trillion, where Sukuk are, at best, 20% of Islamic finance?
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Islamic Finance: A ‘come together’ consolidation? Islamic Finance: A ‘come together’ consolidation?(0)

Will 2012 be the year of “come together” consolidation for Islamic banks?

Size is often the justification for achieving economies of scale, used to access deals for league table prominence, used as a buffer in a challenging environment, used as defensive measure to ward off unwanted suitors, and so on.

Islamic banks are very much like Islamic (equity) funds. There are hundreds of Islamic banks and funds, but the paid-up capital and assets under management, respectively, is too small to be meaningful. Yet, both, more so Islamic banks, present a unique situation (of an industry risk) of “too small to fail”.

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SPECIAL COMMENT: Shariah Equity Compliance in the West SPECIAL COMMENT: Shariah Equity Compliance in the West(1)

By Rushdi Siddiqui, Global Head of Islamic Finance at Thomson Reuters

The time has arrived to take a deeper dive on better understanding of Shariah compliant companies in an Islamic (or Shariah compliant) equity indexes. To many informed and uninformed observers of Islamic equity investing, it seems to imply investing in publicly listed companies in Muslim countries.

The end results contradict the assumptions. This also rebuts the often heard allegations by many from the anti-Shariah movement that Islamic investing is about investing in companies linked to terrorism or financing terrorism. The largest companies in the S&P Global BMI Shariah include ExxonMobil, IBM, Chevron, Nestle, Microsoft, etc.
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‘Cross pollinating’ Islamic finance in GCC, Malaysia ‘Cross pollinating’ Islamic finance in GCC, Malaysia(0)

Continuous effort – not strength or intelligence – is the key to unlocking our potential. – Winston Churchill

How many Malaysian Islamic bankers work in senior positions at Islamic financial institutions in the GCC (Gulf Cooperation Council), Pakistan and the UK? Conversely, how many non-Malaysians work in senior positions at Malaysian Islamic financial institutions?

Does the training and experience in Malaysia for Islamic finance somehow imply that it’s too Malaysia-centric (Shafi school) for GCC (Hanbali, Hanafi, Jafri schools) Islamic financial institutions? Does it somehow imply that there needs to be a “retraining” of Malaysian Islamic bankers to the GCC “way” of Islamic banking, finance and takaful?
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Islamic Finance: Engagement, Inclusion & Expansion Islamic Finance: Engagement, Inclusion & Expansion(0)

By Rushdi Siddiqui, Global Head Of Islamic Finance, Thomson Reuters

On the long plane ride back from Malaysia to New York, I was thinking about ‘out-side-the box’ areas that would interest me to develop in Islamic finance. There were two areas that would not exit my thoughts.

Is Islamic finance capturing the imagination of the Generation Y and Z (the youth) as employees and customers? What has Islamic finance financed to build?
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Islamic Finance 2.0: One Year Anniversary Islamic Finance 2.0: One Year Anniversary(0)

“GOD gave you a gift of 86,400 seconds today. Have you used one to say ‘thank you’?” — Author unknown

I want to thank NST. Islamic Finance 2.0 is one year old.
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SPECIAL COMMENT: Turkish exchange plans ties with UAE and Egyptian markets SPECIAL COMMENT: Turkish exchange plans ties with UAE and Egyptian markets(0)

 

globetrottingrien /Foter

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Turkey has been building capital market bridges to GCC and South East Asia, and chairman of the Istanbul Stock Exchange, Hussain Erkan, has been a leading architect in establishing dialogue, hosting events, and facilitating cooperation and coordination with his counterparts for both Islamic and conventional finance. In this interview, Erkan shares his thoughts on the challenges and progress of Islamic finance in Turkey, among various other issues. He is hopeful that the improvements made should be able to attract investors from the GCC.
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SPECIAL COMMENT: Where Are The Islamic Angel Investors? SPECIAL COMMENT: Where Are The Islamic Angel Investors?(1)

“Angel investors don’t come with a halo and wings, but they can seem heaven-sent to an entrepreneur struggling to find financing.” – Cathie Gandel.

By Rushdi Siddiqui, Global Head Of Islamic Finance, Thomson Reuters

Malaysia has raised the profile of Islamic finance, Takaful and Halal industry, and, now, she must do the same to venture capital (VC). VC is an important emerging asset class that should contribute to government’s objective of building a knowledge based economy by 2020.
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SPECIAL COMMENT: Time To Move To Takaful 2.0 SPECIAL COMMENT: Time To Move To Takaful 2.0(0)

By Rushdi Siddiqui, Head Of Islamic Finance, Thomson Reuters 2011

A conference on the future and expansion of takaful, called Takaful Rendezvous 2011, took place in Malaysia under the banner of Kuala Lumpur Islamic Finance Forum (KLIFF) from October 4 to 6. Although the industry has come far in a short period of time, more needs to be done.

Much like the $640-billion (Dh2.35 trillion) halal industry, takaful needs to rise and address some of the challenges on size, representative industry body, and perception.
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SPECIAL COMMENT: Islamic Venture Capital – A Distinguishing Factor SPECIAL COMMENT: Islamic Venture Capital – A Distinguishing Factor(1)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Failure is a mark of success in venture capital, hence, it is an option with beneficial learning consequences.

Today, Islamic venture capital is a feel-good theory presented at (not many) conferences about the lofty goals of this niche market with the focus on the formalism of structuring and screening. Its impact investing, yet we seem to see it as a cost (at best) and a write-off (at worst).
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SPECIAL COMMENT: Islamic (Or Boring) Finance In Vogue? SPECIAL COMMENT: Islamic (Or Boring) Finance In Vogue?(0)

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

From September 19 to 23, Toronto hosted the massive Swift International Banking Operations Seminar (Sibos) event from Society for Worldwide Interbank Financial Telecommunication (Swift), where I was involved in the session called ‘Islamic Finance 2.0: Growth Opportunities for All’.

There were a number of interesting takeaways from the session that may provide insights on the marketing and positioning of Islamic finance in ‘open minded’ western countries, such as Canada and the Arab spring countries.
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SPECIAL COMMENT: Money, Politics & Political Freedom in OIC SPECIAL COMMENT: Money, Politics & Political Freedom in OIC(0)

By Rushdi Siddiqui, Head of Islamic Finance, Thomson Reuters

KARL Kraus said: “Corruption is worse than prostitution. The latter might endanger the morals of an individual, the former invariably endangers the morals of the entire country.”

I was recently asked to give a speech on political freedom and corruption in Muslim countries. Both areas have a direct impact on capital flight and market formation, brain drain and economic development, portfolio investors and direct investments, including Islamic finance. I wanted to use the example of a secular and tolerant Muslim country, like Malaysia, that allows for a robust dialogue relative to many of its sister countries. Additionally, secondary market data already exist from established sources outside of Malaysia.
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SPECIAL COMMENT: ‘Re-setting’ Islamic Finance in Nigeria SPECIAL COMMENT: ‘Re-setting’ Islamic Finance in Nigeria(0)

By Rushdi Siddiqui, head of Islamic Finance, Thomson Reuters

Nigeria has become a ‘battleground’ for Islamic finance, unfortunately further dividing Africa’s most populated country.

Some recent newspaper headlines include:

Islamic Banking: Muslims Ready to go to War

Islamic Banking: Insult to Nigeria – Cleric

Stop Islamic Banking in Nigeria

Islamic or Shariah banking: Any Benenfit for a Pluralistic & Secular nation

Islamic Banking only for North- Mutallab

Christian groups oppose establishment of Islamic Banking

Islamic Banking: Christian groups may apply for own license

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SPECIAL COMMENT: Sisterhood in Islamic Finance SPECIAL COMMENT: Sisterhood in Islamic Finance(1)

By Rushdi Siddiqui, head of Islamic Finance at Thomson Reuters


If Islamic finance is about inclusion, where are the sisters?

Someone once said, ‘50% of the world’s population is women, and the other half, have mothers.’ Recently, two major articles were widely carried on women in Islamic finance, and highlighted the often heard issues: underrepresentation, interaction with male bankers, travel for meetings in conservative countries, from women scholars to women’s branches, and so on.

If Islamic finance (IF) is about inclusion, where are the sisters?

Stage one of IF has been male dominated industry. Stage two, march towards $2 Trillion, will require addressing a major bottleneck, lack of qualified people, and, its here, women can an important role.

There are numerous studies on poverty reduction in the third world, comprising of almost all of 57 Muslim majority countries, emphasizing the role of women as effective ‘managers’ in raising and educating children, household finances, dealing with stakeholders (extended families), etc., if they are empowered with the right ‘opportunity tools.’

It’s also important to separate cultural (mis)influence versus references to women in Holy Koran, Sunnah of Prophet (PBUH), and leading roles Prophet Mohammad’s (PBUH) wives, Khadija and Ayesha.
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SPECIAL COMMENT: Missing Link in Islamic Finance Hubs: Islamic Venture Capital SPECIAL COMMENT: Missing Link in Islamic Finance Hubs: Islamic Venture Capital(0)

By Rushdi Siddiqui, head of Islamic Finance, Thomson Reuters

Islamic world defined capitalism in 8th/9th century, but today’s Muslim country’s who have planted the Islamic finance hub flag are missing an important elemaent. The interplay between risk capital and innovative ideas for local benefit. The Chairman of Malaysia’s Securities Commission, Zarinah Anwar, stated in a keynote speech in 2007, ‘…how can Malaysia distinguish itself in the emerging market VC [venture capital] pool? Our belief is that Islamic VC provides that distinguishing factor.’

To date Islamic finance has missed two important opportunities: addressing the ‘have nots’ (micro-finance), and deploying the funds of the ‘haves’ into Islamic VC funds. Yes, VC is labor intensive requiring specialized skills, entails active risk capital as part of portfolio, and a long term play, much like Sukuk in hold to maturity portfolio. Its time for Islamic finance to ‘walk the talk’ of venture capital.
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SPECIAL COMMENT – The need of the hour: an Islamic Sovereign Wealth Fund SPECIAL COMMENT – The need of the hour: an Islamic Sovereign Wealth Fund(1)

By Rushdi Siddiqui, head of Islamic Finance at Thomson Reuters

It took Islamic finance forty years to reach the magical US$1 trillion benchmark (in terms of size or assets under management), and this niche market is on the march towards the next milestone of $2 trillion within the next five years — with Moody’s predicting $5 trillion.

Considering the fact that it took almost twenty years for the conventional industry to reach the US$ 1 trillion mark, but only ten to reach US$ 6 trillion (see figure 1), it is highly likely that Islamic finance will reach that level within the next five to six years, subject to the clearance of certain bottlenecks.

 

 

 

 

 

 

 

 

 

 

 

 

 

To reach the $2tn benchmark for a start, the usual suspects of suggestions include standardization (need it), scholars (need more), skilled personal (need more), regulations (level playing-field), governance (need to enhance), risk management (need to improve), derivatives (manage risk), consolidation (size matters), etc.

However, very little has been said about connecting Sovereign Wealth Funds (SWFs), commonly found in the six GCC countries, with Islamic finance, also commonly used in the GCC countries.

SWFs may have exposure to Shariah-compliant investments, but not by design, as the universe of compliant opportunities is alleged to be smaller, with an inability to utilize derivatives to mitigate risks or borrow/short to enhance returns.

SWF equity investing exposure may in fact include Shariah-complaint companies — like Microsoft, IBM, Pfizer, ExxonMobil, P&G, etc. — as more than $14 trn out of $30 trn world market capitalization is Shariah-compliant, according to Standard & Poor’s data. Their intention is not to screen for Shariah-complaint companies as it is not their mandate, but such companies are consistent with their fiduciary duties to maximize long-term returns on a risk-adjusted basis.

Approximately 16 of the 57 Muslim countries (members of the Organization of the Islamic Conference, OIC) have sovereign wealth funds (SWFs), the largest, ADIA of Abu Dhabi, estimated as having in excess of $600 billion (see figure 2).

They imply recognition by the sovereign formally to save for future generations from oil & gas revenues, and it is interesting to note that ten of the sixteen 16 OIC SWFs have been operating for about ten years or less.

However, the $1trn Islamic finance industry does not yet have a champion in a dedicated Islamic SWF, and it is the strategic need of the hour for not only figuratively supporting and raising the profile of Islamic finance, but also incubating and building Islamic asset classes and modalities of investment vehicles.



In the last few years there have been serious discussions about establishing an Islamic ‘mega-bank’ by one of the early pioneers of Islamic banking, either via consolidation or a new license, and an Islamic ‘Goldman Sachs’.

In the post-subprime-induced credit crisis, an Islamic SWF might have more of a global reach, cross-sell potential and impact than a local or, at best, regional Islamic mega-bank with bias towards the real estate industry and its chain of borrowers. An Islamic mega-bank would still not directly address the needs of the ‘non-bankable’ Muslims, which is probably 90-95 per cent of the 1.6 billion Muslims in the world.

In addition, if one examines the Muslim ‘naysayers’ or critics of Islamic finance, the skepticism is generally directed more towards the complicated structured financing attempting in many instances to replicate the weapons of mass financial destruction such as speculative derivatives, and less towards the more transparent Islamic investing.

It’s much easier to verify — via the accepted screening methodology from the Islamic index providers like S&P or MSCI/Barra — permissible investing in, say, Shariah-complaint publicly-listed companies like IBM and Microsoft, or Shariah-based like Dubai Islamic Bank or Al Rajhi Bank, than to explain and accept the structure of a total-returns swap-technology-based instrument or a structured note providing conventional hedge fund returns.

Furthermore, as transparency and governance are the determinative and defining paradigms in the post-crisis period, the proposed Islamic SWF would abide by the recently established Santiago Principles signed by many SWFs, and, I would even suggest, the Equator Principles.

In fact, the proposed Islamic SWF should go one step further, and model itself for Islamic finance on transparency, as demonstrated by Norway’s $450 billion Government Pension Fund which is a role-model for SWF transparency and reporting. It’s a well-established principle that financial transparency and accountability inspire confidence, which attracts capital.

Finally, there have been high-level discussions out of South-East Asia about a Global Zakat Fund, as Zakat contributions amount to tens of billions of dollars per annum. However, there are pending Shariah issues on investing charity tax for the poor and impoverished in activities that could be seen as profit generating investments. In contrast, the concept of a global (Islamic) fund modelled and labelled as an Islamic SWF (actually a ‘fund of funds’) has arrived for serious consideration.

Establishing such a fund would create (for the Islamic countries) a unique and definitive comparative advantage or differentiating feature, that of a (Islamic) financial system based on principles of conservative asset based financing, trust, transparency and risk sharing. This in and of itself could potentially be a “pull” factor for institutions looking to get access to reliable and long term financing and also build a unique reputation for Muslim countries for global thought leadership in the applied finance, much like the United States has gained a reputation for innovation and research, South East Asia for high quality technology manufacturing, the former CIS countries for agriculture and South Asia for cost efficient skilled and unskilled workers.

Beyond borders

While an SWF has been traditionally been utilized for the benefit of the home country’s future generations, an Islamic SWF would not be confined to borders, since the mandate is for all 1.6 billion Muslims and others interested in Shariah-compliant/based investing. It would be the equivalent of a global Islamic pension fund.

Just as pension (CALPERS) or endowment (Harvard, Yale, etc.) funds have allocations to traditional and non-traditional asset classes via external managers, the proposed Islamic SWF has a template for study and consideration. Obviously, the major difference would be that investments must be Shariah-compliant/based.

The physical location of the Islamic SWF could be in one of the transparency- and governance-oriented Islamic finance hubs, such as London, Bahrain, DIFC or Malaysia’s MIFC, as a reward for accountability.

The board of directors/trustees should be a combination of globally-experienced regulators, bankers, fund managers, index and data providers, academics, scholars, central bank governors championing Islamic finance (like Governor Zeti of Malaysia), and chaired by political leaders, like Shiekh Mohammad Rashid Bin Maktoum, who have provided important political support to the cause of Islamic finance.

The initial contributions for such a fund could be from the founding members, like the 300-plus Islamic financial institutions, the OIC countries involved/interested in Islamic finance, Islamic finance hubs, Islamic Development Bank, Asian/African Development Bank, the International Finance Corporation (IFC), and other interested parties.

The international lending agencies are involved in Islamic finance in a variety of capacities for developmental aid and financing. Hence, a formalized Islamic SWF would be the next logical step. A global launch with US$10-20 billion should be within rationale, reach and reason.

Within one or two years of operational experience, the Islamic SWF should be promoted and made legally available for investing in by any and every interested Muslim/non-Muslim ‘man on the street.’ As an added incentive, for every dollar/ringit/rupiah/riyal invested, the fund would match it by a one-time 25 per cent contribution after lock-up of two years has expired, to encourage longer-term investing.

Islamic finance has gained traction among enlightened Western governments and global-centric conventional companies, be it UK’s FSA approving five (GCC-backed) Islamic banks, Luxembourg’s intentions to become a hub for Sukuk listing and Islamic funds, or the IFC and General Electric issuing $100m and $500m Sukuk respectively during the credit turmoil in late 2009.

It’s time to ‘dangle serious money’ to build an Islamic asset management industry in (ideally) an OIC Islamic hub, like DIFC, instead of wiring the money to UK or US for fund management. It’s high time to establish knowledge-based Islamic finance, and build the infrastructure for research, analysts, fund managers, and trading, combined with Shariah principles on law, governance, risk management, accounting, prudential regulations, etc.

An Islamic SWF with a respectable amount of assets under management would be an attractive magnet for a variety of external managers, as they would vie for the opportunity to manage different Shariah-compliant fund mandates. Thus, an Islamic SWF would not only facilitate an opportunity for future generations to invest according to their beliefs, but also encourage the building of an Islamic asset management industry.

Western wealth/asset management firms, hedge funds, private equity, and other fund-raising entities know the GCC landscape of tapping capital, whether it is family offices, institutional money, or SWFs. Many manage money in a Shariah-compliant manner by winning ‘request-for-proposal’ (RFP) mandates, and provide market or market-beating performance.

 

Thus, managing money according to Shariah precepts for equities, money market, real estate, etc., already exists today.

However, the above-mentioned Islamic funds are targeted to bankable Muslim professionals, minimal, if any, alternative asset classes, and with a bias towards actively-managed funds (94 per cent). Latest data by Thomson Reuters Lipper show that of £36.3bn total net assets, only $661m were not actively-managed, i.e. exchange-traded funds (ETFs) and index trackers.

Expanding mandate

Islamic banks have been criticized for not directly catering to most of the world’s 1.6 bn Muslims. An Islamic SWF must be about enfranchisement and inclusion of the ‘lost, least and the last.’

Beyond the ‘traditional’ mandate of Islamic equity, money market, real estate, and Sukuk funds, the Islamic SWF should include, amongst other areas, lender-of-last-resort status for Islamic banks along with the home-country central bank, plus a percentage of funds (say 25 per cent) allocated for venture capital, micro-finance, education, SME, halal industry, green technologies, trade finance, distressed investing, and other areas that have not been traditionally funded or financed by Islamic banks.

The culture of ‘buy-and-hold’ patience, consistent with many SWFs, does not exist in Islamic investing. Thus it is an ideal opportunity for the Islamic SWF to build upon the focus on passive investment vehicles from the mere 6 per cent today. Concurrently, it should grow the takaful industry by providing more investment options for takaful premiums. Finally, a collateral benefit of larger-size Islamic funds is shareholder resolutions for Shariah-based companies, as part of corporate governance.

More than anything else, an Islamic SWF should be considered a strategic imperative for the OIC countries, led by a GCC country or Malaysia.

There are few examples of indigenous innovation or industry that the OIC countries can lay claim to. However, Islamic finance remains a distinct ‘standout’, and it is likely to be one of the most significant contributions to the contemporary global financial architecture in the 21st century.

This development would in and of itself boost the image and attractiveness of the Islamic world, and thereby allow for the exporting of the OIC countries’ ‘comparative advantage’, and increase the intellectual and economic trade flows in the opposite direction of today’s marketplace.

Gulf-based SWF are known for their strategic investment decisions, such as Mumtalakat (Bahrain’s SWF) investing in the Bahrain International Circuit, etc. The indirect returns achieved from such strategic investment will continue to flow for decades beyond the initial investment period.

Islamic finance is no longer – having reached the $1trn mark — an uncertain experiment. The next milestone, be it $2trn or $5trn, should include a borderless benchmark-sized Islamic SWF, promoting multiple assets, passive investing, a growing takaful industry, and introducing governance.

Most importantly, is there the political will to enfranchise the 1.5bn Muslims that Islamic finance has missed, not by an Islamic mega-bank or Islamic version of Goldman Sachs, but by way of an Islamic SWF?

The opinions expressed in this article are the author’s own.

SPECIAL COMMENT: Ramadan-inspired Dates Index & kebabonomics SPECIAL COMMENT: Ramadan-inspired Dates Index & kebabonomics(0)

I have been fortunate enough to be involved in many interesting conversations over the years from the potentially practical (Islamic stock exchange, Islamic LIBOR, convergence between Islamic finance and Halal industry), to potentially flawed (Islamic inflation, Islamic unemployment, consumer price index (CPI), Islamic car, Islamic washing machine), and the potentially feasible (Islamic currency, Dinar).

While some of these topics are ideally suited as conference panel sessions, research topics for academic papers, and even awards for innovation, we need to reflect on the source of ideas that connect to the roots of Muslims in a meaningful manner. Concurrently, these same ideas should also click and tick with the non-Muslim community.
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SPECIAL COMMENT: Dad, Why Islamic Finance? SPECIAL COMMENT: Dad, Why Islamic Finance?(2)

By Rushdi Siddiqui, Head Of Islamic Finance, Thomson Reuters

My children, son (14) and daughter (11), asked a straight-forward two-part question as part of their homework assignment on parent career choices: why did you chose Islamic finance? Will you retire in Islamic finance?

At surface level, they seem to be easy questions, but they are more difficult to explain than stock screening or writing about Shariah compliant risk.

QUERY: Are there programs/courses for children of parents in Islamic finance to train next generation?
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SPECIAL COMMENT: Antidote to Anti-Shariah Movement SPECIAL COMMENT: Antidote to Anti-Shariah Movement(0)

The article below expresses the personal views of the author

A recent article in The New York Times, Behind an Anti-Shariah Push, showcased the crusading efforts of Mr. David Yerushalmi, a 56 year old Hasidic Jew. His circle of support include like minded prominent visionaries, thought leaders and presidential candidates like Newt Gingrich, Michelle Bachmann, Sara Palin, Pamela Geller, Frank Gaffney all alleged experts on culture, financial systems, history and religion.

Mr. Yerushalmi has been taught Arabic and Shariah by two Islamic scholars, but won’t reveal their identities. The premise of his position is that Islamic law, or Shariah, ‘presents the greatest threat to American freedom since the cold war,’ whereby USA would eventually stand for United States of Afghanistan!

[Actually the biggest threat to America may be S&P recently downgrading US debt, from AAA to AA+, with the insulting negative outlook, and stating ‘… America’s governance and policymaking [is] becoming less stable, less effective, and less predictable than what we previously believed…’]
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SPECIAL COMMENT: Islamic finance, halal industry & Shariah-compliant hotels during Ramadhan SPECIAL COMMENT: Islamic finance, halal industry & Shariah-compliant hotels during Ramadhan(0)

Ramadhan is a period of introspection for Muslims and Islamic financial institutions to better observe Islamic teachings, appreciate our blessings and be moved to action by the burdens of others.

In short, it’s a month of narrowing the gap between the rich and the poor.

For Islamic finance – it is a merger of faith and finance, Halal industry – merger of faith and food, and Shariah compliant hotels – merger of faith and hospitality. Ramadhan offers the most brand building opportunities through PR exercises such as sponsoring Ramadhan tents/foods and Azans, launching of new products and donations to mosques and orphans as well as hand outs of Corporate Gifts to Muslims clients, for most conscious-minded institutions.

But, four questions come to mind;

1. Is Ramadhan the most opportune time to recruit more ‘bankable’ customers?

2. Do the photo-ops and press releases cancel out the spirit of donations and good intentions?

3. Should the right hand know what, when, where and how much the left hand is giving?

4. Is Ramadhan becoming a PR bandwagon everyone is jumping into?

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SPECIAL COMMENT: A Different Kind of Consolidation in Islamic Finance SPECIAL COMMENT: A Different Kind of Consolidation in Islamic Finance(0)

One of the most over-used words in Islamic finance is not standardization, scholars, regulations, etc., but ‘consolidation’. Islamic banks, Islamic leasing companies, Takaful companies need to consolidate to reach size and achieve scale.

As larger capitalized entities, they can better compete with not just the Islamic windows and subsidiaries of conventional banks and insurance companies (like HSBC or Prudential) but eventually the larger conventional financial institutions for mandates on project finance, M&A, buyouts, and so on.

Then again, what about consolidation amongst the Islamic industry bodies, the likes of AAOIFI (Accounting and Auditing Organization of Islamic Financial Institutions), IIRA (International Islamic Rating Agency), IIFM (International Islamic Financial Market), and CIBAFI (General Council for Islamic Banks & Financial Institutions)?
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SPECIAL COMMENT: Does Islamic Finance have A.I.R. (Authenticity, Innovation & Reach)? SPECIAL COMMENT: Does Islamic Finance have A.I.R. (Authenticity, Innovation & Reach)?(0)

At the Joint High Level Conference on Islamic Finance in Jakarta, Indonesia, co- organized by Bank Negara Malaysia and Bank Indonesia, the question I wanted to address was:

Does Islamic Finance have A.I.R. (Authenticity, Innovation & Reach) or is it just hot air?
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Why Coca-Cola, Chevron and Microsoft shares are Shariah-compliant Why Coca-Cola, Chevron and Microsoft shares are Shariah-compliant(1)

Islamic finance did not invent or innovate negative screening for publicly listed companies to arrive at a sub- universe of “ethical” companies. In fact, Islamic equity investing is a subset of ethical investing, hence, there are shared values to do the “good by avoiding the bad.”

The best way to explain these common values is to show how a typical conversation takes place between a financial consultant (FC) and a client.

After understanding the risk profile, investment objectives and time horizons of a client, what follows is a discussion on how the screening process works in layman’s terms.

The first question to ask would be:

Are you interested in investing in companies whose primary business involves:

  • Adult entertainment (pornography)
  • Alcohol
  • Gambling/hotels
  • Tobacco
  • Cinema and broadcasting
  • Conventional insurance
  • Conventional financial services
  • Music
  • Mortgage and lease
  • Non-operating interest income
  • Pork

Investors of conscious typically do not invest their hard-earned savings in the first four areas. Obviously, they are interested in making money, but it’s not a pure-play profits story for them.

Financial ratios
The FC then says there is another level of financial screening and it entails three ratios.

The first financial ratio entails how much debt or leverage a company has on its balance sheet. If it has more than 33 per cent debt-to-market capitalisation, then the company is removed from investment consideration.

The debt screen removes highly indebted companies, which many analysts, fund managers and stock pickers look at to assess the health pulse of the company.

Obviously, the debt-light companies are more in demand as they can better survive down markets, and many banks/bond buyers often impose debt covenants on the borrowing company. So, debt considerations are not a novel concept.

The next financial ratio is the accounts receivable of a company, it should not be more than 33 per cent of its market capitalisation. Thus, if the company is having difficulty translating sales into earnings, which can be used for internal funding, dividends for shareholders, acquisitions, then, obviously, its stock typically underperforms.

The final financial ratio is non-operating interest income, and it is expressed as a sum of cash, deposits and interest- bearing debt-to-market capitalisation of not more than 33 per cent.

It is basically flushing out the interest income analysis of the company. The company is relying too much on non-operating interest income, hence, these type of companies may actually under-perform its peers. Some may even be ripe for an acquisition.

Thus, a reasonable question would be: are shareholders investing in a company where the vision of its executives and board is focused on generating non-operating interest income rather than building growth plans that provide value to its customers?

After explaining the above screening process, the FC will then say they want to make sure the companies stay within the outlined parameters, so they will review the companies on a quarterly basis for continued compliance.

Obviously, the primary business of a company does not change often, except when acquired or merged with a non-industry player. It’s the debt screen, debt-to-market capitalisation of not more than 33 per cent that results in companies being removed, but they are typically medium and small capitalised companies. However, to reduce the bandwidth of volatility associated with market capitalisation, as there may be sell-offs in the marketplace due to external events like the credit crisis, we would use a trailing 12-month average.

The FC then shows the top screened companies from the S&P Global “screened” Index.

As of March 28, 2011, the company names include ExxonMobil, Chevron, Nestle, IBM, Microsoft, P&G, J&J, BHP Billington, Coca Cola, and Novartis. One can see that these are global brands that are liquid and large capitalised organisations with a bias towards three sectors: technology, health care and energy. The client investor then says there is nothing Islamic about these sectors or companies, as these are headquartered and publicly listed in the western world and categorized as low-debt, non-financial ethical investing. Exactly!

Finally, all the screening in the world is an academic exercise unless there is market performance and/or out-performance. Chart shows the S&P Global “screened” index (orange line) with not only a high correlation, but also outperforming the S&P Global BMI (black line) from Nov 2007 to May 2011, a period that included the credit crisis.

Thus, Islamic investing does not have a monopoly on doing good, by avoiding the bad, its common shared values with all investors of conscience.

SPECIAL COMMENT: What if the IMF Head was a Muslim, such as PIMCO’s El-Erian? SPECIAL COMMENT: What if the IMF Head was a Muslim, such as PIMCO’s El-Erian?(1)

By Rushdi Siddiqui, Head Of Islamic Finance At Thomson Reuters

The inflation adjusted billion dollar question has become, ‘what nationality should lead the International Monetary Fund (IMF)?’ It used to be the $64,000 question, and then became the million dollar question. This says something about the ‘naked’ dollar or US influence or both.

The tradition has been the Managing Director of the IMF was European. The traditional thinking has gotten us to where we are in today’s inter-connected, borderless, flat-wired world in real time, resulting in credit crisis induced systemic risks, corporate and government bailouts at the expense of hard working tax payers.
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SPECIAL COMMENT: Questions For Islamic Finance SPECIAL COMMENT: Questions For Islamic Finance(3)

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Questions for Islamic Finance

“We don’t see things as they are, we see them as we are” – Anais Nin

I used this quote as I wanted to share with the readers a sample of questions posed to me during the last few years of travel in Europe, GCC and ASEAN countries. These questions originate from people from all walks of life, whom in one way or another form opinions of their own and see Islamic finance from their own lenses.
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Survey: Revival & Reach of Islamic Finance Survey: Revival & Reach of Islamic Finance(1)

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries Thomson Reuters

It’s polling time once again in Islamic finance, but, today, we survey two major developments: Arab revolution and death of Osama Bin Laden (OBL), and examine the consequences, if any, on Islamic finance on the Maghreb and anti-Shariah countries.

Interestingly, the million-dollar mansion living OBL and his executive team camped in ‘cave gate-aways’ witnessed in real time the Al Qaeda ideology of hate, mayhem and murder discredited by a highly educated, but very poor Tunisian fruit-seller seeking dignity of work in providing for his family.
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Islamic Finance: Too Early For Public Good Test? Islamic Finance: Too Early For Public Good Test?(0)

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Has Islamic finance passed the ‘public good’ test?

HRH Dr Raja Nazrin Shah, the charismatic Crown Prince of Perak and Financial Ambassador of Malaysia Islamic Finance Center (MIFC), made reference to the public good concept during a recent event held by Securities Commission and Oxford Center of Islamic Studies. He said, ‘…If every aspect of Islamic finance were to be subject to a public good test, arguably no negative repercussion could ever arise.’

The Crown Prince is on point, but Islamic finance today is still far away from the ideal or lofty objectives of this niche market. Today’s Islamic finance has not reached the critical mass and penetration even among Muslim countries to be considered for a ‘public good’ test!

In about 40 years, it remains about 1% of global banking assets with varying presence in about 30 of 57 Muslim countries, and has reached about 2 to 3% of 1.6 billion Muslims. The conversation in Islamic finance during the decade has been, and continues to be, about lack of standardization, lack of enough scholars and qualified people, and level regulatory playing field.

Islamic fund assets under management are about the size of the paid up capital of Islamic banks, $50-70 billion, and Takaful premiums are still in the single billion dollar digits. Sukuk has inadvertently become the alter-ego of Islamic finance, hence, Islamic finance health pulse is the sukuk, but its only 13% of this niche market.

The Muslims at the ‘bottom of the pyramid’ are financially disenfranchised as they are not within the traditional deposit-taking community. The bulk of Muslims, living on less than $2/day, are not interested in sukuk, capital protected funds, Islamic hedge funds, AAOIFI standards or IFSB prudential regulations, but want access to Islamic micro-finance/funds, SME financing, venture capital, and so on.

They, the non-bankable, want the dignity to financially provide and take care of their families. This is the stress test of ‘public good,’ as Islamic finance is about social justice, equity, and inclusion.

Islamic Business Models

The Shariah prohibitions against interest, uncertainty and leverage plus the embryonic nature of Islamic finance saved it from ‘replicating’ toxic assets on their balance sheet in stage one of the post crisis-period. Yet, Islamic banks in Bahrain, UAE, and elsewhere continue to report non-performing loans (NPLs) and provisioning as exposure to the vertical chain of real estate institutions at commercial, retail and personal continue to impact performance adversely.

The six-month index performance for financial sector shows S&P Global BMI Financial Index up nearly 5%, S&P Bahrain financial up 0.57%, S&P UAE Financial down 12% and S&P GCC Composite financial down 5%.

The question is: where are the poster children of Islamic finance today? Gulf Finance House (Bahrain) and Investment Dar (Kuwait) were winning numerous industry awards, including Islamic Banker of the Year, until two years ago. Now they are case studies for dubious business models, and consequences of concentration risks (real estate) and Islamic ‘over-leverage.’

Another question: Will the risk-sharing nature of Islamic finance allow ‘claw back lawsuits’ against certain self-enriched Islamic investment bank CEOs while the bank is presently on life-support restructuring? Where was the governance that is closely linked to the ‘public good?’

The credit crisis was a wake-up call for Islamic finance, as it was following the conventional path of ‘financializing’ the real economy with many conventional instruments ‘Islamisized.’ The end result would have been a public perception similar to the conventional financial sector: loss of trust. For example, according to a recent survey, Business for Social Responsibility Globe Scan of Sustainable Business poll, the financial sector was considered as the least socially responsible sector.

PR For Public Good

Finally, extending the present partial ‘public good’ associated with Islamic finance, how is Islamic finance perceived in non-Muslim countries interested in this niche market? If it’s partially passing the public good test, assuming public good cuts across geographies and religion, then why the hostility against Islamic/Shariah finance in the world’s largest democracy, India, or world’s largest economy, US?

According to recent Wikileaks cable, former US Secretary of State, Condilezza Rice, inquired about the possibility of Islamic finance funding extremists. Another example from a prominent blogger in the space, Blade Goud, discusses the recently published U.S. Department of Defense funded study of ‘… a hypothetical three stage economic war on the U.S. economy where Islamic finance plays a role in facilitating what the report refers to as ‘economic jihad’.’

Finally, in Korea, certain religious quarters, ‘men of the cloth,’ have raised the issue of extremist financing associated with Islamic finance, hence, putting on hold parliamentary discussions/voting on the leveling of the taxes for sukuk issue.

Islamic finance in Muslim countries is often a Friday khuutba, where it’s preaching to the converts. The real ‘test’ is actually two-fold: (1) merits of Islamic banking in a Muslim country (answering the question, ‘whats the difference?’) as a business proposition, and (2) convincing the non-Muslim country financial stakeholders of the ethical and social nature of Islamic finance from end to end.

The question often asked by non-Muslims is: which Muslim country has ‘Islamized’ its economy in the past 40 years? Eventually, this question has to be answered and supported with actual data!

May be, a more precise wording for a test for Islamic finance is the ‘public reach and awareness’ test before it can be considered a ‘public good.’

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AlifArabia aims to provide analysis on Middle East and Africa business and political issues. It wants to see a thriving and dynamic Middle East that encourages corporate and government transparency, investments and policies that allow the economies to grow.

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