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Research on Islamic Banking, September 2009

The recent developments in Islamic banking, in particular the ruling on Tawarruq, once again highlight the crucial role played by scholars in the industry. With this in mind, Funds@Work AG, a strategy consulting firm, has undertaken comprehensive research covering roughly 180 scholars and their involvement in GCC and international Shariah boards. 

The report shows that the top 5 scholars "make up at least 30.15% of the entire universe of almost 956 board positions". Funds@Work has kindly made this research available to Islamicbanker.com, which can be accessed by clicking here.

Analysis on Islamic Banking, July 2009

Analysis on Islamic Banking, June 2009

As the key product in the Islamic banking industry is declared impermissible and attention turns to AAOIFI - the industry standards body - for direction, Islamic Banker investigates the ruling and its repercussions.  

Tawarruq, also known as Reverse Murabaha or Monetization, is a widely used instrument to obtain cash immediately.

As shown by the below diagram, Tawarruq is essentially very similar to the standard Murabaha structure, with one additional leg. The standard part of the structure involves the Bank buying the commodity from the "Goods Supplier", paying £100. The bank then sells the commodity to "UK Purchasing Company" on a deferred basis, that is, the bank charges "UK Purchasing Company" £110 due in, say, five years time. The final step involves UK Purchasing company selling the commodity to the "Goods buyer" for an immediate cash payment of £100.   

Reports on Islamic banking, April 2009
By Michael Mahlknecht*

From a bird's eye view, one could differentiate between three basic types of Islamic risk management products and mechanisms: First, those that are formally being standardized, such as the ISDA/IIFM Ta'Hawwut (Hedging) Master Agreement; second, risk management methods directly based on the well-recognized Islamic financing modes and rules; and third, the possibility to use formally Shariah-compliant mechanisms to replicate conventional risk management products and risk profiles.

Articles on Islamic banking, March 2009

With Islamic finance continuing to establish itself in the West - home of complex financial instruments - commentators believe that this will lead to a rise in Islamic alternatives for derivatives. With this in mind and given the recent problems caused by such instruments, we ask - what makes derivatives Islamic and are they part of the solution?

Peter Lynch, one of the leading investors in the conventional space, once said before you buy or sell anything, you must be able to explain why you are buying or selling so that an 11 year old can understand - three sentences at most.

In effect, this goes to the very heart of Islamic contract law. If we take a look at Aqd' - the contract - the main scholars contend that excessive uncertainty (gharar) would invalidate the contract (for example, the subject matter needs to be specified: "I will sell you one of my cars..." would be invalid as the car has not been defined). In addition to this, excessive forms of gambling or speculation (qimar) would also invalidate the contract. Despite these concepts being well established, the use of derivatives in Islamic banking is beginning to rise.

Essays on Islamic banking, Updated February 2009

With increasing globalisation, efficient means of transporting goods and better communication between organisations across the world; it is tempting to conclude that location is no longer a source of competitive advantage. However, reality points out an important paradox, namely, the success of industries such as a local Silicon Valley ICT cluster, which have thrived due to, what economist call, positive externalities or “locational spillovers”, more commonly referred to as the theory of clusters.

A cluster can be defined as a non-random agglomeration of firms in a particular location with similar or closely complementary capabilities.

Articles on Islamic banking, February 2009

Uncertainty and fear can make the most ardent of investors question their philosophy. In a year when most market adages have been thrown out of the window by advocates of the free market, at least one has never been more appropriate: financial markets are a great leveller.

This is eloquently captured by Nassim Nicholas Taleb, who has established himself as a leading authority on the current crisis, in his analysis on uncertainty. There are two types of businesses: those protected from major surprises and those that can lose everything in matter of minutes. The income of a dentist, although it can be significant, is unlikely to vary greatly over a given period. However, the income of a bank derivatives trader - and in some cases the income of the whole bank - can disappear rapidly. Taleb, described by The Guardian as the "new sage of Wall Street", refers to the latter scenario as "negative Black Swans".

Essays on Islamic Banking, August 2008

Few would deny the strong correlation between oil price growth and Islamic banking growth. “There’s an indirect but powerful link between the Islamic financial industry and the performance of the oil market,” says Anouar Hassoune, a banking analyst at Moody’s. “As long as oil remains expensive, which is our base-case scenario, Islamic banking will keep on growing successfully.”

In this article, we will explore the potential impact of oil prices on Islamic banking and examine other factors which could explain the exponential growth rate being seen in the industry.

Essays on Islamic Banking, July 2008

When it comes to the current economic environment, it can be said that we are all watching a “horror movie”. This is the ominous verdict delivered by the prestigious think tank, Ernst & Young Item Club.

All conventional indicators point in one direction: Euro Libor fixed rate touched 4.57 per cent (one month); sterling Libor reached 5.38 per cent; dollar Libor hit the level of 2.50 per cent - these are some of the highest levels seen in recent memory. Similar pattern is observed in the Swap market - with the difference in swap rates and government bonds being the highest in 6 months. TED spread, which captures the difference between 3-month Treasury bills and 3-month Libor rose to over 200bp. So what does all this mean?

Essays on Islamic Banking, July 2008

At a time when the global oil industry, celebrates 100 years of existence, basking in record oil prices, it is interesting to note the realisation of another milestone, Islamic bond (sukuk) market, which has an even greater potential of transforming the economic landscape of the Middle East and North Africa (MENA) region.

The impact of record breaking energy prices is currently being felt from the poorest farmer in Haiti to the sumptuous settings on Wall Street. There is no doubt that over the last century, oil has transformed the fortunes of many countries in the Middle East. However, the jury is still out on the economic and social benefits. Indeed, writing for the prestigious Oxford Institute of Energy Studies, Kevin Rosser implies that the oil wealth has been at the expense of regional development: