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What Does Shariah-Compliance Mean in the Islamic Banking Industry?



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Islamic banking, also known as Shariah-compliant banking or halal finance, is a system of banking and financial services that operates by Islamic principles and laws known as Shariah. Shariah compliance is of utmost importance in the Islamic banking industry, as it ensures that all financial transactions and products are ethically and morally sound and adhere to Islamic teachings.

Islamic banking is based on the principles of risk-sharing and profit-sharing, and it prohibits charging or paying interest, which is considered exploitative and unjust in Islam. Instead, Islamic banks provide financial services based on ethical and moral values, such as profit-sharing, partnership, leasing, and joint venture.

One of the key features of Islamic banking is its adherence to Shariah compliance. Shariah compliance refers to the dedication to Islamic principles and laws in all financial transactions and products Islamic banks offer. Shariah compliance ensures that all financial transactions and products are ethically and morally sound and adhere to Islamic teachings. The importance of Shariah compliance in the Islamic banking industry cannot be overstated, as it is the cornerstone of the industry’s credibility and trustworthiness.

Islamic banking has gained significant momentum recently, with the industry’s global assets reaching over $2 trillion. As the demand for Shariah-compliant financial services continues to grow, the importance of Shariah compliance in the Islamic banking industry will only increase, as it is fundamental to the industry’s success and growth.

Shariah is the set of Islamic principles and laws that govern all aspects of Muslim life, including finance and commerce. It is derived from the Quran and the Sunnah (the teachings and practices of Prophet Muhammad). Shariah is the cornerstone of Islamic finance and the basis for developing Shariah-compliant financial products and services.

Shariah compliance refers to the adherence to Islamic principles and laws in all financial transactions and products offered by Islamic financial institutions. Shariah compliance ensures that all financial transactions and products are ethically and morally sound and adhere to Islamic teachings. It is important to note that Shariah compliance is not limited to avoiding interest-based transactions but also encompasses other ethical and moral values such as justice, transparency, and accountability.

For Islamic financial institutions, Shariah compliance is of paramount importance. It is a key differentiator that sets Islamic finance apart from conventional finance. Islamic financial institutions must comply with Shariah standards set by independent Shariah supervisory boards (SSBs) comprising Islamic scholars and experts in Islamic finance. These boards ensure that Islamic financial institutions’ financial transactions and products comply with Shariah principles and laws.

The importance of Shariah compliance for Islamic financial institutions cannot be overstated. It is fundamental to the industry’s credibility and trustworthiness. Shariah compliance ensures that all financial transactions and products are ethically and morally sound and helps build and maintain trust between the institution and its clients. Shariah-compliant financial products and services are gaining popularity among Muslims and non-Muslims, as they are seen as more ethical and sustainable than conventional finance.

Islamic banks offer a range of Shariah-compliant products and services based on ethical and moral values and adhere to Islamic principles and laws. These products and services are designed to meet the financial needs of individuals and businesses while remaining Shariah-compliant.

Some examples of Shariah-compliant products and services offered by Islamic banks include:

  1. Mudarabah: A profit-sharing partnership between the bank (as the financier) and the client (as the entrepreneur).
  2. Murabahah: A cost-plus financing arrangement where the bank purchases the asset on behalf of the client and then sells it to the client at a marked-up price, with the payment being made in installments.
  3. Ijarah: A leasing arrangement where the bank purchases the asset and then leases it to the client for a predetermined period.
  4. Musharakah: A partnership where the bank and the client contribute capital to a joint venture, with the profits and losses shared according to a predetermined ratio.
  5. Sukuk: Shariah-compliant bonds backed by tangible assets and provide a return based on the profits generated by those assets.

Shariah compliance affects banking operations in several ways. Islamic banks must ensure that all financial transactions and products comply with Shariah principles and laws. This requires the establishment of independent Shariah supervisory boards (SSBs) that oversee the bank’s operations and ensure that they remain Shariah-compliant. SSBs comprise Islamic scholars and experts in Islamic finance who provide guidance and advice on all aspects of banking operations to ensure compliance with Shariah principles and laws.

Shariah-compliant certification is a process by which Islamic financial institutions obtain certification from an independent third party to confirm that their financial products and services comply with Shariah principles and laws. Shariah supervisory boards (SSBs), independent Islamic scholars’ bodies, and Islamic finance experts carry out the certification process.

The importance of certification for Islamic financial institutions cannot be overstated. The certificate provides credibility and trustworthiness for financial products and services offered by Islamic financial institutions. It assures customers that the products and services provided by the institution are ethically and morally sound and adhere to Islamic principles and laws. Certification also helps to differentiate Shariah-compliant financial products and services from conventional finance products and services.

The certification process typically involves a review of the financial institution’s operations by the SSB, which examines all aspects of the institution’s operations to ensure compliance with Shariah principles and laws. The SSB examines the institution’s products and services, investment portfolios, risk management practices, and accounting procedures to ensure Shariah compliance. The SSB also provides guidance and advice to the institution to ensure it remains Shariah-compliant.

Once the review is complete, the SSB issues a Shariah-compliant certification to the financial institution, which can then be used to market its products and services as Shariah-compliant. The certificate is typically valid for a specific period and must be renewed periodically to ensure continued compliance with Shariah principles and laws.

Shariah-compliant banking offers several advantages and benefits for customers and the global economy.

Advantages of Shariah-Compliant Banking for Customers

  1. Ethical and Moral Financial Transactions: Shariah-compliant banking allows customers to engage in financial transactions based on ethical and moral principles. Customers are assured that their financial transactions align with their religious and moral beliefs.
  2. Transparency: Shariah-compliant banking promotes openness in financial transactions. Customers are provided with clear and concise information about the terms and conditions of financial products and services.
  3. Risk-Sharing: Shariah-compliant banking allows customers to share risks with the bank. Profit and loss are shared based on a predetermined ratio. This encourages a more equitable distribution of risks and rewards.
  4. Lower Interest Rates: Shariah-compliant banking offers customers lower interest rates on financial products and services than conventional ones.

Benefits of Shariah-Compliant Banking for the Global Economy:

  1. Financial Stability: Shariah-compliant banking promotes financial stability by encouraging responsible and sustainable lending practices. Islamic finance prohibits speculative investments and facilitates investments in tangible assets, which can lead to a more stable financial system.
  2. Economic Development: Shariah-compliant banking promotes economic development by encouraging investment in projects with a positive social impact. This can lead to increased job creation and improved living standards.
  3. Diversification of Financial Markets: Shariah-compliant banking offers a different approach to finance based on ethical and moral principles. This diversifies the financial market and can lead to increased innovation in financial products and services.
  4. Inclusion: Shariah-compliant banking promotes financial inclusion by providing financial products and services that are accessible to a broader range of customers, including those who are excluded from conventional finance due to their religious beliefs.

Challenges in Shariah-Compliant Banking

While Shariah-compliant banking offers many benefits, it also faces several challenges. These challenges can be internal or external and may arise due to cultural, legal, or economic factors.

Common challenges faced by Islamic financial institutions include:

  1. Lack of Awareness: One of the primary challenges confronting Islamic financial institutions is a need for more awareness and understanding of Islamic finance. This can lead to misconceptions and misunderstandings about Shariah-compliant banking products and services.
  2. Limited Product Offerings: Islamic financial institutions may need help developing a comprehensive range of Sharia-compliant products and services that meet the diverse needs of their customers.
  3. Shariah Compliance: Ensuring Shariah compliance can be challenging for Islamic financial institutions, as the interpretation and application of Shariah principles vary among scholars and countries.
  4. Regulatory Framework: Islamic financial institutions may face challenges in navigating the regulatory framework, as regulatory bodies may need a clearer understanding of Islamic finance or develop appropriate regulatory frameworks.
  5. Cost of Funds: The cost of funds for Islamic financial institutions can be higher than conventional banks due to the need to comply with Shariah principles, such as profit and loss sharing.

Solutions to overcome these challenges

  1. Education and Awareness: Islamic financial institutions can invest in education and awareness programs to increase understanding and awareness of Sharia-compliant banking products and services among the general public.
  2. Product Development: Islamic financial institutions can work on developing a comprehensive range of Shariah-compliant products and services to meet the diverse needs of their customers.
  3. Standardization: The development of standardized Shariah-compliant products and services can help address the challenge of Shariah compliance and provide greater clarity for customers and regulators.
  4. Collaboration: Collaboration between Islamic financial institutions and regulators can help develop appropriate regulatory frameworks that support the industry’s growth.
  5. Funding Sources: Islamic financial institutions can explore alternative funding sources, such as sukuk (Islamic bonds) or Islamic microfinance, to help reduce the cost of funds.

In conclusion, Shariah compliance is a fundamental principle in the Islamic banking industry. It is based on Islamic law principles and aims to promote ethical and responsible financial practices. Shariah-compliant banking products and services offer several benefits to customers and the global economy, including increased financial inclusion and stability.

Despite the benefits, Islamic financial institutions face several challenges, including a need for more awareness, limited product offerings, Shariah compliance, regulatory frameworks, and the cost of funds. However, solutions such as education and awareness, product development, standardization, collaboration, and exploring alternative funding sources can help overcome these challenges.

Shariah compliance is crucial for the growth and sustainability of the Islamic banking industry. As more people become aware of Islamic finance and its principles, the industry is expected to grow and become an essential part of the global financial system.

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Islamic Finance Tops $3.3trn but Growth Challenges Remain




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By Andy Sambidge

  • Saudi sector worth $830bn
  • 70% of assets in GCC, Malaysia and few others
  • 10% growth expected in coming year

Saudi Arabia is the world’s biggest player in Islamic finance and the appetite for it in the kingdom is only growing. It has $830 billion of assets out of a global market estimated to be worth $3.3 trillion, according to Ayman al Sayari, the governor of the Saudi Central Bank. Just last week, when Saudi Telecom Company subsidiary Tawal completed a deal to buy tower infrastructure in Europe, it secured a sharia-compliant loan of more than $1.4 billion from Saudi National Bank, Dubai Islamic Bank and First Abu Dhabi Bank.

However a lack of awareness is holding back the global growth of Islamic finance, say analysts at Fitch Ratings and S&P Global Ratings.  Even in Indonesia, which has the largest Muslim population in the world, Fitch reported that the sharia financial literacy rate was just 9.1 percent last year. Only 18 percent of the surveyed population in Morocco, meanwhile, believed that Islamic banks’ financing products were halal.

Bashar al Natoor, global head of Islamic finance at Fitch Ratings, said: “In some cases, customers lack confidence in the sharia compliance of products and believe that Islamic banking is effectively the same as conventional banking. “Islamic banks in general face higher reputational and operational risks compared with conventional banks, as they need to ensure the compliance of their entire operations and activities with sharia principles.”

In the UAE, demand also appears strong for Sharia-compliant products. The government received bids of AED6 billion for its latest auction of T-sukuk, financial instruments that are sharia compliant and issued by the federal government in dirhams. The oversubscription rate was 5.5 times.

Core market growth

Global Islamic finance assets are estimated to have crossed $3.3 trillion in the first half of 2023, according to Fitch.  If impediments are addressed, Fitch expects “strong long-term growth”, although this is likely to be concentrated in core markets. According to S&P Global Ratings, GCC countries, mainly Saudi Arabia and Kuwait, spurred 92 percent of the growth in Islamic banking assets last year.

In Kuwait, this was mainly a result of sharia-compliant bank Kuwait Finance House’s acquisition of Ahli United Bank. Over the next couple of years, Ahli United is expected to convert its conventional activities to sharia compliance.  In Saudi Arabia, the implementation of the Vision 2030 programme and continued growth in mortgage lending supported the 2022 performance.

More than 70 percent of global Islamic banking assets are concentrated in the GCC countries, Malaysia, Bangladesh, Jordan and Pakistan. Domestic market shares range from 15 to 85 percent. Experts expect Saudi Arabia’s banking system performance to continue to underpin a large portion of the expanding Islamic banking industry. The kingdom has the largest proportion of Islamic financing (86 percent) of any country that allows conventional banks to operate alongside Islamic banks.

But there are countries with large Muslim populations – such as Indonesia, Turkey, Egypt, Nigeria, Algeria and Morocco – where Islamic banks have only a niche presence, and domestic market shares of less than 10 percent. Analysts at S&P said they see the Islamic finance industry as a “collection of local industries” rather than a truly globalised sector.

“The industry is therefore looking at ways to enhance its competitiveness and appeal to distinguish itself from the conventional fixed-income market. Streamlining products and processes to make them more appealing to new issuers is one of these methods,” S&P noted. According to S&P, the global Islamic finance industry will see growth of about 10 percent in 2023-2024, following similar expansion last year, largely driven by GCC countries.

“Elsewhere, growth was either muted or held back by local currency depreciation,” analysts said.  Structural weaknesses still curb the industry’s broader geographical and market appeal, they added.

Originally Published in the

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Alliance Bank and SURI Launch Upcycling Empowerment for Langkawi’s Single Mothers




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Alliance Islamic Bank Berhad (“Alliance Islamic Bank” or the “Bank”) today announced a meaningful collaboration with SURI Inspirasi (“SURI”) to launch the MAH-SURI Lifestyle Project (“MAH-SURI”), an initiative aimed at improving the lives of underprivileged single mothers in Langkawi, by equipping them with skills to generate income.

As a community-centric organization, Alliance Bank is committed to creating a positive impact on society by supporting the sustainable development of local communities in Malaysia. This corporate giving campaign is part of Alliance Islamic Bank’s social impact strategy under its SocioBiz initiative, a Shariah-compliant social funding platform that aims to empower communities through entrepreneurship. This initiative promotes financial inclusion and investment in social good, by providing resources and knowledge to the underprivileged in our communities to help them sustain their wellbeing and livelihood for the long run.

SURI is a social enterprise that provides financial opportunity and living skills for B40 single and underprivileged mothers who struggle with financial challenges. SURI aims to improve long-term sustainability by providing struggling mothers with the opportunity to generate income through employment support programs. Under the MAH-SURI project, SURI will be expanding its operations to Langkawi to help underprivileged mothers there make a living by providing support and training in Creative Sewing Techniques, Design, and Product Development.

MAH-SURI is the embodiment of sustainability principles and the empowerment of underprivileged individuals to create a synergy that drives positive change and social elevation. At its core, this initiative seeks to uplift the livelihoods of a disadvantaged community by equipping them with skills to upcycle discarded hotel bed sheets, imbuing them with a fresh purpose and transforming them into innovative products and sustainable fashion items. Notably, this people and planet initiative stands out as Langkawi’s first locally conceived sustainable handcraft brand, which is supported by the Langkawi Development Authority.

Through this campaign, the Bank plans to raise RM70,000 in funds to procure equipment essential in enabling the project’s success such as industrial and portable sewing machines, dedicated laptops for designing purposes, and the locally engineered Flexsilk attire printing machine.

“At Alliance Islamic Bank, we are focused on enhancing the lives and societal well-being of our communities, enabling the development of sustainable livelihoods. Aligned with our goal of evolving into a bank for the community, this collaboration with SURI underscores our shared mission of alleviating the challenges of disadvantaged communities through empowerment and entrepreneurial skills, emphasizing our dedication to positive transformation. We envision the MAH-SURI initiative to nurture seeds of self-reliance and financial resilience while championing an approach founded on sustainability and environmental consciousness,” said En. Rizal IL-Ehzan Fadil Azim, Chief Executive Officer of Alliance Islamic Bank.

The MAH-SURI initiative is a pivotal component of the Bank’s sustainability efforts, in support of the United Nations’ Sustainable Development Goals 1 (No Poverty), 8 (Decent Work and Economic Growth), and 12 (Responsible Consumption and Production).

“SURI aims to erase the mindset of charitable offerings to these mothers, but instead we are geared towards income-based plans through employment support programs. As they work and earn a living, it will leave an impact of growth and personal improvement on them and their children,” said Pn. Salena Ahmad, founder of SURI.

Overall, Alliance Islamic Bank has raised approximately RM1.7 million over the past 3 years and in FY24, the Bank strives to donate RM1 million through various initiatives under the SocioBiz program as well as contributions such as The Flood Relief Assistance Programme, whereby more than RM50,000 worth of flood relief necessities were donated to over 200 households. The Bank collaborated with the Malaysian Relief Agency on this relief initiative to provide aid to those who were impacted by the flood crisis in Johor.

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Russia To Launch Islamic Banking




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On the horizon of financial innovations, Russia is gearing up to make a significant stride by launching its inaugural Islamic banking pilot program on September 1. This initiative is not just a mere experiment but a calculated move, especially considering Russia’s substantial Muslim demographic, which stands at an impressive 25 million. The recent endorsement from the highest echelons of power, with President Vladimir Putin giving his nod, underscores the nation’s commitment to integrating Islamic banking principles into its financial fabric.

Islamic Banking Demystified

Islamic banking, at its core, is a financial system that operates under the guiding principles of Shariah, the Islamic legal code. This sets it apart from its conventional counterpart in several ways:

  1. Shariah Compliance and Ethical Undertones: Unlike conventional banking, which thrives on interest-based transactions, Islamic banking is rooted in ethical guidelines. It prohibits transactions that involve usury or interest, viewing them as inherently unjust.
  2. Asset-based Financial Model: Conventional banking is predominantly debt-centric, often placing the financial burden squarely on the client. In stark contrast, Islamic banking adopts an asset-based approach, ensuring that both profits and risks are equitably shared between the financial institution and its clients.
  3. Ethical Investment Choices: Islamic banking takes a conscious stance by avoiding sectors deemed detrimental to societal well-being, such as alcohol, tobacco, and gambling. This not only ensures ethical investments but also promotes responsible financial practices.
  4. Risk Aversion: One of the hallmarks of Islamic banking is its aversion to high-risk ventures. It prohibits speculative ventures and financial derivatives, emphasizing stability and real value in its transactions.

Deciphering Russia’s Move towards Islamic Banking

Several factors have converged to make this the opportune moment for Russia to embrace Islamic banking:

  1. Economic Potential: Sberbank, Russia’s premier lender, has spotlighted the rapid growth trajectory of the Islamic banking sector. With projections suggesting that this sector could burgeon to a staggering $7.7 trillion by 2025, it’s an avenue teeming with economic promise.
  2. Regulatory Evolution: With the Islamic finance market expanding globally, there’s a pressing need for robust regulatory oversight. Russia’s foray into Islamic banking is a step in this direction, aiming to establish a comprehensive regulatory framework.
  3. Addressing Conventional Banking Limitations: Russia’s existing state support programs, especially for mortgage financing and SMEs, are heavily reliant on interest-bearing loans. This is at odds with Shariah principles. The introduction of Islamic banking is a strategic move to bridge this gap.

Geopolitical Underpinnings

The geopolitical landscape has played a pivotal role in shaping Russia’s stance on Islamic banking. The 2008 financial crisis was a wake-up call, highlighting the need for alternative funding sources. Moreover, the post-2014 Western sanctions, following the Crimea annexation, added another layer of complexity, pushing Russia to explore avenues like Islamic banking to diversify its financial ties and reduce its Western dependence.

The Road Ahead

The pilot program, set to be rolled out in regions with a significant Muslim population like Tatarstan, Bashkortostan, Chechnya, and Dagestan, is a testament to Russia’s commitment. These regions, already familiar with the nuances of Islamic finance, will be the testing grounds. If successful, this could very well be the precursor to a nationwide adoption, reshaping Russia’s financial landscape.

In essence, Russia’s move towards Islamic banking is a confluence of financial strategy, geopolitics, and a commitment to fostering a more inclusive financial ecosystem.

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