ISLAMIC FINANCE & CAPITAL MARKETS

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

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1 year ago

March 27, 2023

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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:

Mudarabah: A profit-sharing partnership between the bank (as the financier) and the client (as the entrepreneur).
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.
Ijarah: A leasing arrangement where the bank purchases the asset and then leases it to the client for a predetermined period.
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.
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

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.
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.
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.
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:

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.
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.
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.
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:

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.
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.
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.
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.
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

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.
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.
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.
Collaboration: Collaboration between Islamic financial institutions and regulators can help develop appropriate regulatory frameworks that support the industry’s growth.
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 & CAPITAL MARKETS

HAQQ Network Advances Islamic Web3 with Gold Token and Real World Assets

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3 days ago

May 16, 2024

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HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” has taken a significant leap forward with the launch of its Gold Token in June, marking a critical advancement in the network’s broader ambition of tokenizing real-world assets (RWA). In a detailed blog post, Alex Malkov, the co-founder and CEO of HAQQ Network, highlighted the dual role of the Gold Token—not only as a stable store of value but as a pivotal element in the Islamic Interbank Market.

Tokenized commodities like the Gold Token promise a more streamlined and transparent approach than traditional asset exchanges. The Gold Token is not just a digital asset but is directly exchangeable for physical gold. HAQQ plans to expand this concept to include other investment commodities and potential securities.

Furthering its innovative strides, HAQQ Network also intends to tokenize Islamic financial products such as Sukuk, transforming them into blockchain-based tokens. This transformation enhances liquidity, accessibility, and efficiency, allowing for fractional ownership and broader distribution. Importantly, these tokens adhere to Shariah law, integrating compliance rules within the token’s smart contracts to ensure religious adherence.

Expanding its offerings, HAQQ has recently introduced VISA cards denominated in its ISLM token, explicitly targeted at EU residents. This development represents a significant stride toward bridging Islamic digital assets with mainstream financial services, offering EU users a platform to manage their finances according to Islamic principles.

Last year, the Islamic Coin project under HAQQ Network saw an impressive launch, garnering extensive coverage from leading crypto publications globally and major fintech outlets in the Middle East. The project built a robust community of over 1.5 million members and was backed by an advisory board that includes members from the UAE’s ruling families. The ISLM token raised substantial funds through private sales and secured investments, totalling over $400 million.

However, despite its successful launch and substantial technological foundation, Islamic Coin faced hurdles, including regulatory scrutiny and media misinformation. The Virtual Asset Regulatory Authority (VARA) initiated an investigation, but HAQQ Network cooperated fully, leading to the closure of the investigation without any enforcement actions.

Alex Malkov acknowledged the challenges posed by the VARA investigation but reiterated their commitment to transparency and combating misinformation and Islamophobia. This stance aims to foster a more inclusive and equitable financial ecosystem. Despite setbacks, Islamic Coin is now listed on major centralized exchanges such as KuCoin, LBank, XT, and MEXC and decentralized platforms like SushiSwap, Osmosis, and Uniswap. This has significantly boosted the token’s liquidity and visibility.

Moreover, HAQQ has launched a non-custodial wallet available on the Apple Store and Google Play, designed to attract non-crypto users with features like social login and device recovery. This wallet is trendy in regions such as Nigeria, Indonesia, and Turkey, providing secure asset management without intermediaries.

A noteworthy wallet feature of the “HAQQ Network Expanding Islamic Web3 Initiative With Gold Token and RWA” is staking, where ISLM holders can earn rewards while enhancing the network’s security and governance. Additionally, they can participate in ‘halal yield’ through liquidity pools on decentralized exchanges, adhering to Islamic financial principles and enabling Muslim investors to engage in the digital economy without compromising their religious values.

HAQQ Network’s dedication to merging Islamic finance with cutting-edge Web3 technology demonstrates its potential to influence the financial landscape significantly, adhering strictly to Islamic ethical standards

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ISLAMIC FINANCE & CAPITAL MARKETS

What is Microtakaful and How Does It Work?

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2 weeks ago

May 6, 2024

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By Hafiz M. Ahmed

In recent years, the concept of microtakaful has emerged as a significant development in Islamic finance, offering a Shariah-compliant insurance solution tailored to the needs of the less affluent segments of society. This form of microinsurance is designed not only to adhere to Islamic principles but also to provide financial protection to those typically underserved by conventional insurance systems. This blog post will explore what microtakaful is, how it operates, and its impact on communities.

What is Microtakaful?

Microtakaful is a form of Islamic microinsurance that offers Shariah-compliant insurance solutions to low-income individuals and communities. This system operates on the principles of mutual assistance and risk sharing, where participants contribute small premiums to a collective pool. The funds are managed according to Islamic law, ensuring no investment in prohibited activities, and profits and risks are shared among all participants.

Difference between Takaful and Microtakaful

Takaful and microtakaful are both forms of Islamic insurance, but they cater to different segments of the market and have distinct operational scales and objectives. Here are the key differences between the two:

Target Audience:
- Takaful is geared towards a broader audience, including businesses, middle to high-income individuals, and larger entities seeking Shariah-compliant insurance solutions.
- Microtakaful specifically targets low-income individuals and communities, offering them affordable insurance coverage to help mitigate financial risks associated with accidents, health issues, and other unforeseen events.
Scale and Scope of Coverage:
- Takaful policies generally cover a wide range of risks and can offer substantial coverage amounts, similar in scope and scale to conventional insurance policies.
- Microtakaful provides smaller, more limited coverage aimed at essential needs, reflecting the lower premium capacity of its clientele. The focus is on accessibility and essential protection rather than comprehensive coverage.
Premiums and Contributions:
- Takaful involves higher premiums reflecting the broader and more significant coverage it offers, and these premiums are also used to invest in permissible (halal) ventures according to Islamic law.
- Microtakaful requires very small, affordable premiums to ensure that the financially weaker sections of society can also access insurance. These contributions are pooled to cover the collective risk of the group.
Objective and Impact:
- Takaful aims to provide a Shariah-compliant alternative to conventional insurance, ensuring participants avoid Riba (interest), Gharar (excessive uncertainty), and Maysir (gambling).
- Microtakaful not only aims to be Shariah-compliant but also focuses on social impact by enhancing financial inclusion and providing safety nets to economically vulnerable groups.

How Does Microtakaful Work?

The operational model of microtakaful is fundamentally different from conventional insurance. Here’s a step-by-step breakdown of its mechanism:

Risk Pooling: Participants contribute small, affordable premiums into a collective pool, which is used to cover potential losses or damages. These contributions are considered donations and thus embody the Islamic principle of charitable giving and mutual assistance.
Takaful Operator: A takaful operator manages the pool. The operator is responsible for ensuring that the fund is used properly, adhering to Shariah principles, and overseeing claims and compensation. Importantly, unlike conventional insurance, the operator does not own the fund but acts as a custodian or manager.
Shariah Compliance: The operations of microtakaful are governed by a Shariah board, which ensures that all transactions remain free from interest (riba), uncertainty (gharar), and gambling (maysir). Investments made with the pooled funds must be in halal (permissible) ventures, avoiding industries like alcohol, gambling, and tobacco.
Surplus and Deficit Handling: Any surplus in the takaful fund (after claims and expenses) can be distributed to the participants as dividends or reinvested to increase the fund’s capacity. In the case of a deficit, the takaful operator may provide an interest-free loan (qard hasan) to the pool to cover the shortfall, which is subsequently repaid.
Claims and Compensation: When a claim is made, compensation is paid out from the collective pool. The focus is on solidarity and support among the members rather than on profit-making.

Benefits of Microtakaful

Microtakaful has several advantages, particularly for low-income communities:

Accessibility: It provides financial security to those who may not afford or access traditional insurance products.
Community Empowerment: By promoting mutual assistance, microtakaful strengthens community ties and resilience.
Economic Stability: It helps stabilize the economic conditions of individuals and small businesses by mitigating risks and providing support in times of need.

Challenges and Future Prospects

Despite its benefits, microtakaful faces challenges such as low awareness, regulatory hurdles, and the need for more tailored products to meet diverse needs. However, the potential for growth is significant, especially in countries with large underserved Muslim populations. As awareness and understanding of microtakaful increase, it is expected to play a more prominent role in global Islamic financial services.

In conclusion, microtakaful represents a pioneering approach to financial inclusion, blending traditional Islamic principles with innovative risk-sharing mechanisms to protect the most vulnerable. Its expansion can lead to more equitable access to insurance and contribute to the broader economic empowerment of disadvantaged communities worldwide.

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ISLAMIC FINANCE & CAPITAL MARKETS

IsDB Forecasts $15 Trillion Needed by 2040 for Global Sustainable Infrastructure

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3 weeks ago

April 30, 2024

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By Aamer Yaqub

At the Islamic Development Bank’s (IsDB) 2024 Annual Meetings in Riyadh, President Dr. Mohammed Al-Jasser articulated a compelling vision for addressing the global infrastructure deficit, which demands an estimated $15 trillion by 2040 to meet burgeoning needs. This statement aligns with the headline: “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB”. This gathering, which also marked the bank’s Golden Jubilee, was themed “Cherishing our Past, Charting our Future: Originality, Solidarity, and Prosperity.”

Dr. Al-Jasser’s comments, as the Saudi Press Agency reported, emphasized the critical inadequacies of current public financing mechanisms in keeping pace with the escalating demands for sustainable infrastructure. He underscored the urgency of rethinking financing strategies to effectively support long-term investment in infrastructure, particularly in the world’s least developed countries.

These nations, hardest hit by resource depletion exacerbated by the COVID-19 pandemic, face a stark reality. The pandemic strained their development efforts and posed significant risks to their future growth and stability. Dr. Al-Jasser pointed out that these countries are at risk of enduring further economic and social degradation without immediate and decisive action.

Highlighting the unique position of Islamic finance in this scenario, Dr. Al-Jasser noted its suitability for funding substantial, long-term infrastructure projects. Islamic finance, known for being asset-based and embracing risk-sharing, dovetails with sustainable and environmentally responsible investing principles. This makes it an ideal approach to tackle these countries’ infrastructural challenges, ensuring that development aligns with ethical financing principles.

Dr. Al-Jasser called for a global mobilization to leverage the principles of Islamic finance to not only bridge the financing gap but also catalyze prosperity, solidarity, and equitable growth across the least developed nations. His vision extends beyond financial growth, aiming to foster enhancements in healthcare, education, and job creation, thus attacking the roots of poverty.

This focus on sustainable and responsible finance underscores a broader shift in global development priorities, where ethical considerations are increasingly becoming as significant as economic factors. Dr. Al-Jasser’s advocacy for a strategic reorientation in financing reflects a deep understanding of Islamic finance’s challenges and transformative potential in the contemporary global economy. This strategic shift is crucial as the “World needs $15 trillion to bridge the financing gap for sustainable infrastructure projects by 2040: IsDB,” emphasizing the urgency and scale of the financial challenges ahead.

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