On the 24th of August 2001, the Institute of Islamic Banking and Insurance hosted a lecture on Islamic Funds, A Case for Dedicated Distribution Arm. The lecture was chaired by Mr John Bauer, Marketing Dierector, SAMBA, UK.

The Institute invited Mr Suleiman Dualeh, CEO, Jersey ii-online Ltd, London, to deliver the talk.

Examining the sales record of Islamic investment products, Mr Dualeh started with an overview of the sector, and proceeded to study some of the less obvious symptoms of problems in the horizon, explored their causes, evaluated all available options to overcome these problems, and then suggested a solution.

The list of all known and widely marketed equity Funds now include some 104 Funds, managing total assets in excess of $5 Billion. While these figures may not look impressive in today's standards, they nevertheless demonstrate a dramatic surge in the popularity of Islamic funds within a fairly short period. Considering that there were only 29 funds managing little over 800 million USD in 1996.

According to Mr Dualeh, the flourishing of the sector during 1990s can be attributed to the acceptance of the equity investment by the Sharia boards. As an Islamic asset manager during the late 1980's and early1990s, he has been fortunate enough to participate in the intellectual debate that led to the lifting of the ban on equity investment by some of the Sharia boards. More importantly, the present consensus among the Sharia scholars on the stock screening criteria was unprecedented and proved helpful to the sector.

Other factors that helped the sector included the growing Islamic awareness among the Muslim youth, the prolonged bull market of the 1990s, and the creation of credible Islamic equity benchmarks by leading index providers such as Dow Jones and FT.

In the later part of his presentation, Mr Dualeh appeared to be more critical of the practices in the sector than we are used to hear from other speakers in the past. But having contributed significantly to the development of products during his 15 years professional career in the sector, he has earned not only the right but also the obligation to expose dangers that are lurking in the dark.

Talking about the problems and the pitfalls in the marketing front, Mr Dualeh took a closer look at the situation and revealed some of the important issues which, in his opinion must be approached with more caution.

The presentation, as usual was very well attended by the professional bankers of both categories that is by Islamic bankers and conventional bankers. The full text of the presentation will be published in the October 2001 issue of New Horizon.

Mr Suleiman Dualeh

Mr John Bauer

How the numerator and the denominator are to be specified in the Capital Adequacy Ratios (CAR), and, what 'risk weightings' are to be applied to Islamic financing assets? are the two issues that require a good deal of clarification according to Prof Simon Archer, who was invited by the Institute of Islamic Banking and Insurance, London to give a talk on "Capital Adequacy Ratios in Islamic Banking".

The lecture, chaired by Mr Suleiman Dualeh, CEO, Jersey ii-online Ltd, London, was held at the Institute's auditorium on 11th July 2001.

Professor Simon Archer is a Professor of Financial Management at the University of Surrey, UK. Professor Archer's work in this issue goes back to 1996 when the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) started to get concerned about the difficulties of applying the Basle methodology to the Islamic Banks which rests on the notion of 'risk weighted assets', which constitute the denominator of the CAR, while 'capital' constitutes its numerator. Problems arise in applying this methodology to Islamic banks, with regard to both the numerator (capital) and the denominator (risk weighted assets) of the CAR.

The presentation, as usual was very well attended by the professional bankers of both categories that is by Islamic bankers and conventional bankers. The full text of the presentation will be published soon.

Risk Management and Liquidity in Islamic Banking was discussed in detail by Mr. Toby Fiennes, Manager Financial Services Authority, in a talk delivered at the Institute's London auditorium on 26th June 2001. The talk was jointly handled by Mr. Toby Fiennes and Mr. Charles Plowden, both of U.K's Financial Services Authority - the authority that regulates all financial institutions in the U.K.

The speaker explained that there were several risks which need to be managed by financial institutions, be they Islamic or conventional. They include operating risk, credit risk, liquidity risk, interest rate risk, foreign exchange risk, litigation risk and regulatory risk.

Mr Fiennes said that FSA operates on a system that monitors, and also encourages financial institutions to monitor,their cash flows and to ensure that there is at least a broad match between the expected inflows and outflows.Continuing, Mr. Fiennes said that FSA was willing to grant, what he termed "Behavioural Adjustments".

Elaborating, Mr. Fiennes said that in an Islamic context FSA can discuss with an Islamic banking applicant some sort of behavioural adjustment; whether their depositors were truly depositors, or whether they were likely to demand 100% of their deposits in a problem situation or whether there would be profit and loss sharing arrangements. He said that risk management in the Islamic financial system would become easier to understand if three things were developed. One, a set of common international accounting standards, so that FSA could compare one institution with another. Two, standardized products and three, the role of the Shariah Boards. He said that the FSA was not willing to provide any special treatment to Islamic financial institutions in the U.K as it could give rise to complaints from others.

Mr. Fiennes said that FSA would apply the same fundamental principles of handling risk to the Islamic financial institutions as are applied to other financial institutions. He said that the main focus for the FSA was the emphasis on the importance of principles rather than rules as such.

Mr. Fiennes disclosed that FSA had not received any application for permission to

set up an Islamic bank during the three years FSA has been in existence. He said if an application were to be received, FSA would apply the minimum criteria of "Principles of Business" set by it. One of the most important aspects, which FSA considers before authorising a firm, is how its risk management system is designed to work. The FSA would expect a clear identification of the risks by the applicant, specially taking into account any risks it perceived in view of its status as an Islamic financial institution. The FSA, he said would like to see how Islamic banking was evolving elsewhere in the world and how major international bodies, such as IMF, view it. FSA would also like to see how regulators in other countries were approaching Islamic banking. Mr. Fiennes said that he appreciated the opportunity to be at the Institute and meet the people involved in Islamic banking.

The proceedings were chaired by Mr. Duncan Smith, Managing Director, ABCIB Islamic Asset Management arm of Arab Banking Corporation. Introducing the subject Mr, Duncan Smith said that risk management was an area which had been misunderstood and worst managed not only in the Islamic banking industry but in the conventional banking also. He said that the issue has been misunderstood not only by the people in the market but also by those who supervise these markets. He said that there were plenty of good risk managers in Islamic banks and if dealt with carefully the related issues could be resolved in due course.

Mr Fiennes presentation was followed by his colleague Mr Charles Plowden. He said that risk and liquidity management were important issues in banking and that a number of key regulatory issues in the case of Islamic banking still remain unresolved. One of the reasons in his opinion for this was that the FSA had limited experience of supervising purely Islamic banks. Regarding liquidity, Mr Plowden said that the dilemma for the Islamic banking sector was that although the liquidity could be very substantial, which is currently the case, there is a need to seek appropriate outlets to offloaded it and to identify that whether the lender of last resort was really available to all the participants in the market. He suggested that the establishment of a genuine interbank market would assist Islamic banks to maintain adequate liquidity and further development of Shariah compliant instruments should be encouraged.

The presentation, as usual was very well attended by the professional bankers of both categories that is by Islamic bankers and conventional bankers. The full text of the presentation will be published in the August 2001 issue of New Horizon, the Institute monthly journal.

April 2001 - Takaful and its Potential for Growth

The Institute of Islamic Banking and Insurance held its monthly lecture Programme on the 28^th of March 2001, at the Institute’s office in London. The lecture was chaired by Mr Tariq Hameed of William M. Mercer Ltd.

Mr Wan Zamri Wan Ismail , Chief Executive Officer of ARIM, presented his paper on "Takaful and its potential for Growth".

Mr Wan Ismail's paper included comparisons between conventional and Islamic insurance and explained the working of Takaful and Retakaful.

The Institute of Islamic Banking and Insurance held its monthly lecture Programme on the 28^th of March 2001, at the Institute’s office in London. The lecture was chaired by Mr Iqbal Khan, Managing Director, Amanah Finance, HSBC, London.

Mr Warren Edwardes, Head of Treasury and Capital Markets, Marketing & Sales, at KBC Bank, London, presented his paper on the ' The Demystification of Islamic Banking '. Mr Edwardes briefly spoke about the history of Islamic banking and continued his presentation towards its modern practices.

Sharing his extensive experience and knowledge in Islamic banking and finance, Mr Edwardes gave a thorough insight into the workings of Mudaraba, Musharaka, Murabaha, Baisalam, Baimuajjal and other key Islamic financial instruments. He also talked about the ethical dimensions of Islamic banking.

The lecture was very well attended by a cross section of representatives from Islamic as well as conventional financial institutions.

On the 28th of February 2001, the Institute of Islamic Banking and Insurnace hosted a lecture on " Islamic Banking and the UK Regulatory Issues. Mr Stephen Foster, Emerging Markets, Financial Services Authourity presented his paper about the UK regulatory procedures as well the issuse related with them. The lecture was chaired by Prof Rifat Abdel Karim, Secretary General AAOIFI.

Speaking at the seminar, Mr Stephen Foster, Manager, said " The Islamic financial sector is growing worldwide, particularly in the UK. We are aware of the competition and we have a duty to encourage and to support financial product innovation. London is a huge source of revenue for the FSA. It is vital to maintain the presence of London in the international financial market. It is a well-regulated, open and free and a good place to do business".

Discussing the issues such as Calculation of capital, Accounting and disclosure standards, Role of Shariah board and Liquidity management, Mr Foster said that Some of these issues have now been partly resolved because of the developments in the disclosure and accounting standards with Islamic banks and also due to the way the investors are treating their investments in Islamic institutions.

Like any other regulatory body, the FSA has accounting and disclosure standards. Any Islamic bank Incorporated in the UK must meet and follow the UK generally accepted accounting principals. When it comes to the Islamic financial market, the issue in the past was what is the consistent basis for measuring and looking at the accounts of the company? The debate about how to treat certain aspect of Islamic banking has driven the Islamic financial institutions in producing consistent accounting standards for Islamic finance. It is a step forward as the FSA needs to be able to look at the set of figures and be able to understand and compare them with either Islamic institutions or non-Islamic institutions.

Professor Karim, chairing the seminar disclosed a new development in this issue. He said, "At the initiative of the IMF, AAIOFI and IDB, an Islamic Financial Board will be created. The board will serve as an equivalent to the Basel Accord for Islamic banks."

Stella Cox, Managing Director Dawnay-Day, suggested that insufficient access to information had been an area that hampered distribution, although there was sufficient demand for Shariah compliant financial services from the Muslim community. People had been deterred by the fact that they had little information about the structuring methodology applied to Islamic fiancé investments

contracts. Most of the Shariah compliant retail financial products made available to date have been through private and smaller institutional sponsors that were not bale to benefit from the strength of mainstream distribution and had, perhaps been unable to reach as wide a marketplace as intended.

Roger Sanders of ihilal regarded the investor protection regulations under the present Financial Services Act 1986, as some of the most rigorous to be found anywhere in the world. He said "Quite rightly, the FSA, acting on behalf of the current regulator, the Personal Investment Authority, needs to satisfy itself on issues relating to capital adequacy and conduct of business. This means that the accounts of offshore institutions wishing to obtain UK authorisation must be capable of being clearly understood and drawn up in accordance with UK accounting standards. Self-evidently, many institutions have fallen at this all-important first hurdle in the past. The same institutions have also failed to grasp the importance of recruiting appropriately qualified and experienced personnel to run their UK business of funds. Until many of the institutions based in the Arabian Gulf get their acts together, these difficulties are likely to remain an insurmountable barrier for entry to the UK and EU market and, thereby, satisfy the pent up demand for Islamic products and services.

On the 17th of January 2001, the Institute of Islamic Banking and Insurance hosted a lecture on Developing, Structuring and Availability of Islamic Investment products in the United Kingdom. The lecture was chaired by Mr Waheed Qaiser, Head, Islamic Investment Unit, United Bank of Kuwait.

Mr John Bauer's presentation was on Developing and structuring Islamic investment products. Mr Bauer, who has been a senior executive for the thirty years with experience in financial services in several financial organisations, discussed the development and structure of products in order to comply with the Shariah, Islamic Investment Market and the key success factors in offering Islamic products.

Mr Bauer pointed out that there is a large market for Islamic investment as there are over 1.5 billion Muslims worldwide and Muslim investors control over $100 billion of the available funds. Mr Bauer also gave a detailed insight on the Islamic products used for investment. He also emphasised the need of Shariah supervisory boards in order to satisfy investors that investment will comply with Islamic standards.

Professor Rodney Wilson's presentation was on Islamic investment products available in the United Kingdom.

Prof. Wilson gave an overview of the Islamic investment funds available and discussed the fund management possibilities in the United Kingdom.

 He also selected some of the Islamic financial institutions and discussed their activities, for example HSBC, which according to Prof. Wilson has the potential to offer Islamic financial services to the local Muslim community. Prof. Wilson emphasised that "although London has emerged as the major western centre for Islamic finance so far it has failed to serve the United Kingdom Muslim community. The major retail banks and fund management institutions seem reluctant to take the initiative by promoting Shariah compliant products for the local market. Whether the new on-line financial services groups such as ii-online.com or ihilal.com break into this market remains to be seen, but this may be one way forward".

The lecture was very well attended by a cross section of representatives from Islamic as well as conventional financial institutions.