Egypt May Sell Foreign-Currency Sukuk, Deposit Certificates

Jan. 18 (Bloomberg) — Egypt may issue an Islamic bond or alternatively certificates of deposit in foreign currency for Egyptians abroad, the finance minister said.

“We are studying issuing sukuk,” or Islamic bonds, Mumtaz el-Saeed said today by telephone in Cairo. “We are comparing the benefits of issuing certificates of deposit with those of sukuk for Egyptians abroad,” adding that his preference is for the certificates. The government hopes to issue one or the other during the current fiscal year ending June 30, he said.

Egypt is struggling to recover from a year of unrest in the wake of the uprising that ousted President Hosni Mubarak last February. The economy grew 1.8 percent in the last fiscal year, the slowest pace in at least a decade, as income from tourism and foreign investment dried up. Tourist arrivals fell 33 percent in 2011, while international reserves are at the lowest level since March 2005.

The government formally requested a $3.2 billion loan from the International Monetary Fund on Jan. 16. An agreement is expected “within weeks,” Fayza Aboulnaga, minister of planning and international cooperation, told reporters.

Egypt turned down a similar arrangement with the fund in June, with officials saying they didn’t want to burden future governments with debt. Foreign currency reserves dropped 32 percent in the following six months while yields on all treasury-bill maturities rose this quarter to the highest since Bloomberg started tracking the data in 2006.

‘Sound Fundamentals’

El-Saeed said today the government would prefer not to increase the amount it requested from the IMF.

The economy “despite its solid and sound fundamentals,” faces challenges that have to be addressed by an economic program that safeguards stability and “creates conditions for a strong recovery,” the IMF’s mission said in an e-mailed statement today.

A program drafted by the Egyptian authorities is being discussed “with emerging political parties to ensure broad political support,” the IMF said. The mission met with the economic committee of the Muslim Brotherhood’s Freedom and Justice Party, and also talked to members of other parties and with the civilian body advising the ruling military council, it said.

The Brotherhood’s party gained the most votes in elections for the lower house of parliament, which is due to convene on Jan. 23, two days before the anniversary of the start of the uprising that led to the ouster of Mubarak. It is still unclear what authority the assembly may have. Activists have called for mass rallies on Jan. 25 to call on the country’s ruling generals to hand over power to civilians immediately.

‘Historic Transition’

The IMF’s meetings this week “provided us with a cross- section of views about Egypt’s current economic and political situation, and possible avenues to address the challenges facing the economy,”the fund said. “It also gave us an opportunity to explain the role the IMF could play in support of Egypt’s historic transition.”

Crescent Wealth aims for $3bn pool by 2019

AUSTRALIA’S first Islamic fund manager Crescent Wealth is aiming high, but will it deliver?

The company “would be happy” with $3 billion under management by 2019, which represents nearly a quarter of the $13bn pool of funds expected to be allocated to Islamic fund managers by then.

That’s a big number given the Crescent Australian Equity Fund, which launched in October, had about $US5.5 million under management, but it isn’t insurmountable given Crescent is the first and only Australian wealth manager specialising in Islamic investing.

CAEF is its first of four planned funds, the others being an International Equity Fund, an Income Fund and a Diversified Property Fund.

All four will form Australia’s first Islamic superannuation option and will be open to both institutional and private investors and will target Muslim community organisations, high net worth individuals as well as institutions both in Australia and offshore.

The group’s recently announced advisory board members include former non-executive director of Citibank Emeritus Professor Dianne Yerbury, former Macquarie Group duo Ted Pretty and Moustafa Fahour, Aon Hewitt chief investment officer Janice Sengupta and deputy chair of WorkCover Nicholas Whitlam.

Aon Hewitt helped seed CAEF – which has a target size of $500m – with an initial investment from its $2 billion fund, the Aon Master Trust, which offers the option of ethical investing and screens out industries such as tobacco, alcohol and gambling.

But even with a growing demographic of Muslims in Australia, Islamic finance is expected to be slow taking off Down Under.

Meezan Funds pay dividends of Rs 108 crore to unitholders

Karachi —The Board of Directors of Al Meezan Investment Management Ltd. (Al Meezan) in its meeting held on July 7, 2011 declared dividend for its three open end funds i.e., Meezan Islamic Fund (MIF), Meezan Islamic Income Fund (MIIF) and Meezan Sovereign Fund (MSF) for the period ended June 30, 2011.The total amount of final dividends declared amounts to Rs. 1,080,387,661 (i.e. over Rs. 108 crores). Interim payouts were made during the year for open- end funds and the total dividends being distributed for all funds amount to over Rs. 281 crores.

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Meezan Islamic Fund (MIF), Pakistan’s largest open-end equity fund in the private sector, has declared a stock dividend of Rs. 10.00 per unit for FY 2011 (i.e., 26.90% on the opening NAV of Rs. 37.17). The Net Asset Value (NAV) of units of MIF increased from Rs. 37.17 as on June 30, 2010 to Rs. 51.57 as on June 30, 2011, thus providing a full year return of 38.74 % to its unit holders. MIF has been awarded 5-Star rating by JCR-VIS being the largest private sector equity fund in Pakistan with net assets of about Rs. 450 crores.

Meezan Islamic Income Fund (MIIF) is Pakistan’s first and the largest Shariah compliant open-end income fund. The fund has declared a final stock dividend of Rs. 1.00 per unit. This is in addition to interim dividends of Rs. 5.25 per unit, making a total payout of Rs. 6.25 per unit for FY 2011. This translates into a total payout of 12.35% on the opening ex-div NAV of Rs. 50.62 for the year ended June 30, 2011. The total return earned by the investors was 11.77% for the year. At the close of the financial year 2011, the net assets of MIIF were Rs. 254 crores. Continue reading

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

Tata Group’s investment unit is seeking to attract about $100 million within three years to India’s first Shariah-compliant fund aimed at global investors, targeting equities in a country that lacks regulations for establishing an Islamic debt market.

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

Tata’s Shariah fund targets $100 m from Gulf in 3 yrs.

The Tata Indian Shariah Equity Fund has $3 million after being set up in June to tap investment mainly from the West Asia, said Mumbai-based Tata Asset Management, which oversees $5 billion in stocks and bonds, on Tuesday.

India has no Islamic finance policies, restricting sales of Shariah-compliant bonds in a nation with 157 million Muslims, according to Paris-based BNP Paribas SA and Standard Chartered. The nation’s benchmark Sensex stock index rallied 16.5% this year, compared with a 13.6% advance for MSCI’s emerging-market share index. Overseas investment in Indian equities climbed 86% this year to a record $26.1 billion as of November 1.

“India remains a great story for most institutional investors globally,” Rohit Chawdhry, who helps manage $350 million of assets at Bahrain Islamic Bank, the Persian Gulf country’s second-largest Shariah-compliant lender, said on Monday. “An Indian sukuk would likely see a blow-out response if there is one, given that there is almost nothing in terms of external sovereign issuance from India.”

A 13-member panel of experts headed by Raghuram Rajan, a finance professor at the University of Chicago and former chief economist at the International Monetary Fund, recommended in April 2008 that India introduce banking that complies with the religion’s ban on interest to attract capital.

Prime Minister Manmohan Singh said last week during an official visit to Kuala Lumpur that he would ask the central bank to learn more about Islamic finance from Malaysia, the world’s biggest market for sukuk. “There have been, from time to time, demands that we should experiment with Islamic banking,” he said.

RBI will conduct a study when the need arises, deputy governor Subir Gokarn told reporters in Mumbai on Tuesday.

Kerala’s plan to set up an Islamic investment company to sell India’s first sukuk was blocked by a state court in January after a petition was filed against it by Subramanian Swamy, whose Janata Party opposes the national Congress Party-led government. The Kerala high court heard arguments from Swamy, a former member of the national parliament, against the plan on Tuesday.

Profit to trump politics in Islamic finance

Mumbai/Kuala Lumpur The desire to power profit may top all opposition on Islamic finance in India.

A small Islamic fund has garnered surprisingly good demand in India as investors chase better returns, suggesting that the country could eventually embrace sharia banking despite strong political opposition.

Non-Muslims are the biggest buyers of Taurus Asset Management’s Sharia-compliant Ethical Fund, while Muslims have not resisted its conventional investments, challenging a widely held view that religious beliefs define investor demand in India.

The misconception that religion governs all activities of Muslims is a myth. Performance and returns are paramount, sharia is secondary, Taurus chief executive Waqar Naqvi said.

 Profit to trump politics in Islamic finance

Profit to trump politics in Islamic finance

The number of Muslim investors I have in my non-Sharia schemes is by far too many as compared to Muslims in the Sharia schemes.

Taurus’s $6 million Ethical Fund, which invests in Sharia-compliant stocks such as Hindustan Unilever, Tata Consultancy and Apollo Hospitals, is up 113.94 percent in the year to April 30 compared to a 59.36 percent rise for the S&P CNX 500 Sharia index.

The surprise welcome for this sharia fund could pave the way for the $1 trillion Islamic finance industry to tap the world’s second-fastest growing economy, although the road to a fully developed sector appears long and bumpy.

Central bank chief Duvvuri Subbarao said last month India needed separate laws for Islamic banking. But legislative changes are likely to face opposition in a country where testy Hindu-Muslim relations have triggered deadly riots.

A court in India’s southwestern Kerala state said in April the state government should not take part in an Islamic financial company after an opposition politician argued against state involvement in a firm that favours a particular religion.

There is some apprehension as the word Islam is used. People resist it, said K. Rahman Khan, deputy chairman of the Rajyasabha, India’s upper house of the Parliament.


India’s regulatory framework does not accommodate Islamic banks but allows several non-bank financial institutions to offer interest-free products and sharia-compliant funds, a potential channel to tap cash-rich Gulf investors.

H. Abdur Raqeeb, general secretary of lobby group Indian Centre for Islamic Finance (ICIF), said Gulf investors are looking towards India as a major investment destination.

India, which has the world’s third-largest Muslim population, has been an investment magnet due to its booming economy.

In 2009, when India’s main share index rose 81 percent, foreign investors were net buyers of $17.5 billion into the market. In the previous year, overseas investors had drained a net $13 billion as the shares plunged more than 52 percent.

But there is growing competition for capital around the world and investors want more reforms to privatise Indian state firms and relax curbs on foreign direct investment.

India wants to be a serious superpower in this part of the world so if they see even China is opening up for Islamic banking, then eventually it’s like peer pressure, said Rafe Haneef, managing director of Fajr Capital, an Islamic investment firm headquartered in Dubai.

Mohammad Faiz Azmi, PricewaterhouseCoopers’s global Islamic finance leader, is less hopeful about the industry’s future in India, saying political opposition meant that government rhetoric has not translated into actual development.

In fact, what we’re noticing is Islamic money coming out of India, he said.

Oasis aims to build Shariah-investment fund brand


Adam Ismail Ebrahim, CEO, Oasis Group Holdings

Oasis Group Holdings is the pioneer of Shariah-compliant investment products – both equity and property funds and REITs (real estate investment trusts) – in South Africa since it launched its first Islamic fund in August 1998, the Oasis Crescent Global Equity Fund. But over the last few years, using its product development and stock selection expertise acquired in the local market and armed with better-than-average performances, the group has ventured abroad and now aims to build the first global Shariah-investment fund brand, complete with a global distribution capability and a global asset management capacity. By June 2010, the Oasis family of funds will reach a staggering 63 funds making South Africa the third largest center for Shariah-compliant funds in the world after Saudi Arabia and Malaysia. The flagship Oasis Crescent Global Equity Fund is one of the world’s largest with $125 million assets under management. At end first quarter 2010, the fund achieved a 1-year return of 47.7 percent compared with the Average Shariah-compliant Fund Peer Group of 39 percent and a, annualized return since inception of 7.9 percent compared with the average Peer Group return of minus (-) 0.9 percent. These performances are underpinned by the numerous awards the group has achieved for its manifold funds. For instance, at the Falaika Islamic Finance Awards in April 2010 in Dubai, the Oasis Group won five awards including the “Best Shariah-compliant Global Equity 5-Year Fund” for 2009 for its Oasis Crescent Global Equity Fund. The prime mover behind the Oasis Group’s success and ambitious expansion strategy is Adam Ismail Ebrahim, CEO, Oasis Group Holdings, who has almost two decades of experience in the asset and fund management industry. Here Adam Ebrahim discusses the rationale behind the Oasis strategy and success, and the challenges for the Islamic fund and investment management industry going forward.

Can you update us on the latest developments at the Oasis Group in terms of your Islamic fund offerings?

We have been offering Islamic mutual funds since 1998, and subsequently a range of retail retirement funds and pension-related products. We now have an investment insurance license which allows us to offer Islamic endowments and to take the pre-retirement money and on retirement pay policy holders a monthly pension. This completes our wealth management platform in South Africa.

This is supported by two Islamic balanced funds. We had a medium equity balanced fund for the last eight years and we have now added a high equity balanced fund and a low equity balanced fund. This allows us to lifecycle a risk profile for clients. As such, people up to the age of 50 will go into a high equity balanced fund; those between 50 and 60 would go into a medium equity balanced fund; and in their wealth preservation part of their life when they have stopped working after 60 plus when they need a pension, they would go into a low equity balanced fund.

We also launched the first Shariah-compliant Income Fund in South Africa on April 1, which we project would give competitive yields with 48 hour liquidity with daily pricing. In the first two days after launch the fund has grown to R15 million – we anticipate this fund to reach R100 million within by June 2010, and R250 million by August 2010.

Who are you targeting your fund offerings at?

Everybody, because all our products are across the board from the retail investor saving R1,000 per month, to the high net worth investor, to the pension fund and to the institutional investor. One product fits all. In this way the products are efficient and you get scale.

We were also awarded a license in April to launch Europe’s first Shariah-complaint Income Fund, which is a UCITS III-compliant product domiciled in Dublin. The fund was launched in May and has a high component of sukuk investments in its portfolio. We project the blended income return at this time is likely to be 45 percent, which is a very attractive income return in the current economic climate.

As the sukuk market grows and we get more sovereign issuances, investors will then get exposure to the global sukuk and Murabaha markets with daily pricing and 48 hour liquidity. These are significant product developments in the Islamic investment space. Within the next few months we will also have our range of global balanced funds domiciled in Dublin – high, medium and low equity balanced funds. That will complete our product range in South Africa and globally.

So the global funds are aimed at investors abroad and servicing the offshore investment needs of South Africans?

Yes. The important thing is that we have distribution with global platforms like Citigroup, Goldman Sachs; with regional platforms like AmBank in Malaysia; and local platforms like Emirates Islamic Bank and Abu Dhabi Commercial Bank. We also have distribution tie-ups with insurance and Takaful companies like Salama and Mayban. We believe that the balanced and income range of funds really opens up the Takaful market because this market has been constrained because of the lack of risk profiled investment products in equities with the right regulatory framework and liquidity. We have a number of Takaful and Retakaful companies working with us, so we would anticipate over the next six months significant flows coming into those funds.

What is the difference between the balanced and income funds?

The balanced funds are comprised of property, equity and income investments in differing ratios. The high equity fund will have a higher equity component; the medium equity fund will have a medium equity component; and the low equity fund will have a lower equity component. You can work on the assumption that there will be a 40 percent equity component; 20 percent property component; and up to 40 percent income component comprising Murabaha and Sukuk investments. This is a more stable investment risk profile.

How many funds do you have now in the Oasis family?

We currently have 58 Shariah-compliant funds. When the balanced funds come on stream our total family of funds will increase to 63. I don’t think any other institution would be able to offer a suite of wealth management products in the Shariah space in South Africa and importantly globally as comprehensive as ours.

What are your total assets under management?

We currently have R31 billion ($4.5 billion) under management. We anticipate that over the next five years our assets under management would double or triple. With all these products in place, we are moving from a product development and internal investment phase to an external brand and distribution building, and client expansion phase.

Where are your target markets outside South Africa?

The target is global through various global wealth management platforms; regional through a number of regional wealth management platforms; and institutional. Our aim is to be on the top ten global wealth management platforms over the next two years. We also need to be on 20 regional and on 40 local wealth management platforms. We need market penetration of between 50-70 percent in the Takaful market, and between 50-70 percent in the Retakaful market. We plan to do this either through partnerships or directly.

We have the products. We are now developing a due diligence model with Barclays and Credit Agricole. We already have due diligence approvals with Deutsche Bank, Citigroup and Goldman Sachs. The due diligence process is quite well defined. We need now to turn the due diligence process into successful distribution agreements. We hope the market will see more of the Oasis and the Oasis Crescent brand globally. Starting the beginning of the second half of 2010 we will embark on a lot more brand building through TV and media campaigns, and through sales agents.

Branding and client connectivity is very important. We are going to be a household name in the UK. That is our objective. The UK is a primary market and outside South Africa that is going to be our second home market.

Why do see the UK as an important market for Shariah-compliant products?

There are various reasons. The UK has the same regulatory framework, tax regime, fund distribution models and product profiles as South Africa. It is virtually on the same central time zone as South Africa and is English-speaking. We understand the media profiles that we are working on. We hope to get our funds registered in the UK within the next three months.

What about the GCC markets especially Saudi Arabia with its huge private liquidity?

It is a market we will hopefully reach through our global, regional and local platforms, but it is not a market where we will go directly. We plan to have tie-ups with local Saudi institutions in due course. Our objective is to build the first global Shariah-investment fund brand.

Islamic Finance in India

Islamic Finance in India

Conventional Banking is a part of the financial system. It is not a complete financial system but when we talk about Islamic Banking we wish that all Shariah permissible financial activities should be carried out by a bank.

The basic difference between profitable mode of investment in banking and Islamic finance is that trading is prohibited for the former and it is must for the later.

There are some reasons for this prohibitions. There was a time when banking in combination of trading was practiced by bankers who happened to be merchants also. During the economic disaster of 1929-32 this combination of banking with trading proved to be fatal for a number of banks.

Since then banking laws, over the world were amended to restrict banking activities to risk-free interest base lending. As such trading is now strictly prohibited for a bank. Instead of ignoring this historical fact we should take a lesson from it.

In case of Islamic finance any kind of involvement in interest base lending is strictly prohibited. Therefore for an Islamic financial institution trading is the only option for making profitable investment.

In view of the above clash of fundamentals of the two Islamic banking is not possible without bringing about a drastic change in the legal framework and the same is not expected in a secular and pluralistic society like India.

To achieve our goals we should think in terms of Islamic financial system of which banking forms an important part. We should not insist on combination of trading with the banking when both the ends can be achieved separately.

In the presence of such a clash of fundamentals where a trade-off is not possible Islamic banking shall remain restricted up to the activities which do not violate banking law such as mobilizing deposits in current accounts, making interest-free advances on actual service charge basis, collection of bills and cheques, safe deposits vaults, transfer of funds, agency services like payment of bills, payment of pension, collection of taxes etc.

But the viability of Islamic bank on above fee based income where minimum capital requirement is Rs. 100cr and mobilization of minimum deposits of Rs. 1000cr within a year of its establishment looks doubtful.

Under the circumstances as explained above we may propose following alternatives:

In view of strong prohibition against any kind of involvement in interest, in Islam, a pious Muslim is reluctant to keep his savings even in current account with a bank which would utilize his funds for earning interest.

In order to make deposits in current account fully compatible with Shariah we may suggest that deposits moblized from Muslims in current accounts by a bank should be utilized in making interest-free loans preferably to Muslims and the government. Deposits in these accounts should be treated by the dealing bank as government business like PPF.

Since quarterly turn-over in comparison of balance outstanding is deemed to be quiet high, the turn-over commission  for dealing this type of business may be separately negotiated by the government with the dealing banks.

The necessary liquidity reserve as is applicable to the conventional bank deposits in terms of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) may be kept in government account as interest-free loan.

Rest of the amount may be disbursed to public in general and Muslims in particular as interest free loans. The cost of operations for deposits and advances may be shared by government and borrowers proportionately.

Security for Advance

Interest-free loans to the individuals may be made against sufficient collateral / personal guarantee. Post dated cheques may also be taken according to repayment schedule.


The loans to the public may be covered under state governments recovery act wherever applicable. All the dues should be treated as government dues and preference should be given in the matter of hearing in recovery suits as also in case of action taken against bouncing of cheques.

Provision for Bad-debts

In the light of the experience of the banks in the matter of defaults in such type of loans, sufficient provision should made by creating a benevolent fund contributed by the government and the borrowers proportionately.

As regards the mobilization of savings for investment on profit or loss sharing (PLS) basis, a number of opportunities are available out side the banking sector. The format of private fund manager suits most to this type of business.

Existing public and private mutual funds may also adopt Islamic financial practices subject to relaxation in the rules governing their business. The funds can easily, be mobilized in the form of securities like units issued by the fund manager for various schemes tailored to suit the requirement of investors.

Collection of funds may also be made in lump sum are in recurring installments (under systematic investment plan). Similarly the repayment of principal +- Profit or Loss (PL) may be made in lump sum are installment (under systematic withdrawal plan).

Proposal can be made to government for extending the status of mutual funds to the business of fund managers. Mutual funds should be allowed to access commodity exchange, foreign exchange financing of government projects and public and private industrial and housing projects.

In the matter of PLS financing efficient deployment rather mobilization of funds is a difficult task. To overcome this difficulty suggestions can be made to government for financing their different projects through Islamic modes under its recent policy “Public-Private-Partnership (PPP)”.

Various government projects can be financed through Musharaka, Murabaha, Istisna, Ijarah modes in a win-win situation. Crop loan to farmers and purchase of farm products at minimum support price (MSP) minus return on funds under administrative price mechanism (APM) can be made through Salam.

Similarly food credit to the government can be made available on cost + mark-up basis through Murabaha.

To encourage Islamic financial system involvement of representative of experts of Islamic finance, investors, fund manager including public and private mutual funds, banks, farmers, industrialists and specialized project financing institutions seems to be inevitable.

Wide discussions among all the perspective parties with regard to their requirements, expectations and constraints in the matter of mobilization of funds and their efficient deployment to exploit all the opportunities in different markets like capital market, commodity exchange, foreign exchange and government projects should be held before submitting a concrete proposal to the government for establishment and development of Islamic financial system.

Ahsanul Haq

Joint Director (Hony.), Islamic Banking Finance & Economics, Institute of Objective Studies

New Delhi, India.

Islamic Finance Will Accelerate India’s Economic Growth

Islamic Finance Will Accelerate India’s Economic Growth

A two-day international conference ends with suggestions to government to seriously consider introduction of participatory banking

New Delhi, September 1: The Government of India is prepared to consider the introduction of participatory banking, also known as Islamic banking, with “an open heart and mind”, Rajya Sabha (Upper House of Parliament) Deputy Chairman K Rahman Khan said here today.

Addressing a press conference at the end of a two-day international conference on the subject Mr Khan said Union Finance Minister P Chidambram had assured a delegation of the participants that the government was open to the idea of Islamic banking. The conference was jointly organised by Institute of Objective Studies and Indo-Arab Economic Cooperation Forum.

Mr Khan said that necessary institutional and regulatory framework had to be put in place to attract foreign direct investment (FDI) from the Islamic financial market. For this the government, Reserve Bank of India, Stock Exchange Board of India (SEBI) and the banking industry would have to take the initiative.

The market worth of such assets today is $700-800 billion and would soon grow to $3 trillion, he added. The conference was of the view that introduction of Islamic bonds (sukuk) and other financial products in India would lead to massive flow of funds.

Participatory banking, by reorganising Muslim moral and religious scruples against paying and taking interest as well as by respecting taboos on investment in breweries, casinos and pornography, would facilitate large-scale investments from Muslim countries. These values would also not come into conflict with the interests of other people.

Some of the important names in the field participated in the conference, including: Vice President of India Mohammad Hamid Ansari, former Chief Justice of India Justice AM Ahmadi, former Deputy Prime Minister of Malaysia Anwar Ibrahim, Chairman Kuwait’s Bayt Al-Mal Sulaiman N Al-Qimlas, former professor of Economics at Saudi Arabia’s King Abdul Aziz University Prof. MN Siddiqui and Minister-in-charge of West Bengal’s Land and Land Reforms Department Abdur Razzak Molla.

Also present were: CEO of US-based Concord Capital Partners Rudy Yaksick, Director General Fortune Institute of International Business Dr Ahindra Chakarbarty, professor of economics at Egypt’s Zagazig University Dr M Sultan Abou Ali, Executive Vice President of Turkey’s Bank Asia Yousuf Izzetin Imre, Advisor Beary’s Group (Bangalore) MH Khatkhatay, economist at Jeddah-based Islamic Development Bank Dr Mohammad Obaidullah, former professor of economics at Egypt’s University of Alexandria Dr AR Yousri, Managing partner of Kuwait’s Mashoura International Consulting Seraj Al-Baker, chief financial officer UTI AMC Imtiyazur Rahman, secretary Institute of Chartered Accountants of India Ashok Haldia, and chief economist at New Delhi-based National Council for Applied Economic Research Dr Abu Saleh Shariff.

The following three-point resolution was passed at the end of the conference:

  • Participatory banking has emerged as an alternative banking in a number of countries. It is based on equity, justice, fairness in financial transactions, both in mobilising resources and investment of the resources. Interest-based financial transactions are not equitable, just and fair to both borrower and lender.

Interest-based finance results in debt proliferation, increased speculation and instability. During last three decades conventional financial markets have introduced new products like mutual funds, venture capital, leasing, equity fund etc. which are not interest based but are in effect participatory financial instruments.

The success of mutual funds, venture finance and leasing is a testament to prove that participatory banking is viable in India. With slight marginal changes these can be acceptable to a section of Indians who would not deal in interest. This conference urges the Government of India, the regulators RBI and SEBI and the Indian banking industry to introduce participatory banking in India, by taking necessary legislative and regulatory measure for its establishment.

  • India has more than 150 million Muslims which is the second largest Muslim population of the world. Islamic faith directs that a Muslim should not take interest and/or pay interest. Participatory banking will fulfill the Islamic obligations and meet the aspirations of a large section of India’s citizens.

Hence this conference urges the Government of India, RBI, SEBI and the Indian Banking industry, to provide a viable alternative for the 150 million citizens to invest their savings in tune with their religious faith by establishing regulatory mechanism for the establishment of participatory banks and financial institutions in India.

  • The Islamic Financial Market, based on participatory principles is now of the order of more than 700 to 800 billion US dollar, growing at an annual  rate of 10% to 15% and poised for a robust growth in the coming years. In the next decade, it is estimated to be in the order of US Dollar 2 to 3 trillions. India needs huge and faster investment for infrastructure and power sectors to maintain the current pace of growth.

India can benefit by attracting large funds from the Islamic financial market. Islamic financial market is keen to invest in India. Approval given to Islamic financial products like Sukuk (Islamic bonds) will facilitate entry into India of billion of funds seeking Islamic ventures for profitable investment.

An institutional and regulatory mechanism is urgently required for establishment of such institutions which could attract funds from global Islamic financial markets.

This conference urges Government of India, RBI and SEBI and Indian Banking Industry to facilitate establishment of Participatory Banking and Financial Institutions by bringing forth necessary institutional and regulatory framework to attract and transfer Foreign Direct Investment from the Islamic financial market.

An Overview of Shariah-Compliant Funds


Shariah-compliant funds are investment vehicles which are fully compliant with the principles of Islam. The funds are prohibited from making investments in industries categorized as morally deficient, such as those related to gambling or alcohol.

Because Islam does not permit any form of exploitation, any kind of investment in conventional banking is outlawed. With the concept of debt also contrary to the principles of Islam, investment in highly leveraged companies is also not permitted for shariah-compliant funds.

The exclusions extend to potential investments in other funds which offer guaranteed returns. Any use of futures and options, either by the fund managers or by companies in which the funds invest, is also likely to attract close scrutiny by the funds’ supervisory shariah boards.

Due to the rapid growth in Islamic finance over recent years, the available range of shariah-compliant funds has expanded as financial services providers seek to tap into the increasing demand for investment products which respect the principles of Islam. The most common forms of shariah-compliant funds are described below.


Ijarah (also transliterated ijara) is a leasing-type fund that acquires assets such as real estate or equipment and then leases them out to another party in return for a regular rental payment. In all cases the fund retains ownership of the asset and must ensure that usage of the asset is at all times in accordance with Islamic principles.


Murabahah (or murabaha) is a kind of development fund that acquires assets and then sells them to a client at a predetermined price which reflects the fund’s cost of acquiring the asset plus a profit margin.

Sometimes described as “cost-plus” funds, murabahah investment vehicles do not hold long-term ownership of the assets, but instead generate a financial return from the payment obligations taken on by clients for a pre-agreed period.


Equity funds invest directly in companies through the purchase of shares. Given the difficulties involved in scrutinizing every aspect of how a company operates to verify shariah-compliance, this new, more progressive attitude allows investment in companies that operate in permitted industries, with the proviso that a proportion of the returns generated for the fund from any interest-bearing deposits held by the company must be donated to charity.


Commodity funds invest in physical commodities, although speculative activities such as short selling are not permitted. However, the fund manager may make use of istisna’a contracts, pre-agreeing the price of goods to be manufactured and delivered at a specified future date, with the manufacturer benefiting from advance receipt of the agreed sale price.

Commodity fund managers can also use bay al-salam contracts. These can be compared to conventional forward contracts, though the key shariah-compliant differentiator is that the seller’s position is protected because payment is passed to the seller on agreement of the contract rather than on its completion.

However, in return for the effective transfer of contract risk, the buyer is compensated by the fact that the agreed delivery price is set at a discount to the physical spot price.


  • Shariah-compliant investment funds provide a means of investing while still honoring the high morals and principles of Islam.
  • Shariah-compliant funds promote large-scale investment along lines similar to the niche ethical funds available to Western consumers.


  • The funds can be more expensive to develop and administer than mainstream funds due to the need for greater verification of compliance with shariah principles.

Action Checklist

  • Assess the full range of available shariah-compliant investment products before selecting the type you wish to use.
  • Consider how much risk you are prepared to assume before investing.
  • Mainstream investors may also wish to consider potential investments in shariah-compliant funds.

Dos and Don’ts


  • Pooled investment vehicles generally offer good value compared to direct investments, but you should still compare fund management charges between different providers.
  • Consider using index products such as exchange-traded funds to gain exposure to Islamic investment indices.


  • Don’t feel you have to verify the compliance of a fund yourself—contact a fund provider for advice.
  • Don’t expect guaranteed attractive returns, even from the most ethical forms of investment.

Shariah Compliance for PE Funds

Shariah Compliance for PE Funds

There has been a growing demand from investors domiciled in the Gulf Co-operative Council region for investment portfolios to include Shariah compliant instruments.

With growing credit crunch, LP defaults in other jurisdictions and other factors that have emerged from the global financial turmoil, the fund managers are evaluating options to tap investors in Gulf, which amongst other things require the fund to comply with the tenets of Islamic laws. This note briefly identifies some basic considerations whilst establishing a Shariah compliant fund.


Many Muslim investors conduct their commercial activities in accordance with an Islamic body of law called Shariah. Shariah, or literally “the way”, is based on the Quran (the religious text in Islam), Hadith (the sayings and actions of Prophet Mohammed), Isma (the consensus of Shariah scholars), Qiyas (reasoning by anology) and centuries of interpretation and precedents. Shariah law does not have uniform set of standards and interpretations.

While some institutions, such as the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institution, work to unify the various interpretations and opinions of scholars, but they are only recommendatory in nature. Whether an investor views a particular private equity fund and its investments as “Shariah-compliant” will depend upon the review and approval by a Shariah consultant or supervisory board engaged by the fund manager and/or the investors’ own consultant or supervisory board.

Investment Restrictions

In order to qualify as Shariah-compliant fund, a fund’s investment policy must contain restrictions that prohibit investment in industries considered haraam.

These restrictions usually prohibit investments in companies involved in the following industries and activities:

• Conventional financial services (including conventional banks and insurance companies);

• Gambling and casinos;

• Alcohol and pork products;

• Certain entertainment, such as gossip columns or pornography (but often including cinemas, music and publications);

• Weapons or military equipments; and

• Any other immoral or unethical activities identified by Shariah consultant or supervisory board.

What are considerations for fund managers?

An investment fund may be structured based on the Mudaraba contract under which an investor provides capital to another person/body (a fund manager), who uses their expertise to devise a suitable investment strategy. Any profits generated by the joint enterprise are divided between the manager and the investor in accordance with a predetermined formula. The financial losses are borne by the investor to a maximum of his capital investment. As indicated above, although there are several restrictions on investments that could be made by the fund, over a period of time there have been certain favorable interpretations by Shariah scholars which permit structuring of the investments and be within the four corners of the permitted activities. Some of the possible avenues include:

• Shariah prohibits usury, which may be defined as exploitation by the owner of a product which another requires. The payment of receipt of interest is usury and therefore investment in entities involved in lending (or borrowing) are prohibited. This restricts ability for most companies to have interest-based debt finance and invest surplus cash in interest bearing bank accounts and other investments. However, some Islamic jurisprudence accepts a debt to equity ratio of 1:3.

• Similarly, there is a school of thought that investors are not partners in a fund but are merely investors. Since no one investor has the power to veto, it would be wrong to ascribe responsibility to an individual for a particular transaction. This may allow some headroom to invest in entities which have merely incidental non-halal features, since investors will not be deemed under Shariah to have authorized the investment. In some instances any company engaged predominantly in halal business, but earns interest on account, an equivalent portion of any dividend paid to a Shariah compliant fund must be given to charity, be it at the fund or the investor level.

• An Ijara fund is usually established for the purpose of purchasing assets (property, machinery, etc) and then leasing those assets to third parties in return for rental income. This may be relevant for real estate funds. Legal ownership of assets remains with the fund as does responsibilities for the management of such asset. A management fee will normally be paid to the manager. It is important that the assets that are leased out must be used in a halal manner and the leasing arrangement is compliant of Shariah.

It is evident from above that there are number of interpretations whilst ensuring whether a particular activity or investment by the fund would be Shariah compliant. Therefore, funds appoint a Shariah consultant or supervisory board that reviews proposed investments and operations and issues opinions as to their compliance with Shariah. There are also certain service providers with their own Shariah boards, which may be engaged on a contractual basis to advice a fund.

Some investors may insist on establishment of Shariah Committee in relation to the fund, which would consist of Islamic scholars and which would advice the General Partners in relation to Shariah compliance. Compliance will be an ongoing obligation and the Shariah committee will be responsible for conducting annual audits to ensure that the fund and portfolio companies continue to operate in accordance with Shariah. One other option that is looked at is that a Shariah compliant parallel vehicle could be established with the main fund.

It is important whilst structuring the fund and preparing investments strategies, private placement memorandum and other fund documents that above restrictions are appropriately addressed for the fund to be able to attract investors for a Shariah compliant fund. With demand for providing opportunities to Gulf investors, the Shariah-compliant funds are growing in numbers and present opportunities to General Partners to tap wider investor base.