azerbaijan: emerging market islamic banking and finance

IIBI WORKSHOP
NEWHORIZON October–December 2008
Structuring Innovative Islamic Financial Products
Mohammad Shafique, IIBI editor of NewHorizon and programme development coordinator,
presents a summary of the second annual three-day residential workshop organised by the
Institute and held on 8th–10th August 2008 at Clare College, University of Cambridge, UK.
The recent turbulence caused by the subprime
crisis and resulting credit crunch has
not settled down. The flush of liquidity in
the Middle East, due to high oil prices, and
the problems in the conventional financial
sector is mainly driving the increasing
interest in Islamic finance. As Islamic
finance continues to consolidate its position
in the financial world, it inevitably comes
face to face with many issues that need
immediate attention. A key issue is the
dearth of professionals well versed in the
structuring of Shari’ah-compliant products.
The demand for Islamic financial products
and services will continue to be highest
where Islamic financial institutions are able
to offer a diverse range of instruments to
meet their clients’ needs, and also utilise
their liquidity in an effective way for
offering optimal returns to the investors.
Those organisations that have competent
teams in Shari’ah-compliant product
structuring will always have a competitive
advantage.
In this backdrop, IIBI organised its second
annual three-day workshop, ‘Structuring
Innovative Islamic Financial Products’. The
workshop, which was held at Clare College,
University of Cambridge, was supported by
Path Solutions, one of the leading systems
providers for Islamic finance industry, and
Bank Islam Brunei Darussalam (BIBD), a
Shari’ah-compliant bank striving to offer
innovative Islamic financial products and
services to the public in Brunei.
The workshop was run by Dr Humayon
Dar, chief executive officer of BMB Islamic
(an international Shari’ah advisory firm)
and member of IIBI editorial advisory panel.
Dr Dar was assisted by Dr Adnan Aziz,
Ms Haliza Abd Rahim and Ms Zaineb
Sefiani from BMB Islamic, and Kamran
Khalid Sherwani from Dubai Islamic Bank
(DIB).
After the introduction and overview of the
workshop, Dr Dar discussed the essential
ingredients of Islamic financial innovation,
such as knowledge of cutting-edge financial
technology, deep understanding of Islamic
commercial law and awareness of the needs
and trends in the industry.
In the next session, on working capital
products, Dr Dar elaborated on the
emerging trends in Islamic trade finance
with examples of some existing products
from the industry. As two key markets in
Islamic finance development are the GCC
countries and Malaysia in South East Asia,
he discussed the variations in Islamic trade
financing practices in these two markets.
Rahim followed with a discussion on an
innovative overdraft facility based on
mudarabah contract, which mimics the
economic effects of a conventional overdraft
facility while complying with Shari’ah
principles of profit-and-loss sharing (PLS).
In the following session, Sefiani explained
the evolution of Islamic private wealth
management, the concept of Islamic private
banks, various products available in the
market and the level of innovation they
employ, and the institutions that offer such
services. She also mentioned the available
asset classes, the future growth potential
and challenges.
Dr Adnan followed by providing a brief
overview of sukuk (Islamic bonds) as an
Islamic capital market instrument, how it
works with the example of the generic
structure of sukuk, its progress and the
secondary market prospects. He cited some
examples of innovative sukuk issued so far,
such as DP World exchangeable sukuk, DP
World’s PCFC convertible sukuk, Abaar
Petroleum sukuk, Tamweel’s sukuk,
Khazanah exchangeable sukuk and
Tabreed’s mandatory exchangeable sukuk.
He also described Shari’ah-compliant
contracts used in structuring such bonds,
their key features and innovative ways to
use such contracts to structure products that
meet the requirements of the diverse set of
investors and clients.
Then, Dr Dar provided an overview of
personal finance products. Broadly these
products are of two types: one offering cash
to the clients and other financing purchases
of the clients. After that, Dr Aziz explained
the cash-based products which are
structured with underlying contracts of
either bai al-ina or tawaruq. Bai al-ina refers
to sale of an asset by one party (financer) at
an higher price to other party (client) on
deferred payment basis and then purchasing
back same asset from the client at lower
cash price (and vice versa); as a result, the
client gets cash. This contract is mainly used
in Malaysia while tawaruq (reversed
murabaha), which involves at least three
parties (bank, client and brokerage house),
is widely used in the GCC and other Islamic
finance markets. For example, in the UK
tawaruq is applied by the Islamic Bank of
Britain, the country’s first fully-fledged
Shari’ah-compliant retail bank.
The following session was taken by
Sherwani, who provided an analysis of
asset-based personal finance products
offered by DIB and Emirates Islamic Bank
(EIB). These products cover a wide range of
financing, from travelling, education and
healthcare to household and auto finance.
He pointed out that commonly used
contracts in such transactions are murabaha
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