A Quarterly Magazine Covering all Aspects of Islamic Economics and Finance in Africa

Vol. 2 No. 1 Rabi'ul-Akhir - Jumadal-Akhirah 1438 A.H. January - March. 2017

ISLAMIC FINANCE.
READY TO FINANCE
A GREENER WORLD.
Africa Islamic Finance Report 2

TABLE OF CONTENTS EDITORIAL TEAM

EDITORIAL: Editor - In- Chief
Inna Lillahi Wa Ina Lillahi Rajiun.......................................................3 Mohammed Fawzi A. Amadu

COMMENT:
We Embark on the Second Mile of our Long Journey!.....................4
Editor
INSIGHT: Abdul Karim Muhammad
- Islamic Finance ready to Finance a Greener World...................5
Sukuk: An Analytical Study of their Nature, Structure
and Payoff arrangement...........................................................10
The Rise of Project Bonds and Sukuk as Part of Debt
Financing in the Middle East.....................................................21
Staff Writers
Abdul Aziz Ibn Shiraz
HORIZON:
Mohammed Awal
- Green Islamic Bonds..................................................................23
Hauwau M. Abdullahi
Nigerias Infrastructure Sukuk Will Support Growth But.............25
- Trust and the Future of Islamic Finance in Africa.......................27

IDEAS - SYMPOSIUM:
Fatwas & Finance: Impact of Islamic Religious Rulings on
Growth of Fixed Capital Investment.........................................28 Production and Design
Muwwafaq Y. Muhammad
IDEAS - OPINION:
- AAOIFI Shariah Standard on Gold...........................................37

IDEAS - ENCOUNTER:
- Islamic Finance: An ethical Alternative to Conventional
Finance?...................................................................................41

WORDS AND IMAGES PROFILE:

Meet New Bank of Ghana Governor, Dr Nashiru Issahaku ... 47
Tijarah Microfinance Bank Limited...............................................49
The Africa Islamic Finance
Report is published quarterly
WORDS AND IMAGES OPINION:
by
What did Americas Founding Fathers say about Bank
and Usury......................................................................52
Africa Islamic Economic
Foundation
Introducing Africa Islamic Economic Foundation............................53 Al Furqan Building, Behind
Vllage Water Reservoirs,
Lamashegu,
P. O. Box ER 516, Tamale,
Northern Region, Ghana
E-mail: editor@afrief.com
Website: www.afrief.com,
Tel: +233 243 65 54 46
+233 244 48 57 48
Africa Islamic Finance Report 3

EDITORIAL

INNA LILLAHI WA INA LILLAHI RAJI'UN

Hadiza Nuhu Muhammad:
Departed this Life!
W hen a soldier dies, we mourn. But we mourn knowing very
well that there will be other soldiers, equally great, to take
his/her place. But when we mourn a scholar, we know that
he/she cannot be easily replaced. There is an abundance of soldiers, but
scholars are relatively few. It is for this reason that the Holy Prophet
Muhammad had said that the ink of the scholar is more sacred than the
blood of the martyr.

The sad and sorrowful death of our sister, colleague and friend, Hajiya
Hadiza Nuhu Muhammad has certainly left an intellectual void at the
Africa Islamic Economic Foundation (AFRIEF). Afflicted with
delicate health since the beginning of 2016, Hajiya Hadiza, 44, quietly
departed this life on Saturday, 3rd of December, 2016, in her native
Zaria, Kaduna State, Federal Republic of Nigeria.

Hadiza Muhammad combined many roles at AFRIEF. Aside being its founding member, she coordinated the
work of the Foundation's Africa Women Entrepreneurship Forum (AWEF), was Editor in Chief of its
quarterly publication, the Africa Islamic Finance Report and coordinated its business development
department until her health prevented her services. Indeed, she was one of those people who have devoted
their lives to action with a view to re-establishing firm links with their societies and their Creator. Regardless
of the challenges she might have had in the course of discharging her responsibilities, everyone who had ever
had the privilege of working with her, always found her a special pleasure to work with. As a result of her
generous spirit and pleasant personality, she was loved by many. Her Islamic life was as beautiful as the
flowers that she loved so well, and her influence will forever remain in the lives of all who knew her.

Hadiza loved to read the Holy Qur'an, praying for and with others, spending time with family, laughing and
always wearing a smile on her face. She was a loving and caring person, devoted wife, mother, and friend,
always thinking of others first. To know her was to love her.

Hadiza will be deeply missed at the Africa Islamic Economic Foundation (AFRIEF), leaving behind now
only those fond memories we have of her. She died at the time the young organization needed her most. But to
Allah, SWT, the Glory. He needed her most. Hence, prior to her eminent death she requested that I, as her
husband, pass on to all of you, particularly her readers that we should not grieve her death. Rather, we should
celebrate her life and continuously pray for her to be warmly accepted by Her Creator. That sounds just like
her. Even in death, she still wished to celebrate life! Really, she always did enjoy life to the fullest. Her most
positive outlook on life was most admirable, even contagious some would say.

Such an extraordinary person Hadiza was. This is truly a great loss to our young organization, and to our
community as a whole. She will be profoundly missed by everyone whose lives she touched. Nevertheless, by
her own last wishes, let us remember Hadiza each time, with a gratitude to Allah, the Most High, and sincere
prayers to Him, to forgive her of all her shortcomings, shower His infinite mercies on her, and take her
departed soul to the highest of the stations of His Heavenly Abode. Amin!
Africa Islamic Finance Report
We Embark on the Second Mile of our Long Journey!
E xactly a year ago, we began in
the name of Allah, the
publication of the Africa
Islamic Finance Report (AIFREPORT)
as a quarterly e-publication of the
Africa Islamic Economic Foundation,
whose aim was is to create a platform,
where refined and innovative ideas in
the fields of Islamic economics and
finance can be freely expressed in
Africa. We hoped that the new
publication would provide an open
forum for intellectual and professional
discourse on the relevance of the
Islamic approach to modern economic
analysis and application, core ethical
investment principles and practices.
As AIFREPORT enters its second year
of publications, we thank Allah
Subhanahu wa Ta'ala for his many
kindness and blessings and turn
towards Him in repentance and
humility asking for His favors. For,
Allah is He who accepts repentance
from His servants and takes the freely
given offerings. Allah - He turns and is
all compassionate.(Quran IX: 104).
Though, a year in the life of a
publication is not long enough, but
considering our own limitations and
inadequacies, we must say with all
humility that we have come a long way.
With a small band of writers and very,
very limited resources we have
attempted to develop a Muslim analysis
of current economic events and
demonstrate that Muslims approach to
economic policy is distinct from the
approach of the liberals and the
capitalists.
We have also argued that the adoption
of this approach is essential for the
identification and the defense of the
economic interest of Muslim countries,
and in particular, African countries. We
have also attempted to look at economic
questions in a practical, down-to-earth
manner and we have addressed
ourselves to issues
with are of concern
t o M u s l i m
businessmen,
planners and trade
unionists.
We have argued
that an inability to
take into account
of the needs and
problems of the
ordinary man and
woman on the
streets has been the
greatest weakness
o f t h e
contemporary
Islamic Economics movement. This
movement has been led by academics
and professionals who are far from the
day-to-day political and economic
struggles of the common man. These
academics have contented themselves
with inventing a new university
discipline by providing Islamic
legitimization for the prejudices and
pre-suppositions of welfare theory.
Islamic economics and Islamic
banking has lost itself blind alley of
neo-classicism.
Meanwhile, Muslim countries and
particularly, third world countries have
continued to face a grim economic
reality. Economic power remains
concentrated in hands anxious to
deprive the Muslims to their economic
independence. AIFREPORT has
consistently argued for the
development of a coherent strategy to
reduce the Muslims world economic
vulnerability. Such a strategy must be
based on two planks.
On the other hand, top priority must be
given to the achievement of effective
regional integration in the field of
monetary and fiscal management, and
the harmonization of investment and
manpower plans. There is an urgent
need to develop an institutional
mechanism for identifying and
4
COMMENT
executing integration projects and for
the removal of all restrictions on the
movements of goods, capital and
labour throughout the Muslim World.
AIFREPORT has argued that the
Organisation of the Islamic conference
and its agencies have a key role to play
in this respect.
Secondly, there is also an urgent need
to reappraise the nature of our
economic relations with the west.
What benefits have we derived from
our present relationship with
international agencies such as the IMF
and World Bank? How secure are the
financial-and-real-assets we have
chosen to deposit in the west? What are
the forces seeking systematically to
reduce our share in the gains from trade
in energy products and in the other
commodity and factor markets? What
are the mechanisms which ensure that
in spite of spending billions of dollars
in the west, our technological
dependence remains perpetually
undiminished?
As it embarks on the second mile of its
long journey, AIFREPORT will seek to
address the foregoing questions in our
subsequent editions. We are grateful to
Allah that the number of people aware
of these issues and interested in our
analysis is increasing rapidly.
Africa Islamic Finance Report 5

INSIGHT

ISLAMIC FINANCE.
READY TO FINANCE
A GREENER WORLD.
Financing a greener world using ethical funding options

G rowing global concerns for achieving sustainable and environment-friendly development has
led to a sharp uptake in green projects. The likes of the World Bank, European Commission,
United Nations Environment Program and other international agencies have all championed
the cause for achieving a cleaner, resilient and sustainable world economic ecosystem. Along with this,
an increase in financing has also been required to fund such green projects. In 2008, the World Bank
pioneered the concept of 'green bonds' which gives investors an innovative way of supporting clean
energy, mass transit, and other low-carbon projects. Since then, financial instruments supporting
green projects have rapidly been on an upward growth trajectory.

Along these growth lines, Islamic finance has a tremendous opportunity to develop instruments that
can support the global surge in green projects. The principles of Islamic finance share substantial
synergies with the concept of environment-friendly and sustainable development. As a result,
Malaysia being a major marketplace has embarked upon undertaking necessary initiatives to
develop Islamic financial instruments, structured to fund green projects. Moving forward,
Malaysia's initiatives are likely to spearhead similar efforts by other jurisdictions leading to the
creation of a new growth
Africa Islamic Finance Report
Financing the Global Green Economy: Trends, Gaps
and Opportunities
According to the Organization for Economic Co-
1
operation and Development (OECD) , Global population
is expected to number more than 9 billion people by the
year 2050. Such a population growth trajectory will create
an unprecedented rise in demand for energy, water,
transport, urban development and agricultural
infrastructure. Consequently, the ability to meet this
bourgeoning demand while respecting global
environmental and sustainability obligations will be
challenging. As a result, a special report by the World
Economic Forum (WEF)2 states that the only way to
alleviate risks from future climate change and
environmental degradation is to adopt a 'green economic
growth' path which achieves growth and development
while reducing greenhouse gas emissions and increasing
natural resource productivity.
The world has made some progress towards achieving a
sustainable 'green growth' modality. For instance,
according to the United Nations Environment Program
(UNEP), global investments in the renewable energy
sector amounted to USD257bln in 2011, a six-fold
increase from 2004. The same report adds that the
Investments in 2012 were 93% higher than in 2007, the
year before the global financial crisis3. The tremendous
investments growth was driven partly on account of
favourable policy support by government agencies
leading to rapid decreases in the costs of renewable
energy.
Nonetheless, substantial amounts of investments are still
required in the water, agriculture, telecoms, power,
transport, buildings, industrial and forestry sectors to meet
future population needs. According to the OECD, under
current growth projections, approximately USD 5 trillion
per year is required in investments over the next two
decades.
However, the McKinsey Global Growth Institute has
estimated that the current rates of environmental
degradation are unsustainable for the long-term
functioning of the global economy and it is essential to
move towards securing greener growth. As a result, in
addition to the USD 5 trillion figure, the WEF report on
green investments estimates at least an additional USD0.7
trillion per year is required to meet the green development
challenge. This additional cost is required for clean-
energy infrastructure, sustainable and low-carbon
transport, energy efficiency in buildings and industry, and
for forestry to limit the global average temperature
increase to 2C above pre-industrial levels. In other
sectors, incremental investment needs are unknown and
more work is needed to understand these
6
INSIGHT
3. Global Infrastructure and Additional Green
Investment Requirements (2010-2030).
c
USD5 trillion per year
Additional investment requirements
in a green growth senario:
Agriculture: USD125 bln
USD0.7 trllion per year
Telecommunications: Building &
USD600 bln Industry:
USD613 bln Building &
Industry:
Transport
USD331 bln Forestry:
USD40 bln
Infrastructure:
USD805 bln
Transport
Energy:
USD139 bln
vehicles:
USD845 bln Transport
vehicles:
USD187 bln
Forestry:
Water: USD64 bln
USD1,320 bln
Energy:
USD619 bln
Investment that needs to be greened
The Global Green Bond Market
Consequently, there was a critical need to develop
financing channels and instruments that can support the
liquidity needs of the green infrastructure development
projects. Earlier in a landmark development, the World
Bank had launched the Strategic Framework for
Development and Climate Change in 2008 to help
stimulate and coordinate public and private sector
activity to combat climate change. In the same year, the
World Bank pioneered the issuance of the first ever
Green Bond: an innovative fixed income instrument that
supported eligible projects aimed at mitigating climate
change and encouraging environmental sustainability.
Since then, the World Bank has raised USD6.4bln in
Green Bonds through 67 transactions and 17 currencies6.
Green bonds are now increasingly being used to fund
projects involving clean energy, mass transit, and other
low-carbon projects that can help countries adapt to and
mitigate climate change, while giving investors fixed-
income investment opportunities that have a positive
impact. Two entities of the World Bank Group the
International Bank for Reconstruction and
Development (IBRD) and the International Finance
Corporation (IFC) have been instrumental in the
development of the global green bond market. In the
case of green bonds issued by the IBRD and IFC,
investors benefit from the AAA (Moody's) / AAA
(S&P) ratings of the issuers and also help rally the
climate financing the world needs to confront the
7
challenges of climate change .
Investors ranging from pension funds to global asset
managers, leading companies and central banks are now
refocusing their investment strategies to include climate
considerations. For example, IFC's USD1bln green bond
issued in November 2013 attracted a new set of green
bond investors, including the Ford Motor Company,
Microsoft, and the central banks of Brazil and Germany.
A floating rate green bond.
Africa Islamic Finance Report 7

INSIGHT
Green bonds are now increasingly being used to fund projects
Sukuk Working Group was established in 2012 by the
involving clean energy, mass transit, and other low-carbon projects
Climate Bonds Initiative, the Clean Energy Business
that can help countries adapt to and mitigate climate change, while
Council (CEBC) of the Middle East and North Africa, and
giving investors fixed-income investment opportunities that have a
the Gulf Bond and Sukuk Association. This working
positive impact.
group had been mandated to identify green energy
projects that fall under Shariah-compliant categories for
issued by the World Bank in January 2014 drew large potential investors. A 'Green sukuk' is the Shariah-
institutional investors such as BlackRock, TIAA-Cref and compliant version of a green bond and represents
Goldman Sachs Private Wealth Management in addition Shariah-compliant investments in renewable energy and
to other pension funds and sustainable investors8 . other environmental assets. Green sukuk notably address
Notwithstanding the above, there still remains vast the Shariah concerns for protecting the environment.
potential in the global green financing market. Although Most recently, efforts for developing the green sukuk
rapidly expanding, the volume of the global green bond sector are being spearheaded by authorities in Malaysia
market is modest: the overall value of the corporate green and Dubai in the United Arab Emirates. The Dubai
bond market was estimated as US$118bn as at the end of Supreme Council of Energy (DSCE) and the World Bank
6
April 2016 . have joined together to design a funding strategy for
Dubai's green investment program using green bonds and
There has been a sharp increase in issuances as a growing sukuk. The DSCE has a green investment program in
number of corporates in North America, Europe and Asia place since 2010 as part of the Dubai Integrated Energy
had tapped the green bond market. Overall, the potentials Strategy (DIES) 2030 that aims to secure a sustainable
for the global green financing market are upbeat given supply of energy for the Emirate. Dubai has a target of
the increasing awareness of investors and gradual drawing 1% of its energy needs through solar means by
transformation of economic systems towards a more 2020 and green bonds and sukuk would play a crucial role
sustainable and green growth path. in arranging the necessary financing required to
implement the various green projects.
Islamic Finance and the Green Economy
In Malaysia however, the involvement of the Islamic
As the world economy gradually moves towards adopting financial sector in the Green economy had already begun
a green and more sustainable development model, the a few years back. Green technology has been identified as
Islamic finance industry has tremendous opportunities to a major growth area by the Malaysian government under
develop Shari'ah-compliant green financing facilities to the National Green Technology Policy in 2009.
meet the expanding liquidity requirements in this sector. Following this, a number of government-led initiatives
The global Islamic finance industry has continued its have been implemented with a view to position the
sustained double-digit asset growth. Estimates of the 15
current size of the industry range from $1.88 Trillion to country as a hub for green technology by 2020 .
$2.1 Trillion with expectations of market size to be $3.4 Alongside, the potential for Islamic finance stakeholders
Trillion by end of 2018. to facilitate the financing and investments in Malaysia's
green economic sector have also been upbeat. Given
Such figures under-estimate the size of the Islamic finance Malaysia's progressive strides in its Islamic financial
industry by failing to recognize Islamic Equities as an sector, the Shariah-compliant green financing sector has
asset class, as well as distinguish between an asset being tremendous opportunities to innovate and expand itself
compliant by design or filter. both within and beyond the Malaysian financial markets.

Islamic finance has substantial synergies with the Green

economic concept and fits in well with the ethical
requirements of green projects.
The Islamic law of Sharia which governs the Islamic financial system has ample
injunctions which emphasize the need to care for the environment and forms of life on
earth while ensuring the proper usage of natural resources.

ENERGY ECONOMY
Enhance the
Islamic finance endeavours to promote an ethical financing and economic concept that Seek to attain
energy
independence
ENVIRONMENT national
economic SOCIAL
Conserve and development
extends beyond being a component of a financial system, but as part of a total value- & promote
efficient
minimise
impact on the
through
the use of
Improve the
quality of
life for all
based social system that is driven by the principle of public interest. utilisation environment technology

As such environmental protection and sustainability fits in

nicely with the Islamic finance agenda that seeks to
enhance the general welfare of society. The National Green Technology Policy
At present, Islamic finance has largely remained absent
from the Green financing sector in the global markets. In
an effort to facilitate the Green Bond concept, a Green
Africa Islamic Finance Report
Malaysia: Leading Ethical Green Financing
Initiatives
Green financing initiatives in Malaysia are already in
place. The Malaysian Government has implemented
various initiatives promoting green financing through the
major financing channels including banking, equity
market and the fixed-income market. More importantly,
Malaysia has proactively included formal guidelines on
the use of Islamic financing facilities to support the green
technology sector. The three major Green financing
initiatives currently in place by the Malaysian
Government are as follows:
Green Financing
Initiatives in Malaysia
Green Socially Environmental,
Technology Responsible Social and
Financing Investment Governance
Scheme (GTFS) (SRI) Sukuk (ESG) Index
Green Technology Financing Scheme
The Malaysian Government first announced the Green
Technology Financing Scheme (GTFS) in October 2009
when the Malaysian Prime Minister cum Finance Minister
presented the National Budget 2010. The scheme
commenced with a budget of MYR1.5 billion
(USD0.45billion) soft loan to companies and users of
Green Technology. The Malaysian Government
announced to subsidize funding costs of Green
Technology financing by 2% while also Commercial
banks in Malaysia are eligible to participate in the GTFS
and have been actively supporting the scheme in view of
the potential market for environmental business.
guaranteeing 60% of the financing amount via Credit
Guarantee Corporation Malaysia (CGC). The remaining
40% financing risk is to be borne by participating financial
institutions
Malaysia's Islamic financial institutions have been important
catalysts in driving the growth of the nation's green economy. Over
the past four years, Islamic financing has grown to account for over
40% of all funds granted under the Green Technology Financing
Scheme, facilitated by Malaysian Green Technology Corporation.
Drawing on their pioneering role and accumulative knowledge and
experience, Malaysia's Islamic financial marketplace stand poised
to capitalise on the rapid growth of the global green technology
sector.
Ahmad Hadri Haris,
Chief Executive
Malaysian Green Technology Corporation
8
INSIGHT
Along with the conventional banks, Islamic banks in
Malaysia are also eligible to participate in the scheme
known as Green Technology Financing Scheme Islamic
(GTFS i). Effective 11th October 2013, following a
restructuring exercise, the scheme now offers users either
a rebate of 2% on the interest or profit rate, or a
government guarantee of 30% on the financed amount. As
of July 2016, the GTFS has approved a total of 243
projects with financing amounting to RM2.79 billion
under this scheme through both conventional and Islamic
facilities
This financing has benefited green technology companies
in the energy, transport, building as well as waste and
water management sectors. It is anticipated that these
projects would help avoid 3.14 million tons of carbon
dioxide equivalent per year, while generating RM5.51
billion in green investments and creating over 4,000 jobs.
Key Highlights of the GTFS / GTFS i
Facilities Green Technology Financing Scheme (GTFS)
Green Technology Financing Scheme Islamic (GTFS -I)
Purpose To finance investments in the utilization of green technologies that meets the scheme
objective.
Investment in Green Technology refers to products, equipment, or systems which
satisfy the following:-
Minimizesthe degradation of the environment
Investment Criteria Has zero or low greenhouse gas (GHG) emission
Safe for use and promotes healthy and improv ed environment for all forms of life
Conserves the use of energy and natural reso urces ;
Promotes the use of renewable resources.
Financing Limit Up to MYR100 million
Financing Tenure Up to 10 years
Eligible Financing Facilities All types of financing facilities under Islamic and Conventional financing
Total GTFS funds allocated
MYR3.5 billion
to the Scheme
Total Financing Approved* MYR2.79 billion
Balance of GTFS Fund* MYR 710 million
Total No. of Projects
243
Financed*
Socially Responsible Investment (SRI) Sukuk
Malaysia's initiative in developing Shariah-compliant
green fixed-income instruments received a significant
boost when the Malaysian Prime Minister announced in
the Budget of 2014 to set formal guidelines for developing
and issuing SRI sukuk, which would be raised to fund
sustainable and responsible investment projects.
Accordingly, the Malaysian capital markets regulator,
Securities Commission Malaysia (SC) finalized a
framework for socially responsible sukuk, which was
launched in the third quarter of 2014.
The SRI Sukuk is the Islamic capital market's response
to the rising trend of green bonds and social impact
bonds that have been introduced globally to finance a
wide range of sustainable activities such as those
addressing the needs of the country like infrastructure
and small businesses,
Dato Dr Nik Ramlah Mahmood,
the Deputy Chief Executive, Securities Commission
Malaysia
Africa Islamic Finance Report
The SRI Sukuk guidelines were instrumental in attracting
Malaysian issuers to raise funds through green sukuk while
attracting investors from the Western countries who are familiar
with the concept of socially responsible investing but have yet
to venture into the sukuk market. This, in turn, contributed
significantly in raising the profile of sukuk in the global fixed
income markets, thus enabling the sector to expand on its
offerings.
Environmental, Social and Governance (ESG) Index
In addition to the SRI Sukuk, the Malaysian Prime Minister also
announced the formation of an Environmental, Social and
Governance (ESG) Index in Budget 2014 which would list
companies that demonstrate high accountability, transparency
and sustainability, including inclusiveness in diversity
encompassing gender, age and ethnicity. This Index would
enable investors to divert their capital into companies that instill
high levels of environmental, social and governance standards.
Effectively, the ESG Index enables green investors to channel
their funds into eligible companies that comply with the green
economic growth and developmental requirements along with
upholding social and governance responsibilities. To lead the
momentum in this asset class, the government also announced
that its related entity, Valuecap Sdn Bhd would allocate
MYR1billion to invest in companies that score high on the ESG
Index. The proposed index would also feature Shariah-
compliant companies.
The Malaysian bourse, Bursa Malaysia, has implemented
efforts to launch the ESG index, expected by the end of 2014. In
this regard, Bursa Malaysia has formed a partnership with
United Kingdom's FTSE, under which Bursa Malaysia rolls out
an FTSE4Good Index series covering 14 sectors and based on
Bursa-listed companies designed to promote transparency and
openness. It was the first in Asia to be part of the globally
benchmarked ESG Index series.
The introduction of a Bursa Malaysia-focused ESG
Index Series will provide the marketplace an enhanced
advantage in Asean, especially in attracting theUS$3.4
trillion (RM10.9 trillion) socially responsible
investments from around the world,
Datuk Tajuddin Atan,
CEO, Bursa Malaysia
The introduction of the ESG Index was a monumental
development that gave due recognition to companies that
already had high socially responsible practices and set an
encouragement for others to follow suit.
Meanwhile, the combined SRI Sukuk and the ESG Index
initiatives has created a new asset class for investments in the
funds sector in Malaysia. Fund managers are expected to offer
new green investment funds that would invest in eligible SRI
Sukuk and ESG Index instruments, thus creating a new market
in the green financing and investments segment. The offering
9
INSIGHT
would have tremendous potentials to attract business from
overseas investors, particularly from the West, where there is a
gradual but expanding preference for green investment
opportunities.
Ethical Finance for Funding Green Projects: Promising
Prospects
The use of ethical finance to fund green projects is a promising
business proposition given the synergies between the two
concepts. There is a growing awareness among the global
demographics on the need for ethical financial solutions. A
recent survey by the Economist Intelligence Unit (EIU) on
private banking practices and strategies revealed that private
bankers expected ethical investments to increase by an annual
average of 9.1% for the next five years, with 31% of
respondents forecasting a double-digit annual percentage
increases17. As such, funding green projects using ethical
finance provides a strategic combination.
In this regard, the prospects for Islamic finance to contribute
towards a sustainable global ecosystem are tremendous. In
Malaysia, the Islamic banking system has already contributed
towards this agenda by supporting the Green Technology
Financing Scheme of the government. This year, initiatives
have been put in place to develop a green sukuk and green/
ethical equities index in the country's capital market. The
government has firmly placed its support behind formulating a
holistic Islamic financial ecosystem that is supportive of a
sustainable and innovative growth of this sector. Malaysia is
well position to lead the development of this sector given that
its Sukuk market is the largest in the world in terms of volumes
in both the primary and secondary markets. Moving forward,
Islamic financial institutions now have to build their capacity
and capabilities to capture the growth prospects and
opportunities available in the green projects industry. It is
expected that Malaysia's
It is clear from statistics that we need to rechannel
trillions from the existing assets entrenching
today's unsustainable economy into greener growth.
However it is less clear where the necessary finance to
deliver the change will come from and how to mobilize it to
enable this transition.
United Nations Environment Programme
Symposium on Financing a Green Economy
initiatives are likely to be followed by other key Islamic
finance jurisdictions in Africa. Collectively, the global Islamic
finance industry has an opportunity to penetrate into a new
niche segment which has large untapped business potential.
Given the firm support by the world's major bodies including
the World Bank, United Nations, European Commission and
others, the Green finance and economic sector is bound to
experience strong growth in the near future. Consequently, the
global Islamic finance industry, in turn, has tremendous
opportunities moving forward to penetrate into this rapidly
growing Green financing sector and expand its market
outreach.
Africa Islamic Finance Report
SUKUK: AN ANALYTICAL STUDY OF THEIR NATURE,
STRICTURE AND PAYOFF ARRANGEMENT
BILAL AHMAD MALIK
Abstract:
The Sukuk are asset based, tradable and Shari'ah
compatible Islamic securities which represent the
ownership in an asset and shares the profits and risks of
the business. The Sukuk instruments are developed on the
basis of basic Islamic principles of financing like
Mudarabah, Musharakah, Ijarah, Salam and other
structures of Sukuk financing. In the past few years, the
global Sukuk market witnessed solid growth, as official
reports suggest that annual Sukuk issuances almost
tripled from US$45bln in 2011 to US$118.8bln in 2014.
The present study examines the six different Sukuk
structures, which actually emerged in early 1990s and are
now increasingly traded in both key markets like
Malaysia, Saudi Arabia, UAE and Iran as well as in
emerging frontiers such as Indonesia and Turkey. In this
back-up, this study classifies Sukuk contracts as pure
debt, equity-based, and asset-backed. Further, this study
prudently specifies the contract peculiarities like the
Shari'ah permissibility, applicability and potential cash
flow pattern of the different Sukuk instruments
(Mudarabah, Musharakah, Murabaha, Ijarah, Salam, and
Istisna) and will focus on how the Sukuk financing can be
modelled for building it in practical applicability for the
overall development of industry.
Key words: Sukuk, Payoff Arrangements, Market
I. INTRODUCTION
The Arabic term 'Sukuk' is actually plural form of 'Sakk'
which literally means certificate, legal instrument, deed
or check and technically sukuk are certificates of equal
value representing undivided shares in ownership of
tangible assets, usufruct and services or the assets of
particular projects of special investment activity
(AAOIFI, 2010). The emergence of Sukuk instruments
has been of the significant developments in Islamic
capital market in recent years. It approximately
contributes 90% out of the total Islamic capital market.
Historically, the application of Sukuk has been with the
Islamic world since its formative period. In the 1st century
Hijri (corresponding to the 7th Century AD) the Umayyad
government would use sakk al-bada'i certificates as the
method of transferring financial obligations originating
from trade and other commercial activities. For example,
10
INSIGHT
sakk al-bada'i certificates where given to government
officials instead of cash salaries and they would later
redeem such certificates in line with their day-to-day
consumption of goods or groceries (Brugnoni (n.a);
Kamali 2000, DIFC Sukuk Guidebook 2009, p. 9). Some
classical commercial writings even suggest that during
Turkish Empire, Sukuk instruments were used to finance
re-development projects after the devastating wars of 11th-
13th centuries which resulted in the mass destruction of
state and public infrastructures (Jalil 2005; Dusuki 2009;
Vishwanath & Azmi 2009; Shaikh 2010). However, the
revival of Sukuk in its contemporary form and application
lies in the decision of the Islamic Fiqh Academy, holding
its Fourth session, in Jeddah, (Kingdom of Saudi Arabia),
from 18 to 23 Jumada Thani 1408 H (February, 6 to 11,
1988). It described Sukuk as:
Muqaradha Certificates are investment instruments which
allocate the Muqaradha capital (Mudharaba) by floating
certificates, as an evidence of capital ownership, on the basis
of shares of equal value, registered in the name of their
owners, as joint owners of shares in the venture capital or
whatever shape it may take, in proportion to the each one's
share therein. It is preferable to call this investment
instrument
`Muqaradha Deed".
The efforts of Islamic Fiqh Academy provided theoretical
framework of Sukuk as a result first version of modern
Sukuk came into existence in 1990 in Malaysia, when a
private firm of Malaysia issued a Sukuk with RM125
million (equivalent to US$33mln). Today, Malaysia has
become the world's largest Sukuk market by corporate
Sukuk and holds 67% of the total global Sukuk share (IRTI
2015). Since its commence in early 1990s, the global
Sukuk market witnessed tremendous growth, as annual
issuances almost tripled from US$45bln in 2011 to
US$118.8bln in 2014 (Ariff, Iqbal & Shamsher 2012;
Rezaei 2013). Of significance, growth was driven by both
the key markets of Malaysia, Saudi Arabia and the United
Arab Emirates (UAE), as well as emerging markets like
Turkey and Indonesia. More recently in 2014, landmark
issuances were recorded from the UK, Hong Kong,
Senegal, South Africa and Luxembourg cementing the
Sukuk market's status as a viable and competitive source of
funding (Global Sukuk Report 2015). In face of its recent
development it could be said that Sukuk being a Shari'ah
Africa Islamic Finance Report 11

INSIGHT
compliant alternative to interest-bearing investment funding effort but with a limited period over which the
certificates or fixed income securities has enabled Islamic
Sukuk holders would receive their money back with a
investors to produce 'interest-free' certificates which
share of profits. The another form of Sukuk called as
represent a right to receive a share of profits generated by
mudarabah Sukuk offers an opportunity to general
an underlying asset which is capable of being traded on the
investors to invest or project where by issuer will act as
secondary market. The Accounting and Auditing manager to manage the business established by using
Organization for Islamic Financial Institutions (AAOIFI)
funds of Sukuk holders. The issuer is mudarib and
which issues standards on accounting, auditing, subscribers are Rab-ul-mal (investors) while realized
governance, ethical, and Shari'ah standards has mentioned
funds are capital of the entity. Sukuk holders share profit
14 different types of Sukuk. This classification is largely
according to agreed ratio and bear all losses [shared among
based on the overall financial transactions involved in the
sukuk-holders as per equity stake]. Reward of issuer would
formation of Sukuk. For example, if a Sukuk structure is
be in the form of actual profit sharing. Another form is
based on the principles of Musharakah it is called as Sukuk
asset based Sukuk such as ijarah, murabaha and others one
al-Musharakah. The present paper is primarily an attempt
may issue an Ijarah Sukuk, which is a lease agreement
to study the efficiency of Sukuk by examining mechanism
while another business may issue Istisna Sukuk as project
and payoff patterns of six prominent types of Sukuk finance. Hence, there are various forms of Sukuk contracts
instruments namely; Mudarabah Sukuk, Musharakah with peculiar risk factors and payback schemes all tied to
Sukuk, Murabaha, Salam Sukuk, Ijarah Sukuk, and Istisna
the purpose for which the funding is raised (Saeed & Salah
Sukuk. Including the introductory remarks, the present
2014; Haider & Azhar 2010, pp. 21-24). For example, in
paper is organized into five sections. The 2nd section
countries like Europe, high net worth individuals are
describes the different principles involved in originating,
brought together by financial institutions to organize
regulatory framework and different interpretations ofprivate investment via Sukuk contracts for long term
Sukuk. The 3rd section provides a brief classification of
investments in energy sector for example, on the basis of
Sukuk instruments. The 4th section discuses conditions and
profit shares, which yield higher returns to investors.
payoff patterns involved in six types of selected for this
Similar contracts are drawn up in several financial centers
study. The 5th section ends with concluding remarks. which have set up regulatory framework to tap into the
high net worth individuals especially in the Persian Gulf
I I . D E F I N I T I O N S A N D R E G U L AT O R Y region to raise much needed capital for private sector
FRAMEWORK (Safari 2013).

In the current Islamic finance literature, Sukuk are
considered as Islamic funding certificates which allow
businesses and companies to borrow funds in a manner
submissive with the principles of Islamic law (Shari'ah). It
becomes acceptable to Shari'ah only when the purpose of
creation of Sukuk and its overall construction is Shari'ah
compliant as affirmed by the Shari'ah regulatory boards.
Contrary to conventional a bond, which fixes guaranteed
interest payment, Sukuk promises to pay out of the profits
of funding at the business. The Shari'ah boards regulate
funds which are generated through the creation of Sukuk
and explicitly prohibit investment of these funds in any
anti-social activity like gambling, prostitution, drugs,
cigarettes, alcohol etc. Once the structure and agreement
of Sukuk is finalized, the assets of borrowers are
transferred to a Special Purpose Vehicle (SPV) which is
created and controlled by the lenders (Haneef 2010;
Simmons and Simmons 2010; Saeed & Salah 2014).
Unlike traditional bonds, Sukuk instruments are complex
and are structured on the basis of purpose and conditions of
financing needs and not for general purpose of borrowing.
It may even have some features of common equity (for
example in case of musharakah Sukuk) which is share-like
As mentioned earlier that Sukuk instruments have to abide
by certain laws and regulations so that it doesn't violate the
basic tents of Shari'ah. In this regard different boards and
regulatory authorities have mentioned different legal
definitions of Sukuk. For example, in its Shari'ah
standards, Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) defined Sukuk as
Certificates with the same value which after
accomplishment of the underwriting process; it represents
the nominal amount paid by the buyer to issuer and the
holder will be the owner or a set of assets, benefits of the
asset or beneficiaries of an activity or a specific investment
project (AAOIFI Legal Standard No. 17). Similarly, the
International Islamic Financial Market (IIFM) defines
Sukuk as a commercial paper that provides an investor
with ownership in an underlying asset. It is asset-backed
trust certificates evidencing ownership of an asset or its
usufruct. It has a stable income and complies with the
principle of Shari'ah. Unlike conventional bonds, Sukuk
needs to have an underlying tangible asset transaction
either in ownership or in a master lease agreement (IIFM
2010). Another globally recognized Islamic regulatory
authority namely Islamic Financial Services Board (IFSB)
has put the definition of Sukuk as Sukuk (plural\ of sakk),
Africa Islamic Finance Report
frequently referred to as Islamic bonds, are certificates
with each Sakk representing a proportional undivided
ownership right in tangible assets, or a pool of
predominantly tangible assets, or a business venture (such
as a Mudarabah). These assets may be in a specific project
or investment activity in accordance with Shari'ah rules
and principles (IFSB 2009). The world's largest Islamic
banking unit, Islamic Development Bank (IDB) defines
Sukuk as an asset-backed bond which is designed or
structured in accordance with the Shari'ah and which may
be traded in the market (IDB 2004). After recognizing the
growing global importance of Sukuk market many
agencies not purely of Islamic nature like the Luxemburg
Tax Authorities issued circular on 12 January 2010 and
defined Sukuk as debt instrument whose income and
capital return depend on the performance of underlying
assets. Assets must be corporeal assets or the usufruct
thereof (Rabia & Dascotte 2010, p.13). The difference
between Sukuk and conventional bond can be traced in
following points.
Sukuk are based on the Shari'ah ruling while as
conventional bonds are in accordance with
capitalistic financial structures containing more
interest.
Since the Sukuk are backed by real underlying
assets transferred with lenders owning pro-rata
shares, income generated by the assets must be
related to the purpose for which the funding is
used.
The Sukuk certificate represents a proportionate
ownership right over the assets in which the funds
are being invested. The ownership rights are
transferred, for a fixed period ending with the
maturity date of the Sukuk from the original owner
(the originator) to the Sukuk holders.
Apart from these internationally accepted definitions
some Muslim markets have developed local definitions
and interpretations with regard to the nature and
functioning of Sukuk instruments. For example, in
Malaysia the Securities Commission of Malaysia, which
issued the 'Guidelines on the Offering of Islamic
Securities', defines Sukuk as a document or certificate
which represents the value of an asset. Similarly, the
Liquidity Management Center (LMC) in Bahrain defines
Sukuk as a certificate of equal value representing
undivided shares in ownership of tangible assets, usufruct,
and services or (in the ownership of) the asset of particular
projects or investment activity. From the above
mentioned definitions it is evident that there is no time-
horizon specification for Sukuk that means Sukuk may be
issued for both long term financing as well as short term
financing. In case of Short term Sukuk many issuers issued
maturities as short as one month. For example the earliest
12
INSIGHT
short term Sukuk are the 30- and 91-days Salam Sukuk
issued by Bahrain Monetary Agency (BMA) in 2001 and
one-year short-term Ijarah Sukuk issued Bank Negara
Malaysia (BNM).
To ensure smooth tradability of the Sukuk in primary and
secondary markets certain rules and regulations become
imperative on both issuer as well as investor. These rules
are as (Al-Jarhi & Abozaid 2010; Zin et al. 2011):
If Sukuk are issued against specific assets or
services, then this issuance implies the sale of
these assets to the Sukuk holders in return for cash
money based on current values of assets or
services, and therefore the Sukuk becomes
tradable.
If Sukuk are issued against described assets or
services to be manufactured or constructed in the
future (mausuf fii zimmah), then this issuance
implies the sale of these assets to the Sukuk
holders in return for cash money, and these Sukuk
are not tradable until the deliverability of assets or
services.
If Sukuk are not issued against assets or services,
but for the purpose of utilizing the proceeds to
acquire some assets, then Sukuk do not become
tradable until the stage at which those assets or
services are purchased. This is because the Sukuk
up to that point represent liquid proceeds, i.e. cash
money and money cannot be sold against money
unless the Shari'ah rules of sarf are observed.
III. CLASSIFICATION OF SUKUK: A BRIEF
OVERVIEW
In order to conduct their businesses the Shari'ah compliant
financial companies need funds to initiate, operate and
expand their businesses as their conventional counterparts
do. Usually companies generate funds either from internal
sources or from external sources (Safari 2013). In case of
conventional companies the external financing is mostly
obtained through issuing common stocks but in case of
Shari'ah compliant firms, sometimes equity-share
certificates (e.g. infinite-period Musharakah) are used to
generate external funding. They also do this by creating
funding certificates (Sukuk) as an Islamic finite-period
loan for productive uses of funds (Haider & Azhar, p.
22). As mentioned above the mechanism of Sukuk is
applied in different forms depending on the nature of
transaction involved. For example, the two primary forms
of Sukuk Mudarabah and Musharakah Sukuk are based on
the profit-loss sharing (Chapra, 1998; Rezaei 2013; Saeed
& Salah 2014). However, due to regulatory concerns,
these two forms of Sukuk constitute less than 10% out of
the total Sukuk funds. In profit-loss sharing (PLS)
Africa Islamic Finance Report
methods, the outcome of the project is not predetermined
rather it is completely based on the performance of the
project. The agreement at the time of creating Mudarabah
and Musharakah Sukuk involves certain predetermined
factors like the duration of investment and the ownership
in special purpose firm or distribution ratio of profit of the
project. In contrast to that in non-PLS methods the
outcome of investment for investors is to some extent
predetermined and is not fully tied to the performance of
the investment project. For example, in an Ijarah lease
contract, the investor will benefit from a predetermined
rental (i.e., lease) fees for a certain period of time. However
in the secondary modes of finance, the principal
investment should not be guaranteed by the issuer (Zin et
al. 2011).
The literature available on Sukuk operations so far,
provides two broader classifications for Sukuk. The first
classification is based on issuer type: sovereign Sukuk
(government, quasi-government) and corporate Sukuk.
The second classification is based on the underlying nature
of the financing contract and its characteristics i.e., pure
debt, equity-based, or asset backed as is shown in the
below given illustration. Though, there other some
subcategories like property-backed (semi-collateralized)
Sukuk, advance or deferred payment Sukuk, and project
financing Sukuk to accommodate various types of asset-
backed Sukuk contracts but in the below illustration only
six types under discussions have been highlighted.
1. Sukuk Based On Their Underlying Contractual Structure
IV. MECHANISM AND PAYOFF PATTERNS
Sukuk are designed in view of the usage of funds and the
mode of financing adopted in compliance with the Islamic
law. Accounting and Auditing Organization for Islamic
Institutions has identified fourteen eligible Sukuk types
(AAOIFI, 2003-2004).The most common types of Sukuk
issued around the globe are six, which are explained below:
13
INSIGHT
a. Mudarabah sukuk
a. Mudarabah Sukuk is essentially based on principles of
simple Mudarabah contract. It involves cooperation
agreement between two parties' viz. investors and
managers of capital. It represents a common ownership of
units of equal value in the Mudarabah equity. The holders
of Mudarabah Sukuk are the suppliers of capital (Rabb al-
mal) and each holder owns a share in the Mudarabah
equity and its returns according to the percentage of
ownership share. All Mudarabah Sukuk holders have the
right to transfer their ownership by selling the deeds in the
securities market (Rezaei 2013; Safari 2013; Saeed &
Salah 2014). In the standard of AAOIFI, Mudarabah
Sukuk are defined as follows:
These are investment sukuk that represent ownership of units
of equal value in the Mudaraba equity and are registered in the
names of holders on the basis of undivided ownership of shares
in the Mudaraba equity and its returns according to the
percentage of ownership of share. The owners of such sukuk
are the rabbul-mal. Mudaraba sukuk are used for enhancing
public participation in big investment projects.
In order to issue a Mudarabah Sukuk the originator
establishes a Special Purpose vehicle (SPV) and enters
into a Mudarabah contract with this SPV. This SPV will
act as owner of the capital (rabb al-mal) and the originator
will act as manager (mudarib). In the overall process of
payback of Mudarabah Sukuk the proceeds collected by
the SPV from the Sukuk investors are applied as the
capital of the Mudarabah which the mudarib will manage
for a share in the profits. The profit sharing ratio is being
specified at the outset (Alvi et al. 2010; Saeed & Salah
2014).
As mentioned earlier that there should not be a
predetermined rate of return in a Mudarabah contract that
is why the Sukuk issued until early 2008 were formed in
such a way that Sukuk holders receive the so-called
announced at the inception of the issue. Alvi et al. (2010)
highlighted that Sukuk holders received this indicative
rate of return by including clauses in the Mudarabah
agreement that would specify a 'maximum' rate of return.
Any profit to be generated above that rate of return would
be directed to a reserve account, which could be used to
cover any shortfall in future years. In case of insufficient
profits as well as insufficient funds in the reserve account,
the issuing company has to provide Shari'ah-compliant
funding to meet the shortfall and make it up to the
indicative rate of return. Although Mudarabah Sukuk are
debt based and are not tradable. However, Alvi et al.
(2010) emphasized that the Mudarabah Sukuk, in
practice, can be structured in a way to be tradable. The
Africa Islamic Finance Report
2. Cash Flows Pattern of Zero-Reward Mudarabah Sukuk
If the issuer pays periodical rewards to Sukuk holders than
the other payoff pattern is possible for a Mudarabah Sukuk
contract. Although the sharing ratio is predetermined, but
the amount of reward cash flows should not be
predetermined and hence, must be based on the
performance of the venture in that period. Thus, similar to
zero-reward Mudarabah Sukuk, the maturity payment is
undetermined and based on the venture's performance. The
pay-off structure of such general Mudarabah Sukuk is
depicted in Figure 3.
3. Cash Flows Pattern of Reward Paying Mudarabah Sukuk
The basic requirements while using Mudarabah as the
underlying structure for the issuance of Sukuk are as:
Originator (Mudarib) discharges and performs its
obligations under the Mudarabah Agreement with
the degree of skill and care that it would exercise in
respect of its own assets;
The Mudarabah would be entered into on a
restricted basis in which Originator (Mudarib)
must invest the Sukuk proceeds in accordance
with the specified investment plan.
The profit sharing ratio between Issuer SPV (Rab
al-Maal) and Originator (Mudarib) must be agreed
at the time of the conclusion of the Mudarabah
Agreement.
Any losses of the Mudarabah enterprise would be
borne by Issuer SPV (Rab al- Maal), although its
liabilities are limited to proceeds invested
therefore, Investors would not be liable for more
than their investment.
The risk of passing any losses of the Mudarabah
enterprise to Investors may be mitigated through
the use of a purchase undertaking granted by
Originator in favour of Issuer SPV so that in the
event that proceeds from the Mudarabah
enterprise are insufficient in meeting any amounts
14
INSIGHT
payable by Issuer SPV to Investors, Issuer SPV
may call on Originator to purchase its Mudarabah
interests for a price which represents their market
value.
b. Musharakah Sukuk
The term Musharakah is derived from the word shirkah,
which means partnership. In its simplest form, a
Musharakah arrangement is a partnership arrangement
between two (or more) parties, where each partner makes
a capital contribution to the partnership (i.e. to the
Musharakah), in the form of either cash contributions or
contributions in kind. The Musharakah Sukuk is an
investment Sukuk based on principles of Musharakah and
represents ownership of Musharakah equity. It is a form of
joint venture agreement between the issuer and (usually)
the originator to engage in a Shari'ah compliant
investment activity in accordance with a business plan that
is appended to the Musharakah agreement. Any profits
received from the Musharakah arrangements are
distributed between the issuer and the originator as agreed
(DIFC Sukuk Guidebook 2009, p. 20; Zin et al. 2011;
Haider & Azhar, p.25). According to AAOIFI
Musharakah Sukuk are defined as follows:
Musharakah Sukuk are investment Sukuk that represent
ownership of musharakah equity. The musharakah agreement is
a form of joint venture agreement between the issuer and
(usually) the originator to engage in a Shari'ah compliant
investment activity in accordance with a business plan that is
appended to the musharakah agreement. Any profits received
from the musharakah arrangements are distributed between the
issuer and the originator as agreed (AAOIFI shari'ah standards
17, 2010).
Similar to Mudarabah, loss in Musharakah Sukuk is
shared in proportion to the capital contribution unless the
loss is proven to be due to negligence of one party
(Daryanani, 2008). Musharakah arrangements can be
structured in a number of different ways; however, in
practice Shirkat Al-'Aqd (commonly referred as 'business
plan' Musharakah) and Shirkat al-Melk (commonly
referred to as the 'co-ownership' Musharakah) are most
accepted. In different Musharakah Sukuk operations the
same general concept of Musharakah, where its parties
(capital owner and entrepreneur) are ensured an equitable
share in the profit or loss on pre-agreed terms, is ensured
(Haider & Azhar 2010, p.26-28; DIFC Sukuk Guidebook,
p. 20-21). Depending on the pre-agreed sharing ratio
Musharakah Sukuk are structured in two methods (Lewis
and Algaoud 2001). In the first method, the pre-agreed
ratio is fixed and non-changeable for the whole period of
the contract while in the second type the ratio of share
declines. The second method is generally preferred by
Africa Islamic Finance Report
some financiers since it allows them to release their capital
from the investment by reducing its equity share each year
and receiving periodic profits based on the remaining share
balance. For example in order to issue a diminishing
Musharakah Sukuk the issuer transfers the ownership of
an asset to the SPV to enter the partnership agreement and
investors enter the agreement by paying cash. Therefore,
both the investors and the issuer are equity partners in the
SPV. However, the investors share in the SPV diminishes
over time as the issuer pays installments to investors to
repurchase their respective share in the asset. These
installment payments plus the issuer's rental payments for
use of asset (i.e., asset's generated income) constitute the
cash flow stream for Sukuk holders. The structure of a
diminishing Musharakah Sukuk is shown in the Figure 4.
4. Diminishing Musharakah Sukuk Structure.
The payments in a diminishing Musharakah Sukuk are
usually monthly or quarterly, but not necessarily in equal
amounts. Smaller installments could be made during the
initial period of the Sukuk, with most of the asset value or
SPV capital remaining with the investors, but the amount
of the installment payments could increase in a linear
fashion, or according to some predetermined formula. As
the issuer's share in the asset increases through the buy-
back process, the periodical rental might be expected to
decrease due to the decline in remaining share (Wilson,
2008; Safari 2013).
In case of Musharakah Sukuk the simplest payoff
structure contract is the form of zero-reward fixed
Musharakah Sukuk which does not provide any form of
reward during its tenure. The only cash flow that Sukuk
holders receive is the undetermined maturity payback. Its
cash flow structure is the same as the zero-reward
Mudarabah Sukuk as is shown in the Figure 5. The
amount of maturity payment (I`) is undetermined and is
based on the venture's performance.
15
INSIGHT
5. Cash Flows Pattern of Zero-Reward Musharakah Sukuk.
In case of the fixed Musharakah Sukuk another possible
payoff structure is when issuer pays periodical rewards to
Sukuk holders. However, based on the characteristics of
Musharakah contract, amount of cash flows should not be
predetermined and hence, must be based on the
performance of the venture. Similar to zero-reward
Musharakah Sukuk, the maturity payment (i.e., I` in the
diagram) is also undetermined and based on the venture's
performance as is illustrated in the figure 6. It must be
noted that R1 is the periodical reward payment distributed
among Sukuk holders, which is based on the actual
performance of the venture in each period (Simmons and
Simmons 2010; Saeed & Salah 2014).
6. Cash Flows Pattern of Fixed Musharakah Sukuk with
Floating-Reward Payments.
The periodical payments, in case of diminishing
Musharakah, where the profit ratio of the capital owner
declines over time, organize from two parts; reward and
portion of original equity capital. Thus, the periodical
payment could be engineered in many ways. First possible
cash flow pattern may be the case where the periodical
payment is fixed at a certain amount. The pay-off structure
of such diminishing Musharakah Sukuk is illustrated in
figure 7. In the figure R1 is the periodical payment
distributed among Sukuk holders, which is sum of reward
amount (based on the actual performance of the venture in
that period) and the portion of original capital paid back to
the capital owners.
7. Cash Flows Pattern of Diminishing Musharakah Sukuk
with Fixed Amount Periodical Payments.
Africa Islamic Finance Report 16

In growing- amount periodical structure of Diminishing
Musharakah Sukuk contract, the pattern of periodical
payments could be designed in a way that the periodical
payment amounts follow a constant growth model over its
tenure as is shown in figure 8 (Saeed & Salah 2014; Safari
2013).
8. Cash Flows Pattern of Diminishing Musharakah Sukuk
with Growing- Amount Periodical Payments.
c. Murabaha Sukuk
Like other Sukuk contracts the Murabaha Sukuk is rooted
in basic Murabaha contract. It is considered as a possible 9. Cash Flows Pattern of Bay Mu'ajjal- Murabaha Sukuk.
alternative where there is no possibility to identify a
tangible asset for the purposes of the underlying
investment. According to AAOIFI Murabaha Sukuk is
defined as:
INSIGHT
and bears its risk first and then sell it to the buyer.
As in agent-principal relationship the buyer may
purchase commodity from third party on the
seller's behalf and then purchase the same form the
seller.
While exercising the Murabaha Sukuk the originator
(Islamic bank) securitizes its trading transactions with a
proportion of the fixed markup providing the return to the
Sukuk investor, and the bank using the repayment from its
trading client to repay the Sukuk holder on termination of
the contract (Wilson, 2008). For example in case of Bay
mu'ajjal- Murabaha Sukuk the issuer pays back the total
amount borrowed at a certain time in a predetermined
lump sum payment. Payback structure of bay mu'ajjal -
Murabaha Sukuk would only have a maturity payment (I`)
that constitutes the original amount plus the predetermined
markup as is shown in figure 9.

These are the certificates of equal value issued for the

purpose of financing the purchase of goods through
murabaha so that the certificate holder become the In another type of Murabaha Sukuk named as Bay bi
owner of the Murabaha commodity (AAOIFI shari'ah thaman al-jal Sukuk the issuer pays back the total
standard 17, 2010). amount borrowed in deferred installments. For this reason
the payback pattern of structure of this Sukuk can be in
The holder of Murabaha Sukuk or the capital provider two types. In first type, periodical payments are equal and
purchases the specific asset/commodity from the third fixed in amount and maturity payment (I`) is
party and then sells it to the buyer or capital users at cost predetermined. Cash flows of this form of bay bi thaman
plus profit basis (Pollard & Samers 2007, p.315-316). The al-jal Sukuk is depicted in figure 10. The alternate
capital users then pay price of the asset/commodity in method for payback structure of bay bi thaman al-jal
installments as agreed between them (Usmani 1998, p.1- Sukuk is where the periodical payments follow a growth
14; Obaidullah 2005). Murabaha Sukuk cannot be legally model over its tenure. The growth pattern, as well as the
traded at the secondary market, as the certificates represent initial periodical payment amount, should be
a debt owing from the subsequent buyer of the commodity predetermined.
to the Sukuk holders and such trading in debt on a deferred
basis is not permitted by Shari'ah. The basic requirements
of a Murabaha contract are as: 10. Cash Flows Pattern of Bay Bi Thaman Al-jal Sukk
It more likely a sale rather than a mode of financing With Fixed-Amount Reward.
in Islamic Shari'ah so it should meet all applicable
conditions of a valid sale agreement.
Finance is made only for the purchase of a
particular commodity i.e. purchase of wheat for a
floor mills and not for other overhead expenses i.e.
utility bills, salaries ,etc. It cannot also be used for
already purchased asset/commodity.
The cost of the purchased commodity and the
As the general rule of Murabaha Sukuk, the maturity
profit therein should be disclosed to the buyer at
payment is also known in advance. The cash flows diagram
the time of sale.
of this payback structure is depicted in figure 11.
The seller should own and possess the commodity
Africa Islamic Finance Report
11. Cash Flows Pattern of Bay Bi Thaman Al-jal Sukk with
Growing Reward.
d. Ijarah Sukuk
The Sukuk al-Ijarah is a very common Sukuk structure
based on the contract of Ijarah. In the Islamic finance
industry, the term Ijarah is broadly understood to mean
the 'transfer of the usufruct of an asset to another person in
exchange for a rent claimed from him' or, more literally, a
lease. Thus Sukuk al-Ijarah structure uses the leasing
contract as the basis for the returns paid to investors, who
are the beneficial owners of the underlying asset and as
such benefit from the lease rentals as well as sharing in the
risk (Iqbal & A. Mirkhor 2006, p. 182, DIFC Sukuk
Guidebook 2009, p. 13; Saeed & Salah 2014). The
AAOIFI defines the Ijarah Sukuk as:
These are Sukuk that represent ownership of equal
shares in a rented real estate or the usufruct of the real
estate. These Sukuk give their owners the right to own
the real estate, receive the rent and dispose of their
Sukuk in a manner that does not affect the right of the
lessee, i.e. they are tradable. Holders of such Sukuk
bear all cost of maintenance of and damage to the real
estate (AAOIFI shari'ah standard 17, 2010).
The specific terms and conditions of the contract made
Ijarah different form the traditional lease. The Islamic
principles of Ijarah are as:
The consideration (Rentals) must be at an agreed
rate and for an agreed period.
The asset under subject should have valuable use in
accordance with the Islamic laws otherwise it
cannot be considered as Ijarah.
The ownership of the asset(s) must remain with the
Trustee and only the usufruct right may be
transferred to the originator (therefore anything
which can be consumed cannot be leased by way of
an Ijarah.
Lessor is responsible for all the liabilities
associated with the asset leased except the
liabilities results from the usage of assets. For
example lessor is liable to pay property tax,
insurance under takaful (Islamic mode of insuring)
and the normal deprecation, utility bills and taxes
should be borne by the lessee only.
17
INSIGHT
The Originator (as lessee) cannot use an asset for
any purpose other than the purpose specified in the
Ijarah (or lease) agreement (if no purpose is
specified, the Originator can use such asset for the
purpose it would be used for in the normal course
of its business.
In order to issue Ijarah Sukuk, the originator, who
primarily owns the assets, sells the assets to a SPV which is
typically a company in an offshore tax-free site. Then the
SPV leases back the assets to the issuer at a specific
predetermined rental fee and then the SPV securitize the
ownership in the assets by issuing Sukuk certificates to the
public investors (Lewis, 2007). These Sukuk certificates
represent an undividable share in the ownership of the
assets which entitle the Sukuk-holders to distribution of
the rental payments on the underlying assets. However, the
rental payment could be fixed or floating for the whole
period, dependent on the leasing contract between the SPV
and originator. Since these Sukuk certificates represent
ownership in real assets, they could be traded in a
secondary market. In conduction of Ijarah Sukuk the role
of the SPV is the management of the Sukuk cash flows,
particularly receiving periodical rentals and installments
from the originator and disbursing them to the Sukuk-
holders (Aseambankers 2005; DIFC Sukuk Guidebook
2009, p. 14; Saeed & Salah 2014). In other words, once
Sukuk reaches maturity date, the SPV no longer has a role
and consequently will be ceased from existence. However,
the Ijarah Sukuk is typically issued for periods longer than
five years and could be considered as long term debt
certificates. This long duration can raise the issue of SPV's
default risk. Therefore, investors typically receive a direct
guarantee from the issuer of the SPV obligations which
also obligation by the issuer to repurchase the asset from
the SPV at the end of the Ijarah contract at the original sale
price (Wilson, 2008).
In the simplest form, Ijarah Sukuk payback could be as
fixed reward payments and an undetermined maturity
payment. The formal Ijarah contract does not have the
option for parties to transfer the ownership of the asset at
the end of the period. Thus, at the end of an Ijarah contract,
the asset should be returned to the owner (i.e. capital owner
or the SPV). In order to transfer the ownership back to the
issuer at the maturity, one has to use another form of Ijarah
contract called as Ijarah wa Iqtina or lease and purchase
(Al-Jarhi & Iqbal 2001; Zaher & Hassan 2001). The Sukuk
structured on the basis of Ijrah wa iqtin' contract
transfers the ownership of the asset to lessee (i.e. issuer) at
the maturity of the Sukuk. However, the maturity payment
is not determined at the issuance time of Sukuk. The
valuation of the asset in Ijarah wa iqtin' sukk should be
conducted at the maturity time, when the market value of
Africa Islamic Finance Report
the asset is recognized and maturity payment (I') is set to be
principles for the issuance of Salam Sukuk are as:
equal to the market value at that point in time. Such cash
flow pattern is depicted in Figure 12. In this diagram, Ri is
the periodical reward payments that is fixed and
predetermined and I' is the undetermined maturity
payment.
12. Cash Flows Pattern of Ijarah Sukuk with Fixed-Amount
Periodical Reward Payment and Undetermined Maturity Payment.
The rewards involved in Ijarah Sukuk contracts may
follow a growth model over its tenure to compensate the
actual increase of the rental fees in the market during this
period. The payback structure of this form of Sukuk
contract is illustrated in the figure 13. Here the amount of
maturity payment (I`) is undetermined and will be
determined only at the maturity time based on the actual
market value of the asset. The amount of reward payments
(Ri) are predetermined and set to follow a growing pattern.
13. Cash Flows Pattern of Ijarah Sukuk with Growing-Reward
Payments and Undetermined Maturity Payment.
e. Salam Sukuk
In its simplest form, a Salam contract involves the purchase
of assets by one party from another party on immediate
payment and deferred delivery terms. The purchase price
of the assets is typically referred to as the Salam capital and
is paid at the time of entering into the Salam contract. The
assets sold under the Salam contract are referred to as al-
muslam fihi, delivery of which is deferred until a future
date (DIFC Sukuk Guidebook 2009, p. 34). The Salam
Sukuk is issued to raise Salam capital. The holder of slam
Sukuk is the purchaser of the commodity from the issuer of
the Sukuk, the seller at an agreed price paid at spot for the
consideration of the commodity whose delivery will be
made at agreed future dated (Usmani, 1998, p.1-14).Salam
is way to replace the traditional future/forward contracts by
considering the Islamic laws and basic principles. The
basic requirements based on established Shari'ah
18
INSIGHT
The price of the commodity/asset is fully paid to
the seller by the buyer at spot but delivery will be
made at specified future date.
The commodity should be standardized. Quality
and quantity is well determinable and it is easily
available in the market.
The future delivery date and place should be
clearly mentioned in the contract. (Usmani, 1998,
p.1-14)
In exercising a Salam Sukuk, a not-for-profit SPV is
created as a separate legal entity for the duration of the
Sukuk to administrate the flow of payments between issuer
and investors as well as holding the title of the underlying
asset (Dommisse & Kazi 2005). The issuer of Sukuk
transfers the title to the assets to the SPV, which in turn
issues certificates of participation to the public investors.
In order to obtain these certificates of participation the
investors should make an advance payment which entitles
them to a future payback of the investment plus a fixed pre-
agreed mark-up (Wilson, 2008). As mentioned above, in
Salam contracts, capital owner pays in advance for a
commodity to be delivered in future. The capital owner
(i.e., Sukuk holder) would benefit from the difference
between amount paid in advance and the market price of
the commodity at maturity. The maturity reward (I'), thus,
is undetermined at the issuance as is shown in the figure
14.
14. Cash Flows Pattern of Salam Sukuk.
f. Istisna Sukuk
In the modern day context of Islamic finance, the Istisna
has developed into a particularly useful tool in the Islamic
funding of the construction phase of a project it is often
regarded as being similar to a fixed-price 'turnkey'
contract. Istisna is alternatively referred as Islamic
project bond. The structure of Sukuk al-Istisna has not
been that widely used. The Istisna based Sukuk often
combines an Istisna arrangement with a forward lease
arrangement whilst the Istisna is the method through
which the investors can advance funds to an originator, the
Ijarah provides the most compatible payment method to
those investors (DIFC Sukuk Guidebook 2009, p. 40; Zin
et al. 2011). The basic requirements involved in the
issuance of Salam Sukuk are as:
Funds are used only for the manufacturing of a
Africa Islamic Finance Report
specified product or asset only which has to be
delivered at future dated.
The sale price may or may not be paid in full in
advance as in case is Salam structure.
The specific of the intended manufactured asset
should be clearly agreed between the manufactured
and the fund provider (Haider & Azhar 2010, p. 30)
The issuance of Istisna Sukuk has evolved as a contractual
form for financing construction projects. In order to issue
Istisna Sukuk, a parallel Istisna contract is used between
financier and the actual subcontractor of the project.
According to the agreement the project commissioner
provides details of the technical, financial, and project
management specifications of the project to the financier.
Then, financier sets up a tender to find the best
subcontractor for the project (Wilson 2004). It important to
mention that at the time of bid, they should also specify
their proposal for selling the completed parts of the project
over time and the amount of expected in installment
payments. It generates a good flow of revenues based on
the expected installments. It must be also borne in mind
that Istisna certificates are not are not tradable in secondary
market at discount because they are not based on any real
asset and are solely representing debt obligation. In case of
Istisna contracts, the capital owner (i.e., Sukuk holder)
would benefit from the difference between amount paid in
advance and the market price of the project at maturity. The
maturity reward (I'), thus, is undetermined at the issuance.
The payback structure of Istisna Sukuk is depicted in
Figure 15.
15. Cash Flows Pattern of Istisna Sukuk
v. CONCLUSION
The development of the Sukuk market is a recent
economic discourse. It has come into existence when
economic structures, both at regional as well as at global
level, are in the state of 'transformation' culminating into a
more diversified and private sector driven economy. Thus
Sukuk markets are generally expected to grow faster. This
paper examines and classifies various Sukuk contracts
based on their nature, purpose and structure. It broadly
classified Sukuk instruments into three main types as: pure
debt, equity-based, and asset-backed. Equity based
contracts include Musharakah and diminishing
Musharakah contracts and are similar to finite-term equity
19
INSIGHT
ownership for investors. In the following Sukuk contracts
murabaha, Ijarah, salam and istisna ownership of an asset
is transferred to investors as a part of fund raising process.
This paper also reviews major types of Sukuk contracts
such as (Mudarabah, Musharakah, Murabaha, Salam,
Ijarah, and Istisna) and draws possible cash flow patterns
pertaining to each form of contracts. It provides a very
useful point to commence the more arduous task of
building mathematical models of how the six Sukuk
instruments should be valued.
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Africa Islamic Finance Report
The Rise of Project Bonds and Sukuk
as Part of
Debt Financing in the Middle East
Makhbub Radzhabboev
is head of Banking & Finance at TLG The Legal Group, Dubai. Before joining the firm he has worked with EBRD,
The World Bank and Agroinvestbank and he specializes in Russian, Tajik and international law.
A s a result of the global economic downturn
and deepening Eurozone crisis, international
banks reduced their lending in the Gulf
market and European banks refocused on their
domestic markets partly due to the effect of the
upcoming restrictive Basel III capital and liquidity
regulations. The regional governments in the GCC
currently face the challenge of raising finance for
important infrastructure projects of their government
related entities (GREs). To meet this challenge, GREs
are considering issuing of project bonds as an
effective way of raising finance in the existing
environment.
Recent major project bonds under consideration
include the Emirates Aluminium joint venture, Saudi
Arabia's Sadara Chemical - the $20bn petrochemical
joint venture between Saudi Aramco and the US' Dow
Chemical considering a riyal-dominated project
sukuk. Abu Dhabi National Energy Company (Taqa)
21
INSIGHT
and its partners in the Shuweihat S2 independent
water and power plant (IWPP) are also planning a
project bond to refinance their debt.
These market developments pose interesting
questions regarding the choice of the financing
method and the investor base. In the Middle East, and
particularly in the GCCregion, these questions should
be considered in the light of the emergence of a very
liquid Islamic Finance market and Islamic investors
who demonstrate a huge appetite for Shariah
compliant securities, and especially for sukuks.
One of the prominent features of recent sukuk issues is
that they are well oversubscribed when announced
and the issuers may choose among the potential
investors. So there is a clear economic incentive for
originators to structure their deals according to
Islamic principles. In turn, if the deal is structured in
strict compliance with Sharia principles, then the
Africa Islamic Finance Report 22

INSIGHT
sukuk holders avail themselves of much better legal came under the scrutiny of the US courts in the East
protection than conventional bondholders. Therefore, Cameron Gas Co. bankruptcy case. East Cameron
in addition to economic factors, the level of the legal Gas Co.'s $165.67 million investment trust
protection should be seriously considered in the certificates were structured as a Musharaka between
choice between the project bond and sukuk. an offshore SPV domiciled in the Cayman Islands and
the originator, East Cameron Partners. The offshore
Project Bonds v. Sukuks SPV issued sukuk and contributed the proceeds to the
Generally, projects bonds are promoted by entities onshore SPV, while the company made an in-kind
such as the European Commission in order to contribution of the overriding royalty interest (ORRI)
stimulate investment in key strategic infrastructure in in the lease properties. In October 2008, East
transport, energy and broadband plus use of the debt Cameron Partners (the originator) filed for
capital markets as an additional source of financing bankruptcy and this created uncertainty about how
for these major projects. The scheme is built on partly the sukuk holders would be treated under U.S.
guaranteeing the bond issue which is based on a bankruptcy law. Eventually, despite criticism of its
specific project to be implemented by a SPV. The aim legal structure, the US courtsmade an order under
is to achieve an investment grade rating so that which the Sukuk certificate holders were able to get
institutions may invest in these instruments. Unlike full ownership and possession of the project assets
conventional bonds, investors here are exposed not to without having to share it with the other creditors.
the strength of the borrowing company but rather to In another sukuk default case, the Nakheel sukuk
the success of the underlying project. So in the event issued by a subsidiary of Dubai World, there was a
of any problems, recourse can be made only to the situation where, after the default by the issuer due to
assets of this particular project. Normally, the impact of the global financial crisis, the sponsors
international syndicated loans and bonds are who initially guaranteed the issue were not in the
unsecured and, in case of the project company's position to fulfill their obligations and the only way
insolvency, bondholders may find themselves in the for the investors exit was to gain redress to the
queue behind other creditors. property underlying the deal. Even though this case
was settled without going through the UAE courts, it
There are a lot of economic similarities between highlighted the importance of the proprietary rights
project bonds and recent sukuks as both instruments of sukukholders in an insolvency scenario.
are intended to finance large infrastructure projects.
As reported recently by S&P, the Gulf infrastructure Based on the above outline, parties who wish to raise
sukuk represented 30% of total sukuk for the year to debt financing in the Middle East are strongly advised
July 17, 2012, compared with just 7% for the wholeof to use sukuk structures for their deals. In the current
2011. This means that sukuks are increasingly used to investment environment, apart from strong economic
meet the financing needs of specific infrastructural reasons related to high liquidity of the Islamic
projects rather than to provide a general debt for the Finance market, the use of Sharia compliant
issuer. However, despite economic proximity, sukuks instruments gives the investors clear legal
substantially differ from project bonds and advantages. One should not also neglect the
conventional bonds in legal terms. Apart from the behavioral aspect of using Shariah compliant
prohibition to charge interest on the principal, the key structures where the sponsors and managers of the
feature of sukuk is that it should give its holder the underlying project have higher moral and legal
legally executed right of direct ownership in the responsibility to honour their duties because, firstly,
underlying assets. they will have not only business but also religious
reasons for being diligent and secondly, from the
Although this usually applies to existing and tangible outset they will have a clear understanding that they
assets, a sukuk giving rights to future assets was also are dealing with assets belonging to others not
recognized as Shariah compliant. This was the case themselves.
with the legal structure of the first ever project sukuk
issued in 2011 by Saudi Aramco Total Refining and From a public policy perspective the wide use of
Petrochemical Company (Satorp) where the key asset Islamic securities will help the GCC countries to
- the Jubail oil refinery is still being built. develop their domestic capital markets which will be
This clear proprietary character of sukuk structures a valuable alternative to normal bank lending.
Africa Islamic Finance Report 23

HORIZON

Green Islamic bonds

Bashar Zeitoon

P lans to establish green Islamic bond markets

are being promoted in the Middle East and
North Africa (MENA) region, several news
reports suggest. The use of Islamic debt
instruments, known as sukuk, to raise capital for
long-term projects. The Abu Dhabi English-
language publication, the National, reports that
green sukuk and bonds could provide as much as
$300 billion for projects to combat climate
change.
sustainable development projects in the MENA
region would set a new precedent. It is hoped that Promoting climate sukuk is designed to attract
the green sukuk would become key to financing low Islamic funds under management to investments in
carbon economies in a region bent on diversifying low carbon transitions in the MENA region. Such
away from fossil fuel to renewable sources of funds are becoming attractive at a time when
energy. Green ventures in need of capital may alternative financing scenarios have so far not
include projects to build renewable energy materialized sufficiently to provide the kind of
generation or to implement large-scale energy sustained funding needed to invest in carbon
efficiency measures in cities and industries. emission reduction or climate adaptation at a pace
and at a scale large enough to make a strong impact
The effort to spur Islamic climate bonds is being in combating climate change.
spearheaded by the Climate Bonds Initiative, a
global civil society network created to promote the Private banks are increasingly reluctant to offer
rapid development of climate bonds in global loans for climate solutions due to financial market
markets. uncertainties and the shifting priorities in the
European Union to address the debt crisis. More
Climate bonds are long-term, debt securities that are and more, governments do not have the capacity or
specifically issued to finance climate mitigation and the appetite to provide funding for a transition to a
adaptation projects, while creating stable returns for low-carbon economy, with other priorities pressing
long-term investors. The issuer guarantees on their public budgets. Furthermore, the failure to
repayment of the debt plus a rate of return after a conclude an international climate agreement now
certain period of time, called maturity. Bonds are means that funding from carbon trading and other
ideal instruments to mobilize private financing for carbon pricing schemes will take years to
Africa Islamic Finance Report 24

HORIZON
materialize. Another potential source of funding is As the new phrase implies, green sukuk involves
the Green Climate Fund, which is supposed to certifying the environmental credential of the bond
channel $100 billion a year by 2030 for carbon as well as the compliance of the debt security with
emission reduction projects in developing Islamic Shariah law. To ensure climate and Shariah
countries. However, mechanisms for governance compliance, the Climate Bonds Initiative, in
and distribution for the Green Climate Fund are yet partnership with the Clean Energy Business
to be formally developed. And finally, the value of Council, an Abu Dhabi-based trade group, is
United Nations-backed carbon credits has declined setting up a panel to develop a standard for a
in 2011 due to oversupply and weak demand. climate sukuk. The standard will be used to
provide assurances to issuing entities and investors
These dynamics have provided the impetus to that the bond is certified to contribute to low
consider green or climate sukuk as a source of carbon emissions. By working together, the
financing that could provide long-term liquidity in Climate Bonds Initiative and the Clean Energy
the bonds market while offering stable returns to Business Council hope to engage governments,
long-term institutional as well as retail investors. industry, and investors to develop the regulatory
Many believe that the next few years up to 2015 will and policy framework for a green sukuk in the
be critically pivotal in mobilizing capital for climate MENA region. The Clean Energy Business
solutions. The Climate Bonds Initiative has stated Council is a not for profit company representing
that the small window available to grow the critical the private sector involved in clean energy sector
low-carbon industries is closing and avoiding two- across the MENA region. It is registered in Masdar
degree warming will require simultaneous and rapid City, Abu Dhabi.
industry growth across all mitigation
opportunities. In fact, regardless of the shape and The Climate Bonds Initiative has already launched
form of any future binding international agreement an internationally recognized Climate Bond
on climate change, financing schemes, or emission Standard as a screening tool to ensure that
targets, the Initiative believes that rapid progress investments seeking funding through climate
on low-carbon industries within the next five years bonds are specifically tied to climate change
will be critical to allowing any long-term measures a mitigation and adaptation. The Climate Bonds
chance of success. Initiative is a special project of the Carbon
Disclosure Project (CDP) and the Network for
Climate sukuk may just provide the kind of jolt Sustainable Financial Markets (NSFM). NSFM is
needed for governments and corporate entities in the an international network of finance sector
MENA region to raise capital for a low carbon professionals, academics, and others dedicated to
economy. In general, making a transition to a ensuring financial market integrity and efficiency.
diversified energy sector in the MENA region frees
oil-producing countries to export more of their Other financial institutions are also lobbying for
crude oil, while allowing them to rely on renewable the promotion of climate bonds for financing low
energy sources, such as solar and wind, to meet local carbon investments. A group of large insurance
electricity demand. Green sukuk would provide the companies, such as Allianz and Swiss Re, with
necessary financing for investments in renewable assets of more than $3 trillion have called on policy
energy generation and higher efficiency buildings makers at the COP 17 climate negotiations to
and factories. Even climate change adaptation encourage governments to issue green sovereign
measures may qualify for funding through a green bonds.
sukuk if a compelling business case for stable, long-
term returns can be made. Looking forward, the challenges facing those
advocating climate bonds include labeling and
According to Bloomberg, anywhere between $10 certification, standardization of ratings,
and $15 billion can be raised by a green sukuk today aggregating individual low carbon projects, and
to fund some of the green climate projects that have the pooling of climate bonds into a new asset class.
been announced in the MENA region. For example,
Dubai is considering plans to issue a green sukuk to Bashar Zeitoon is program manager at the Arab
finance a $30 million 10MW solar park, biogas Forum for Environment and Development
plants, and energy efficiency in buildings, according (AFED)
to the Dubai Carbon Center of Excellence.
Africa Islamic Finance Report 25

HORIZON

NIGERIA'S INFRASTRUCTURE SUKUK

Will Support Growth But .

I f Nigeria can increase the infrastructure stock to

the global average share of the economy, the
country has a significant opportunity to increase
its economic growth. In doing so, issuing a sukuk,
which the Securities and Exchange Commission and
have to increase by 0.7% of GDP (not including the
investment required to maintain existing
infrastructure which will also rise). Adding this
amount to the budget deficit each year (the deficit was
estimated at 2.2% of GDP in 2015 according to the
Debt Management Office in Nigeria have announced IMF's Regional Economic Outlook) is possible but
they will do this year, can help attract significantly with just a small gap between domestic savings and
more financing for infrastructure. The Director- existing investment levels, deficit financing of added
General of the SEC, Mounir Gwarzo, told a local infrastructure investment in the domestic market may
news agency that the need for alternative sources of lead to crowding out private investment.
capital to finance infrastructure becomes increasingly
more compelling with fragility of growth from major If the necessary infrastructure investment was made,
emerging markets. it would have huge impacts. The elasticity of GDP
with respects to infrastructure ranges from between
In order to understand the significance of 0.07 and 0.15 which means a doubling of the
infrastructure investment, and how the government infrastructure stock would increase GDP by 7% to
could integrate sukuk into its long-term financing 15%. As the slowdown in China's growth
plan for infrastructure investment, it is useful to look demonstrates, there are limits to a quantitative
at a hypothetical analysis over the long-term). For focused infrastructure program as a growth strategy
but for countries in Nigeria's position where
example, consider a 50-year time horizon (the length
infrastructure stock is low, the elasticity of
of time that the World Bank said it could take for water infrastructure investment is likely to be at the high
and sanitation to be provided to all in many African end (or even above) the range established in empirical
countries).[1] In Nigeria the stock of infrastructure research.
today equals about 35% of gross domestic product
(GDP) compared to 70% in most economies. The figure below shows the hypothetical return using
an elasticity of 0.15 over a 50-year timeframe, and
In order to double the share of infrastructure over a 50 assuming that GDP growth begins at 4% per year and
year period, the overall stock of infrastructure will declines to 2% per year in 50 years (economic growth
Africa Islamic Finance Report
slows as economies get larger and as the marginal return on investment declines). As would be expected, the
higher growth rate created by the added infrastructure spending leads to an economy that is 15% larger in 50
yearsequivalent to $355 billion in additional growth in 2064 and a cumulative $6.4 trillion in added
e c o n o m i c
This dramatic impact is due to a relatively small
annual changethe annualized growth rate rises just
0.29% as a result of the infrastructure increase. The
most challenging aspect is how the infrastructure
investment is paid for which makes the approach that
includes sukuk one which can have significant
benefits if designed in a way that facilitates the
investment as well as the eventual recover of the
costs involved.
Collection of user fees for infrastructure (particularly
in the power sector) has been challenging in Nigeria
which has been a significant driver of the power
shortage. Tax collection has also been difficult both
to pay for government services (Nigeria's
government revenue was just 10.7% of GDP
between 2013 and 2015) and fund infrastructure
improvements.[1] Public sector infrastructure
cannot be measured merely by its short-term fiscal
impact, but infrastructure that can have as dramatic
an impact on the economic growth cannot be
assumed to have a similar impact on the fiscal
position if the government's revenue share is low.
An annual increase by 0.7% of GDP to the
infrastructure stock would require incremental
26
HORIZON
a c t i v i t y .
investment of $50 billion over the first ten years. If
the GDP growth could be fully captured to recover
the costs of that investment, it would become net
positive within just a few years as better
infrastructure supported faster growth. However,
assuming that all of the revenue generated from the
incremental GDP growth was used to recover the
costs, it would take until 2050 to recover the
investment, not including any financing cost.
The best option for a financing structure would likely
be some combination of public finance for
infrastructure which leverages private sector capital
as well with a focus of private sector involvement
where the direct benefits created from the
infrastructure can be most transparently measured
and user fees most readily collected. It is unlikely, at
least initially, that the private sector investment
would be made through a sukuk but if the
government financed a portion of its own
contribution towards infrastructure development
with a sukuk, it would provide a significant source of
new sukuk.
Courtesy: Finance Forward
Africa Islamic Finance Report
Trust and the Future of
Islamic Finance in Africa
T he Islamic Finance industry went through arguably its most
serious crisis at the end of 2007. In November of that year,
the influential scholar in the Islamic Finance industry,
Sheikh Taqi Usmani, declared that 85% of Islamic bonds, also
known as Sukuk, are not compliant with the principles of the
Islamic law, the sharia. His words resonated in the industry, with
the Sukuk market slowing down considerably, due to his fame and
reputation as one of the most respected scholar in the industry. Why
such an impact?
The principle of profit and loss sharing is the backbone of the
argument of Islamic finance as an alternative to interest rate based
financing. Although many patronize Islamic banks solely on the
basis of pure faith, the potential of Islamic finance in creating a
fairer and socially efficient economy is professed based mostly on
the superiority of equity-based compared to debt-based financing.
To share the reward, the investor must share the risk. That's the
substance of the profit and loss sharing principle.
The argument of Sheikh Usmani, which is that of the Bahrain-
based Accounting & Auditing Organization for Islamic Financial
Institutions, is that investors have to face the consequences of their
investment decisions, and that guaranteeing the capital invested
through a ubiquitous promise to buy back the Islamic bonds at face
value at maturity, or in case of default, violates the principal of risks
and profits sharing that is the pillar of these alternative types of
financial assets. The so-called repurchase undertaking is a
provision that is introduced to basically ensure a steady and
predictable returns on the Sukuk, mimicking conventional bonds
that pay the very interest rate that is prohibited by Islam. The risk of
losing the trust of the market is commensurate to the size of the
established industry. For infant industries, losing credibility and
starting without the trust of the stakeholders will lead irrevocably
to the industry not living up to its potential.
In Africa, the industry is in its early infancy. In many countries, the
27
HORIZON
By Ousmane Seck,
oseck@isdb.org IRTI
market share of Islamic finance is less than 1% although the
Muslim population is overwhelming. It is essential to identify the
references of the market in terms of the appreciation of the
authenticity of the Islamic finance products. That could ensure a
steady growth or even an accelerate growth to the Industry in the
country, especially in places where Muslims are a large market
constituency.
Earning the trust of the references of terms of religious
authenticity of financial products is key. A recent survey by the
Islamic Research and Training Institute in collaboration with
Thomson Reuters, and The General Council for Islamic Banks
and Financial Institutions (CIBAFI) conducted for the 2015
Malaysian Islamic Finance Country Report. To the question of
how would you ensure the Sharia-compliance of the products and
services you buy if dealing with an Islamic financial services
provider, only 12% of responding listed their local sharia scholar,
right about the same as the proportion of respondents who
reported they don't deal with an Islamic finance institution (11%).
Also 16% reported doing their own research, 30% asking for
evidence, 30% relying on family, friends or colleagues. The good
news about the credibility of the system is that 25% trust
government will ensure sharia compliance, and a high of 37%
report that they trust the financial provider to ensure sharia
compliance (respondents were allowed to pick more than one
answer, therefore the sum of proportions is higher than 100%). In
a country like Malaysia, the risk of financial meltdown coming
from scholars seems lower than in Middle Eastern countries
where scholars have a higher following, and a bigger potential in
affecting the market.
Thinking about the references in Africa is an important step in
ensuring the growth of the industry. Such growth can take place
without grass-root support. However for a sustainable expansion
based on market depth, grass-root support is essential, and passes
through the trust of the references.
Africa Islamic Finance Report 28

IDEAS - SYMPOSIUM
FATWAS & FINANCE:
Impact of Islamic Religious Rulings on
Growth of Fixed Capital Investment

Azizjon Azimi
Department of Economics
Advisors: Professor Kevin Thom & Professor Christopher Flinn
New York University
Spring 2016

Abstract
Islamic finance has recently come at the forefront of scholarly research in economics due to its rapid rates of
growth globally. While most studies in the literature have focused on comparative analyses of Islamic financial
institutions vis--vis conventional banks, much remains unknown in the domain of correlation between Islamic
finance and macroeconomic conditions. A cross-national time-series analysis covering 15 countries from 1985 to
2010, this research employs OLS regressions to examine the impact of different types of fatwas (i.e. Islamic
religious rulings) on growth of gross fixed capital investment. Over a thousand fatwa resolutions extracted
through data mining techniques and textual analyses were classified and coded over a span of several months. As
a result, robust results demonstrated that legal fatwas lead to an increase while financial fatwas lead to a decrease
in gross fixed capital investment. Concurrently, significance is found for interaction terms involving the
percentage of Muslim population, whereby financial fatwas have a negative effect and legal fatwas have a
positive effect on investment in countries where Muslims constitute less than 70% of the population.

Acknowledgments acknowledge the Islamic Shariah Research Academy

F irst and foremost, I would like to express sincere

gratitude to Professor Kevin Thom and Professor
Christopher Flinn for their guidance, feedback,
and support throughout this research project. I would
like to also thank the Economics Department at New
York University for providing me with the educational
resources to conduct research in the field of Islamic
finance. In addition, I would like to heartily
located in Malaysia for collection of immensely useful
data that was used extensively in this research. Last but
not least, I would like to thank my parents, Azimjon
Gafurov and Rafoat Gafurova, for endowing me with
the opportunity to pursue my research interests in the
United States, and my sisters, Gulnora Gafurova and
Gulsara Gafurova, for their utmost love and support
throughout the past months.
Africa Islamic Finance Report
Introduction
T he role of institutions in shaping economic
outcomes has been debated in the scholarly
economic literature for decades. Acemoglu,
Johnson and Robinson had argued that different types of
institutions have varying effects on income levels, which in
their turn pave the way for a path-dependent trajectory
(2001). As a matter of policy, plenitude of research has been
conducted on the issue of economic diversification and
institutional measures that promote it. Diversification has
been identified as a priority on the political agenda of the
Organization of Islamic Cooperation (OIC) global
intergovernmental political and economic union between
Muslim-majority states. These states had experienced
unprecedented levels of economic growth thanks to the
discovery of oil in the Gulf Cooperation Council (GCC)
region in the 1950s and tremendous rises in oil prices during
the 1970s and throughout the 2000s. Subsequently, GCC
states have emerged as some of the wealthiest countries in
the world by GDP per capita as of 2015, with Qatar leading
the world in this metric.
Nevertheless, the chronic issue of systemic
overdependence on the hydrocarbon sector (oil & gas) for
both GDP growth and government revenue has been
endemic for all countries in the OIC. For instance, the IMF
estimated that the total share of the hydrocarbon sector in
the GCC countries was 51% in 2010 (Hassan & Dridi
2010). Although this figured demonstrated significant
improvement from 1990, when it stood at 61%, and 2000,
when it was 59%, much of the non-hydrocarbon sector
growth took place in the services sector partly reflecting
greater spending on non-tradable goods made possible by
higher oil revenues. Furthermore, in the period of 2000-
2009, fiscal dependency on hydrocarbons continued
increasing and constituted 90% of government revenue and
80% of export of GCC member states by 2009. Thus, due to
slow pace of economic diversification from expansion of
services sector, the GCC member states have identified the
growth of non-hydrocarbon industry particularly, the
manufacturing sector as a new avenue for diversification.
This has led to substantial investments in infrastructure
both public and private in the form of land improvements,
equipment purchases and machinery renovations,
construction of roads, railways and the like, causing an
increase in gross fixed capital investment.
An instrumental role in investment growth has been
allocated to Islamic financial institutions. Revolving
around the principle of asset-backed finance, Islamic banks
are in theory expected to positively contribute to a country's
capital stock through provision of loans to infrastructural
projects. As such, Islamic banks are mandated to institute
Shariah Supervisory Boards (SSBs) consisting of religious
experts hired to validate permissibility of their operations
and compliance with norms of Islamic law. In their turn,
these Shariah boards often base their decisions on
29
IDEAS - SYMPOSIUM
precedents established by internationally recognized
authoritative institutions engaged in Islamic finance. One
of the largest obstacles in conducting research on the role of
such institutions has been a persistent lack of reliable data
on Islamic finance at-large. The main contribution of this
research is the compilation of a comprehensive data set on
two types of Islamic religious rulings financial and legal
over a span of 25 years. Utilizing this data set, I examine the
impact that financial and legal fatwas have on investment
by segmenting fatwas from three important Islamic finance
institutions OIC's Islamic Fiqh Academy, Malaysia's
Central Bank and the Auditing & Accounting Organization
for Islamic Financial Institutions. Moreover, I take into
account countries with varying levels of Muslim
population from European nations such as the United
Kingdom and Switzerland with lower percentages of
Muslim population, to Muslim-majority states such as
Saudi Arabia and Turkey.
Literature Review & Theoretical Framework
The literature on Islamic finance has come largely
from multilateral financial institutions such as the
International Monetary Fund (IMF) and the Islamic
Development Bank (IDB). Researchers at the IMF have
cited three crucial factors that have contributed to the recent
governmental promotion of investment through Islamic
banking across the GCC member states: finite income from
hydrocarbons in light of limited reserves that are due to run
out over the next few decades, high volatility in price
fluctuation especially given the 50% drop in oil prices
since mid-2014, and sectorial overdependence on the
hydrocarbon industry (Callen et. al. 2014). The role of
governmental incentives in the form of tax subsidies and
looser monetary regulations have been cited as major
drivers of asset growth for Islamic financial institutions
across the world. At the same time, GCC states have
identified the Islamic private sector-driven growth in
industrial and construction sectors as viable options for
diversification due to vast share of state-run and statetied
institutions already present in the services sector (Kammer
et. al. 2015).
Since 1990, the total volume of Islamic financial assets has
steadily grown by 15-20% annually, and now surpasses the
$2 trillion mark according to the Al Huda Centre of Islamic
Banking and Economics (2014). Moreover during the
recent financial crisis, the sector of Islamic finance had
tripled and expanded more rapidly than the conventional
financial sector in all market areas ranging from insurance
(i.e. takaful) to investment banking (i.e. mudarabah) across
the Islamic world. In the meantime, the limited use of
derivatives and other securitized structures by the vast
majority of Islamic financial institutions has led to
substantially higher capital adequacy ratios than in most
conventional banks. Thus, minimal leverage ratios
generated from risk-sharing and speculation-free
parameters have placed Islamic banks on an advantageous
position in regards to the Basel III requirements (Kara
2011).
Africa Islamic Finance Report
Estimates of Global Assets in Islamic Finance
Due to emerging global support for principles of Basel III,
it is not surprising that there has been a concurrent surge in
demand for Islamic financial products in the West. Islamic
sukuks which are Sharia-compliant bonds issued by
major financial institutions such as the IDB have been
consistently ranked as AAA because of their prudent risk
management nature by credit rating agencies (Moody's
2013). The trend has caught the eye of the British
government, which became the first non-Muslim country
to issue 200 million of five-year Islamic sukuks with
marketing assistance from major European and Middle
Eastern banks in 2014 (Moore & Hale 2014). Islamic
finance has also been on the rise in Switzerland, with six
Islamic banks operating in the country according to the
Global Banking & Finance Review (2010).
Several factors have been identified as pivoting Islamic
banks to the role of chief investment sources for
governments across the world and safeguarding them
from the ills of the global financial crisis. On the demand
side, the robust demand for industrial and infrastructural
project finance from the private sector in the GCC due to
state dominance in hydrocarbon and service sectors has
placed Islamic banking at the forefront of investment
(Maierbrugger 2016). Increased funding of Islamic
financial institutions by Gulf sovereign wealth funds and
state corporations that has stirred greater supply of
liquidity in the market of Islamic finance has
demonstrated the growing link of this demand-supply
model, leading to a positive link between Islamic loans
and growth of investment. In addition, the rising presence
of Islamic developmental institutions such as the Islamic
Developmental Bank and the Islamic Corporation for the
Development of the Private Sector in the market for
medium- and long-term project finance is another vital
element that positively contributes to the growth of non-
hydrocarbon sector in the OIC.
30
IDEAS - SYMPOSIUM
At this point, it is crucial to discuss the differentiation of
Islamic finance from conventional banking. The main
distinction lies in the application of and adherence to
Islamic religious law known as Sharia by all Islamic
financial institutions. The most prominent feature of
Sharia finance is the banning of usury in all forms and
provision of interest-free loans with permissibility of
mark-up and commission charges by the provider (El-
Gamal 2001). Sharia law also imposes a strict ban on
speculative and excessively risky (i.e. gharar) operations
such as securitization of subprime lending, short-selling,
and credit-default swaps, which have been among the
major catalysts of financial stress in conventional banks.
For instance, AIG's bankruptcy resulting from
incongruence in the high amount of credit-default swaps
that it had undertaken and the minimal volume of assets
stands out as a prime example of such failure that Islamic
banks have largely avoided due to lesser composition of
toxic portfolio investments.
Islamic financial institutions also differ in their corporate
governance and compliance structures from conventional
banks. Special review boards called Shariah
Supervisory Boards (SSBs) that are composed of
religious scholars exist to ensure compliance of Islamic
financial institutions with Shariah procedures and
regulations (El-Gamal 2006). Hence, each Islamic
financial institution incorporates these boards as an
integral part of internal governance structure. These
boards are expected to issue adequate rulings on matters
of bank's operation, ranging from permission of
institutional engagement in issuance of a complex
financial instrument to norms governing gender
interactions within banks. In some OIC member states,
authorities have established oversight mechanisms
including state-run Shariah boards and Islamic banking
divisions within governing supervisory agencies that
regulate the operation of individual bank SSBs. As such,
the Governor of the Bahrain Monetary Agency
emphasized the role of SSBs by noting that Islamic
banks have grown primarily by providing services to a
captive market, people who will only deal with a financial
institution that strictly adhered to Islamic principles
(Grais 2006).
Over the years, the general trend followed by the OIC has
been toward standardization of SSBs' regulatory
mechanisms through issuance of consensus-based fatwas
that serve as precedents for individual bank SSB decisions
and rulings (Oxford Analytica 2010). As such, the
International Islamic Fiqh Academy launched under the
auspices of OIC was tasked with issuing fatwas on
questions submitted by OIC's member states regarding
economic, financial, social and legal matters. Since then,
the Academy has issued several hundred fatwas that have
had a substantial impact on the work of Islamic financial
Africa Islamic Finance Report
institutions. These fatwas have been also instrumental in
defining the normative aspects of regulation and legal
procedures toward Islamic banks in OIC member states.
In terms of investment allocation, Islamic banks have been
found to have a concentrated base of assets, focusing on
select sectors and avoiding direct competition with
conventional financial institutions. Historically, Islamic
banks have specialized in financing the agricultural,
construction, and microfinance sectors. This practice has
made Islamic banks vulnerable to cyclical shocks in
particular sectors, as had been demonstrated by sectorial
and seasonal downfalls of Islamic banks in Jordan, UAE,
and Tunisia over the past decades as was found by Iqbal's
study (2008). Aggarwal & Yousef examine investment
behavior of Islamic banks worldwide and compare the
share of Islamic profit-and-loss sharing financial
instruments vis--vis conventional markup instruments
(2000). They conclude that Islamic banks allocate less
funds to long-term productive projects as well as less
investment financing in agricultural and industrial sectors.
Data collected from the International Association of
Islamic Banks and annual reports by Islamic banks that
covered three GCC member states also showed that
Islamic banks prioritized short-term micro-finance loans
in their portfolios due to higher markup rates, resembling
investments made by conventional financial institutions.
The effects of bank metrics such as capital-to-asset and
loan-to-asset ratios, as well as the financial environment in
the form of macroeconomic performance and
governmental involvement in the economy on the
performance of Islamic banks were analyzed by Bashir
(2003). Regression results showed higher profitability in
Islamic banks with substantial government shares in them,
as well as positive correlation between favorable
macroeconomic conditions (i.e. higher GDP per capita and
lower inflation) and Islamic bank performance with data
compiled on Saudi Arabia and the UAE. Another IMF-
sponsored study on Islamic finance in the GCC found
higher profitability in Islamic banks with substantial
government shares in them, as well as positive correlation
between favorable macroeconomic conditions (higher
GDP per capita and lower inflation) and Islamic bank
performance. Furthermore, a study of post-crisis
performance of Islamic banks vis--vis conventional
banks concluded that higher capital adequacy ratios were
found to have strong positive correlation with higher asset
growth, while higher investment portfolio and leverage
(assets to capital) negatively impacted profitability all
leading to the conclusion that Islamic banks fared
substantially better than conventional banks due to their
principles of operation. The panel data that covered GCC
states as well as Turkey, Jordan, and Malaysia resulted in
Islamic bank dummy being significant, reflecting the
robust market demand for Islamic financial products in test
countries in the period after the financial crisis.
31
IDEAS - SYMPOSIUM
Theoretical Framework & Research Design
As evident, much of existing literature has focused on
comparative studies of Islamic financial institutions vis-
-vis conventional banks. This research employs ordinary
least squares (OLS) regression models to investigate the
impact of fatwas on countries' fixed capital investment
while controlling for a number of key macroeconomic
and demographic variables. Textual analysis of hundreds
of financial fatwas conducted as part of the research
showed that over the years, the issued financial fatwas
dealt with both permissibility and impermissibility of
various financial and economic activities without a
specific trend toward liberalization. Majority of these
fatwas were concerned with financial instruments (i.e.
tawarruq, sukuk, musharaka, etc.) and other tools within
the financial sector. Based on Aggarwal & Yousef's
finding that Islamic banks allocate less funds to long-term
productive projects in the industrial sector, I contend that
financial fatwas have led to a decrease in fixed capital
investment. The baseline suggestion of this argument is
that Islamic banks favor provision of loans in the services
and financial sectors over provision of loans to
infrastructural or industrial projects, which decreases the
amount of available investment into fixed capital assets
and infrastructure. Hence, the following is the first
hypothesis:
Hypothesis I: Issuance of financial fatwas leads
to a decrease in gross fixed capital investment.
On the other hand, analysis of legal fatwas
showed a trend of liberalization of regulatory standards in
the Islamic financial industry. As legal procedures
became more defined and incrementally loosened to
accommodate vitality of the industry, Islamic financial
institutions were able to increase the scope of their
financial operation, both in terms of engagement in
issuance of financial instruments and direct funding of
projects. For instance, a number of legal fatwas over the
years established and furthered legal regulations of
Islamic project finance through definition of standards
governing the istisnaa ijara and wakala ijara contracts
that have been crucial in project finance investment.
Subsequently, it can be inferred that there is a positive link
between the furthering of Islamic project finance and
growth of fixed capital investment in a country as long
term financing of infrastructural and industrial projects
involves investment in plant, machinery, equipment, and
land, among other factors that constitute fixed capital.
Hence the following is the second hypothesis:
Hypothesis II: Issuance of legal fatwas leads to an
increase in gross fixed capital investment.
At the same time, it is crucial to distinguish the
impact that financial and legal fatwas might have on fixed
Africa Islamic Finance Report
capital investment based on varying percentage of Muslim
populations in different countries. This is especially
pertinent in light of the rapid rise of Islamic finance in
western countries where Muslims are a minority. I put
forward the following hypotheses based on an assumption
that fatwas will have the greatest impact in countries with
largest percentages of Muslim population:
Hypothesis III: Financial fatwas will have a
negative impact on gross fixed capital investment in
countries with larger Muslim populations.
Hypothesis IV: Legal fatwas will have a positive
impact on gross fixed capital investment in countries with
larger Muslim populations.
Given the persistent lack of data on Islamic financial
metrics and rulings, I engaged in data mining on the
world's largest database of fatwas Islamic Shariah
Research Academy's IFIKR database. As a result of
months-long analytical research, I was able to create a new
data set covering 1,160 resolutions as part of fatwas issued
by international and governmental authorities on Islamic
finance. The remaining macroeconomic and demographic
data was extracted from World Bank's World
Development Indicators, while the data on percentage of
Muslim population estimates was taken from a
comprehensive study published in the International
Journal of Environmental Science and Development. A
fatwa was coded as financial if it dealt with financial and
economic matters, while legal fatwas were defined as
rulings dealing with regulatory and governmental aspects
of Islamic finance. The following three international or
governmental issuers of fatwas were studied in the
research through the IFIKR database:
o Accounting and Auditing Organization for
Islamic Financial Institutions (AAOIFI) is an
international autonomous non-profit corporate body
headquartered in Bahrain that was established in 1990.
Supported by the Islamic Development Bank, the
organization comprises over 200 largest Islamic
financial institutions and central banks from 45
countries. Rulings and standards issued by the
organization have had a tremendous impact on the
Islamic financial industry globally, having been
codified as national banking standards in Bahrain,
United Arab Emirates, Jordan, Lebanon, Qatar, Sudan
and Syria. Furthermore, AAOIFI's rulings have been
legally applied by financial authorities in Australia,
Indonesia, Malaysia, Pakistan, Saudi Arabia and
South Africa.
o Organization of Islamic Cooperation's
International Islamic Fiqh Academy was established
in Jeddah, Saudi Arabia in 1981. The Academy is the
most authoritative source of religious rulings in the
Islamic world. Its rulings are adopted based on the
32
IDEAS - SYMPOSIUM
consensus of Shariah scholars from across the OIC's
57 member states and carry a non-binding status.
Despite the non-binding nature of the Academy's
rulings, they have been vital in furthering the research
on Islamic finance through authorization and funding
of studies on financial, social, cultural and economic
topics.
o Central Bank of Malaysia (Bank Negara):
global center for the growth and development of
Islamic finance over the past three decades, Malaysia
has been instrumental in implementation of
innovative Islamic financial instruments since the
1980s. As such, the country's central bank established
a Sharia council that today consists of some of the
most prominent Shariah experts globally in 1998. The
council is tasked with reviewing queries from the
country's Islamic finance sector and issuing
substantive resolutions with legally enforceable
status. Given Malaysia's pivotal role in the global
sector of Islamic finance, taking into account Bank
Negara's fatwas provides an important insight into the
impact of religious rulings on growth of investment in
non-GCC countries.
The countries studied in this research include 15 countries
with the largest Islamic financial industries in the
1985-2010 period, with the exclusion of Iran. This
was intentionally done in order to avoid delving into
the Sunni-Shia divide aspect as the fatwa sources
taken into account in this research operate under the
Sunni interpretation of Islamic law. Furthermore, a
detailed taxonomy and descriptive statistics of all
variables and list of countries are provided in the
appendix. The following is a breakdown of dependent
and independent variables:
Dependent Variable: Gross Fixed Capital Formation
o Formerly gross domestic fixed investment, this
World Bank metric quantitatively measures land
improvements (fences, ditches, drains, and so on);
plant, machinery, and equipment purchases; and the
construction of roads, railways, and the like,
including schools, offices, hospitals, private
residential dwellings, and commercial and industrial
buildings. According to the 1993 SNA, net
acquisitions of valuables are also considered capital
formation.
Independent Variable: Financial Fatwas
o Measures the number of financial fatwas issued
either by OIC's Fiqh Academy, AAOIFI, or
Central Bank of Malaysia in a given year. The
variable is lagged by one year in regression
specifications in order to account for
implementation of or industry reaction to fatwas'
Africa Islamic Finance Report 33

IDEAS - SYMPOSIUM
resolutions. Histogram of frequency distribution Results:
follows a normal distribution and can be found in Regression results demonstrate strong statistical
the appendix. The following is an example of a significance of all of these models. The addition of
financial fatwa containing one resolution: country fixed effects in models 3, 4 & 6 did not diminish
their statistical significance, which attests to the
The SAC, in its 4th meeting dated 14 February 1998, 95th robustness of results. Analyzing the independent
meeting dated 28 January 2010 and 101st meeting dated variables, we observe that financial fatwa variable has a
20 May 2010, has resolved that the late payment charge negative coefficient and is statistically significant at 1%
imposed by an Islamic financial institution encompassing across all models. Thus, it can be concluded that the first
both concepts of gharamah (fine or penalty) and ta`widh hypothesis is correct and Aggarwal & Yousef's finding can
(compensation) is permissible (Source: Central Bank of be reinforced.
Malaysia) Table of Results
Model 5 Model 6
Variable: Model 1 Model 2 Model 3 Model 4 (Interaction) (Interaction)
Independent Variable: Legal Fatwas Financial 7
-9.65 x 10 *** 8
-1.85 x 10 *** 7
-8.37 x 10 *** 8
-1.10 x 10 *** -8.32 x 108 *** -2.69 x 108 **
Legal 5.30 x 107 * 1.02 x 108 *** 3.53 x 107 * 7.31 x 107 *** 6.26 x 108 *** 2.18 x 108 **
o Measures the number of legal fatwas issued either Financial x Muslim 9.9 x 106 *** 2.6 x 106 *
-7.7 x 106 *** -2.3 x 106 *
by OIC's Fiqh Academy, AAOIFI or Central Bank Legal x Muslim
Muslim -4.47 x 108 3.68 x 108 -1.65 x 108 *** -1.16 x 109
of Malaysia in a given year. The variable is lagged Population
Industry
10.58
0.16
290.6

by one year in regression specifications in order GNI 0.6 *** 0.14 *** 0.53 *** 0.15***
Consumption -0.52 *** -0.39 ***
account for implementation of or industry reaction CPI 7.54 x 10 7
1.62 x 108 ***
FDI 0.087 ** 0.07
to fatwas' resolutions. Histogram of frequency Current Account -0.51 *** 0.067 -0.26 ** -0.83 ***
Exports -0.16 * -0.019 0.61*** 0.08**
distribution follows a normal distribution and can Domestic Credit 1.03 x 108 *** -2.76 x 107
-5.42 x 107 -1.03 x 108
be found in the appendix The following is an Agriculture
Inventory
0.46 *** 0.36 *
-0.027 -0.17
0.17
0.15
example of a legal fatwa containing one Observations
Countries
236
15
211
15
306
15
211
15
283
15
338
15
resolution: R2 0.99 0.99 0.99 0.99 0.95 0.99
Country FE ? ? ?
Country Cluster ? ? ? ?
*p
0.10 **p
0.05 ***p
0.001
The Council of the Islamic Fiqh Academy of the *p 0.10 **p 0.05 ***p 0.001
Organization of the Islamic Conference in its Twelfth
Session held in Riyadh (Kingdom of Saudi Arabia) during This finding provides basis for the argument that Islamic
the period from the 25th of Jumad Thani to 1st of Rajab banks tend to prefer non-industrial financing that
1421 H (23 28/9/2000), decides the following: The negatively impacts the growth of fixed capital investment
Court may, if so required by one of the two parties, adjust in a given country. As such, it can be inferred that issuance
the amount of the compensation (as per the contract's of financial fatwas has furthered Islamic banks' provision
Penalty Provision), subject to a reasonable justification, of loans in the services and financial sectors as opposed to
or when the compensation proves to be exaggerated. project financing, which has decreased the availability of
(Source: OIC's Islamic Fiqh Academy) financing for loans that would have increased fixed
capital investments. According to regression model 1,
In order to adequately test the robustness of these issuance of an additional financial fatwa leads to a
hypotheses, I employed six distinct OLS regression cumulative decrease of $96.5 million in fixed capital
specifications, with and without country fixed effects and investment. Results from remaining non-interaction
clusters, and using a variety of control variables that have models (1-4) provide a range of estimates from $83.7
been previously employed in the literature on investment. million to $185 million in decrease in gross fixed capital
Four of the models involve individual specifications, investment from additional financial fatwas.
while models 5 & 6 are interaction models. The following
are the regression specifications: Examining the legal fatwa variable, we can conclude that
the second hypothesis is also correct and can be accepted.
As such, we can observe that issuance of legal fatwas
leads to a substantial increase in fixed capital investment
across all models. This can be explained by the fact that
the vast majority of legal fatwas dealt with substantive
liberalization of laws and regulations on Islamic finance,
allowing for an increase in variety of Islamic financial
activity that incorporated industrial and infrastructural
financing. As such, this comes in contrast with financial
fatwas that mostly focused on innovation within the
domain of financial instruments geared toward non-
industrial financing. The magnitude of growth in gross
fixed capital investment from each additional legal fatwa
Africa Islamic Finance Report 34

IDEAS - SYMPOSIUM
ranges from $53 million to $102 million across models 1- because the Muslim populations in these countries are
4. minorities that constitute less than 5% of the total
population, the statistical significance of these two
Concurrently, we observe strong significance for financial countries is rather an example of correlation than
and legal fatwa variables, as well as the two interaction causation. Nevertheless, it can be inferred that because
terms, in interaction models 5 & 6. This paves the way for a both countries are non-member states of the OIC,
conclusion that a joint effect of fatwa type and percentage regulators and Islamic financial institutions alike have
of Muslim population has a statistically significant impact more closely followed the rulings issued by authoritative
on the growth of gross fixed capital investment in countries entities included in this research, producing a
included as part of this research. In order to properly disproportionate impact on fixed capital investment.
interpret the interaction coefficients, we ought to examine
the average marginal effects graphs: Furthermore, we observe strong statistical significance of
Marginal Effects Graphs from Model 5 several macroeconomic control variables, which is in line
with findings in the literature. Model 1 postulates that a
rise in either gross national income, domestic credit-to-
private sector ratio, or value-added agriculture leads to an
increase in gross fixed capital investment, while a rise in
current account balance and general government and
household consumption leads to a decrease. The latter two
phenomenon can be explained by the fact that a rise in
consumption or in current account imbalances depletes
availability of funds for fixed capital investment. Models
2, 3 & 6 also stipulate that gross national income is
As such, the marginal effects graphs from model 5
positively correlated with investment. Additionally,
demonstrate that financial fatwas (on the left) have a
foreign direct investment is found to be significant and
negative effect on investment in countries with less than
positive in model 2, consumer price index is found to be
70% Muslim population. On the other hand, legal fatwas
significant and positive in model 3, and consumption is
(on the right) have a positive impact on investment in
found to be significant and negative in model 3. It is
countries with less than 70% Muslim population. The
worthy to note that all models have an R2 of nearly 0.99,
graphs also demonstrate that results for both variables in
meaning that independent variables explain almost 99% of
the interaction terms are insignificant when percentage of
variation in the dependent variables across th models.
Muslim population is greater than 70%, which disproves
hypotheses 3 and 4. To further test this conclusion, we can
Conclusion:
examine marginal effects from model 6:
Marginal Effects Graphs from Model 6
This research adds a new dynamic to the discussion of
Islamic finance and macroeconomic conditions by
examining the impact of financial and legal fatwas as well
as interaction terms. Having created a comprehensive data
set that includes over a thousand resolutions extracted and
textually analyzed from hundreds of fatwas, strong
statistical significance for the hypotheses and control
variables is found as a result. While the first two
hypotheses are fully accepted, the latter two are found to
be statistically significant in the opposite direction.
Financial fatwas are found to decrease gross fixed capital
As evident, these graphs reinforce the aforementioned investment due to their promotion of loan provision to
notion that the threshold for significance of interaction non-industrial sectors which impedes the availability of
terms is Muslim population percentage below 70%. The capital investment funds. On the other hand, legal fatwas
three countries with such metric are Malaysia, are found to increase capital investment by widening the
Switzerland and the United Kingdom. In the case of scope of Islamic banks' operations in project financing on
Malaysia, it can be speculated that the large statistical a regulatory basis. Concurrently, it was found that
significance stems from the fact that over half of analyzed financial fatwas have a negative impact and legal fatwas
fatwas were issued by the Central Bank of Malaysia and have a positive impact on capital investment when Muslim
had a disproportionate effect on macroeconomic population percentage is below 70%, which was the case
conditions within the country in comparison to other in three countries within the data set: Malaysia,
states. As for Switzerland and the UK, one can argue that Switzerland and the UK. Further research can be
conducted on these robust results, specifically in the
Africa Islamic Finance Report 35

IDEAS - SYMPOSIUM
dimension of interaction between other economic and Policy Options. The International Monetary
demographic variables including percentage of Islamic Fund.
banking sector as a total share of country's financial Kara, H. 2011. Islamic Banks Hold Basel III
industry, impact of differentiation between Sunni and Shia Advantage. The Banker.
doctrines within the domain of fatwas, and others. Mills. P and J. Presley. 1999. Islamic Finance: Theory
and Practice. London: Macmillan.
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Acemoglu, D., Johnson, S., and Robinson, J. 2001. The in 2014. Al Huda Centre of Islamic Banking
Colonial Origins of Comparative Development: and Economics article on Trade Arabia.
An Empirical Investigation. MIT. Naghton, S.A.J. and M.A. Tahir, 1988. Islamic Banking
Acemoglu, D., and F. Zilibotti. 1997. Was Prometheus and Financial Development. Journal of Islamic
Unbound by Chance? Risk, Diversification and Banking and Finance, Vol. 5, No. 2.
Oxford Analytica. 2010. Islamic Finance Moves
Growth. Journal of Political Economy 105 (4);
Toward Common Standards. Forbes.
709-51. Sadikot, R. 2012. Islamic Project Finance: Shari'a
Archer, S., and Abdel Karim, A., 2002, Islamic finance: Compliant Financing of Large Scale
Growth and Innovation. London: Euromoney Infrastructure Projects, Al Nakhlah: Online
Books. Journal on Southwest Asia and Islamic
Aziz, Z. A., 2009. Islamic Finance: During and after the Civilization.
global financial crisis. Istanbul. Yousef, T. and Aggarwal, R. 2000. Islamic Banks &
Bashir, Abdel-Hameed. 2003. Determinants of Investment Financing. Journal of Money, Credit
Profitability in Islamic Banks: Some Evidence and Banking.
from the Middle East. Islamic Economic Studies Yudistira, D. 2004. Efficiency in Islamic Banking: An
Bonaglia, F., and K. Fukasaku. 2003. Export Empirical analysis of Eighteen Banks. Islamic
Diversification in Low-Income Countries: An Economic Studies, Vol. 12, No. 1, 1-19.
International Challenge A after Doha. Working Appendix A: Table of Descriptive Statistics
Paper 209. Organization for Economic Variable Observations Mean St. Dev. Min. Max.
Investment 361 4.68 x 1010 8.24 x 1010 7.16 x 108 5.56 x 1011
Cooperation and Development, Paris. Financial 375 27.32 19.95 0 67
Callen, T., Cherif, R., Hasanov, F., Hegazy, A., and Muslim %
Legal
390
375
76.73
19.48
30.51
19.06
1.41
0
98.43
60
Khandelwal, P. 2014. Economic Diversification Population 387 4.84 x 107 6 x 107 3.7 x 105 2.42 x 108
GNI 365 2.22 x 1011 4.39 x 1011 2.74 x 109 3 x 1012
in the GCC: Past, Present, and Future. The Consumption 362 1.72 x 1011 3.65 x 1011 1.82 x 109 2.48 x 1012
International Monetary Fund. CPI
FDI
364
390
61.04
6.94 x 109
27.13
2.59 x 1010
0.0079
-4.55 x 109
107.72
2.53 x 1011
Chapra, M. U. 2008. The Global Financial Crisis: Can Industry 322 7.1 x 1010 1.06 x 1011 9.43 x 108 6.02 x 1011
Agriculture 322 1.2 x 1010 1.35 x 1010 4.02 x 107 1.05 x 1011
Islamic Finance Help Minimize the Severity and Current Account 298 2.20 x 109 2.3 x 1010 -1.01 x 1011 1.32 x 1011
Frequency of Such a Crisis in the Future? Exports 362 7.47 x 1010 1.23 x 1011 1.13 x 109 7.74 x 1011
Jeddah: Islamic Development Bank. Domestic Credit %
Inventory
286
330
54.1
1.24 x 109
42.8
4.47 x 109
6.48
-1.98 x 1010
200.6
3.29 x 1010
El-Gamal, M. A. 2001. An Economic Explication of the
Prohibition Riba in Classical Islamic Appendix B Taxonomy of Variables
Variable Measure Unit
Jurisprudence. Working Paper. Rice University. Investment Gross fixed capital formation (formerly gross domestic fixed investment) includes land Current US
El-Gamal, M. A. 2006. Islamic finance: Law, improvements (fences, ditches, drains, and so on); plant, machinery, and equipment
purchases; and the construction of roads, railways, and the like, including schools, offices,
Dollars

Economics and Practice. Cambridge: Cambirdge hospitals, private residential dwellings, and commercial and industrial buildings.
Financial Frequency of financial fatwas. Frequency
University Press. Muslim % Percentage estimate of total population identifying themselves as followers of Islam. Percentage
Global Banking & Finance Review. 2010. List of Legal Frequency of legal fatwas. Frequency
Population Total population is based on the de facto definition of population, which counts all residents
Islamic Banks in Switzerland. regardless of legal status or citizenship except for refugees not permanently settled in the Numerical
country of asylum, who are generally considered part of the population of their country of
Grais, W. and Pellegrini, M. 2006. Corporate origin
Governance in Institutions Offering Islamic GNI Total value of currently produced final goods and services produced by the domestic Current US
economy of a country, measured within a given period of time Dollars
Financial Services: Issues and Options. The Consumption Sum of private and general government consumption expenditures. Current US
World Bank. CPI
Dollars
Changes in the cost to the average consumer of acquiring a basket of goods and services that Laspeyres formula
Hale, T. and Moore, E. 2014. UK Sukuk Bond Sale may be fixed or changed at specified intervals
FDI Sum of equity capital, reinvestment of earnings, and other capital Current US
Attracts 2bn in Orders. Financial Times: Dollars
Business & Economy. Current Sum of net exports of goods and services, net primary income, and net secondary income Current US
Account Dollars
Hassan, M. and Dridi, J. 2010. The Effects of the Exports Goods, services and primary income is the sum of goods exports, service exports and Current US
primary income receipts. Dollars
Global Crisis on Islamic & Conventional Banks: Industry Value added in mining, manufacturing, construction, electricity, water, and gas. Current US
A Comparative Study. The International Dollars
Agriculture Value added in forestry, hunting, and fishing, as well as cultiva tion of crops and livestock Current US
Monetary Fund. production. Dollars
Kammer, A., Norat, M., Pinon, M., Prasad, A., Towe, C., Domestic
Credit %
Financial resources provided to the private sector by financial corporations, such as through
loans, purchases of non-equity securities, and trade credits and other accounts receivable, that
Percentage of
GDP
Zeidance, Z., and an IMF Staff Team. 2015. establish a claim for repayment.
Inventory Stocks of goods held by firms to meet temporary or unexpected fluctuations in production or Current US
Islamic Finance: Opportunities, Challenges, and sales, and work in progress. Dollars
Africa Islamic Finance Report 36

IDEAS - SYMPOSIUM
Appendix C List of Countries
Country: Year: Appendix E Average Marginal Effects (Model 5)
Bahrain 1985 2010

Bangladesh 1985 2010

Egypt 1985 2010
Indonesia 1985 2010
Jordan 1985 2010
Kuwait 1985 2010
Malaysia 1985 2010
Pakistan 1985 2010
Qatar 1985 2010
Saudi Arabia 1985 2010
Switzerland 1985 2010
Syria 1985 2010
Turkey 1985 2010
United Arab Emirates 1985 2010
United Kingdom 1985 2010

Appendix D Histograms of Financial & Legal Fatwas

Appendix F Average Marginal Effects (Model 6)

Africa Islamic Finance Report 37

IDEAS - OPINION

AAOIFI Shariah Standard on Gold WRITTEN BY

Dr. Mohammed Daud Bakar

AAOIFI Shariah Standard On Gold Under Development In

Collaboration With The World Gold Council And Its Expected Impacts

I have been asked to articulate on why a stand-

alone Shariah standard on gold is essential. Many
people would have assumed that gold does not
deserve a separate Shariah standard in the AAOIFI
production house. They have thought that the guiding
principles of gold can be provided under, or made
reference to, the existing AAOFI Shariah Standard
No (1) under the heading of Trading in Currencies as
gold has been perceived by the overwhelming
majority of the scholars, both classical and
contemporary, as carrying the function of currency
(al-thamaniyyah). Or at least, many would have
thought that the Shariah position on gold will only
need one or two pertinent Shariah rulings, namely the
requirement of spot transaction and equality of the
counter-values if it is exchanged for gold. They are not
wrong.
Africa Islamic Finance Report
This was also my first impression when we, at Amanie
Advisors, were approached by the World Gold Council
in 2014. I was personally carried away by my own
limited Shariah mind by under-estimating some peculiar
principles governing gold which are distinctive from
currencies. More interestingly, I was not aware of many
robust technical standards on gold in the world. When
the World Gold Council expressed their desire and
intention to look seriously into developing a Shariah
Standard on gold, it triggered my mind to take the
challenge to look into gold from a high ground position
(being a very important and sensitive asset from both
Shariah and world economy perspectives) as well as a
stand-alone Shariah standard to arrange and provide all
relevant Shariah principles and guidance in one Shariah
standard.
Working closely with the World Gold Council, we
managed to see through many important and potential
issues, prospects, as well as challenges surrounding the
whole value chain of gold production, distribution,
investment and monetisation in the world. From the
outset, it promised to be a good and worthwhile piece of
research and potentially a Shariah standard for the world
consumption. Backed and supported by the World Gold
Council (hereinafter referred to as WGC), we have
embarked on an intensive and extensive research on gold
from all points to appreciate this precious yellow
commodity in a novel perspective. In the journey to
make this endeavour more refined, and most
importantly, to have the international credential in the
eyes of global Islamic finance industry, we and the WGC
have managed to get the unreserved support from
AAOIFI early this year in 2016.
The involvement of AAOIFI in this effort is
unprecedented. It is a welcomed approach for AAOIFI to
be working with another reputable world class
organisation such as the WGC to strike their niche
objective that is to render as many Shariah Standards
available as possible on the world stage for the benefit all
stakeholders of financial community. It goes without
saying that the same benefit will go to the WGC in terms
of putting another standard on their shelves, namely
Shariah Standard on gold in addition to many of their
existing standards on gold from many various
perspectives. This is a perfect match, as far as I am
concerned, of a good collaboration between the WGC, an
industry standard setting body and AAOIFI, the Shariah
standard setting body.
38
IDEAS - OPINION
Why is this Shariah Standard on Gold Timely and a
Game Changer?
I believe that the timing for this Shariah Standard on
gold is perfect. Apart from being supported by the WGC
in terms of data and technical knowledge, and reinforced
by its international credentials, the interest on gold has
been on a trajectory path and welcomed by individuals,
corporations and not to mention various countries. Each
one is looking for many standards to suit their own plan
in dealing with gold. There are many standards on gold
as we speak now but one standard is lacking, which is a
Shariah standard on gold that may appeal to all
stakeholders who aspire to take part in gold dealings,
conforming to their religious teachings.
The interest on gold from Shariah perspective can be
seen coming from various quarters, ranging from
individuals to corporations to central banks and even
governments. While the public may be more interested
to have a clear cut guidance of how to invest in gold
either direct acquisition of the physical gold or via
financial instruments such as sukuk, ETF, fund, gold
deposit-based products or gold based structured
products the central banks may look at gold from Basel
III requirements. Governments may look into building
up their reserve via gold accumulation. This is on the
front-line. Those working at the back-end such as
producers and miners, financiers, guarantors, insurers,
not to mention transportation, distribution and vault
companies, amongst others, may be equally interested to
know how the Shariah would look at gold and regulate
its dealing. To be certain of the limit of the Shariah
parameter is a must in a business environment to avoid
any breach of the Shariah requirements. Nothing can be
taken for granted. The cost is too high and may be
punitive.
This is from a market perspective. From the internal
movement of the Shariah standards, we have seen many
Shariah standards being developed and propagated for
more than two decades already. There are many good
materials of these standards governing issues of security
or collateral, many various forms of transactions of both
sale and partnership, sukuk and shares, possession and
agency, etc. These have collectively provided a solid
platform to be used to support any 'new financial
product' in the industry leveraging on all of these great
achievements that we have achieved in the past. The
Shariah standard on gold or the gold industry in
particular, from my view, is the first beneficiary to
benefit from all these robust Shariah Standards which
have been developed thus far. Thus, the current design of
the Shariah standard on gold has incorporated many of
Africa Islamic Finance Report
these existing Shariah stands in many various Shariah
Standards to this new and stand-alone Shariah standard
on gold. This is also, to some extent, unprecedented.
The AAOIFI can simply make reference to these
relevant clauses without incorporating the impact and
implication of these clauses in the new Shariah standard
on gold. The AAOIFI has opted nevertheless to
incorporate as many relevant and pertinent clauses of
the existing Shariah Standards in this newly born
Shariah standard. What do you call this approach? As
for me, I would like to call it a symbiotic approach that is
using the same materials that we already have to
produce more refined and valued-added product. This
will create value not only to this new standard but also to
all other previous standards. Apart from leveraging on
the same materials, this approach helps to show how
coherent (or incoherent) the AAOIFI Shariah Standards
are, if we want to be analytical in our research.
The last point I would like to make in this section is that
this Shariah standard on gold is really a game changer.
Intuitively speaking, many would believe, of course
after reading this Shariah standard that these Shariah
provisions dealing with gold must have been made
available many years ago. All the provisions of this
standard are essentially something that are floating
around in the minds of people, both the scholars and
public, for many years already. But no one has ever
thought and planned to compile all of these provisions in
one place. This is exactly what AAOIFI in
collaboration with the World Gold Council is doing.
We at Amanie Advisors took the first step to compile
what we thought to be the relevant and pertinent Shariah
principles and issues in dealing with gold. The draft was
later further refined by many hours of meetings amongst
the AAOIFI sub-committee meetings in both Dubai and
Bahrain. The end product was later further scrutinised
by the Shariah Board of AAOIFI over many days of their
extensive discussions (and debate).
When we produce something which is in need by the
market, then we are actually producing something
which is a game changer. Internet is a game changer.
Nano-technology is another example. Plastic industry
was a game changer. This new standard can change the
ways we do or plan to do things. I will elaborate further
in the subsequent sections of this paper of how the world
of gold has reacted to this initiative of producing the
world's first Shariah standard on gold being
championed by two international bodies, namely
AAOIFI and the WGC. Suffice for me to say that this
39
IDEAS - OPINION
collaborative effort has benefited both worlds; the
Islamic financial world and gold industry world alike.
Methodological Observation on the AAOIFI
Shariah Standard on Gold
AAOIFI has been issuing more than 50 Shariah
Standards already. This Shariah standard on gold
wouldn't be the first and the last. As such, what is so
special about this standard? Allow me to share some of
the insights that I am able to discover while working on
this Shariah standard from day one.
First things first. It is essentially meant to be a stand-
alone standard in the sense that you can find as many
relevant principles of Shariah on gold as possible in one
standard. It seems that the initial drafters and the
AAOIFI sub-committee of the standard have the
motivation to compile almost all relevant rulings
dealing with gold under this standard. It will be easier
for the readers then to know the overall Shariah
prescriptions without referring to many other Shariah
Standards of AAOIFI found elsewhere. In other Shariah
Standards, many of the Shariah issues, if already
covered by other Shariah Standards, will be straight-
away referred to that Shariah Standard so that the reader
may need to flip through relevant Shariah Standards to
get what they need to know.
In the case of this Shariah Standard, special care is given
to mention clearly what are the relevant rulings for
example for salam, istisna', 'urbun (earnest money),
rahn (collateral and pledge), muqasah (set-off), hamish
jiddiyah (security deposit), wad (undertaking), etc., in
dealing with gold in one way or another. In short, the
relevant provisions or perhaps new provisions under
these different contracts and principles have been
reproduced or created just to support the whole master
design of this standard. This standard thus, can be
deemed to be a synthesis of the various Shariah
contracts in respect to gold contained in one
comprehensive stand-alone standard. This is very
unique.
Also, having the benefit of working with the WGC, the
Shariah standard on gold has the credential of
incorporating technical inputs, market conventions and
legal provisions related to gold, into the standard. This
is obvious when the Shariah standard does not even
define gold in its technical sense as many would have
expected it to be. Instead, the AAOIFI has provided a
general definition of gold saying that gold is the known
precious natural metal. This is a definition that
everyone seems to have in their minds. Different karats
of gold have been put under the definition section of the
Africa Islamic Finance Report
Shariah standard and this has been taken almost entirely
from the WGC standard definition. However, in dealing
with many different karats of gold under the Shariah
principles and rulings, this has been provided further
under section of 3/3/2 of the Shariah standard covering
gold which is mixed with other substances. This is the
most important but complicated section to develop in the
whole standard as far as I am concerned.
What is the substance of this provision?
Allow me to elaborate this section in detail to give both
high level and practical thinking of AAOIFI. Basically,
gold can be mixed with many other substances and the
mixing activity can be intended or not intended. For the
first case where the mixing is intended, it could take two
scenarios, namely it is mixed with silver and with other
elements other than silver. The Shariah standard
prescribes that when it is mixed with silver with the full
intention of making it mixed and infused, this mixed
gold can be sold for another pure gold or pure silver
provided the sale is on spot and the pure gold counter
value is heavier than the gold weight in the gold mixed
with silver. When the same mixed gold with silver is
exchanged (or sold) for silver or money, it must be on
spot without having the requirements of having the
weight of the pure gold more than the silver. The reason
is because, in this case, the gold component in the mixed
gold with silver is being exchanged for another element
of different type that is silver or money. The
requirements of having equality of the weight is no
longer a case in this case which is similar to the sale of
USD for AED.
In the second scenario when gold is mixed with elements
other than silver (provided that the gold component is
more than 50% of the mixture), it can be sold for another
pure gold on spot on a condition that the pure gold
component is heavier than the gold component in the
mixed gold. The same mixed gold can be exchanged for
pure silver or mixed gold with other elements other than
silver on spot basis without having the requirement of
being equal. If this mixed gold is exchanged or sold for
other than silver and monies, spot transaction is not
required.
The next sub-section of this clause of the Shariah
standard is very interesting indeed. It prescribes with a
certainty that if pure gold is less than 50% of the total
mixture, it will not be deemed as gold unless when it is
exchanged or sold for gold or silver or monies in which
case only the spot sale is a requirement.
40
IDEAS - OPINION
The other possibility is when the gold is mixed with
something that is not intended for itself. The purpose is
only to change the karat or colour of the gold. In this
case, this mixed gold may be sold for another pure gold
provided it is a spot transaction and of equal amount of
the two components of pure gold in both counter values.
The last possibility is the mixture of little gold in some
other items which is not intended for itself like pens,
watches and the like. The ruling of gold does not apply
to all these items.
As you can see, the articulation of these rulings and their
various scenarios are important to provide clarity for all
the stakeholders as gold items in the modern times (as
well as in old times) may take different forms. The
Shariah standard has taken the reality of different karats
in the industry to be dealt with in this standard though it
is painstaking. The Shariah discussion must engage all
the issues and prescribe the views that are in line with
both the Shariah juristic algorithm of rulings and the
industry standard.
The last point that is worth pointing out is the stand
taken by the AAOIFI Shariah Board to prescribe two
different views in the same section of the Shariah
standard. This is relating to jewellery. As this topic has
recorded two strong different streams of juristic thought
amongst the contemporary scholars, as well as the
various Shariah boards of many Islamic financial
institutions from Indonesia to America, the Shariah
standard tend to allow both views to be adopted by
respective Shariah board of the financial institutions or
funds or any other vehicles as the case may be. This is
quite a rare phenomenon in the whole history and DNA
of the other Shariah standards of AAOIFI but it is
arguably suitable and fit for the Shariah standard on
gold. Having said that, the Shariah standard has added a
new qualification which is quite interesting that is the
workmanship for the jewellery must be really intended
and of certain considered value to avoid any bad
intention to make the gold bar part of the exceptional
ruling of jewellery by having just a very minimalist
workmanship. This is not a good law on making gold bar
jewellery.
Dr Mohd Daud Bakar is the President/CEO of the
International Institute of Islamic Finance (IIIF) Inc.
(BVI) and Amanie Advisors Sdn. Bhd. Views and
opinions expressed by the author of this paper are those
of the author's and do not necessarily reflect or directly
or indirectly represent the official policy of AAOIFI, the
WGC and any other institutions the author is affiliated
with.
Africa Islamic Finance Report 41

IDEAS - ENCOUNTER

Islamic Finance:
an ethical alterative
to conventional Finance?
Aziz Tayyebi is financia reporting officer at ACCAand is a leading contributor
to ACCA's responses to global developments in this area.

York and London have launched indices affiliated to their

Whether the Islamic finance
industry continues to escape the
full force of current economic
turmoil remains to be seen. What
is clear is that the rapid growth in
this area of finance and its ethical
foundations make Islamic finance
an increasingly serious alternative
to conventional finance.
main Dow Jones and FTSE indices, to provide a
benchmark for equity prices for investments in Islamic
financial institutions.
The UK Government has also played a major role in
trying to make the City of London the global centre of
Islamic finance by extending support wherever possible,
including the abolition of double stamp duty on Islamic
mortgages, and the recently announced plans to test the
feasibility of issuing Shariah-compliant sukuk bonds.

The 2007 Budget introduced new measures for sukuk

I slamic finance is one of the fastest-growing segments

of todays banking industry. Formerly deemed a
marginal industry by some, Islamic finance is now
bonds to be issued, held and traded on the UK financial
market. Indeed, the emergence and growth of sukuk
instruments (commonly referred to as Islamic bonds)
recognised as a vital and thriving market. While the size of
Islamic finance and banking activities, estimated to range
have revolutionised the Shariah-compliant debt
securities sector. They have not only given momentum to
from $500bn to $1,000bn, is still a fraction of the Islamic financial industry on a global scale, but have
conventional banking, the impressive growth rates of also provided opportunities for the development of
1015% seen in recent years emphasise the potential secondary debt markets. After the German state of
market for such activities. Saxony-Anhalt became the first non-Muslim issuer to
enter the Islamic debt market in 2004, US and Japanese
It is the fact that this growth is increasingly being seen firms have also issued sukuk bonds. In the UK, the
outside the traditional markets of the Gulf Cooperation leveraged buy-out of Aston Martin from Ford (2006) was
Council (GCC) countries and Malaysia which has meant carried out using a sukuk instrument.
that global market participants and policy makers are
increasingly paying attention to its potential. Both New
Africa Islamic Finance Report
What is Islamic Finance?
Islamic finance is any finance that is compliant with the
principles of Islamic law (Shariah). In terms of finance,
Shariah explains in detail the ethical concepts of money
and capital, the relationship between risk and profit and
the social responsibilities of financial institutions. Interest
(riba) The most well-known aspect of an Islamic financial
system is the prohibition of paying or receiving interest on
capital.
Essentially, any positive, fixed, predetermined rate tied to
the maturity and the amount of principal, which is
guaranteed irrespective of the performance of the
investment, is considered riba and is so prohibited.
This prohibition is not to be confused with a rate of
returnor profit on capital, as the earnings and sharing of
profit is very much encouraged within Islam. Moreover,
profit, determined ex post, symbolises the creation of
additional wealth through successful entrepreneurship,
whereas interest, determined ex ante, is a cost that is
accrued irrespective of the outcome of business
operations, and may create wealth, even if there are
business losses.
Risk and uncertainty (gharar) Contractual risk is also
forbidden. In general, this prohibits the selling of goods or
services that the seller is not in a position to deliver or the
making of a contract which is conditional on an unknown
event. You cannot sell something you do not own. Also,
the price and nature of the goods being transacted are
defined in detail and agreed upon by both parties, thereby
avoiding a sale that may represent a gamble (for example,
conventional short sales or sales on margin are
prohibited).
Although the prohibition of interest can indeed be viewed
as the nucleus of Islamic doctrine relating to finance, there
are a number of other supporting principles which provide
guidance for an Islamic financial system:
advocating risk sharing
promotion of entrepreneurship
discouraging speculative behaviour
preservation of property rights.
These are evident through consideration of the Islamic
financial system and conventional banking.
What differentiates Islamic finance and Conventional
finance?
The evolution of Islamic banking and finance has
comeabout from two main objectives, namely the
elimination of interest-based (riba) finance and the
development of low-risk products which would give
42
IDEAS - ENCOUNTER
confidence to regulators, shareholders and depositors
alike. This latter aim was all the more necessary given the
failure of some of the earlier Islamic banking models in
Egypt, Pakistanand Malaysia in the 1950s.
One of the most notable features of the current
Islamicfinance market is the development of a
comprehensive range of product offerings, with the
industry now having almost like-for-like parity with
conventional banking, whether it be investment banking,
commercial banking or personal financial services.
Many of the primary products developed in Islamic
banking were debt based in order to be more akin to the
anatomy of conventional banking products. The use of
these products, clearly similar to conventional
instruments certainly appeased many of the stakeholders,
including the financial services industry itself. However,
those same resemblances did and continue to receive
criticism from those wishing to see Islamic finance based
on the core principles of Shariah.
Nonetheless there are quite distinct aspects of Islamic
finance which differentiate it from conventional modes of
finance. Describing the Islamic financial system simply as
interest-free does not do justice to the system. Its essence
stretches to the promotion of entrepreneurship,
preservation of property rights and the transparency of
contractual obligations. These and the other pivotal and
underlying principles are formed through a thorough
consideration of Shariah.
The nature of capital as solely being a medium of
exchange (ie no intrinsic value) is central to the
prohibition of interest, and forms the central tenet of
Islamic banking and finance. However other important
principles include:
the prohibition of contractual risk
advocating sharing of risk and return
asset-banked finance (as banks cannot rely on issuing
against collateral alone).
Some also view the integration of ethics and
values into finance as a positive development,
with many investors reportedly considering SCF
(Shariah-compliant finance) to be more reliable
than conventional financing, given the recent
global credit crisis and fears of economic
recession.
What are the most commonly used instruments
of Islamic finance?
Given the restrictions outlined above, modern-day
scholars have developed principle modes of financing
which can be applied to contemporary financial scenarios
while adhering to Islamic principles. Some common
Africa Islamic Finance Report
financial instruments currently being utilised in Islamic
finance in various forms are as follows.
For financing working capital and liquidity management
Murabaha: this is effectively cost-plus financing, as used
for trade and asset finance, allowing deferred payment by
customers. Rather than lending money as in conventional
loan, the bank purchases the requested commodity
(thereby taking in on risk) and sells it to the customer at
the agreed mark-up price. In recent times murabaha
contracts have been the instrument of choice for many
financial products, be it trade and asset finance or the
provision of working capital facilities.
Istisnaa: aimed at long-term construction projects, this
along with murabaha products, is one of two types of
finance which allows the sale of a commodity prior to it
coming into existence. Istisnaa contracts are clearly
aimed at long-term projects, and are frequently used to
finance the construction of real estate developments and
large assets such as ships.
For asset finance
Ijara: this is a quasi-debt instrument, essentially
equivalent to leasing. Often used in the context of home
purchasing, most aspects of an ijara are the same as those
of conventional leasing, whereby the investor (lessor)
purchases and leases the underlying asset to the
prospective borrower (lessee) for a specified rent and
term. Ijara are frequently used to finance the acquisition
of real estate and equipment, although they have also
been utilised to effect leveraged buy-outs in private
equity transactions.
Diminishing musharakah: recent times have witnessed a
shift in emphasis away from ijara towards diminishing
musharakah (DM) as a mode of financing Islamic
mortgages. Many of the major Islamic mortgage
providers have either already switched to DM (HSBC
Amanah uses DM) or are planning to do so imminently.
DM is a hybrid financing technique involving both ijara
and musharakah. It appeals to Islamic investors because
it is based on the fundamental principle of sharing risk.
The attraction for financiers is twofold, in that it can
incorporate a variable rate of return and has a credit
profile that would be acceptable to most conventional
institutions.
Equity-like instruments
Musharakah: this is akin to a joint venture arrangement,
through an equity participation contract. Ownership is
distributed according to each partners share in the
financing, and profit and loss is shared by the partners.
Such contracts are often used in connection with large
project finance and private equity funds. Despite it being
a preferred option by many Islamic scholars, musharakah
43
IDEAS - ENCOUNTER
still captures only a tiny portion of all Islamic finance, as
there can be questions over the control of the assets.
Mudarabah: this is essentially an investment fund where
one party provides the entire capital, and the other party
provides the management (usually the bank, but can be
the reverse). Profit sharing is agreed up-front, although
the loss is borne by the provider of the funds alone.
Fixed income investment Sukuk: this is an investment
certificate (bond) that represents a proportionate interest
in a well-defined pool of assets that yield income and
capital returns. Usually set up through the conventional
securitisation process, with a special purpose vehicle
acquiring the assets, the returns from the assets are passed
to sukuk holders (investors). To date popular asset classes
have included real estate. This method has been a popular
way for many governments to raise funds for
infrastructure, and accounts for the largest portion of
Islamic finance.
Who regulates Islamic finance?
At the micro level, institutions that wish to offer hariah
compliant products have to have a Shariah Supervisory
Board (SSB) (or at least a Shariah scholar). It is their
responsibility to review and approve financial practices
and products for compliance with Islamic principles.
However, just as Shariah itself is open to interpretation,
so Shariah scholars often disagree as to what is Shariah
compliant or not. Thus the laws that govern Islamic
finance and the regulation of Islamic finance institutions
continue to vary (mainly across jurisdictions).
At the macro level, given the markets where Islamic
institutions initially developed, and the fact that the
largest proportion of the market still remains in those
jurisdictions, it is unsurprising that the major regulatory
institutions are located in countries like Bahrain and
Malaysia. The following are the most influential
standardsetters regarding accounting for Islamic
financial institutions.
Accounting and Auditing Organisation for Islamic
Finance (AAOIFI)
AAOIFI was founded in Bahrain in 1990. Its standards
(about 70 to date) are followed by a number of countries
and institutions in the Gulf region, in particular.
Malaysia Accounting Standards Board (MASB)
MASB is the national standard setter for Malaysia and
also produces Islamic accounting standards for Islamic
institutions (since about 2001).
Islamic Financial Standards Board (IFSB)
IFSB, based in Malaysia, is more akin to the Basel
Africa Islamic Finance Report 44

IDEAS - ENCOUNTER
Committee, and aims to promote the development of a concern around whether members should require FSA
prudent and transparent Islamic financial services approval and, where members are on more than one board,
industry. It also has a member on the International how potential confidentiality issues are dealt with.
Accounting Standards Boards Standards Advisory
Council. Ensuring financial promotions of Shariah compliant
products are clear, fair and not misleading.
How is the UK leading the development of Islamic
finance? In practice both the FSA and Islamic institutions
themselves have been pragmatic, and issues over the
Having initially relied on products created in traditional definition of deposits, separating the responsibilities of
markets, the UK has in recent years used its long-standing SSBs and management have been resolved. This approach
reputation for innovation to develop products which are has already seen the establishment of six solely Islamic
now being marketed in other countries such as the Middle banks in the UK. These now operate alongside the
East. The reasons for this are numerous but are headed by increasing number of Islamic business lines (Islamic
the UK financial services proven skills base, with the large windows) being operated by major international financial
pool of legal, accounting and banking professionals institutions such as HSBC, Deutsche Bank and Citibank.
leading the way in developing Islamic finance in the UK as
well asaround the world. The preference for English law in While growth rates for Islamic finance are relatively high
many Islamic finance transactions outside the UK is it still only constitutes a small proportion of the global
testament to that skills base. financial services sector. For it to take a greater share and
to expand in other jurisdictions, Islamic finance needs to
We have earlier mentioned the various public policy and focus on a number of key issues.
tax initiatives the UK Government has taken since the
early 2000s. The relaxation of double stamp duty was a Product development
considerable relief, as property for instance purchased As some risk management tools are not available to
using Islamic finance would be bought and sold (legal title Islamic firms, such as certain derivatives, other risk
transferred) more than once. Thus stamp duty would management methods need to be developed.
otherwise be payable initially when the bank purchased the
property and again when the legal title is transferred to the Standardisation
borrower upon repayment of the loan to the bank. Differences of opinion from Shariah scholars on whether
Subsequent Finance Acts have contained further measures certain practices or products are Shariah compliant
at equalising the tax position of other Islamic products with continue. A common set of standards and closer links
those of their conventional counterparts. between regulators and standard setters such as AAOIFI,
the IFSB and the FSA are crucial.
In the UK, the regulation of Islamic financial institutions
falls within the remit of the Financial Services Authority Human capital
(FSA). However, in contrast to other centres of Islamic The nuances of Islamic jurisprudence and its assimilation
banking such as Bahrain and Malaysia, which have with conventional banking requires a great deal of
separate authorisation and regulation for Islamic banks, expertise. Investment in training and formal qualifications
the FSA regulates all financial institutions to the same will be vital to attract and maintain the right level of
standards. Thus while aiming to promote the UK as a professionals to allow the industry to develop.
global hub for Islamic finance, the FSAs approach was
clearly articulated by its then Chairman, Sir Howard As would be expected with a relatively recent
Davies in 2003, as being one of no obstacles, but no phenomenon, there remain legitimate concerns over the
special favours. mechanics and regulation of Islamic finance. However, as
a Congressional Research Service report on Islamic
This unique position that the FSA has to maintain means finance in July 2008 notes: Some also view the
that when authorising an Islamic bank in the UK, careful integration of ethics and values into finance as a positive
consideration is required. While Islamic financial development, with many investors reportedly considering
institutions fall within the same regulatory regime as SCF (Shariahcompliant finance) to be more reliable than
conventional banks, some specific issues which the FSA conventional financing, given the recent global credit
have previously raised have included the regulatory crisis and fears of economic recession.
definition of products and the role of the SSB. The
significance of Shariah definitions in Islamic contracts is
paramount, and it is therefore vital that institutions assess
whether those products are within the bounds of regulated
activities. With regards the role of SSBs there is particular
Africa Islamic Finance Report 45
Africa Islamic Finance Report 46
Africa Islamic Finance Report
Dr. Abdul-Nashiru Isshaku, New Governor of the Central Bank of Ghana
D r. Abdul-Nashiru Issahaku is Governor of
the Central Bank of Ghana and Chairman
of the Monetary Policy Committee. His
appointment as Governor was approved by His
Excellency, John Dramani Mahama, President of
the Republic of Ghanaand took effect from the 4th
of April, 2016.
Dr. Issahaku joined the Bank of Ghana in July 2013,
and prior to his new appointment, he was the second
Deputy Governor and an Executive Board member of
the central bank, with oversight responsibility of nine
47
WORDS & IMAGES - PROFILE
departments including Economics, Statistics,
Finance, Legal, Banking Supervision and Financial
Stability. Dr. Issahaku is also a member of Ghana's
Economic Management Team and Chairman of the
Investment Management Committee of the Bank of
Ghana.
He also chairs the Finance and Administration
(F&A) Committee of the Ghana Cocoa Marketing
Company and is also the Commissioner and
Chairman of the F&A Committee of the Securities
and Exchange
Commission.
Africa Islamic Finance Report 48

WORDS & IMAGES - PROFILE

Dr Issahaku is a Development Economist of in International Affairs and Development from
international repute, having served in different Clark Atlanta University, USA.
capacities at various international financial and
economic institutions both in Ghana and abroad. Dr. Issahaku is a prolific writer with scores of
He worked with the World Bank as a Senior scholarly and professional works to his credit.
Public Sector Specialist; the African His well-known works include the Political
Development Bank (ADB) as a Principal Economy of Economic Reforms in Ghana,
Governance Expert and the United Nations Capacity Building for Good Governance and
Economic Commission for Africa as a Poverty Reduction in Parliamentary Systems
Development Management Officer. Dr. Issahaku and Human Rights, Economic Development and
was a Socio-Economic Advisor and Project Democracy. His major strengths are his passion
Coordinator for the Canadian International for excellence, ability to transform challenges
Development Agency. into opportunities, integrity and exceptional
people-management and problem solving skills.
In addition, Dr. Issahaku has effectively managed This is complemented with strong interpersonal
and supervised complex projects of international and negotiation skills as well as sound economic
proportions. He was the Task Manager for analytical and financial management
Gambia' s Economic Management Programme capabilities.
(2004 2009), and spearheaded the Institutional
Budget Support Programme for Tanzania (2005 He leverages his diverse exposure and works
2009). effectively with people of different backgrounds
in the private and public sectors. He is excited by
Back home in Ghana, he was Senior Planning opportunities to formulate policies that will raise
Analyst of the National Development Planning people's standards of living.
Commission, and later, Chief Executive Officer
of the Export Development and Agriculture Dr. Issahaku is stepping in as Governor of the
Investment Fund (EDAIF), which he remarkably Bank of Ghanaat a critical and sensitive time for
restructured and restored is operational the Ghanaian economy, in light of rising budget
effectiveness with unparalleled excellence. deficits and a record high inflation.

Dr. Nashiru Issahaku, a committed Muslim from As an International Development Economist

the Northern region of Ghana had his early
education at the Ghana Secondary School,
Tamale, the capital of the Northern Region,
before moving to Malaysia, where he bagged his
Bachelor degree in Business Administration from
the prestigious International Islamic University.
He got his MBA in Finance and Strategic
Management from Maharishi University of
Management, USA and obtained a certificate in
Public Financial Management from Harvard
University Kennedy School. He crowned his
academic achievements with a Doctorate degree
with a rich and versed experience in economic
policy management and development, he is
expected to introduce and implement
fundamental restructuring reforms, including
policy shifts that are expected to restructure
Ghana's monetary policies and refocus the Bank
of Ghana as the most effective monetary
authority in Africa. Under his leadership, Islamic
finance is also expected to get a boost. Dr.
Issahaku is a sports enthusiast and enjoys Table
Tennis. He is married with four children.
Africa Islamic Finance Report 49

WORDS & IMAGES - PROFILE

TIJARAH
MICROFINANCE BANK
LIMITED
www.tijarahmicrofinancebank.com
Nigerias First Islamic Microfinance Bank
TIJARAH MICROFINANCE BANK LIMITED (TMBL) ,
.............a new innovation in microfinance banking in Nigeria.
TIJARAH MICROFINANCE BANK LIMITED is
the first Non Interest (full-fledged Islamic)
Microfinance Bank in Nigeria. Incorporated on
the 26th of November, 2014, TMBL was issued
with a state-wide Microfinance Banking License
by Central Bank of Nigeria on the 5th of
September, 2014 and commenced full banking
operations on the 10th October, 2014, in Bauchi,
capital of Bauchi State in the north-eastern part of
Nigeria.

Vision

To lead the way in deploying Islamic

microfinance towards ensuring a poverty-free
Nigeria.

Mission Statement

To be the Bank of choice for the efficient delivery

of non-interest microfinance in support of the
vulnerable, the poor and the micro-entrepreneur
to facilitate sustainable economic development
and growth.
Value Proposition
Tijarah MFB Limited operates on purely Islamic
banking and finance principles, where it invests to
facilitate productivity, add value and anticipate a
reward from a positive business outcome. Thus, it
agrees to take risk for a share of reward and is
bound to accept negative outcomes when they
occur, while demanding for the best of effort,
diligence and responsibility from its operating
partners. Its lending, investment and funding
operations are strictly assets or services based
and within the tenets of the Shari'ah, making it
possible for its customers to transact their
banking activities in accordance to the dictates of
Alhaji Jamil Hassan, MD/CEO - TMBL
their religious belief. Thus, Tijarah MFB is here to
facilitate adherence to the divine call: O ye who
believe! Fear Allah and give up what remains
of your demand for interest, if ye are indeed
believers (Qur'an 2:278).
Products and Services
Deposits:
1. Ash-Shams (Current) Account provides safe
custody for depositors' funds and allows them
access to the Bank's financial intermediation
services. Although depositors don't normally
come to the Bank to offer it a loan, for practical
reasons however, the Bank is obliged to treat
deposits on this account as benevolent (Qard
Africa Islamic Finance Report
Hassanah) loan, which it agrees to pay back
upon demand from the depositor either in
person or proxy (cheque). The Bank neither
receives payment of fees on these deposits.
2. Al-Qamar (Savings) Account is an everyday
savings account that caters for small savers'
need for safe custody, security of payment
and the potential to instill financial discipline
and steady capital build-up towards future
investment and wealth accumulation. Only a
fraction of the depositors' earning is being
targeted, while the owner is encouraged to
live on the balance for a better tomorrow.
Deposits through this product are treated as
Qard Hassan loan to the Bank to be returned
on demand.
3. Al-Qamar Plus (Premium Savings)
Account, is a target savings account based
on the Mudarabah principle (profit sharing
joint venture), where funds are locked down
for a minimum period of 90 days and invested
by the Bank in opportunities of similar tenor.
Profits are to be shared at 65:35 ratio between
the Bank and investors. It requires minimum
deposit of N25, 000.00.
4. Hajj Savings Account, provides opportunity
for fractional savings for intending pilgrims
both for the current and later year(s)
pilgrimage. Also based on the Mudarabah
principle, where savings are invested and
profits shared with participants (at 60:40 ratio
between the Bank and participants) to fast-
track realization of their Hajj. It has no
minimum threshold but as the depositor
decides, funds can only be accessed for Hajj
payment where enough has been
accumulated for the purpose.
5. Elegance (Fixed Deposit) Account is based
on the Musharakah principle (profit/loss
sharing partnership). With a minimum deposit
of N250,000.00 and tenor 180 days or six
months, without access to the funds, for a
share of profit or loss according to
participants contribution. Profits are shared
quarterly (at 50:50 ratio), while losses are
borne according to the portion of participant's
investment to the pool. The principal plus
50
WORDS & IMAGES - PROFILE
accrued profit are re-invested continuously for
the tenured period, which would then be
terminated or renewed on depositor's
request.
6. Al Noujoom or Galaxy (Fixed Deposit)
Account, is also based on the Musharakah
principle but with a minimum deposit of
N500,000 and a longer contract tenor of 270
days or nine months. Profits are shared
quarterly but at the ratio of 40:60between the
Bank and depositors while losses are shared
according to each participant's contribution.
Likewise the principal plus accrued profits are
re-invested till the end, unless otherwise
instructed by the participant.
7. Attajiri Investment Account, is based on
the Wakalah principle (fee-based Agency
relationship). Supported by a standard
Master Wakalah contract where the Bank as
Wakeel (Agent) selects the best and most
profitable portfolio with track record of
favourable performance to invest managed
funds. Forecast profit are indicated on the
offer letter to the Muwakkeel, while the Bank
deploys its best funds management skill to
ensure its realization for a 1% Wakalah
(Agency) fee on amount invested. If forecast
profit is realized, it all goes to the
investor/depositor, but when exceeded, the
Bank keeps the excess along with its 1%
agency commission. It requires an initial
deposit of N1,000,000.00 and to be locked
down for one year before termination. Profits
are to be distributed annually.
8. Zakkat (Management) Account, is also
based on the Wakalah principle, where the
Bank collects Zakkat due from its customers
and other volunteers for distribution to the 8
categories of Shariah prescribed
beneficiaries on annual basis. The Bank
benefits from the 12% recommended
management fee as fund manager.
Stewardship accounts are rendered to
contributors on half yearly basis.
9. Sabil (Charity Management) Account is
based on the Wakalah principle. This is a
unique innovation from Tijarah MFB Limited,
Africa Islamic Finance Report
which seeks to institutionalize the
mobilization, collection and distribution of
Charity on a sustainable basis. Premised on
the adage that 'little drops make an ocean'
this scheme has the potential to mobilize
enormous amounts through small charity
contributions of as little as N100 monthly
from workers' salaries to feed, heal, cloth
and even shelter the hungry, the sick, the
naked and the homeless in our society
and in their wealth and possessions
(was remembered) the right of the
(needy), him who asked and him who (for
some reason) was prevented (from
asking)Qur. 51:18.
Tijara Microfinance Bank therefore reminds all
people of means to give our Creator a small
portion of their earnings as loan for which He has
promised to repay in multitude. Stewardship
accounts are to be published on national dailies
biannually.
Business:
1. Tijarah (Business) Boost supports MSMEs
with tools, equipment as well as working
capital to accommodate other financing
gaps on profit sharing basis. The nature of
the proposal determines the appropriate
financing mode to adopt as agreed by both
parties.
For further inquiries, please call as follows:
TIJARAH
MICROFINANCE BANK
LIMITED
www.tijarahmicrofinancebank.com
Nigerias First Islamic Microfinance Bank
TMB Limited. A better way to bank!
51
WORDS & IMAGES - PROFILE
2. Naurah with Ease, to help finance the
acquisition of household goods and other
luxury equipments (TV sets, Refrigerators,
Vehicles, Laptops and etc), on cost-plus
mark-up/deferred payment or cost-plus
mark-up/lease basis.
3. Quangilah Express, to provide Bid-Bond,
APG and Performance Bond fee-based
services, as well bridge finance to
contractors to facilitate timely execution of
contracts on profit/loss sharing basis.
4. Qungiyah (Group) Finance, to provide
shared-responsibility/joint-liability
financing facilities to women groups and other
indigent community based organizations on
cost-plus mark-up or profit sharing joint
venture arrangement.
5. Saeedah Loan Scheme, to provide
soft/benevolent interest-free loans to salary
earners and small-savers for non-
commercial or personal consumption
purposes only. It requires the purchase of an
Application Format the cost of N1, 500 only
per request, while the borrower repays the
exact amount borrowed without any addition
whatsoever. Repayment is to be scheduled to
the borrower's convenience as the loan is
aimed at easing his difficulty. It is based on the
Qard Hassan principle.
STABLES PLAZA
2A Murtala Mohammed Way
(Opposite Fidelity Bank Plc)
P. O. Box 3583,
Bauchi, Bauchi State, NIGERIA
Telephone: +234 (0) 802 201 5400
Email: info@tijarahmicrobank.com
Website: www.tijarahmicrobank.com
Africa Islamic Finance Report
I believe that banking institutions are more
dangerous to our liberties than standing
armies. If the American people ever allow
private banks to control the issue of their
currency, first by inflation, then by deflation,
the banks and corporations that will grow up
around [the banks] will deprive the people of
all property until their children wake-up
homeless on the continent their fathers
conquered. The issuing power should be
taken from the banks and restored to the
people, to whom it properly belongs. Paper is
poverty it is only the ghost of money, and
not money itself. - (Thomas Jefferson,
Founding Father, 3rd US President, and
Author of the Bill Against Usury)
I see in the near future a crisis approaching
that unnerves me and causes me to tremble
for the safety of my country; corporations
have been enthroned, an era of corruption in
High Places will follow, and the Money Power
of the Country will endeavor to prolong its
reign by working upon the prejudices of the
People, until the wealth is aggregated in a few
hands, and the Republic is destroyed.
- Abraham Lincoln, 16th US President
Banks have done more injury to the
religion, morality, tranquility, prosperity,
and even wealth of the nation than they
can have done or ever will do good.
- John Adams, Founding Father and 2nd US
President
52
WORDS & IMAGES - OPINION
You (the bank) are a den of thieves and
vipers, and I intend to rout you out, and by
the Eternal God, I will rout you out.
- Andrew Jackson, 7th US President
OTHER OPINION
The one aim of these financiers is world
control by creation of inextinguishable
debts. - Henry Ford American Industrialist,
Founder of the Ford Company
"The most hated sort, and with the greatest
reason, is usury, which makes a gain out of
money itself, and not from the natural object
of it. For money was intended to be used in
exchange, but not to increase at interest. . .
Wherefore of all modes of getting wealth this
is the most unnatural." - Aristotle, Greek
philosopher and scientist
If you lend money to any of my people
with you who is poor, you shall not be like
a moneylender to him, and you shall not
exact interest from him. - Exodus 22:25
"Lends at interest, and takes profit; shall he
then live? He shall not live. He has done all
these abominations; he shall surely die; his
blood shall be upon himself. - Ezekiel 18:13)
Africa Islamic Finance Report 53

.......developing alternatives

Laying the Foundations for Halal Market Economy in Africa

Helping Small Businesses and Entrepreneurs Gain New Skills
Building Capacities to Educate and Innovate
Supporting Research and Growing New Ideas
Connecting Research, Education and Training to the Challenge
of International Development
Providing Access to Cutting EdgeTechnologies

www.afrief.com
Africa Islamic Finance Report 54

AFRICA ISLAMIC ECONOMIC FOUNDATION

........developing alternatives

A Whole New World Economy is Emerging.

We are Here to Energize its Growth

T
he Africa Islamic Economic Foundation (AFRIEF) is an independent organisationthat
enhances dialogue, enables exchanges and encourages collaboration across the thematic
areas of Islamic economics and finance, education, sustainable development, governance
th
and public health. AFRIEF assumed the legal status of a Non-Governmental Organisation on 9
December, 2013 and its secretariat, located in Tamale in the republic of Ghana is at present hosted
by Al Furqan Foundation.

Working in close collaboration with its strategic partners, AFRIEF networks with individuals,
Governments, public and private sector organizations and supports transformative strategies
among community stakeholders, anchor institutions, and key policymakers in AU and OIC
member countries. Its staff and associates are involved in a wide range of projects involving
research, training, policy development, and community-focused work designed to promote an
asset-based/interest-free paradigm of economic development in Africa.

Within the general promotion of Islamic Economics and Finance, AFRIEF puts research work at
the centre of its efforts, with the goal of better understanding and interpreting trends and structures
of social-economic phenomena for the advancement of knowledge. Recognising that a country's
GDP does not tell the whole story about the health of its economy, AFRIEF promotes an
alternativeeconomic thought that emphasizes and places the well-being of the individual on centre
stage.Through the application of alternative economic tools and modelsAFRIEF compiles the
collective and individual experiences of peoples, organizations, companies and countries from all
over Africa.

Bringing together scholars and professionals, leaders, policy makers and graduate students from
diverse academic backgrounds, AFRIEFhosts a series of conferences aimed at discussing the
state of research advancements in the most important topics affecting the social and economic
development of Africa within an international framework and designs innovative and sustainable
solutions for today's challenges, but that are flexible to serve tomorrow's needs.

AFRIEF supports national regulatory institutions like Central Banks, Security and Exchange, and
Insurance regulatory bodies to develop plans and roadmaps towards a well-functioning Islamic
Finance and Halal economic system.It also works with relevant stakeholders to establish,
develop, promote and regulate a financial market based on Shari'ah principles and subsequently,
create a secondary market for Islamic capital market instruments in Africa.

Organizationally, the Africa Islamic Economic Forum (AIEF) that is held each year in a different
African country is themost important annual event of the Foundation, which serves as platform for
exchange of ideas, knowledge sharing and networking.

AFRICA CONTACT US:

Al Furqan Building, Behind VilLage Water Reservoirs,

AFRIEF
Developing Alternatives
ISLAMIC
ECONOMIC
Lamashegu, P. O. Box ER 516,
Tamale, Northern Region,
Tel: +233 - 243 65 54 46, +233 244 - 48 57 48, +234 70 30 15 01 83
E-mail: info@afrief.com, islamicinvestmentforum@gmail.com
FOUNDATION Website: www.afrief.com
Africa Islamic Finance Report 55

42Years
in the Service of Development
Africa Islamic Finance Report
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