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Islamic Finance: Instruments and Markets

Viewpoint: Shariah Law—Bringing a New Ethical Dimension to Banking by Amjid Ali



Amjid Ali, senior manager, HSBC Amanah Global, believes that shariah finance is broadening its appeal and reach—both among Muslims and non-Muslims—as a result of the banking and financial crisis. Recognized as one of the most influential Muslims in the United Kingdom by the Muslim Power 100 Awards, Ali has 22 years of branch banking experience with Midland Bank and HSBC in the United Kingdom.

In September 2003 he joined HSBC Amanah UK as senior business development manager, with responsibility for raising the profile of Amanah Home Finance in the United Kingdom. He took over as UK head in January 2005, with responsibility for strategy, distribution, and sales, and was appointed senior manager, HSBC Amanah Global, in August 2008. In this role Ali is working as part of the HSBC Amanah central team headquartered in Dubai.


What are the underlying principles of shariah law from a financial perspective? In other words, what defines the kind of model to which a financial institution that seeks to offer shariah-compliant services to its Muslim customers will have to adhere?

Shariah is the body of Islamic faith and has two main sources. The first is the Qur’an, the sacred book that records the word of God as revealed to the Prophet Mohammed. To quote directly from the Qur’an: “God has permitted trade and for- bidden interest,” Qur’an, Chapter 2, Verse 275. The fundamental underlying principle is that interest is prohibited.

The second source is the Hadith, the body of documents that records the Sunnah (the practice, or “life example”) of the Prophet Mohammed.

From these two sources there are five main prohibitions that must be observed in the creation of a shariah-compliant financial services model. They overlap somewhat and are mutually supportive.

  1. Riba: the prohibition of interest.
  2. Gharar (translated as “uncertainty” or opacity): there must be a full and fair disclosure (for example, certainty as to the price of a contract before it is concluded).
  3. Maysir: the prohibition of speculation or gambling (“obtaining something easily or becoming rich without effort”).
  4. Profit: the Islamic financier should only generate benefit from the project in which they invest and must take some risk, since risk equates to effort and potential loss.
  5. Unethical investment: Islam prohibits investing or dealing in certain products such as alcohol, armaments, and pork, and in activities such as gambling, entertainment, and hotels. (Exactly how this last prohibition is interpreted varies widely depending on where one is in the Muslim world.)


Is this list sufficient to define shariah-compliant financial services?

No, there are other factors to keep in mind when constructing product offerings. Very importantly, one has to keep in mind the Islamic view of money. In Islam money is not a commodity; it has no intrinsic use and it can only be exchanged for the same par value. Also, Islam allows the use of securities to support a transaction, which guards against the wilful wrongdoing or carelessness of partners.


HSBC, Lloyds, and other banks now offer shariah-compliant mortgages for house purchase. How can this be reconciled with the principles you have outlined?

If we are supporting a customer in the buying of a property, it is done under a contract known as diminishing musharakah. This translates as co- ownership. In this transaction, the bank and the customer buy the home jointly, in joint names. As time progresses the customer buys more and more of the property from the bank and the bank’s share in the home diminishes, until the bank no longer has any stake in the home. It is proper for the bank to take a reward for bearing the initial risk, but this reward is not interest on a loan but a rental charge for the portion of the asset owned by the bank. This method follows the underlying principle that “you cannot make money on money,” but it is permissible to “make money on the use or the exchange of an asset.”


Can you provide a sense of the growing scale and importance of shariah finance around the world?

Islamic banking is already large and it is grow- ing very substantially. The target market is the world’s 1.6 billion Muslims, who represent 25% of the world’s population and are largely concentrated in emerging economies. The industry’s total funds under management are estimated to be worth around US$450 billion to US$500 billion, excluding Iran. The annual growth rate for Islamic finance is currently running at 30%, which suggests that the market will reach US$1 trillion in funds under management by 2010. These figures were provided in a recent issue of The Banker.

While the Muslim community in general views shariah banking as the only acceptable method of banking, we have to accept that, when viewed globally, shariah banking is an alternative to, rather than a replacement for, the conventional, traditional model of Western banking. The latter has been in existence for centuries and has developed into a very sophisticated global industry. By contrast, Islamic finance is still very much an emerging, developing form of banking, which continues to evolve almost on a daily basis. At this moment, no shariah bank has a complete set of products that would mirror the portfolio of products on offer in a traditional bank.


Following the financial crisis, there have been calls for a more ethical financial infrastructure in the West. Does shariah banking have anything to offer to non-Muslims on this front?

If you look at the ethical platform of shariah banking, it will undoubtedly appeal not only to the Muslim community, but to the wider community as well. The transparency of products and the sharing of risk, together with the emphasis on like-for-like benefits are very appealing universally. What is also very clear is that, with any shariah bank, the principle of treating customers fairly must be at the heart of the bank’s practice or it cannot be shariah-compliant.

There are les- sons for all from the credit crisis and subsequent global recession. However, I personally do not believe that Islamic financing can be considered a replacement for traditional banking. However, as it stands today, it is a credible alternative for non-Muslims. And for Muslims, it is really the only way for a Muslim to do business and sleep peacefully at night.

The prohibition against interest is not just an incidental or minor detail. It is the only prohibition in the Qur’an for which it is actually specified that to be in breach of it is to “make war on God and on his messenger,” the Prophet Mohammed. This is a fundamental dividing point between traditional banking practice and shariah banking and it is not something that a Muslim can “fudge” and be happy.

I should point out that both the Christian and the Jewish traditions have a long history of being against usury, or the payment and receipt of interest. So the three traditions are not very far apart on this point.


You have provided an example of mortgage finance shariah-style. What other products
are available?

One that comes to mind is ijarah, a lease-backed contract, which “mirrors” asset-based finance in traditional banking. In ijarah, the bank buys the asset in its entirety and then leases it back to the client and charges a rental. With ijarah, the return going to the bank from the customer is rent not interest, and Islam is comfortable with the concept of rent. Here, the bank is making money on the use of an asset.

Another product area is pensions. The restrictions of riba mean that pensions cannot be invested in government securities, as these are pure interest-bearing investments. However, certain equities are perfectly acceptable because the investor is a partner in the company, so he or she shares its risks and losses. Therefore, our pension product is very heavily based on equities, although property is also allowed as an asset class if the transaction is structured correctly.

The whole pensions area is much undeveloped in the Muslim community. Because of riba, Muslims naturally look to rental income and property ownership as the most natural way of funding their retirement. There is a real culture clash in the area of pensions, and it is something that we have been in longstanding discussions with the HM Revenue & Customs about. In the United Kingdom, the law mandates that at the age of 75 you have no other option but to buy an annuity with your pension.

And annuities, being interest-based, are not ideal for Muslims. We have made this point through the Islamic Finance Experts Group that the government has set up, in which I participate. But it is not an issue that can be resolved overnight.

Then there are wholesale products, such as support for major corporates that are Muslim- owned. Again, this is very much a developing area in Islamic banking.


It seems that Islamic banks and traditional banks do coexist in some areas, perhaps because they are serving different markets. In others, Islamic financial institutions are predominant. And there are also areas where Western banks are developing Islamic finance arms, such as HSBC’s Amanah proposition. Is this how you see things progressing?

Today there are over 500 institutions around the world offering shariah-compliant products in 47 countries across the globe. I expect this to continue to expand, particularly in the Middle East, Indonesia, and Malaysia. The market is big enough to accommodate both wholly Islamic financial institutions as well as those which have “window” operations that offer Islamic products through existing branch networks. At HSBC we have adopted a three-pronged approach.

  • Window Model—this offers Islamic products through existing branch networks, and is used in the UAE, Bahrain, the United Kingdom, and Indonesia.
  • Partnership Model—a joint venture between HSBC and Saudi British Bank. This unique partnership has given us access to one of the biggest markets in the Muslim world.
  • Islamic Subsidiary—HSBC’s Malaysian subsidiary was the first international bank to be offered this license in Malaysia. This is a unique proposition available for HSBC, with the option of opening branches outside Malaysia (in Brunei and Bangladesh).

It is all about understanding the local market and deciding which model works best.

The window model, which offers shariah- compliant products through an existing branch network, works extremely well for us in markets where the idea of shariah banking remains unfamiliar. In the United Kingdom, for example, there is not a particularly well developed understanding of what makes a product shariah-compliant, even among British Muslims. There is also a lack of understanding of how a shariah-compliant financial product might benefit a Muslim customer. There are invariably many questions, and one needs the interaction with a customer and trained branch staff who can make clear how a shariah product differs from a conventional one.


Is it necessary for a bank that wishes to have a shariah banking service to have a body of Islamic scholars overseeing its shariah products and its operations?

It is absolutely fundamental. It is the key to gain- ing credibility and integrity in the eyes of the market. Right from the outset, in 1998, when HSBC first set up HSBC Amanah as the Islamic financial services division of the group, we established an independent board of leading Muslim scholars to be our shariah advisers. These are very eminent and respected scholars from across the Muslim world.

Success in this market depends on a shariah bank’s ability to deliver in a way that continually demonstrates a respect for and understanding of cultural differences and of the importance of Islam in the daily life of a Muslim.

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