Islami Banking and Finance Resilience and Stability in the Present System

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1 Current Issues in Islami Banking and Finance Resilience and Stability in the Present System

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Singapore World Scientific N E W J E R S E Y L O N D O N S I N G A P O

3 Current Issues in Islami Banking and Finance Resilience and Stability in the Present System Editor Angelo M Venardos Heritage Trust Group, Singapore World Scientific N E W J E R S E Y L O N D O N S I N G A P O R E B E I J I N G S H A N G H A I H O N G K O N G TA I P E I C H E N N A I

4 Published by World Scientific Publishing Co. Pte. Ltd. 5 Toh Tuck Link, Singapore USA office: 27 Warren Street, Suite , Hackensack, NJ UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE Library of Congress Cataloging-in-Publication Data Current issues in Islamic banking and finance : resilience and stability in the present system / edited by Angelo M. Venardos. p. cm. ISBN-13: ISBN-10: Banks and banking--islamic countries. 2. Banks and banking--religious aspects--islam. 3. Banking law (Islamic law) 4. Finance--Islamic countries. 5. Finance--Religious aspects--islam. 6. Finance (Islamic law) I. Venardos, Angelo M. HG3368.A6C '67--dc British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. Copyright 2010 by World Scientific Publishing Co. Pte. Ltd. All rights reserved. This book, or parts thereof, may not be reproduced in any form or by any means, electronic or mechanical, including photocopying, recording or any information storage and retrieval system now known or to be invented, without written permission from the Publisher. For photocopying of material in this volume, please pay a copying fee through the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA. In this case permission to photocopy is not required from the publisher. Editor: Juliet Lee Ley Chin Typeset by Stallion Press enquiries@stallionpress.com Printed in Singapore.

5 DISCLAIMER The views and opinions expressed in this whole book are the authors and do not necessarily represent those of their affiliations.

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7 FOREWORD Southeast Asia is the powerhouse of skills and innovation in Islamic finance as the GCC is the pool of liquidity. Recently, there have been many issues of concern in the sector, with some recalled certifications and Shariah incompatibility concerns. The sector is young and growing rapidly, thereby demanding close monitoring to enable the establishment of a robust and sustainable alternative to conventional finance. This is a timely book as it addresses the issues facing the momentum that Islamic finance has taken in the world. The sub-prime crisis and the credit crunch have focused considerable attention on the sector: its viability and sustainability. The challenges are many and not insurmountable. The market place is constantly evolving and expanding beyond the Muslim clientele and regions. The expected growth of the Islamic finance sector worldwide is estimated at about 15% by the year 2020, but if it exceeds that it should come as no surprise. Standardisation and harmonisation are issues raised consistently at many fora and being addressed and dealt with by many of the active members and institutions involved in the Islamic finance sector. It takes time but the start has been made and many intelligent minds have committed to establishing this means of finance. vii

8 viii Foreword Dr. Angelo Venardos has provided a valuable service in the publication of this book with contributions from some of the legends in the Islamic finance industry who have considerable knowledge of their subject and are active practitioners. The leading lawyers, bankers, regulators, and accountants in the sector are among the contributors and some of them are personal friends. They are talking the talk and walking the walk on a daily basis and are at the cutting edge of development in the industry. There is not much available in the form of literature on the current issues in the sector and this is a fine addition that will prove useful to academics, practitioners, students, and others who would be interested in this sector where it has been, where it is, and where it is going. All extremely relevant. Majid Dawood CEO, Yasaar Limited Dubai, UAE

9 CONTENTS Foreword Majid Dawood (CEO, Yasaar Limited, Dubai) 1. Resilience and Stability: Socioeconomic Response 1 in Southeast Asia Angelo M. Venardos (Heritage Trust Group, Singapore) 2. Legal and Regulatory Changes to Promote the 17 Development of Islamic Banking and Finance in Singapore Arfat Selvam (Managing Director, Arfat Selvam Alliance LLC, Singapore) 3. Brunei: A Niche Money Market for Offshore 45 Islamic Finance Khairul A. Khairuddin (Director, HMR Trust Ltd, Brunei) and Sukor Ashak (Business Development Manager, HMR Trust Ltd, Brunei) vii ix

10 x Contents 4. The Risk Profile of Mudaraba and Its Accounting 61 Treatment Hajah Salma Latiff (Senior Lecturer, Universiti Brunei Darussalam, Brunei) 5. Legal and Regulatory Issues Concerning Islamic 81 Finance s Development in Malaysia Dato Dr Nik Norzrul Thani Nik Hassan Thani (Chairman/Senior Partner, Zaid Ibrahim & Co, Malaysia) and Madzlan Hussain (Associate, Zaid Ibrahim & Co, Malaysia) 6. Recent Legal and Regulatory 99 Developments for Islamic Banking and Finance in Indonesia Hanim Hamzah (Partner, Zaid Ibrahim & Co; and Senior Foreign Counsel, Roosdiono & Partners) 7. Making Sense of the Fast-Growing Islamic 115 Finance Market Tadashi Maeda (Director-General, Japan Bank for International Cooperation) 8. The Growth of Islamic Finance in Southeast Asia: 125 Regulatory Challenges and Opportunities for the United States Mercy A. Kuo (Director, Strategic Asia Program, The National Bureau of Asian Research, The Financial Center, USA) 9. An Introduction to the Laws and Practices of Islamic 145 Trusts and the Distribution of a Trust upon Maturity Angelo M. Venardos (Heritage Trust Group, Singapore) and Aimi Zulhazmi Abdul Rashid (BIMB Trust Ltd, Labuan)

11 Contents xi 10. Lessons From Pakistan s Model 167 Bilal Rasul (Registrar, Securities and Exchange Commission of Pakistan) 11. Islamic Structured Products: Issues and Challenges 189 Aznan Hasan (Professor, International Islamic University, Malaysia) 12. Islamic Banks: Resilience and Stability Not Immune 229 from Crisis Shamshad Akhtar (Former Governer of the Reserve Bank of Pakistan and currently with Asian Development Bank) 13. Islamic Capital Markets: A Growing Area 255 for Investments Michael Mahlknecht (Delta Hedge) 14. Short-Selling Replication in Islamic Finance: 277 Innovation and Debate in Malaysia and Beyond Ryan Calder (Department of Sociology, University of California-Berkeley, USA)

islamic finance in southeast asia

nbr project report march 2008 islamic finance in southeast asia Local Practice, Global Impact table of contents 1 Foreword Mercy Kuo & Eric Altbach 5 Project Overview Remarks Emile Nakhleh 7 Opening 15