There are many financial products offered in the market catering to a person's preparation to protect themselves and their loved ones from financial shocks caused by undesirable events. For Muslims, these include takaful protection schemes, inheritance instruments and others.

When promoting such products, one should not use fearmongering techniques because they are contrary to their original principles. Although the intention is to raise awareness about some issues, this may confuse people on some aspects of Islamic jurisprudence.

This can be seen in misunderstandings regarding the Islamic jurisprudence on faraid. For example, when advertisements state that if a Muslim does not take a particular financial product, that person will leave his family in suffering as the property will be divided according to faraid as the process takes time, compounded by the absence of a "stopper" heir (son) and others.

It can cause misunderstandings in the Islamic law of inheritance. In reality, faraid is a part of the distribution management of a deceased's property, which is implemented after factoring in the deceased's funeral expenses, debts, wills, jointly acquired property (acquired by husband and wife during the subsistence of marriage) and heirs who disagree on the share they will receive.

The provision in Islamic law of inheritance comes with a great responsibility as Allah states in the Quran, "Men are in charge of women by (right of) what Allah has given one over the other and what they spend (for maintenance) from their wealth." (An-Nisa ', 4:34).

Anyone who deliberately becomes irresponsible towards his or her dependents will be punished in the hereafter. If a person consumes the property of orphans under his or her care unjustly, they will be punished by Allah as the Quran states, "Indeed, those who devour the property of orphans unjustly are only consuming into their bellies fire. And they will be burned in a blaze" (An-Nisa', 4:10).

Among the real issues in managing a deceased's property include getting the right information on the property and disputes on other claims before faraid, such as the claim of will or jointly acquired property. Other issues are generations of heirs, a monitoring system to the new guardian and others, which need to be dealt with by different agencies. These are reasons why the implementation of some faraid cases can take a long time and cost more.

These issues originate from human weaknesses, such as stubbornness or lack of responsibility, greed and bureaucracy. By identifying and resolving these issues, people can understand the wisdom of the Islamic law of inheritance.

Therefore, solving such issues should be channelled in appropriate platforms and not by promoting financial products in such a way that lead to confusion about faraid.

Islam celebrates the good intentions of individuals who manage their financial matters based on care and love towards others.

For example, by participating in takaful protection schemes, bequeathing to adopted children, giving hibah (gifts) to spouses and parents and others.

This is the true and genuine objective of Islamic financial products. Islamic financial planning has its advantages and rules.

The wisdom prescribed in such a way is for the benefit of all parties. In the case of Saad bin Abi Waqas R.A., who intended to bequeath his entire property, the Prophet stated that only one-third of a person's property is allowed in a will as it is better to leave the heir in sufficiency (reported by al-Bukhari).

The same is with today's takaful protection schemes, which are based on the principles of ta'awun (helping each other) and tabarru' (sincere donation), and limited to certain rules when implemented. In promoting them, one should not over claim the products beyond the original concepts, which can cause frustration to consumers once they realise they are not benefiting from some protection under the scheme.

A person should make a financial plan according to his ability, not forced or following market trends. Muslims need to understand that the principles in Islamic financial products are different from their conventional counterparts.

The principles and laws in Islamic matters contain great wisdom and a symbol of piety of a Muslim to the Creator.

The writer is Senior Research Officer, Centre for Economics and Social Studies, Institute of Islamic Understanding Malaysia (IKIM)

Published in: New Straits Times on Friday, 16 April 2021

Source NST: https://www.nst.com.my/opinion/columnists/2021/04/682677/muslims-must-have-good-grasp-principles-islamic-financial-planning

Islamic Finance Instruments Can Replace US Dollar in Trade

US weaponization of the US Dollar and the international payment system of SWIFT has led to a push to look for alternatives as trust wanes in the green-back and its payment systems.

In response, Turkish president Recep Tayyip Erdogan has pushed the use of islamic finance “trade in national currencies has gained urgency. We should first of all put the issue of Islamic finance on our agenda.”

The Turkish president has previously called on other countries to end the “monopoly” of the dollar in global trade. US treasury chief Steve Mnuchin acknowledged “if we’re not careful, people will look at using other currencies.”

Iranian Banks removed from SWIFT

Us sanctions have removed Iranian banks from the SWIFT payment system crippling Iran’s ability to conduct foreign trade. Similar sanctions have impacted German firms working on a Russian-German pipeline.

Russia and China have set-up their own payment system to trade directly with each other and avoid the use of the dollar.

Increased Use of Gold and Local Currencies

The eight-nation member Shanghai Cooperation Organization (SCO) includes China, Pakistan and Russia represents almost a quarter of global GDP. SCO members have been increasing their gold and foreign exchange reserves which now amount to nearly 4 trillion USD. At a finance ministers’ meeting in Moscow the SCO made a decision to conduct bilateral trade and investment in local currencies.

Use of Gold in Islamic Cultures

Gold is an attractive asset class and store of wealth passed through the generations in Asian cultures. Turkey and Malaysia have been at the forefront of Islamic financial gold banking and gold-based currency development.

The Malaysian states of Kelantan and Perak introduced gold dinar and silver dirham coins as a means of payment and for trade. Turkish Islamic bank, Kuveyt Türk (Kuwait Turkish Bank) began offering gold banking in 2007 and has collected over 26 tons of gold (worth around $1.2 billion – July 2019) and integrated it into the Turkish economy Current initiatives include an Islamic finance gold based crypto currency to better facilitate cross border trade.

Islamic Finance Gold Standard

In 2016 the World Gold Council and Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) approved the sharia standard for gold-based products with the objective of increasing the use of bullion in Islamic finance and the creation of new financial instruments. The standard addressed the use of collateral, and the exchange of gold in spot and deferred transactions.

Published in: Islamic Finance Foundation, 25 October 2020

Source: https://www.islamicfinance.com/2020/10/islamic-finance-offers-alternative-weaponised-us-dollar-swift/#/?playlistId=0&videoId=0

Although Islamic banks emerged relatively unscathed from the 2008 global financial crisis, VIDOC-19 has a deeper impact. However, this disruption could provide opportunities to diversify the sector and accelerate its expansion once the pandemic is over. Compared to conventional institutions, Islamic banks are more exposed to small and medium-sized enterprises (SMEs), microfinance and retail lending, particularly in Asia. The economic performance of the major Islamic financial jurisdictions is expected to remain moderate for the rest of the year.

As a result, although the industry was previously on a strong growth trajectory in 2020, the rating agency Standard & Poor's predicted in June that it would record low to mid-digit growth in 2020-21, due to both the pandemic and the uncertainty of oil prices. In comparison, last year's growth of 11.4% was supported by a more dynamic sukuk (Islamic bonds) market and new growth opportunities. Nevertheless, Standard & Poor's believes that Covid-19 could unlock the long-term potential of the sector, arguing that the pandemic offers "an opportunity for more integrated and transformative growth with a greater degree of standardization, greater emphasis on the social role of the industry and significant adoption of financial technology".

Sukuk is a financial certificate similar to a bond in a conventional bank. It is a key element in the Islamic financial ecosystem. However, the sukuk market is more concentrated, smaller and less liquid than its conventional counterpart. In addition, the issuance process remains relatively complex and lengthy, and involves higher transaction costs.

In this context, the overall issuance volume is expected to decrease this year, although there will be a slight recovery after the sharp decline observed in recent months. Standard & Poor's expects issuance to reach $10 billion in 2020, compared to $162 billion in 2019. However, there are signs that the pandemic could lead to an expansion of the role of sukuk..

In June, for example, the Islamic Development Bank (IsDB) raised $1.5 billion with its first "Sukuk of Sustainability", designed to help the recovery of Covid-19 in its member countries. The proceeds will be used exclusively for social projects within the framework of the IsDB's sustainable financing, focusing on "access to essential services" and "SME financing and job creation".
Following the success of the sukuk, the President of the IsDB, Bandar Al Hajjar, then called on the Islamic financial industry to "promote sustainable and social sukuk as an alternative asset class that has the potential to counteract the multiple impact of the Covid-19 coronavirus.

Also in June, Indonesia issued a $2.5 billion global wakalah sukuk in three tranches, including a $759 million green sukuk dedicated to sustainable development.

The sukuk was oversubscribed by almost seven times the target amount. Its main objective was to support the government's coronavirus control programme, as well as to "strengthen Indonesia's position in the global Islamic financial market and support the development of Islamic finance in the Asian region," Dwi Irianti, director of Islamic finance at the ministry of finance, told local media.

Despite being home to the largest Muslim population in the world, Indonesia has not yet taken full advantage of Islamic finance. Therefore, sukuk is an encouraging sign that the potential of the sector is beginning to be tapped. Meanwhile, it was recently announced that Malaysia's Ministry of Finance will launch a RM500 million ($120 million) "Sukuk Prihatin" on 22 September. The revenue will be used to finance economic stimulus measures, as well as to help micro-enterprises, improve broadband coverage in schools and fund research into infectious diseases.

While the coronavirus has caused headwinds across the industry, these examples show how it has also led to a greater awareness of the potential of Islamic finance. How can this momentum be maintained and strengthened as we enter the post-pandemic world?Digitisation and the increased importance of financial technology (fintech) are essential.

"Covid-19 has led us to accelerate the digital transformation that was already underway before the pandemic," Ayman Sejiny, CEO of ICD, told OBG. This will help widen access and increase the sector's social transformation role. In addition, fintech can increase standardisation, streamline processes, reduce costs and increase transparency, making Islamic financial instruments more competitive with conventional forms.

As far as sukuk are concerned, standardisation is particularly important, both in terms of the theory behind the vehicle and the legal documentation associated with it. Further standardisation will also enable Islamic banks to make progress in new areas. "Islamic finance now needs to explore new sectors such as health and tourism, in line with Sharia law. We need to work hard to develop appropriate Islamic banking products for these sectors," Sejiny told OBG..  

It is also possible that Islamic finance tools could play a greater role in promoting trade, which could help stimulate economic recovery in emerging markets.  "The Covid-19 epidemic has opened up new opportunities for Islamic financial markets, such as the provision of Sharia-compliant trade finance products, as well as trade development programmes to promote greater attention to social impact, sustainability, innovation and digitisation," Hani Salem Sonbol, Managing Director of the International Islamic Trade Finance Corporation, told OBG. . 

So while Islamic banking continues to face significant headwinds related to Covid-19, the crisis could be a major turning point in the global growth of the sector. The economic performance of the major Islamic financial jurisdictions is expected to remain moderate for the remainder of the year.

Published in: atalayar.com, 16 September 2020

Source: https://atalayar.com/en/content/after-covid-19-what-next-step-islamic-finance

The Organisation of Islamic Cooperation (OIC) has 57 member countries. The top 10 by GDP account for almost 73% of the OIC’s total GDP. Thus, the overall economic well-being of the Muslim world is dependent on the performance of these 10 countries.

Examining the performance of their currencies over the last 10 years for an indication of the relative well-being of the Muslim world paints a rather sombre picture. Two of the 10 countries, Saudi Arabia and the UAE, have their currencies pegged to the US dollar.

A peg effectively renders impossible independent domestic monetary policy. With their exports being little else but oil, a USD-denominated commodity, exchange rate competitiveness is immaterial, thus the hard peg.

Examining the performance of the remaining eight countries’ currencies shows a common feature. All eight have depreciated substantially against the dollar compared with 10 years ago. The Turkish lira is down by about 390%; the Iranian riyal, 300%; Egyptian pound, 176%; Nigerian naira, 147%; Pakistani rupee, 93%; Indonesian rupiah, 67%; Malaysian ringgit, 35%; and Bangladesh taka, 22%.

The depreciation of a currency automatically erodes a nation’s terms of trade. It has to produce and export much more to purchase the same level of imports. In the longer term, imported inflation, capital flight and a host of other ills can plague the nation. That all eight countries have suffered substantial depreciation points to a systemic problem within the Muslim world.

Two of them, Turkey and Indonesia, should really be doing much better. Both have tremendous natural resources, low labour costs, well-diversified economies, and, in Turkey’s case, a well-developed industrial sector.

Furthermore, political leadership is strong in both countries and has undertaken serious reforms, particularly in fighting corruption. Yet, both their currencies have not only depreciated sharply over the last 10 years but also experienced episodes of high volatility.

Perception and other extraneous factors, rather than economic fundamentals, may be at work here. The question that arises is why, despite their underlying economic strengths, have these countries suffered disproportionate setbacks to their currencies?

The answer, perhaps, lies in the way they have funded growth. Both countries have been plagued by the twin deficits — current account and fiscal deficits. The need to fund these shortfalls adds more debt and reduces policy flexibility.

A feedback loop from foreign-sourced debt financing of development to the budget and current account deficits, arising from the need to service such debt — resulting in currency depreciation, imported inflation, interest rate hikes, a slowdown and more borrowing — entraps these nations within a vicious circle. A history of currency volatility and crises only makes foreign exchange markets hypersensitive to even the smallest policy change.

What is surprising is the continued use of the same policies and the inertia of policymakers to try alternatives, especially with the financing alternatives available in Islamic finance.

The risk-sharing contract, Mudarabah, can be modified to be an effective alternative to debt. Being terminal and with minimal ownership dilution, it provides funding benefits without the disadvantages of debt. As a profit/loss sharing contract, the absence of leverage means that when used to fund infrastructure projects, it imposes no fixed obligations. This provides an automatic stabiliser to government fiscal balances, especially during downturns.

Fixed debt-servicing requirements, even during downturns, cause capital outflows that accentuate current account deficits, thereby putting more pressure on a country’s currency. A large depreciation of the currency would result in sharply higher debt obligation to domestic entities that have sourced debt overseas.

If some of these entities were banks, a banking crisis could ensue. To prevent a meltdown, the central bank has to intervene in foreign exchange markets — either through purchase of the home currency, thereby eroding reserves, or sharply raising interest rates, potentially throwing the economy into a recession.

When debt accumulation is substantial within the economy, the latter option of raising interest rates is not even feasible. Debt simply reduces the policy options available and forces governments into a corner.

The result, as is the case in these countries, is a never-ending roller coaster of currency devaluation, economic restructuring, new debt-funded growth and balance-of-payment problems yet again. The risk-sharing alternatives of Islamic finance can offer these countries a way out.

Dr Obiyathulla Ismath Bacha is professor of finance at INCEIF ( International Centre for Education in Islamic Finance)

Published in: Forum, The Edge Malaysia Weekly, on October 12, 2020 - October 18, 2020.

Source: https://www.theedgemarkets.com/article/my-say-muslim-world-needs-get-currency-roller-coaster