Thursday, December 30, 2010

Shari`ah Supervision of Islamic Mutual Funds

Islamic mutual funds presently represent one of the fastest growing sectors within the Islamic financial industry. As Shari`ah supervision is an integral part of the industry, its place in relation to Islamic mutual funds is certainly no less important. My intention in this paper is to discuss in a general way the variety of functions performed by Shari`ah supervision and their importance. In doing so, I will make observations about the industry and suggestions for a better future.

It is a matter of concern that a significant number of managed Islamic equity funds function without Shari`ah supervision of any sort. In fact, according to the data available on the ninety or so Islamic mutual funds, less than one half actually retain their own Shariah supervisory boards. This is an alarming circumstance which, for the reasons that will be discussed in this paper, needs to be remedied. Ideally, if management is slow to address the issue, then the remedy will come from the investors themselves. In fact, as Muslim investors grow in numbers and sophistication, they expect more from the professionals who manage their money. Then, in terms of performance, always the bottom line, and in terms of customer service, and in terms of Shari`ah compliance, Muslims have already begun to expect more and more from their funds. In terms of Shari`ah supervision, a great deal can be expected. Particularly now, with the opening of the retail markets to middle class Muslim investors, Islamic mutual funds find themselves if not in direct competition, then at least subject to direct comparison, with the host of conventional mutual funds available to consumers.

Today, funds offer all manner of services to investors, from virtual office space on their websites, to real time performance updates, to regular reports, to the ability to customize a portfolio by using a pin number and selecting new fund options online or over an automated phone systerm! In short, the mutual fund industry has progressed from its beginnings as almost a closed sort of country club operation that catered to a financial elite, to its present service-oriented state that is driven by competition. Our new generation of Islamic equity funds is a part of this market, and certainly subject to many of the trends that move it. It is for this reason that, by way of example, the Azzad / Dow Jones Islamic Index Fund offers its investors a host of online facilities, in addition to regular reports by management, independent auditors, and a Shari`ah Supervisory Board. Then, with standards of service, accountability and transparency rising to keep pace with the market, and with sophistication and expectations on the rise among Islamic investors, Islamic funds which fail to upgrade will certainly be bested by funds that succeed in doing so. Moreover, when retail Islamic funds begin to offer so much to their clients, investors in the other Islamic funds, institutions and high net worth individuals will not fail to take notice and, ultimately, either move their assets or insist that management take measures to give them more value for their money.

There are, however, instances of Islamic funds that have found other ways to see to the Shari`ah supervision of their businesses. For example, some funds have retained the services of a single Shari`ah supervisor. I find nothing wrong with such an arrangement, especially if the fund is set up to track an Islamic index like one of indexes from the Dow Jones Islamic Market Indexes family. Obviously, such an index fund will require less Shari`ah supervision for its portfolio than an actively managed portfolio because its investable universe will already have been screened by the Shari`ah Board of the index provider. Then, with the active support and cooperation of management, a single Shari`ah supervisor should suffice to ensure Shari`ah compliance and assume responsibility for the other aspects of Shari`ah supervision. Even so, the presence of a full board would undoubtedly be more assuring to investors, and quite possibly more effective as well.

Another way that an Islamic fund may ensure Shari`ah supervision without retaining the services of a Shari`ah Supervisory Board is for it to appoint a Shari`ah scholar to the fund's Board of Trustees. Then the scholar may either chair a subcommittee or work alone to supervise the fund for Shari`ah compliance and oversee the other Shari`ah- related matters. Thus, while the ideal situation will always be for a fund to retain the services of a full Shari`ah Supervisory Board, with three or more members, there are other ways of accomplishing the requisite Shari`ah supervision.

In this context, however, I would like to point out a serious misunderstanding that appears to have been repeated by a number of different Islamic mutual funds; though very likely with the best of intentions. This misunderstanding is based on the assumption that a fund licensed by an index provider with a Shari`ah Supervisory Board of its own will not require Shari`ah supervision of any sort; not in the form of a board, and not in the form of a single supervisor. Writing in a recent issue of New Horizon, a Muslim financial professional observed,
The arrival of the Dow Jones Islamic Market Index is seen as a cure all for banking houses who wish to broaden their success in placing equity funds with wealthy Muslims. The requirement, however, that they must still contract a Shari`ah Board of their own to supervise their own behavior does not appear to be widely understood.

Obviously, an Islamic mutual fund will become a licensee to an index provider with its own Shari`ah Supervisory Board for the reason that the fund wants assurance for its investors that its choice of stocks will be Shari`ah compliant. However, there is a great deal more to Shari`ah supervision than the review of stock choices from a Shari`ah perspective. Then, even if the fund is licensed to an index like the Dow Jones Islamic Market Index, it will still require Shari`ah supervision and advice. In this paper, I shall attempt to explain why this is so by examining a number of different areas in which the participation of a Shari`ah scholar is essential. I will also speak of the need for the proactive involvement in fund affairs by its Shariah supervisor(s). Finally, I will make some recommendations on the future of Shari`ah supervision that I believe will add value to every Islamic mutual fund.

Consumer Advocacy

It is of primary importance to understand Shari`ah supervision as consumer advocacy. By taking every possible step to ensure that an Islamic mutual fund represents a halal investment for Muslims, the services performed by Shari`ah supervisors are directed toward the investor. Undoubtedly, as a result of these efforts, the fund and its management will also benefit. But the primary beneficiary is the Muslim investor who can rest assured that his/her money is being put to use in ways that accord with the teachings of Islam and its message for all of humankind. So, while the functions of a Shari`ah supervisor may be compared to those of an independent financial auditor, in the sense that regulatory compliance is ensured, there is a further and far more vital aspect to the role of a Shari`ah supervisor. By assuming responsibility for the Shari`ah compliance of a fund, including its components and its management, the Shari`ah supervisor places himself in a position of directly representing the religious interests of the investor. In discussing the different aspects of Shari`ah supervision, it will become clear that a Shari`ah supervisor functions in many different ways as a consumer advocate with both religious and fiduciary responsibilities. By performing these functions the Shari`ah Supervisor adds significant value to the fund(s) with which he works.

It has already been stated that there is far more to the Shari'ah supervision of an Islamic mutual fund than the screening and selection of equities. Let us now examine some of the different Shari`ah supervisory functions that are inseparable from the success of an Islamic mutual fund. One of the most important of these functions has to do with purification which, as I have carefully explained in my internet-based (at course on the Principles of Islamic Investing, actually takes place at two different levels: at a fiscal level and at a moral level.

Portfolio Purification: Fiscal and Moral

It should not be necessary to explain that Zakah and purification are two entirely different, though not unrelated, matters. After all, the literal meaning of Zakah, which will be discussed later in this paper, is purification. But the purification intended for discussion here is the cleansing of an investment portfolio of impure elements.

Many Muslims are familiar with the practice of "purifying" their checking accounts, for example, by simply donating the amounts listed as "interest earned" to charity. Thus, our concern from a Shari`ah perspective is with amounts of money earned by the corporations in which our Islamic mutual fund has invested; money earned by means deemed unacceptable by Shari`ah principles and teachings. Such "impure" earnings must be quantified and then purified.

Of course, the assumption here is that these are stocks that have cleared the various screens for Shari`ah compliance. Thus, the sources of such income might include non-operating income from interest-bearing investments, or earnings from prohibited business activities that are beyond the scope of a company's primary business. Oftentimes, such earnings will result from corporate diversification and new acquisitions. Whatever their source, the fact remains that even Shari`ah-compliant equities will often yield small percentages of income that is considered impure by Shari`ah standards, and which must then be purified.

The responsibility of the Shari`ah supervisor in this regard is to ensure that all such income is calculated by the fund, and that a corresponding percentage is deducted from the earnings, passed on to investors through the dividends, thereby ensuring that these are free of impurities and completely halal. The methodologies for calculation may differ from fund to fund, or from one Shari`ah Supervisory Board to another, where scholars, for whatever reasons, have preferences in the matter. This, however, is of secondary importance. Of primary importance is that the fund is actually commited to, and regularly engaged in, such purification. On behalf of the investor, then, it is the Shari`ah supervisor who will ensure that purification takes place, and that it takes place in a manner that accords with Islamic law.

The tangible results of such fiscal purification are that amounts of money begin to pile up. Generally speaking, it is recommended that funds sweep these amounts into separate accounts. With the advice and counsel of the fund's Sharia`ah Supervisory Board, these amounts may be distributed among suitable charities, or a charitable fund may be established for the purpose; again, under the supervision of the Shari`ah scholars.

Of course, it is certainly possible that the matter of purification be left entirely to the individual investor. Nonetheless, when we are speaking of adding value to a fund, it is clear that the fund's performance of this function will relieve the investor of the responsibility, and the considerable time and effort required to perform it. In fact, it is clear that this is a service that is much more effectively performed by the fund itself, particularly when the calculation process, including the collection of relevant data, is not a simple matter for those not equipped to undertake it.

The second half of the purification equation is what I term moral purification, and I consider it no less important than the fiscal purification of earnings. When speaking of fiscal purification, the thing that comes immediately to mind is that we are dealing with an amount of money that has been earned by means we find unacceptable, and is therefore in need of purification. So, in our haste to put aside the offending percentage, we often overlook our moral and religious responsibility in the matter. This responsibility is perhaps best understood in the context of the Qur'anic concept of "enjoining the right and prohibiting what is wrong."

Now the ways to discharge this particular responsibility are varied. But modern corporate democracy has provided Muslim investors with every opportunity to share with management our views and sentiments with regard to corporate practice and policy. By law, in fact, publicly owned corporations are required to hold annual meetings for their shareholders, and these provide opportunities for Muslim investors, or for the Shari`ah supervisors who look after their interests, to voice their concerns to management as vocally and as directly as they feel necessary. Of course, it is impractical to suppose that Shariah supervisors will attend every annual meeting of every holding in the fund's portfolio. But it is still possible to participate in the process of corporate governance by means of proxies and absentee ballots. It is likewise possible, at any time, for shareholders to raise issues with management, and to initiate positive change, by means of corporate shareholder resolutions. When a fund with substantial holdings brings up an issue, management will surely listen.
In an Islamic fund's strategy of proactive engagement with companies, the participation of Shari`ah scholars is essential. It is essential, in the first place, to ensure that the fund is concerned with moral purification on behalf of its investors. And it is essential, thereafter, to ensure that issues of importance to Muslims, from an Islamic perspective, are represented accurately and effectively to the management of major corporations. As Islamic mutual funds grow larger, and begin to hold larger and larger blocks of shares, the attention we receive from corporations will grow proportionately. It is of all the more importance, then, that we represent our way of life in the best and most effective manner possible.

Portfolio Selection: Screening Stocks

Undoubtedly, one of the most important functions of a Shariah Supervisory Board is its scrutiny of equities for compliance with established, Shari`ah-based criteria. Much has been written on this subject in recent years, and much more remains to be written. For the purposes of this paper, however, suffice it to say that if an Islamic fund is not licensed to an Islamic index with a full Shari`ah Supervisory Board, then it will undoubtedly require the services of a Shari`ah Supervisory Board to oversee its choice of investments.

Such choices cannot be made on the basis of software, or by simply applying the published criteria of another fund, or index. So, when an Islamic equity fund is licensed to such an index, it may at least rest assured that the stocks it invests in will accord with the guidelines for prudent Islamic investing. Even so, and I continue to explain why, it will still require Shari`ah supervision.

While I will not repeat here what has now become common knowledge in regard to the Shari`ah screening of equities, I will take this opportunity to say that beyond the quantitative screening of securities is the highly subjective matter of ethics, and what is socially responsible. Again, from the perspective of enjoining the good and prohibiting what is wrong, I believe that it is the responsibility of Shari`ah Supervisory Boards to work on these issues, even after a fund has licensed to an investable universe through an index. Muslim investors, with our spiritual, cultural, and family ties to what is politely termed the third world, are more intimately concerned with, and sensitive to, the practices and policies of multinationals.

A company's ethics, unlike its primary business and capital structure, are highly subjective and not easily quantified. In considering issues of this nature, it is important that the fund's Shari`ah Supervisory Board works closely with management on policies and guidelines that will adequately cover these issues. Islamic investing has much in common with the modern forms of investing known as ethical investing, socially responsible investing, faith investing, and green investing. Each of these investment sectors, or subsectors, has much of value to contribute; and each has something in common with the teachings of Islam. It is therefore important for Shari`ah Supervisory Boards to keep abreast of what is happening in these areas. The internet is an excellent tool for the purpose of research into these forms of investing, the organizations that support and implement their principles, and the issues that concern them. Perhaps the most encouraging thing for Muslim investors to note about the funds that have grown up around these concepts is that they have been very successful, and that they are the fastest growing sector on the market.8 Given the affinities shared by these groups and Muslim investors, it is important that Islamic funds begin to build bridges. In this effort, the participation of Shari`ah Supervisory Boards will be all important.

Portfolio Monitoring

Beyond selecting stocks is the equally important task of monitoring stocks. In the business world, there is very little that remains the same. A company with non-operating interest income at less than five percent for the present quarter, may show earnings in excess of fifteen percent for the next. Obviously, vigilance is required in these matters to ensure that all of the fund's holdings remain within the limits of the prescribed Shari`ah filters. Again, when a fund is licensed to an index, information of this nature will be passed on by the index provider as a matter of course. In such cases, the responsibility of the Shari`ah supervisor will be to verify the removal of the security from the fund's portfolio. In the case, however, that the fund is not licensed or otherwise positioned to receive such information, even more vigilance is required.

Fund management will generally assign this responsibility to their portfolio managers or research analysts. My own experience to date with portfolio managers is that they are very diligent about these matters. Even so, it is the responsibility of Shari`ah supervisors to ensure that this sort of vigilance is maintained. Very recently, specialized software has been developed that allows management, and Shariah supervisors, to track portfolios with ease. Such software, when connected to the internet, will also provide real time access to portfolios, as well as a host of third party information. To my knowledge, very few Islamic funds have actually provided their Shari`ah Supervisory Boards with this sort of access. Here again, though, the funds that do so will have a competitive edge. In the future, Allah willing, every Islamic fund will have this facility. In fact, work is underway on even more sophisticated software. By the time this paper is actually delivered at the 4th Annual Forum, I expect that the beta versions will be up and running. In the final analysis, however, no matter how powerful the search engine or how seamless the links in the software, the expertise of Shari`ah supervisors will be required to make the final call. The software will identify the problem, the Shari`ah Supervisory Board will solve it.

Monitoring Management

The Shari`ah supervisory function includes vigilance in relation to the management of the Islamic equity fund as well. One of the most important issues in this regard is the fund's cash-to-assets ratio. Fund or portfolio managers may keep a large cash portion on hand if, for example, they are bearish on the market, or if they are unable to find attractive securities to buy, or, in the case of an index fund, if they are temporarily unable to purchase the stocks needed to match the index. Of course, the reason for the concern of the Shari`ah Supervisory Board under these circumstances is the possibility that idle cash will lead to interest.

Likewise, Shari`ah Supervisory Boards must be especially vigilant when, owing to adverse market conditions, management decides to assume temporary defensive positions. These may occur as the result of political, economic, or a host of other reasons. The important thing, however, is that the Board ensure that the strategy does not include recourse to the conventional, knee jerk strategies of moving into high quality, short term securities and money market instruments, or commercial or agency paper, or T-bills, or CDs. At such times, it will be best for management to convene a meeting of the Shari`ah Supervisory Board, or at least to confer with the members either individually or by whatever other means, for the purpose of discussing to what lengths the fund may go. Obviously, when such situations occur, it is the expertise of the portfolio managers and analysts that will determine the defensive strategy. It is the Shari`ah Supervisory Board, however, that will determine whether or not that strategy is a lawful one from a Shari`ah perspective.

Another thing that Shari`ah supervision will watch for is the purchase of equities on margin. While managers are aware that such purchases are not permitted, oftentimes their brokers are not. It is for this reason that Shari`ah supervisors must be on guard for these sorts of seemingly innocent mistakes.

In monitoring management, as in monitoring the portfolio, the use of software is particularly helpful. Obviously, this is the trend of the future. In mentioning this, I direct my remarks to both the management of Islamic equity funds and to the members of the various Shari`ah Supervisory Boards. In the future, I expect that a further qualification for Shari`ah Supervisory Board members will be computer literacy.
As a sort of a footnote to this section, I might mention another matter I believe to be of consequence. Everyone recognizes the need for a working relationship between the members of the Shari`ah Supervisory Board and the management of the fund. What people often fail to realize, however, is that relationships between the Board and the portfolio managers, the brokers, the accountants, and the auditors are equally important. When the fund management is openly Muslim, and makes its preferences and practices known to those with whom they work (portfolio managers, brokers, analysts, etc.), there is clearly less likelihood on the part of those colleagues of lapses leading to non- compliance with Shari`ah precepts. Even so, the possibility remains. And when fund management is non-Muslim, the likelihood is greater. Thus, in both cases, it is important to establish relationships between these business associates and the Shari`ah Supervisory Board. Perhaps the best way to accomplish this is to simply introduce the members of the Shari`ah Supervisory Board to the business colleagues of the fund. A short face to face meeting for the purpose of getting acquainted is all that is required. Thereafter, if any issues arise, these may be discussed in a manner befitting professionals who have actually made each other's acquaintance and share a genuine interest in the success of the fund. Such face to face meetings can easily be scheduled around an annual meeting of the Shari`ah Supervisory Board, for example, and may even take place at a lunch or a dinner.
In this regard, I might share an example from my own experience. When our Shari`ah Supervisory Board decided that a certain fund needed to liquidate its position in a certain stock, the decision was passed by management to its broker and the stocks were sold. Moreover, the accountants were instructed to sweep the profits from dividends and capital gains into the fund's charitable account. In a matter of days, the fund's auditors contacted management to question the liquidation of such a lucrative equity, and the justification for separating its earnings. At the request of management, I spoke on the phone with the auditor and we agreed that I should subsequently inform his firm in writing of the action we had requested, and the reasons for it. Thus, a potentially confusing and time-consuming situation was taken care of in a simple and straightforward manner. And the reason that it went as smoothly as it did is that a relationship of collegiality had been established, so that there was nothing awkward or hesitant about the exchanges which took place between us. Similar relationships have led to my receiving tips from portfolio managers concerning the peripheral involvement in prohibited business on the part of certain firms whose stock was held by funds that I supervise.

Monitoring Fees

Certainly, from the perspective of the individual investor, one of the most important of all the different functions performed by a Shari`ah Supervisory Board is its ensuring that the consumer is made aware of the fund's fees and how these are structured. Here again, the Shari`ah Supervisory Board finds itself in the role of consumer advocate. While there is generally no formal channel for communication (other than quarterly or annual reports) between the Board and those who invest in the Islamic fund, the responsibility in this regard is not so much consumer education as it is a matter of the Board's satisfying itself of two essential matters. Firstly, that the fee structure is a reasonable one and, secondly, that the fees are clearly stated in the fund's literature and otherwise communicated without ambiguity to investors.

As the market for Islamic mutual funds grows, investment professionals (and even conventional brokers) will become familiar with the various offerings, and will explain all of the nuances and differences between them to their clients. At the present time, however, most Muslim investors approach Islamic funds directly, and purely on the basis of their understanding that the product offered is halal and will yield halal results only. Under such circumstances, it is very important that Islamic funds clearly state their fees, especially when the middle class Muslim investor may be less inclined to be meticulous on the matter. Then, while I am confident that there is no real danger of unscrupulous practices on the part of funds, my real concern is that investors fully understand what sorts of fees they are expected to pay. For example, even here in the US, where the regulatory atmosphere is so strict, the annual expense ratio, or annual fee does not appear on the client statements of most conventional funds. As a result most consumers are not even aware of it. So, if someone invests in a no-load fund, and then sees no mention of fees on their client statements, they might very well suppose that they are paying nothing to their funds.
Even aside from the annual fees and the different sorts of loads, funds will generally charge fees for a number of other services. For example, investors who move money between funds in the same family of funds (from a growth to an income fund, for example) may generally do so without any additional load. There may, however, be a fee for doing so, as well as a tax liability. It should be the responsibility of the Islamic fund to provide investors with a clear picture of their responsibilities in these instances. Such a schedule of fees, if you will, should also include information on breakpoints or volume discounts, on the investors' rights of accumulation, on surrender fees (contingent deferred sales charges), on the facilities accorded by the fund for letters of intent (including the terms of retroactive collection in the event that the LOI is not fulfilled), and on special items like performance incentives and thresholds. The concern of the Shari`ah Supervisory Board in these matters is simply that the investor be apprised of factors that may be of significance to him/her when investing Islamically. By looking out for the interests of the consumer in this manner, the Shari`ah Supervisory Board is actually adding value to the fund. This is because when all the fees are carefully spelled out for investors, there is far less chance of unpleasant surprises and the resulting ill will that might be generated by even the simplest of misunderstandings. In today's service-oriented markets, this should be more than obvious.

Monitoring Fund Documentation

Perhaps more than monitoring, this function of a Shari`ah Supervisory Board is actually one of assisting management in the preparation of filings for regulatory agencies like the Securities and Exchange Commission, subscription agreements, private placement memorandums, fund prospectuses, and the like. Obviously, in the preparation of such documentation references will have to be made to the Shari`ah and its interpretations. For this reason, it is essential that the expertise of Shari`ah scholars be accomodated. It is clearly of inestimable importance that the documents which define the Islamic mutual fund and the ways it works be in complete consonance with Shari`ah precepts. The only way to ensure this is to have the Shari`ah Supervisory Board involved in the drafting and review of all pertinent legal and business documentation.

In fact, I will go one step further and suggest that Shari`ah supervision is extended to include marketing materials, like brochures, advertisements, websites, and even multimedia presentations. In all of these, reference of one sort or another is sure to be made to the Shari`ah and the Islamic nature of the fund. In order to ensure that all such references are made correctly, especially in view of the fact that these will be made public, the involvement of the Shari`ah Supervisory Board is essential.

Monitoring the Industry

As academics, the members of Shari`ah Supervisory Boards will naturally keep abreast of scholarship in their respective fields and specializations. As professionals, it is equally essential that we remain informed of developments in the industry we supervise. In order to comprehend the issues fully, the sorts of issues that require the attention of the Shari`ah Supervisory Boards, it is important to understand them in the broader context of the marketplace in general. From this perspective, the attention brought to bear on the issues by the Board will certainly be more pertinent; with the result that the Board's decisions will be more informed and ultimately of more value to the investor. This is not to say that Shari`ah Supervisory Boards should tell management how to run their business. Rather, what I mean to say is that a Board that is sensitive to the business environment is an effective Board.

In order to maintain this edge, Shari`ah Supervisory Board members need to understand the stock market and its various indicators. They also need to be able to use the tools that will allow them to follow the stock market and the factors that influence it. Thus, at the level of fund and sector performance, the Dow Jones Islamic Market Indexes and the Financial Times\TII Indices are indispensable tools. Specialized websites like,, and are important sources of information about the Islamic investing sector, as are a handful of specialized publications like New Horizon, The Islamic Banker, and others. Finally, at the level of the mutual fund industry in general, the sources of information are seemingly limitless, whether in print, online, or over the airwaves. Finally, academic and professional forums, such as this one, may have much to contribute to this important aspect of Shari`ah Supervision.

Product Development

While the issue of product development is more commonly associated with Islamic banks, there is nonetheless a certain amount of scope for it in Islamic mutual funds as well. With the goal of mitigating risk through portfolio diversification, an Islamic fund might consider turning to markets other than the stock market, or to target other asset classes, like REITs. Or the fund may want to do something different as a part of a defensive strategy for a bearish market, or as a way to manage short term liquidity. Whatever the case, there will be a clear need for the expert advice and assistance of the Shari`ah Supervisory Board.


The assumption might easily be made that if Islamic mutual funds are active in purification, then they should surely be doing something about Zakah. This, however, is not the case. The matter of Zakah is complicated by any number of factors that lie outside the control of Islamic funds (and, for that matter, Islamic banks and other financial institutions as well). Since these factors are particular to the circumstances of each investor, the matter of Zakah is best left to the investors themselves. In this regard, I will simply refer to the fatwa of the Islamic Bank of Jordan, which effectively explains the reasons why the matter of Zakah should be left to the individual Muslim investor or depositor.

Even when the matter is left to the individual, the fund may consider requesting its Shari`ah Supervisory Board to prepare guidelines for the calculation of Zakah on profits earned through investments in funds. These guidelines might then be published in brochure form and mailed to investors, or posted on the fund's web page as an extra service to its investors. As there is still a considerable amount of debate on the details of Zakah to be paid on such investments, the attention to the matter on the part of Shari`ah Supervisory Boards may indeed help in bringing about a needed consensus on several outstanding issues.

Regular Reports

Finally, one of the most important functions of a Shari`ah Supervisory Board is to prepare reports on the status of the fund it supervises. Such reports are best issued quarterly and should address issues of Shari`ah-compliance in the portfolio, and on the part of management. Likewise, the reports should keep investors informed of the purification process and the charitable ways in which purification money has been put to use by the fund. Other issues of relevance to the supervision of the fund might also be mentioned in the reports, like the new software that enables the Board to easily monitor the fund's portfolios, or to screen stocks for Shari`ah-compliance, and so on. In addition, the Board may use the reports to communicate the ways in which it is addressing issues related to socially responsible investing and the business ethics and practices of corporations. Finally, as the goal of these reports is to promote transparency and full disclosure, they should always be prepared in a straightforward manner. If shortcomings have occurred, these must be mentioned; and the steps taken to remedy the situation as well.


Throughout this paper, I have alluded to what the future might bring. All such references, I believe, have been made with with a degree of optimism. No one doubts that there is a sizeable, and as yet untapped, market for Islamic financial products and services, especially in the United States and Europe, and in Muslim majority countries with prosperous middle classes. When I consider this market, I see a religious community that is in many ways just as comfortable, and at ease, with the modern world as it is with its own Islamic heritage. The politics of the modern world have provided haven, and its economics have provided comfort. At the same time, Muslims are inextricably tied to Islam. My concern, as an advocate for this community, is that we receive the value that we deserve. Not only that we get what we pay for. But that the tenets of our religion are respected; not only in the sense of compliance, but in the sense of honor and esteem as well.

It will not be out of place, in our discussion of the future of Shari`ah Supervisory Boards, to mention here the need for impartiality and independence. In the same way that independent auditors are brought in to review the finances of a business, Shari`ah Supervisory Boards review compliance to Shari`ah precepts. Independent audits are understood as ways to gain and the best way to gain and maintain the trust of Muslim investors and consumers.

The call goes out, from time to time, for the establishment of a central, or a unified Shari`ah Supervisory Board that could look after the interests of every Islamic bank or financial institution. Just as often the call is ignored. (Though, admittedly, an attempt was made in the eighties to establish such a central board, but for Islamic banks only.) My thinking on the subject, and I hope that this is clear from the contents of this paper, is that it is simply impossible for a centralized board to effectively perform all of the tasks required for the Shari`ah supervision of each and every Islamic financial institution. In the early 1980s, when there was only a handful of such institutions, such a notion may have seemed reasonable. But today, when Islamic mutual funds alone number nearly one hundred, the notion is highly impractical.
Not only that, but as the Islamic financial sector looks at ways to provide Shari`ah- compliant financial services to retail consumers, there is an increasing need for specialization among Shari`ah supervisory professionals. Takaful operations, for example, while based on many of the same principles, are nonetheless quite different from banking operations. The operations of commercial banks differ considerably from those of thrifts and investment banks. I expect that in the future we will come to see more specialized Shari`ah supervision, or supervision geared toward specific sectors within the Islamic finance industry as it grows in size and sophistication. Under these circumstances there is no practical future for a single, central Shari`ah Supervisory Board.

To ensure that Shari`ah Supervisory Boards remain current, however, it may be preferable to have a professional organization, an industry association if you will, that sets standards for everything of importance to Islamic mutual funds. Such an association might therefore be inclusive of standards and practices for Shari`ah Boards, Islamic funds, and fund management as well. Such an industry association might also look after the interests of membership, and promote understanding and exchange through publications and regular forums. It could also establish relationships with relevant academic, commerical, and professional bodies The industry appears to have matured to the point where such an association would be of great value to everyone involved in Islamic funds. From the perspective of a consumer advocate, I will strongly recommend the timely establishment of such an industry association.

And it is Allah who prospers and assists!

By : Yusuf Talal DeLorenzo

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Monday, August 09, 2010

Islamic Banking in Indonesia in Brief

In view of providing a wider banking services alternative to Indonesian economy, the development of Islamic banking in Indonesia is implemented under dual banking system in compliance with the Indonesian Banking Architecture (API). Islamic banking and conventional banking systems jointly and synergically support a wider public fund mobilization in the framework of fostering financing capability of national economic sectors.

The characteristic of Islamic banking operation is based on partnership and mutual benefits principle provides an alternative banking system with mutual benefits both for the public and the bank. This system will give priorities to aspects related to fairness in transaction and ethical investment by underlining the values of togetherness and partnership in production, and by avoiding any speculative activity in financial transaction. By providing various products and banking services supported by variative financial scheme,.Islamic banking will be a credible alternative that can be benefited by all of Indonesian people without exception.

In the context of macro economic management, an extensive use of various Islamic financial products and instrument will help attaching financial sector and real sector and create harmonization between the two sectors. In addition to support financial and business the widely use of islamic product and instrument will also reduce speculative transactions in thus the economy supports the stability of overall financial system. At the end, the Islamic banking will significantly contribute to the achievement of mid-long term price stability.

The enactment of Act no. 21 of 2008 issued on July 16, 2008 has provided a more adequate legal base to the development of Islamic banking in Indonesia ,and consequently will accelerate the growth of the industry. With an impressive development progress reaching an annual average asset growth of more than 65% in the last five years, it is expected that Islamic banking industry will have a more significant role in supporting national economy.

Policy of Islamic Banking Development in Indonesia.

”The Blueprint of Islamic Banking Development in Indonesia ” prepared by Bank Indonesia in 2002 provides guidance to stakeholders of Islamic banking and to set the position and vision of Bank Indonesia in developing Islamic bank in Indonesia. In the process of preparing this Blueprint, various aspects have been taken comprehensively into consideration such as the actual condition of national Islamic banking industry including related tools, development trend of Islamic banking industry within international scale as well as system development of national Islamic finance that has started to be materialized and inseparable from wider architectural landscape such as Indonesian Banking Architecture (API) and Indonesian Financial System Architecture (ASKI) including international best practices formulated by international Islamic financial institutions such as IFSB (Islamic Financial Services Board), AAOIFI and IIFM.

The development of Islamic banking was directed to provide the highest benefits to the public and to give optimal contribution to national economy. Consequently its development path is always referred to other strategic plans, such as Indonesian Banking Architecture (API), Indonesian Financial System Architecture (ASKI) as well as Medium Term National Development Plan (RPJMN) and Long-Term National Development Plan (RPJPN). Therefore, the policy in developing Islamic banking is a part and an activity supporting the achievement of a larger scale strategic planning in developmnet at national level.

”The Blueprint of of Islamic Banking in Indonesia ” defines the vision, mission and target of Islamic banking development as well as strategic initiatives with clear priorities in response to the main challenge and in reaching the target for the next ten years by achieving significant market share of Islamic banking through the advancement of the role of Islamic banking in the national, regional and international financial activities with other Islamic financial sectors.

In the condition of its integration, in the short term, the phase of Islamic banking development is more directed toward servicing the huge potential of domestic market. In other words, Indonesian Islamic banking must be able to become domestic player with an internatioal quality in services and performance.

Subsequently, the Islamic banking system envisioned by Bank Indonesia is a modern Islamic banking with open and universal characteristics and inclusive to all Indonesian people with no exception. It refers to banking system presenting applicative forms of Islamic economic concept that is wisely formulated in the current context of problems faced by Indonesia within the consciousness of the historical socio-cultural condition of this country. Only by doing that, the aspiration development of Islamic banking will always be recognized and accepted by all Indonesian people as a part of the solutions to the various problems encountered by this country.

Grand Strategy of Islamic Banking Market Development

In line with the concrete efforts in developing Islamic banking in Indonesia, Bank Indonesia has formulated a Grand Strategy of Islamic Banking Market Development, as a comprehensive strategy of market development covering strategic aspects, such as: determining the vision of 2010 as the leading Islamic banking industry in ASEAN, creating the new image of inclusive and universal Islamic banking, mapping a more accurate market segment, developing more various products, improving services as well as adopting new communication strategy of Islamic banking by positioning it as a beyond banking position. ( Islamic banking is more than just a bank).

Hence, different concrete programs have and will be performed as the implementation stage of the Grand Strategy of Islamic Banking Market Development including but not limited to the following measures:

First, assigning a new vision of Islamic banking development on phase I in 2008 to build understanding in Islamic banking as Beyond Banking by reaching an asset target of Rp 50 trillion and industrial growth of 40%, phase II in 2009 with the objective of positioning Indonesian Islamic banking as the most attractive one in ASEAN. Phase III in 2010 will have the objective of attaining Indonesian Islamic banking as a leading Islamic Bank in ASEAN.

Second, new image program of Islamic banking that includes positioning, differentiation and branding aspects. The new positioning of Islamic bank as banking that provides mutual benefits to both parties, differentiation aspect with competitive advantages with various products and schemes, transparency, competent and ethical finance, updated and user friendly information technology as well as qualified investment expert of Islamic finance. Branding aspect will be represented by ”Islamic bank, more than just a bank “( beyond banking).

Third, new mapping program which is more accurate on Islamic banking market potential that generally directs Islamic bank services as universal service or bank accessible for all kinds of people and all segments in accordance with the strategy of each Islamic bank.

Fourth, product development program directed to various products variations supported by the unique value offered (mutual benefits) and strenghthened by a wide office network and the use of easily comprehended standards of product name (example : deposit – iB, financing – iB).

Fifth, program of service quality enhancement supported by competent human resources and the supply of information technology to meet customer ’s requirement and satisfaction. This competency is also expected to be able to communicate products and services of Islamic banking to customer correctly and clearly get always complying to sharia principles; and

Sixth, a wider and more efficient socialization and educational program for public interest through various direct or indirect (printing and electronic media, online/website) communication channels with the objective of contributing comprehension on the advantages of Islamic banking products and services that can be benefited by the public.

Source : Bank Indonesia
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Wednesday, July 28, 2010

A Mosaic of Islam, Democracy and Modernity in Indonesia

The face of Indonesia has dramatically changed in the past decade. Often dubbed as a thriving exemplar of democracy, Indonesia has now been able to standing tall amongst democratic nations of the world.
Simultaneously, Indonesia successfully emerges from the havoc of economic crisis that hit the entire region in late 1990s. Today, harnessed by strong exports, vigilant domestic consumption, as well as sound and viable fiscal and monetary policies, its economy is amongst the most vibrant and far-reaching.
What makes it so unique about Indonesia is not so much about democracy or its rapid economic development. It is truly about the underlying story beyond its venture towards democracy and economic prosperity.
It is at all about a soul-searching journey of a country where more than 150 million Muslims call it a home. Indeed, as a home to the largest Muslim population on earth, Indonesia’s successful transformation to become the world’s largest democracy is indeed a story in itself. In the modern history of nation-state, and by the standards of growing suspicions amongst civilizations and culture that was underpinned by waves of violence, Indonesia’s face of Islam, democracy and modernity is indeed soothing.
What is the nature of Islam in Indonesia?
In terms of religious teachings and the fundamental of faith (aqeedah), Islam in Indonesia is no different from that of Islam in other places, the Middle East alike. As a monotheistic religion, Islam is widely understood and well practiced as the religion of peace. Islam came to the archipelagic Nusantara (ancient lands of Indonesia) through various ways and from various places, mostly South India, Persian, and Southern Arabian Peninsula. Islam was spread though the words of merchants and scholars, who were able to blend in and mixed well with the local predominantly Hindu and Budhist societies, as early as 13th century. Just in the span of seven centuries, there are more Muslims in today’s Indonesia compared to the entire Muslims in the Arabian Peninsula, the birthplace of Islam.
From the outset, pluralism has always been the nation’s religious spirit. One theory illustrates that such spirit stems from the geographical nature of Indonesia, where the country is rightly situated between Asia and Australia, and between the two world’s oceans, the Pacific and the Indian. It allows the local inhabitants to receive constant influences from all places through trading and economic activities, and adapt well to it. Yet, such a theory should be coupled with our objective understanding on the nature of religious teachings. At its core, Islam, like other religions, always puts a special respect for diversity. It also embraces tolerance and care for others.
But those two factors—geography and foundations of religious teachings—while necessary and important, are inadequate to explain to true face of Islam in Indonesia today. We need to take another important element into our account, and that is the Muslim in Indonesia itself.
Here we are talking about the devoted, pious, and enlightened Muslim scholars who gained their prominence through their moderate interpretation and moderate voice of Islam. Their message is clear: while differences are indeed facts of life, one should not resort to violent means to settle their squabble. Harsh and bloody bickering would only suffer the Ummah any further. And as history has shown us, we have more than enough examples of how social fabrics were disrupted only by strict interpretation of religion.
Indonesia is fortunate to having moderate Muslims and Islamic organisations that form the majority of its body of Islam in the country. The works of the Nadhlatul Ulama and Muhammadyah, two largest Muslim organisations in Indonesia, in the promotion of unity, prosperity and tolerance, are indeed commendable and exemplary. Even in the early formative years of the Republic in 1945, despite their strong influence over our national politics, moderate Islamic leaders at that time, gave their consent not to make Indonesia an Islamic state. And at the subsequent stages of our statehood, the question of Islam and the state remains at the realm of constructive dialogue, leading to a deeper mutual understanding on the role of state to ensure the harmony and tolerance amongst peoples of different faiths in Indonesia.
The majority of Muslims in Indonesia is convinced that the difference(s) within and across faiths should be settled through intensive dialogue. This provides a strong rationale for Indonesia to take an active role in promoting inter-faith, inter-civilization, and inter-cultural dialogues with our friends and at all levels, including with the United Kingdom, among others, through the establishment of the UK – Indonesia Islamic Advisory Group in March 2006.
Arguably, settling differences in a peaceful manner is not the biggest problem that everywhere Islam is facing nowadays. All conflicts and collisions in the name of religions may have something to do with malicious sense of religiosity or simply wrong and contending interpretations of the religions concerned. While many perceive radical groups such as Al Qaeda as proponent of violence, Indonesia does not rely much on the military might nor does it resort to the use of gross violent means to subdue it. Instead, we strengthen the moderate Muslims and strengthen their voice of moderation. We in Indonesia continue to strengthen our education system, and enhance the modern curriculum of our Madrasahs (Islamic boarding schools), while restlessly improving the welfare of and justice system for our peoples. Anger simply derives from ignorance, hunger, injustice and madness. Hence, we must not fail to address them in a comprehensive and sensible manner for the stake is too high.
We simply believe that Islam, democracy and modernity are panacea to the social problems that often disrupt our social harmony and threaten our national unity. And they are the true face of modern and transformed Indonesia today and in the future.

Written By Landry Subianto
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Wednesday, June 02, 2010

Indonesia: Embracing the growth of Islamic finance

Indonesia is seeking to further develop its Islamic banking sector, looking to tap into the growing market for sharia-compliant financial instruments, though it still has some way to go before being able to match the major players in the segment.

In late January, Bank Indonesia officials laid out their plans and projections for the coming year, including a four-point program to strengthen the country's banking sector and promote growth across the economy.

Along with initiatives to enhance banking resilience, reinforce the supervisory regime, build a better platform for bank intermediation through the improvement of regulation, develop and strengthen rural banks' roles in micro-finance, there was also the key objective of raising the profile of Islamic banking in the economy.

Currently, Islamic banking assets represent only a fraction of the total within the country's banking sector, with the central bank estimating the year-end figure to be around US$7.6 billion, equivalent to between 2 and 3 percent of total bank assets.

While asset levels in the sharia-compliant banking institutions remain low, there has been greater movement in another segment.

The state, some of its autonomous enterprises and, to a lesser extent, the private sector are all making more use of Islamic finance to bankroll their activities.

In late March, state electricity firm PT PLN announced it was planning to fund an upgrade of its infrastructure through bond issues valued at $330 million, using both conventional instruments and a rupiah-denominated sukuk issue, with the auction set for May or June.

Early in the same month, the government successfully auctioned $109 million worth of sukuk, with the Finance Ministry saying the Islamic-compliant bonds, with terms ranging between five to 15 years, would be used to help fund the state deficit, which is projected to come in at 2.1 percent of GDP this year.

Though the private sector is starting to give sukuk more consideration, some estimates put the number of corporate sukuk issues in the past five years or so at around 20, low when compared to Malaysia, the world's largest market for Islamic debt instruments last year.

In part, the low figure could be down to a deficiency of proper promotion by lenders and a consequent lack of understanding by potential customers, but also potentially a result of wariness by the corporate sector and the public due to perceived risk stemming from a weak regulatory regime.

According to Mohamad Safri Shahul Hamid, deputy chief executive at the MIDF Amanah Investment Bank of Malaysia, Indonesian authorities will have to do more if they want to see the domestic Islamic finance sector develop.

"If Indonesia wants Islamic finance to grow faster, they have to clear these tax and legal issues, and come up with proper guidelines on Islamic securities," Hamid told international media in an interview in mid-February. "The regulators need to play a more active role to open up the market, initiate discussions and encourage the introduction of new products, especially retail and sukuk."

The government has moved to address at least some of these problems, with the parliament passing new legislation last year that would remove double taxation on certain Islamic banking transactions, in particular murabaha, Islamic trade finance. Under the law, which is set to come into effect in April, when a lender extends finance to a client through a murabaha scheme, it technically buys an item or product and then sells it to the client at a profit, thus avoiding charging interest.

Previously tax was charged on both sales, that of the original vendor and then subsequently from the bank, though under the new legislation the sale and resale will be treated as a single transaction for tax purposes.

However, while welcomed by the Islamic finance sector, some lenders have complained that the legislation did not go far enough, with no retroactive clause included. In late March, the sharia unit of PT Bank Negara Indonesia (BNI), the country's fourth-largest lender, said it would be filing an appeal against a charge of some $44 million levied by the taxation office on the bank's murabaha transactions during the 2007 tax year.

Though BNI has not been alone in having issues with the tax office over its murabaha activities, most of the other banks in the sharia-compliant segment - none of which had the same level of exposure as BNI - have either resolved their problems with the state or are in the process of doing so.

While some 85 percent of the country's estimated 240 million people are of the Muslim faith, and with Islamic finance having long since crossed denominational lines to become a mainstream component of the global financial system, there remains massive unfulfilled potential for sharia-compliant finance in Indonesia.

It is up to the government, regulatory authorities and the private sector to work together to ensure the required regulatory platform for these products is in place.

(source: the Jakarta Post)

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Monday, April 05, 2010


1. Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit or mark-up thereon.

2. The profit in Murabahah can be determined by mutual consent, either in lump sum or through an agreed ration of profit to be charged over the cost.
3. All the expenses incurred by the seller in acquiring the commodity like freight, custom duty etc. shall be included in the cost price and the mark-up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises etc. cannot be included in the cost of an individual transaction. In fact, the profit claimed over the cost takes care of these expenses.
4. Murabahah is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on murabahah basis. In this case the commodity must be sold on musawamah (bargaining) basis i.e. without any reference to cost or to the ratio of profit / mark-up. The price of the commodity in such cases shall be determined in lump sum by mutual consent.
Example (1) A purchased a pair of shoes for Rs. 100/-. He wants to sell it on murabahah sale is valid.
Example (2) “A purchased a ready-made suit with a pair of shoes in a single transaction, for a lump sum price of Rs. 500/-. A can sell the suit including shoes on murabahah. But he cannot sell the shoes separately on Murabahah, because the individual cost of the shoes is unknown. If he wants to sell the shoes separately, he must sell it at a lump sum price without reference to the cost or to the mark-up.
Murabahah as a mode of financing
Originally, murabahah is a particular type of sale and not a mode of financing. The ideal mode of financing according to shariah is mudarabah or musharakah. However, in the perspective of the current economic set up, there are certain pratical difficulties in using mudarabah and musharakah instruments in some areas of financing. Therefore, the contemporary shariah experts have allowed, subject to certain conditions, the use of the murabahah on deferred payment basis as amode of financing. But there are two essential points which must be fully understood in this respect:
1. It should never be overlooked that, originally, murabahah is not a mode of financing. It is only a device to escape from “interest” and not an ideal instrument for carrying out the real economic objectives of Islam. Therefore, this instrument should be used as transitory step taken in the process of the Islamization of the economy, and its use should be restricted only to those cases where mudarabah or musharakah are not praticable.
2. The second important point is that the murabahah transaction does not come into existence by merely replacing the word of “interest” by the words of “profit” or “mark-up”. Actually, murabahah as a mode of finance, has been allowed by the Shariah scholars with some conditions. Unless these conditions are fully observed, murabahah is not permissible. In fact, it is the observance of these conditions which can draw a clear line of distinction between an interest-bearing loan and a transaction of murabahah. If these conditions are neglected, the transaction becomes invalid according to shariah.

Source: An Introduction to Islamic Finance By Muhammad Taqi Usmani
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Thursday, March 18, 2010

Islam in Southeast Asia

Asia is home of 65 percent of the world's Muslims, and Indonesia, in Southeast, is the world's most populous Muslim country. This essay looks at the spread of Islam into Southeast Asia and how religious belief and expression fit with extant and modern polictical and economic infrastructures.

It is difficult to determine where Islamic practice begins or ends in any Muslim society, especially as the teachings of Islam encourage Muslims to be mindful of God and their fellow believers at all times. Still, the absence of publicly demonstrated mindfulness of God—whether expressed in terms of the wearing of special dress, such as the many sorts of veils donned by Southeast Asian women, or by recourse to frequent enunciations invoking His name—need not be taken as meaning that the person is any less a Muslim. Indeed, one’s faith is not to be measured by outward acts alone, and Muslim tradition ascribes greater weight to the personal intention of the believer than to outward appearance. Even so, what follows is an explanation of some aspects of the outward expression of Islamic identity in Southeast Asia.

Unity and Diversity

Although the national motto of Indonesia, “Unity in diversity” (Bhinneka tunggal ika), was intended to be an explicitly national one, it is no less applicable to the community of Southeast Asian Muslims, as well as to Muslims the world over. When Muslims come together to worship in the mosque on Friday, or when they perform their daily prayers as individuals, they face the same direction. As such they participate in a unitary tradition. The same might be said of when Muslims greet each other with the traditional Arabic blessing “Peace be with you” (al-salam `alaykum), when they undertake the fast (sawm) during the month of Ramadan, or when they make the pilgrimage (hajj) to Mecca.

If asked about the core elements of their faith and practice, many Muslims will point to the five basic duties of Islam. These consist of the profession of faith (shahada), the daily prayers (salat), the hajj, fasting in Ramadan (sawm), and the giving of alms (zakat). However, there is a whole range of calendrical celebrations and rites of passage associated with Islam, not to mention the simple acts of piety that some perform before carrying out basic actions. This might include invoking God’s name before eating or washing one’s face and limbs before prayer. Once again, these acts are shared across Islamic time and space.

On the other hand, many distinctions between believers of different cultural and theological traditions remain in evidence. Even when the global community of the faithful gather in Mecca for the hajj and don the same simple costume of two unsewn sheets (known as ihram), they often travel together in tightly managed groups of fellow countrymen or linguistic communities—at times with tags displaying their national flags. By the same token, there are many specific local practices that are felt to be thoroughly Islamic in Southeast Asia, but these, on occasion, have been condemned by Muslims of different cultural backgrounds by virtue of their absence in, or displacement from, their own histories. Local practices include the use of drums (bedug) in place of the call to prayer (adhan), or the visitation of the tombs of the founding saints of Java.

Other such examples of distinct Southeast Asian practices might be linked to the wearing of the sarung (a practice shared with Muslims and non-Muslims throughout Southeast Asia and the Indian Ocean), the relatively late circumcision of young males (often celebrated as a major event in village life), the use of shadow puppets (believed by some communities to have been invented by one Muslim saint to explain Islam in the local idiom), or the many popular verse tales of the exploits of an uncle of the Prophet, Amir Hamzah, drawn from Persian and Arabic originals. Even if such practices are regionally distinct or viewed askance elsewhere, if not contested openly, such practices are nonetheless seen as ways of connecting to a faith that is global and egalitarian.

Arabic and the Qur’an

One undeniably universal expression of religiosity is the recitation (qira’a) of the Qur’an, which all Muslims are enjoined to learn as soon as they are able. The Qur’an is understood to be the eternal expression of God’s will revealed through the Angel Gabriel to the Prophet Muhammad, who is believed by Muslims to be the last messenger appointed to mediate between God and humanity. Indeed the Qur’an is also affirmed as the final validation of the messages of all the prophets before him, including those known in the Jewish and Christian traditions. These include Abraham, Joseph, and Jesus, though there are additional figures such as Iskandar (Alexander the Great) and the enigmatic Khidr.

The Qur’an contains stories of all these prophets and many accounts of the difficulties that they—and Muhammad in particular—had in being accepted by their own people before winning them over and establishing God’s law (shari`a) among them. It is further replete with parables ranging over a broad range of human experience, and its recitation brings feelings of closeness to God and His Prophet, as well as solidarity with Muslims all over the world. Some Southeast Asians, such as the Indonesian Hajja Maria Ulfah, have even obtained international recognition for the quality of their recitations.

Yet while the Qur’an may be recited as proficiently, and as often, in Jakarta and Pattani as in Mecca or Algiers, the fact remains that the Holy Text was revealed in Arabic, and in the Arabic of Muhammad’s day. As such all Muslims require explanation of its meanings and those of non-Arab traditions—whether in India, Central Asia or Southeast Asia—require the additional intervention of translation.

The task of the explanation of the divine text is helped, in part, by the fact that Malay (both in its modern Indonesian and Malaysian variants), Javanese, and several other Austronesian languages spoken in insular Southeast Asia, are infused with Islamic terms. This process of linguistic appropriation may be linked with the expansion of a Muslim role in the trade linking the port towns of Southeast Asia, starting in the thirteenth century. It was in this way that the Arabic of the Qur’an, its associated scholarly traditions, and the everyday speech of many of the visiting traders suffused local languages—Malay in particular—with both sacred and profane terms. For example, the Arabic word fard (broadly meaning an obligation), has left two traces in Malay: one with the same sense of a “religious obligation” (fardu), and the other as the more general verb “to need” (perlu).

Regardless of the presence of Arabic elements in the Malay vocabulary that are not specifically religious, Southeast Asian Muslims have long been mindful of the sacred role that Arabic has played in what has increasingly become their history as much as that of Arabs. Certainly, there is a long history of the translation and explication of the Qur’an in the region, although it is important to note that in the Islamic tradition a translation, being the result of human interpretation, may never be elevated to the status of the divine text itself.

This principle, along with heightened contacts with new forms of Islamic thought being propagated from British-occupied Egypt and India in the late nineteenth century, led to debates in the similarly-colonised entities of Indonesia (then the Netherlands Indies) and Malaysia about the legitimacy of attempting to produce a translation—particularly after the widespread availability of printing presses and heightened literacy made it a commercial possibility. Some even argued that written translation (as opposed to the glossing of words and fragments) had never been permitted by Islamic law.

Whether permitted or not, such translations have long been made. Indeed, among the Islamic books brought back to Europe from Southeast Asia in the sixteenth and seventeenth centuries were Qur’anic texts, religious treatises, and works in verse that made use of holy scripture. These include the works of the mystical poet Hamzah Fansuri (d. 1527), who liberally infused his writings with Qur’anic verses, as well as more neutral Arabic, Persian, and Javanese terms, while stressing his distinct identity as a Malay of Fansur, a port-town of Sumatra.
Script and Identity

Alongside its major oral contribution to Southeast Asian Islamic identity, Arabic also has had a visual impact with the adoption of its script for many local languages, with modifications to suit local phonemes such as the sounds “p” and “ng.” By the time Hamzah Fansuri would compose his Malay poems, this phonetic form of writing had already been in use for some three centuries, whether for commemorative stones or for further Islamic propagation. This did not mean that the script displaced earlier methods of writing immediately or permanently. In some cases, local scripts have been maintained for both religious and non-religious texts. Even so, by the time that the Portuguese arrived in Southeast Asia in significant numbers at the beginning of the sixteenth century, Malay was being written primarily with Arabic letters and in a cursive form that is immediately identifiable as pertaining to the region.

In Indonesia, the Arabic script would only be displaced after the widespread popularization of newspapers and school texts in roman script starting in the late nineteenth century, and ever more so in the twentieth when reformist Muslims founded schools to provide the opportunities for modern education largely denied by the Dutch and British. Arabic and Arabic script remain in use in many Islamic schools in Indonesia (now known broadly as pesantren), and both are still used on billboards and signs recommending certain behaviors as Islamic. For example, an advertising campaign in West Sumatra in the 1990s was accompanied by Arabic statements attributed to the Prophet such as “Love of cleanliness is a part of belief ” (Hubb al-nizafa min al-iman).

The Arabic script remains strongly linked to Muslim identity in neighboring Malaysia and Brunei. This is especially the case in Malaysia, with its prominent non-Malay minorities; and it is further discernible in southern Thailand, where the script serves to mark the Muslim community off from the Thai-Buddhist majority and remains the written medium for a considerable local Malay-language publishing industry.

The Study Circle and Its Absence

Whereas Arabic has long been studied by Muslims in Southeast Asia, due to its elevated status as the language of revelation and its importance for connection with the Middle East as the source of Islam, and even though it has made its contribution to the oral and written cultures of the region, the fact remains that Southeast Asians require the aid of teachers and glossaries to make the texts of Islam comprehensible and applicable in daily life. To this end, the months spent learning the Qur’an under the guidance of a teacher is often a crucial period in a child’s life. At the end of this period of study a celebration (known as khatm al-Qur’an) is held in the family home.

More advanced studies of Islam usually require the sort of in-depth education offered by traditional religious schools, such as Indonesia’s pesantrens. Here students learn the requisite texts concerning pronunciation and grammar by the use of glosses in their own languages and various mnemonics or songs. This will allow them to make sense of more advanced works concerning the formal rules laid out in Islamic law defining social interaction, as well as those pertaining to the inculcation of moral values (akhlaq). At all stages a teacher ensures that the individual student has properly mastered a text before advancing to any higher stage of learning. Still, even in these traditional schools—which may be found throughout Southeast Asia and which allow the movement of individuals across national borders— there is a blurring between global religious practice and indigenous cultural expressions. Even when they are in Arabic, many of the songs learned or the texts mastered are related to a specifically Southeast Asian source of inspiration, either from a creator born in the region who assumed a place of importance in Mecca, such as Nawawi of Banten (1813-97), or at the hands of a foreigner who once sojourned through its mosques and fields, such as Nur al-Din al-Raniri (d. 1656). Furthermore, in recent times students have begun to popularize and rephrase many of the popular poems sung in praise of the Prophet. Some musical groups have reached wide audiences by incorporating Arabic lyrics, and Arabic songs have been composed and sung in Southeast Asia with the aim of propagating certain messages among a broader community of Muslims—ranging from gender equity to jihad.

On the other hand, there are also a great many Southeast Asians who never receive such traditional Islamic schooling, who have not learned Arabic or mastered the Qur’an, and for whom such lyrics may be incomprehensible. Many still feel themselves to be full members of the Muslim community (umma), though. For, while they may not fully understand the literal rules of the provisions of Islamic law, they feel that the texts in which it is explained are part of their own Muslim cultural heritage, with which they might connect at rites of passage such as birth, marriage, and the commemoration of death.

Religio-Cultural Intersections and the Modern State

Just as the colonial regimes sought to monitor and regulate the pilgrimage and Islamic schools, the modern state often attempts to play a role in defining religious and cultural practices at both the level of religious obligation and as officially-sanctioned cultural expression. The most obvious interventions may be seen in the specifically national mobilizations for the Hajj. Each year, for example, Indonesia supplies one of the largest contingents of pilgrims (over 200,000 people) for the annual series of ceremonies that take place in Mecca and its surroundings. To get there on such a massive scale necessitates a large degree of national coordination, including the provision of financial support. Beyond finance and coordination though, states also play a proactive role in
determining what variants of religious practice may be tolerated, particularly when those variants seem inimical to the government itself or which contest, sometimes violently, the depth of religious commitment of their fellow countrymen. For example, both Malaysia’s quietist Dar al-Ar qam organization, and the radical Ngruki network in Indonesia have seen their activities stopped or severely curtailed in the past decades.

Less tangible, but no less important, than contesting expressions of Islam framed in political terms or in alternative dress and practice, is the role of the state in presenting the style of religiosity felt to represent best the genius of its peoples. Sometimes the gaze is directed outward, sometimes inward. For example, one might think in terms of the architectural designs for many of the region’s modern mosques, which increasingly have a distinctly internationalist style owing more to India and Arabia than Southeast Asia; with minarets and onion domes and arches added to or supplanting the old multilayered pyramidal roofs.

On the other hand there is the Indonesian national museum for the Qur’an in Jakarta, with its showcase holy text (Al-Qur’an Mushaf Istiqlal) that has one page decorated in the style of each province of the Republic. But while the illuminations of Aceh have a distinct pedigree, many of the others are modern inventions designed to help Indonesians to think of the history of their country and its artistic expressions as an inevitable and natural process of combination given added meaning by Islam.

This is not to say, however, that this has always been the case, or that such increasingly Islamic views of history are universally accepted. Both Indonesia and Malaysia include substantial non-Muslim minorities, minorities that at times have become scapegoats during periods of economic uncertainty or because of the taint of imagined collaboration with colonial forces or even as fifth columnists for international communism. Indeed, Indonesia itself has a strong history as an avowedly secularist state, whose officials once placed more emphasis on the region’s pre-Islamic heritage in the form of temple remains. Its best-known author, the late Pramoedya Ananta Toer, even downplayed the role of Islam in the making of Indonesia and focussed instead on the powerful ideas of unity engendered by resistance to Dutch colonialism across the archipelago.

In either form of history, though, whether the view of an Islamic or an areligious anti-colonial national past, it is important to see Southeast Asians placing themselves in relation to a wider world, a world in which “Islam” offers just one set of civilizational practices to draw upon and which may be freely combined with others. In fact, many of the expressions that feed into globalising trends beyond the reach of the state, and redolent of an Islamic identity, are certainly at great variance to what might be conceived of as “traditional” Islam. Here we might think of the many popular groups that fuse the musical styles of the Middle East and Southeast Asia with a presentation owing something to western music videos, or the instructional literature for children now replete with illustrations drawn in the style of Japanese manga. And, again, there is a sphere of personal reflection and reaction that can seem outside the control of the state or that strives to take more from within the Southeast Asian artistic tradition than what lies beyond, whether in poetic musings on experiences in the mosque, or A. D. Pirous’s luminous canvases, which reflect upon both the eternal message and the troubled experiences of his own Acehnese people, who once fought for Indonesian independence in the 1940s but found themselves newly oppressed in the decades that followed.

Certainly one gains a more intimate view of the inner spirituality of Southeast Asian Muslims in such expressions. Even so, while Muslims are joined to each other by the medium of a religious inheritance in their archipelagic homelands, as well as to the broader Muslim community, in the expression of that identity they are undeniably drawing at all times from the images and sounds of the wider, shared world.

by Michael Laffan
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Friday, March 05, 2010


Baitul-mal according to Fiqh (classic Islamic literature) is the exchequer of an Islamic state. Being public property, all the citizens of an Islamic state have some beneficial right over the Baitul-mal, yet, nobody can claim to be its owner. Still, the Baitul-mal has some rights and obligations. Imam Al-Sarakhsi, the well-known Hanafi Jurist, says in his work “Al-Masut”:
“The Baitul-mal has some rights and obligations which may possibly be undetermined.”
At another place the same author says:
“If the head of an Islamic state needs money to give salaries to his army, but he finds no money in the Kharaj department of the Baitul-mal (wherefrom the salaries are generally given) he can give salaries from the sadaqah (Zakah) department, but the amount so taken from the sadaqah department shall be deemed to be a debt on Kharaj department.”
It follows from this that not only the Baitul-mal, but also the different departments therein can borrow and advance loans to each other. The liability of these loans does not lie on the head of state, but on the concerned department of Baitul-mal. It means that each department of Baitul-mal is a separate entity and in that capacity it can advance and borrow money, may be treated a debtor or a creditor, and thus can sue and be sued in the same manner as a juridical person does. It means that the Fuqaha of Islam have accepted the concept of juridical person in respect of Baitul-mal.

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Saturday, February 13, 2010

Islamic Investment Fund

The term "Islamic Investment Fund" in this chapter means a joint pool wherein the investors contribute their surplus money for the purpose of its investment to earn halal profits in strict conformity with the precepts of Islamic Shari’ah. The subscribers of the Fund may receive a document certifying their subscription and entitling them to the pro-rata profits actually earned by the Fund. These documents may be called ‘certificates’, ‘units’. ‘shares’ or may be given any other name, but their validity in terms of Shari’ah, will always be subject to two basic conditions:

Firstly, instead of a fixed return tied up with their face value, they must carry a pro-rata profit actually earned by the Fund. Therefore, neither the principal nor a rate of profit (tied up with the principal) can be guaranteed. The subscribers must enter into the fund with a clear understanding that the return on their subscription is tied up with the actual profit earned or loss suffered by the Fund. If the Fund earns huge profits, the return on their subscription will increase to that proportion. However, in case the Fund suffers loss, they will have to share it also, unless the loss is caused by the negligence or mismanagement, in which case the management, and not the Fund, will be liable to compensate it.

Secondly, the amounts so pooled together must be invested in a business acceptable to Shari’ah. It means that not only the channels of investment, but also the terms agreed with them must conform to the Islamic principles.

Keeping these basic requisites in view, the equity fund is one of the Islamic Investment Funds, which will be discussed below:

In an equity fund the amounts are invested in the shares of joint stock companies. The profits are mainly derived through the capital gains by purchasing the shares and selling them when their prices are increased. Profits are also earned through dividends distributed by the relevant companies.

It is obvious that if the main business of a company is not lawful in terms of Shari’ah, it is not allowed for an Islamic Fund to purchase, hold or sell its shares, because it will entail the direct involvement of the share holder in that prohibited business.

Similarly the contemporary Shari’ah expert are almost unanimous on the point that if all the transactions of a company are in full conformity with Shari’ah, which includes that the company neither borrows money on interest nor keeps its surplus in an interest bearing account, its shares can be purchased, held and sold without any hindrance from the Shari’ah side. But evidently such companies are very rare in the contemporary stock markets. Almost all the companies quoted in the present stock markets are in some way involved in an activity which violates the injections of Shari’ah. Even if the main business of a company is halal, its borrowings are surplus money in an interest bearing account or purchase interest-bearing bonds or securities.

The case of such companies has been a matter of debate between the Shari’ah experts in the present century. A group of the Shari’ah experts is of the view that it is not allowed for a Muslim to deal in the shares of such a company, even if its main business is halal. Their basic argument is that every share-holder of a company is a sharik (partner) of the company, and every sharik, according to the Islamic jurisprudence, is an agent for the other partners int the matters of the joint business. Therefore, the mere purchase of a share of a company embodies an authorization from the share-holder to the company to carry on its business in whatever manner the management deems fit. If it is known to the share-holder that the company is involved in an un-Islamic transaction. In this case, he will not only be responsible for giving his consent to an un-Islamic transaction, but the transaction will also be rightfully attributed to himself, because the management of the company is working under his tacit authorization.

Moreover, when a company is financed on the basis of interest, its funds employed in the business are impure. Similarly, when the company receives interest on its deposits an impure element is necessarily included in its income which will be distributed to the share-holders through dividends.

However, a large number of the present day scholars do not endorse this view. They argue that a joint stock company is basically different from a simple partnership. In partnership, all the policy decisions are taken through the consensus of all the partners, and each one of them has a veto power with regard to the policy of the business. Therefore, all the actions of a partnership are rightfully attributed to each partner. Conversely, the policy decisions in a joint stock company are taken by the majority. Being composed of a large number of share-holders, a company cannot give a veto power to each share-holder. The opinions of individual share-holders can be overruled by a majority decision therefore, each and every action taken by the company cannot be attributed to every share-holder in his individual capacity. If a share-holder raises an objection against a particular transaction in an Annual General Meeting, but his objection is overruled by the majority, it will not be fair to conclude that he has given his consent to that transaction in his individual capacity, especially when he intends to refrain from the income resulting from that transaction.

Therefore, if a company is engaged in a halal business, but also keeps its surplus money in an interest-bearing account, wherefrom a small incidental income of interest is received, it does not render all the business of the company unlawful. Now, if a person acquires the shares of such a company with clear intention that he will oppose this incidental transaction also, and will not use that proportion of the dividend for his own benefit, how can it be said that he has approved the transaction of interest and how can that transaction be attributed to him?

The other aspect of the dealings of such a company is that it sometimes borrows money from financial institutions. These borrowings are mostly based on interest. Here again the same principle is relevant. If a share-holder is not personally agreeable to such borrowings, but has been overruled by the majority, these borrowing transactions cannot be attributed to him.

Moreover, even though according to the principles of Islamic jurisprudence, borrowing on interest is a grave and sinful act, for which the borrower is responsible in the hereafter; but, this sinful act does not render the whole business of the borrower as haram or impermissible. The borrowed amount being recognized as owned by the borrower, anything purchased in exchange for that money is not unlawful. Therefore, the responsibility of committing a sinful act of borrowing on interest rests with the person who willfully indulged in a transaction of interest, but his fact does render the whole business of a company as unlawful.

Source: An introduction to Islamic Finance by Muhammad Taqi Usmani
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