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Islamic finance

I am a regular writer and presenter on Islamic finance. This page starts with my short glossary. The other works are listed with the newest at the top.


Glossary of Islamic finance terms
There are many Islamic finance glossaries available on the internet. I have create another due to some specific objectives about spelling and to give more detailed explanations than the typical glossary. The glossary will grow slowly as I add words to it. If there is a word you would like me to include, please let me know.

Other works

Overpaying for Shariah compliant fund management
I looked at some of the Shariah compliant equity funds available in the UK. What struck me is how expensive some of them are.
First steps in Shariah compliant equity investing
Most people, irrespective of their religious views, would benefit from putting their long-term savings into equity investments. However there are some basics which need to be understood before starting out.
In praise of fractional reserve banking
Fractional reserve banking enables banks to create money out of nowhere, as if by magic. That applies for both conventional banks and Islamic banks. It has long been attacked from both the far left and the far right of the political spectrum. However fractional reserve banking helps the economy to grow, which is why almost all countries practice it.
A brief look at Islamic fintech Kestrl
Kestrl is part of London's fintech sector. I had never heard of it until July 2023 when I found myself sitting opposite the CEO Areeb Siddiqui at an Islamic finance dinner. I decided to take a look at its iPhone app.
Islamic finance would not help Australia's housing crisis
It would not increase housing supply, but might increase prices by increasing total housing demand. My article was written after a TEDxSydney talk by an Australian academic proposing Islamic finance as a possible solution to Australia's housing crisis.
Measuring what people actually do, compared with what they say they do
Social desirability bias is a serious problem for survey research about sensitive subjects. Even when promised anonymity, people often give the survey answer "society expects them to give" rather than reporting their beliefs or actions truthfully. This research measured poor Pakistanis actual use of conventional finance, overcoming the social desirability bias problem by using a "list experiment."
American Finance House Lariba — another US Islamic finance provider
Lariba is not a bank itself, but is close linked with Bank of Whittier NA which states that it also operates on a riba-free basis.
Another US Islamic banking provider — Devon Bank
I continue my review of the USA's Islamic banking scene by looking at Devon Bank. This is a small, but very profitable, US conventional bank which operates an Islamic window.
University Islamic Financial — the USA's first Islamic bank
The USA has a small but growing Muslim population. Accordingly I decided to take a look at the USA's oldest established Islamic bank. Although long established, it is much smaller than even the smallest of the UK's Islamic banks.
Why buying shares and gambling are fundamentally different
Every so often, family members and friends make the comment that buying shares is a form of gambling. This is based on a fundamental misunderstanding. Life, and investing, involve unavoidable uncertainties. However gambling involves the artificial creation of unnecessary uncertainty.
How you do something usually changes its tax treatment
If the bank and the amount financed are not changing, a Shariah compliant diminishing musharaka transaction can be reorganised without triggering a tax liability. However in the case discussed in this article, the bank wanted to carry out the transaction a different way which led to a significant tax cost.
Islamic equity investing costs more than conventional investing
Islamic finance normally costs more than conventional finance, because it is a niche industry. Conventional finance has economies of scale and simpler transactions than Islamic finance. For this article I looked at the cost differential for managed equity funds. To ensure that I was comparing "like for like" as far as possible, I chose two relatively similar exchange traded funds from the same fund provider.
A quick look at Germany's first Islamic bank — KT Bank AG
This is a subsidiary of Kuveyt Türk Participation Bank Inc of Türkiye. I look at the results of its first seven years, finding that it has made significant losses while establishing its business in Germany.
A comparison of the UK's two smaller Islamic banks
Gatehouse Bank plc and QIB (UK) plc are similar sizes. However QIB (UK) performed much better in 2020 and 2021 than Gatehouse. I look closely at their differences and make some guesses.
Islamic banking and conventional banking have only minor economic differences
Many believe that there is a fundamental economic difference between Islamic banking and conventional banking. In my experience, this belief is most common amongst people who are not familiar with Islamic banking. My short article explains that Islamic banking is just banking, albeit with Shariah compliant contracts.
An update on Bank of London and the Middle East plc
This is the UK's largest Islamic investment bank, and has been in business since 2007. Overall, its results have been disappointing, with moderate profits in good years followed by significant losses in bad years. Recent years have continued this pattern.
Al Rayan Bank plc becoming internet-only is sensible
Al Rayan Bank recently closed its last branch serving regular (that is not high-net-worth) retail customers. I regard that as sensible, since physical branches are an expensive luxury in retail banking. I have believed for over a decade that small retail banks should avoid having branches.
The tax treatment of Shariah compliant refinancing is unfair
Muslims who have refinanced property (other than their principal private residence) in a Shariah compliant way are regularly facing unexpected tax bills. The Government is aware of the problem. However it has failed to do anything to fix it despite stating long ago that it wanted Islamic finance to be on a "level playing field" with conventional finance.
Is it religiously acceptable for Muslims to trade KuCoin futures?
A website reader asked me if trading KuCoin futures was halal or haram, pointing to a number of technical features of KuCoin. I answered in a way that illustrates how I tackle almost all religious questions. I explained that to decide, you need to understand the transactions, and consider whether they serve any social purpose. Applying legalistic tests is the wrong approach.
Governments should stop privileging debt over equity
Tax relief for interest expense paid by trading companies has the effect of encouraging companies to take on more debt, rather than issuing equity. Some countries have experimented with ways of reducing or eliminating this tax privilege for debt. However, even though Islamic finance scholars prohibit explicit interest payments, as far as I am aware no Muslim majority country has sought to reduce the tax privilege for debt.
When a tax law is badly drafted, what should you do?
I faced this question in 2006 when reviewing the Finance Bill. In that case, I wrote to HM Treasury and pointed out the error, which was corrected a year later. This page also sets out my views on the ethical issues in taxation in four short points.
Low interest rates can lead to unsophisticated investors taking on excessive risk
As someone who has been investing in equities and equity linked products for nearly 50 years, I am very aware of the risks, and accept them knowingly. However I have concerns that unsophisticated investors sometimes take on excessive risks. That risk is particularly acute with the current low interest rate environment. I illustrate this by looking at the risk disclosures made by Yielders Ltd.
The Bank of England's facility for accepting Shariah compliant deposits from banks
UK regulators have understood for a long time that UK Islamic banks find liquidity management hard due to the absence of high quality, liquid, Shariah compliant assets. After several consultations that started in 2016, in December 2021 the Bank of England finally launched its deposit taking facility.
A quick look at Emirates Islamic Bank PJSC
The bank's profitability suggest that the UAE Islamic banking market may not be very competitive. Its immediate parent is a conventional bank, and like many UAE businesses is state owned.
Development of illustrative financial statements for Islamic financial institutions
AAOIFI is consulting widely as it develops illustrative financial statements compliant with its proposed revisions to the relevant accounting standard. This led to me attending a 3-hour online meeting based in Bahrain to discuss progress to date. That same day I also spoke online in a corporate governance conference in Saudi Arabia, illustrating how technology is changing work.
Why Shariah compliant annuities are still unavailable
In April 2016 I wrote an article on the need for Shariah compliant annuities. In my December 2021 column for the magazine "Islamic Finance News" I explained why they are still unavailable. The reasons are mainly the lack of demand but also the duration mismatch risk faced by providers. Devising Shariah compliant structures is not a major problem.
My views on cryptocurrency
Cryptocurrencies are a “hot” investment topic. Cryptocurrencies are also attracting the attention of Shariah compliant investors, which I regard as somewhat surprising since Shariah scholars often say that Islamic finance is about financing worthwhile real activity. I am not aware of any use for Bitcoin other than speculation on its price.
How will Islamic finance Shariah standards develop over time?
Interpretations of Shariah by Muslims vary between geographical regions. The reason is that the schools of Islamic law are not equally represented everywhere. I used to expect convergence upon the stricter Shariah standards of the capital exporting Gulf states. I no longer do.
How should Islamic banks account for profit sharing investment accounts?
The hard question in Islamic bank accounting is how Islamic banks should account for profit sharing investment accounts. These have their basis in the classical Islamic partnership structure called mudharabah. There is no easy answer. To decide on the accounting treatment one needs to consider the economics of the arrangement in detail.
AAOIFI Roundtable on planned revisions to its Financial Accounting Standard 1
I attended a 3-hour Zoom meeting to discuss The Accounting and Auditing Organisation for Islamic Financial Institutions (“AAOIFI”) proposed changes to Financial Accounting Standard 1 “General Presentation and Disclosures in the Financial Statements of Islamic Banks and Financial Institutions.” Afterwards I realised there were important messages about the future of international meetings, the common language of Muslims worldwide, and how to maximise your impact when attending meetings, whether physical or virtual.
What are the accounting standards needs of Islamic finance?
Accounting standards generally are needed for comparability between companies, both within the same country and internationally. Do Islamic financial institutions need anything more beyond the accounting standards applicable to all companies? They do, but only for those relatively few subjects where Islamic financial institutions differ from conventional ones. Those are the only areas where AAOIFI (the Accounting and Auditing Organisation for Islamic Financial Institutions) should seek to set standards.
A snapshot of the UK Islamic banking scene in 2021
While planning my June 2021 column for the magazine Islamic Finance News I realised that I had not written a comparative survey of the UK Islamic banking scene since 2015. Of the six Islamic banks originally established in the UK, only four remain. They divide naturally into a "Big 2" and a "Little 2."
The price of money in Islamic finance and conventional finance
In free countries, Islamic finance and conventional finance exist side by side. Islamic banks always base their prices on the conventional finance interest rate. People often ask me why Islamic finance does not have an independent price for money? Even with arbitrage, I conclude that Islamic finance's pricing of money can differ from conventional finance. However, the difference will always be unfavourable to Islamic finance's customers!
Why Islamic finance does not use traditional Islamic law
I am often asked why Islamic finance uses secular legal systems instead of using Islamic law. The reasons are very practical ones. Traditional Islamic law ("fiqh") suffered many centuries of non-development and is therefore not adequate for modern commercial life.
The locations leading Islamic finance innovation
Islamic finance originated in Egypt while today the main jurisdictions are the Gulf states and Malaysia. However I believe that the UK and North America lead on Islamic finance innovation. I offer three possible reasons.
A close look at short selling from an Islamic finance perspective
Short selling is an important part of modern securities markets. Shariah scholars consider short selling to be religiously prohibited. I disagree with their religious analysis for the reasons explained on the page. Ultimately each Muslim must decide the religious question from themselves, as they are individually answerable to God. I have never engaged in short selling because I consider the risks outweigh the potential gains.
Islamic finance needs more rapid innovation
My January 2021 Islamic Finance News column was inspired by the turn of the year. I found myself thinking about where Islamic finance needs to go. I focused on the fact that Islamic finance still cannot satisfy many of the financial needs that conventional finance does. While innovation is happening, much more is needed.
My view on the religious permissibility of futures trading
Modern futures markets exist because they have unquestionable economic benefits for society. Those who doubt that are economically naive. Despite the economic benefits, many Muslims believe futures trading is religiously prohibited because some Hadith appear to prohibit the transactions involved. However the problems these Hadith aim at do not exist in modern futures markets, so I regard these Hadith as simply inapplicable to futures trading.
Islamic mortgages - who should gain / lose from property value changes?
Subject to local financial services regulation, the parties should be free to agree any terms they consider financially and religiously acceptable. I used my November 2020 Islamic Finance News column to remind readers that Muslims' views on religious questions such as the one above vary.
Short review of a 2019 UK corporate sukuk
Corporate sukuk in the UK are quite rare. I missed this 2019 issue by Al Waseelah plc to finance NQ Minerals plc when it took place. However, I summarised the details for my monthly Islamic Finance News column once I learned about it. One of my goals was to show how much one can learn simply by reading published documents.
Determining beneficial ownership in Islamic finance transactions
Registers of beneficial ownership are an important tool in combating corruption, since illicit wealth is often hidden by using trusts (as understood in English law) and similar entities which are found in other legal systems. I consider the implications of such anti-corruption measures for Islamic finance. I also set out some principles for determining where beneficial ownership lies in Islamic finance transactions.
How should Islamic financial institutions account for Zakat?
Zakat is a charitable donation or tax payment made by Muslims. Many Islamic financial institutions are either required to pay Zakat or choose to do so. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is consulting regarding a proposed Financial Accounting Standard on accounting for Zakat. My page includes the response I have sent in, and my article on the subject, as well as discussing how the word should be spelled in English.
VAT and Islamic finance transactions: a discussion of the policy issues
Value added tax, like income tax and corporation tax, was devised in a conventional finance environment. Accordingly Islamic finance transactions risk giving rise to greater VAT costs than their conventional analogues. My November 2015 report considers the issue from first principles. It then considers how four countries deal with VAT on Islamic finance. It concludes with some recommendations for tax policy makers.
Comparing Malaysia's largest conventional bank with its Islamic affiliate
In August 2019 I compared the results of the Malaysian CIMB Group's conventional and Islamic banks. I was surprised to find that the Islamic bank, although smaller, was the more profitable. I have recently made the same comparison for the conventional and Islamic banks within the Maybank group. I found the same pattern, despite the expectations of someone who wrote to me after the CIMB article.
The impact of Saudi Arabia's VAT increase on Islamic financial institutions
My article explains that because financial services are exempt for VAT purposes, an increase in the VAT rate means higher costs for Islamic financial institutions because they will suffer more non-deductible input tax. However conventional financial institutions will suffer the same way.
Why has UK retail takaful never taken off?
Most Islamic finance discussion focuses on banking. However the financial system is about much more than just banking, and insurance is a critical financial service. The Islamic version of insurance is takaful, and this is of growing significance in Muslim majority countries. However the UK retail takaful market has been a complete failure. My article considers possible explanations.
Calling yourself a "bank" does not guarantee that you are a bank
I was very surprised when someone asked me about a UK Islamic bank that I had never heard of before, called Rosette. When I investigated, I concluded that the organisation, whose full name is Rosette Merchant Bank LLP, was not a bank. The reason is that it does not have the key attributes that in my opinion define a bank.
Does divesting shares for ethical or religious reasons produce real change?
Investors are often pressed to divest from companies for ethical reasons, or to avoid their shares for religious reasons. While investors should always follow their ethical and religious beliefs, does such divestment achieve real change? When companies need retail customers, publicity from such divestment can change corporate behaviour. However generally divesting shares does not result in change. My page explains why.
The continuous losses of ADIB (UK) Ltd
I ask why this UK subsidiary of Abu Dhabi Islamic Bank PJSC has lost money in every year of operation. This article concludes my review of the financial histories of all of the UK's Islamic banks.
Looking back at 15 years of tax law changes around the world
This is my article in the 15-year anniversary book published by the magazine "Islamic Finance News." I illustrate some of the tax issues Islamic finance can cause, and explain why they arise. I also look briefly at countries around the world, both Muslim majority and Muslim minority, and explain why the UK has been a global pioneer in the tax and regulatory treatment of Islamic finance.
What does the UK general election result portend for Islamic finance?
The editor of the magazine Islamic Finance News asked me what I expected from Mr Johnson's administration with regard to Islamic finance. I wrote a column explaining that leaving the EU will damage Britain's Islamic finance industry alongside the financial services industry generally. However I do not expect any specific action to harm Islamic finance.
UK Islamic finance: The business opportunities for a small conventional bank
Habib Bank Zurich plc (which trades as Habib Bank AG Zurich) is a small British conventional bank. It now offers Islamic banking as well. I gave a presentation to their senior management team about the business opportunities. The presentation was based entirely on public domain information, and can be watched on my website page. To allow full and frank discussion after the presentation, I did not record the discussion session.
The Financial History of Gatehouse Bank plc
Gatehouse Bank was originally a wholly owned subsidiary, and remains mainly Kuwaiti owned. Since formation, it has lost very significant amounts of its shareholders' money.
The financial history of Qatar Islamic Bank’s UK subsidiary
Unlike the first three Islamic banks which I reviewed, QIB (UK) has always been a wholly owned subsidiary. It has lost large amounts of money, due to a combination of small size and a risky strategy. It now seems to have stabilised, but may be over-concentrated in real estate finance.
How Islamic banks create money
The way that money is created in a modern economy is not well understood by most people. I have never forgotten how informative I found having it explained in an economics textbook when I was 18. Many proponents of Islamic finance assert, incorrectly, that Islamic banks do not create money. Accordingly this page explains in very simple terms how Islamic banks create money.
The tax trap with Shariah compliant refinancing
UK Islamic banks use a structure known as diminishing shared ownership to offer real estate finance in a manner compliant with Shariah, Islamic religious requirements. Tax law has been enacted for this but is not comprehensive. Accordingly, the use of the structure to refinance appreciated real estate triggers crystallisation of the inherent capital gain. People may use this structure without realising they have triggered a capital gains tax "CGT" disposal. That can lead to them filing incorrect tax returns as well as owing CGT. I wrote an article for Tax Adviser magazine published in August 2019.
The regulatory capital position of CIMB Bank and CIMB Islamic
A previous page identified that, contrary to expectations, CIMB Islamic was more profitable than its larger conventional parent, CIMB Bank. I have looked further at the published financial information. For some unexplained reason, CIMB Islamic appears to have lower overheads. CIMB Bank's assets are also riskier, and therefore require it to hold more regulatory capital. However CIMB Bank appears not to earn a higher return on those riskier assets. That depresses its return on equity.
Two banks, one Islamic and one conventional, which are directly comparable
As they are part of the same group, I expect CIMB Bank (which is conventional) and CIMB Islamic to have similar cultures and operational efficiency. As CIMB Bank is larger, I expected it to be more profitable. The 2018 accounts showed the opposite. I investigated some possible reasons.
The terrible financial history of European Islamic Investment Bank, now called Rasmala plc
I looked at the financial accounts for 13 years of this company. They show that it has lost significant amounts of money most of the time, with occasional profits. It has been a disastrous investment for its shareholders.
Can you pay interest between companies with 100% common ownership?
A reader asked this question. In my view, a transaction between two wholly owned companies is a nullity for religious purposes, so no religious prohibitions can apply.
Islamic finance faces many regulatory barriers, not just tax obstacles
Financial services regulations generally pre-date Islamic finance. As a consequence, unless the regulatory provisions are adapted, they often preclude Islamic finance transactions. I give three examples, one from Russia and two from the UK.
What does the prohibition of preference shares in Islamic finance teach us?
One of my website readers recently asked whether preference shares were permitted in Islamic finance. I explained that almost all Shariah scholars who set down the rules for what is allowed in Islamic finance prohibit them. However the legal reasoning behind the prohibition relies upon analogies with very old Islamic partnerships law and is not well thought out in my opinion.
UK bank levy and the nature of Islamic banks' liabilities
A reader asked me whether the UK's bank levy might discriminate against Islamic banks. The drafter of the UK's bank levy legislation wrote it to ensure that Islamic banks were included. The reader's question led me to address the accounting for profit sharing investment accounts. My view is that, as operated in practice, profit sharing investment accounts are clearly liabilities for accounting purposes.
A financial history of Islamic Bank of Britain plc, now called Al Rayan Bank plc
This is the UK's first retail Islamic bank. I summarised all of its published accounts. They show steady losses year by year, until the bank was taken over and recapitalised after which it has made reasonable profits. It was previously just too small to be viable.
Small profits mixed with big losses - the record of the UK's largest Islamic investment bank
People underestimate how much you can learn about a company just by reading its published accounts. I downloaded and summarised the accounts of Bank of London and the Middle East plc. They show a pattern of small losses in good years, interspersed with very big losses in bad years. I consider this shows how hard it is to make money in Islamic finance in the UK.
Why private sector Shariah compliant student finance would not work in the UK
The Government's promised Shariah compliant student finance is long delayed, but I expect it to be launched eventually. A reader asked whether the private sector could instead offer a pure equity based scheme that would be more desirable from a Shariah perspective. In my view "adverse selection" would cause the private sector financiers excessive losses.
Changing the UK tax system for Islamic finance is challenging
It is nearly two decades since the UK started modifying its tax law so that Islamic finance transactions should not be taxed more heavily than conventional finance transactions. However a "level playing field" has not yet been achieved. One key reason change is so slow is because the tax system is extremely complex. Accordingly, every change risks creating fresh anomalies.
Are Islamic banks automatically ethical?
Nine years after its founding, the Global Alliance for Banking on Values has very few member institutions. Islamic banks put much more emphasis on their ethical nature than do most conventional banks. Islamic banks do not charge interest. However does that automatically make them ethical?
Islamic finance requires accurate vocabulary
For many years I have been unhappy with the name (in English) many Islamic finance practitioners give to the payment made by a customer under a takaful (Islamic insurance) contract. It is often described as a "donation" when it is nothing of the sort. Such terminology risks misleading people who are new to Islamic finance regarding the true economics of the transaction. My September 2018 Islamic Finance News column suggested more accurate names for the payment.
A second look at the performance of Shariah compliant share indices
My June 2018 Islamic Finance News column looked at the relative performance of the conventional and Shariah compliant versions of the FTSE All World Index from 2008-2017. A reader responded by saying that the MSCI World Index showed the opposite result. I have taken a detailed look at the figures which not change my fundamental point. A conventional equity investor should perform better than a Shariah compliant investor, simply because the conventional investor can pick from the entire universe of shares, while the Shariah compliant investor cannot.
The UK tax treatment of Islamic finance "borrowing" costs
Islamic banks do not make loans, but provide finance in other ways. UK tax law gives the finance costs paid by Islamic banks' customers the same tax treatment as it gives interest expense. That is normally helpful, but not always. For example, it means that the rent paid in a diminishing musharaka transaction to finance "buy to let" property will receive only basic rate income tax relief.
Do Shariah compliant shares perform better?
Writers and speakers about Islamic finance often contend that not only is it more moral, it also produces better financial results. During the global financial crisis, they regularly pointed to the superior performance of Shariah share indices. However, the evidence shows that in general Shariah compliant share indices perform worse than their conventional counterparts. That is what logic would predict.
UK taxation needs to accommodate Shariah compliant real estate refinancing
The UK is slowly amending its tax laws to facilitate Islamic finance. However the tax treatment of Shariah compliant real estate refinancing is a particular problem. Conventional refinancing of appreciated real estate involves no tax costs. Meanwhile, Shariah compliant refinancing causes the accrued capital gain to become taxable.
The UK's first Islamic bank sukuk issue
Conventional banks securitise mortgages to free up their regulatory capital. Investors in conventional mortgage backed securities receive a pre-specified return provided that the mortgages do not default beyond a safety margin built into the terms of the securities. Al Rayan Bank similarly issued sukuk in order to free up its regulatory capital. The sukuk investors will receive a return equal to LIBOR + 0.8% provided the mortgages do not default beyond the safety margin. From an economic perspective, there is no difference between conventional mortgage backed securities and this sukuk.
Many Islamic scholars don't understand that corporations are not partnerships
Traditional Islamic law (fiqh) includes a detailed partnership law, covering several types of partnerships. However it never developed the concept of a corporation. Today many Islamic scholars attempt to analyse corporations using only the partnership categories in traditional Islamic law. This is a serious mistake, and holds back the development of Islamic law, and in my view holds back Muslim majority societies more generally.
A transaction apparently complying with Islamic finance rules which dismays most Muslims who look at it
This page discusses a "total return swap" structure which has been signed off as Shariah compliant. The structure would allow Muslims to achieve the same economic returns as investing in any identified asset. For example, a Muslim could achieve the economic results of investing in brewery shares, while remaining Shariah compliant. The structure risks violating any purposive intent of Islamic finance. That may account for the nickname of the underlying religious opinion as "The Doomsday Fatwa."
An example of the risk to international investors from local country legal regimes
A key requirement for a successful economy is reliable, relatively inexpensive, and rapid, enforcement of commercial contracts. Sadly the courts of many countries cannot be relied upon when it comes to enforcing contracts, particularly when foreigners are seeking to enforce contracts against local country residents. The case of Dana Gas and its sukuk default illustrates this very well.
Leverage attributes in Islamic banking are the same as in conventional banking
Islamic banks fulfil the same economic functions as do conventional banks. Furthermore, the services they provide to their customers, whether "depositors" of money or "borrowers" of money, are essentially the same. Accordingly it should be no surprise that both types of bank derive competitive strength from the same leverage attributes.
For Islamic banks, Shariah compliance is a foundation attribute
About 25 years ago, Price Waterhouse's (now PricewaterhouseCoopers or PwC) global strategy was heavily focused on the distinction between "foundation attributes" and "leverage attributes". A foundation attribute is one you must have to play in the game; a leverage attribute is something that gives you competitive advantage. Because Shariah compliance is essential for all Islamic banks, it does not distinguish one Islamic bank from another. Hence it is a foundation attribute.
The difference Islamic finance makes
Islamic finance has basically the same economics as conventional finance. This naturally leads to the question of whether Islamic finance makes any difference to the world. I see its key benefit as bringing people into the financial system who would not use conventional finance for religious reasons. Islamic finance should also discourage borrowing to accelerate consumption.
Is there a meaningful choice between AAOIFI and IFRS accounting standards?
My correspondence with a journalist on the apparent choice between AAOIFI and IFRS accounting standards. In most cases, financial institutions cannot choose which standards to use; their regulator prescribes the accounting standards to apply. Quite separately, users of accounts need to remember that AAOIFI and IFRS standards have different goals. The page also includes my subsequent Islamic Finance News article, and links to some other resources on my website.
Islamic and conventional banks face almost identical transfer pricing issues
Islamic banks are banks which operate in accordance with rules set by Shariah scholars. As both conventional and Islamic banks fulfil the same economic functions, they face similar transfer pricing issues. I gave some technical responses to a researcher and based this page on them. The page starts with a basic explanation of what transfer pricing is.
Late assertions of Shariah non-compliance damage Islamic finance
Islamic finance arrangements need to be Shariah compliant throughout their life. Unfortunately some borrowers initially accept their arrangements are Shariah compliant, but assert non-compliance when repayment is due. Several such cases have resulted in litigation. Late assertions of Shariah non-compliance create extra risk in Islamic finance, thereby making it more expensive. They also damage Islamic finance's reputation. Contractual uncertainty in Islamic finance must be minimised.
Lecture: Islamic finance - why, how, and the problems under UK tax law
My recorded 55 minute PowerPoint presentation explains how the UK has modified its tax law to facilitate Islamic finance. It also mentions the problems that still remain.
Why Islamic finance is insufficiently innovative
"Fintech" looks like disrupting conventional finance. A reader asked why this is not happening in Islamic finance. One reason is the much smaller size of Islamic finance. Conventional finance offers much bigger rewards to successful innovators. I believe another important reason is religious conservatism in Islamic finance, with innovative concepts having to be justified within narrow historical modes of legal analysis.
Bank of England almost ready to take Shariah compliant deposits
Banking regulations require banks to maintain large amounts of high quality, preferably risk free, assets which can be accessed almost immediately. Conventional banks maintain deposits with the central bank, which in the UK is the Bank of England. Islamic banks cannot do so, as such deposits are not Shariah compliant. The Bank of England is consulting about it offering a Shariah compliant deposit facility, and in my view it is nearly there.
UK slowly progressing towards providing Shariah compliant student finance
Discussions have been held with the Government since 2011 regarding the possible introduction of Shariah compliant student finance. Progress has been made steadily over the years, albeit very slowly. The Government now has the statutory power to offer such finance. However the Government has not set any deadline for the introduction of the scheme. I remain hopeful that it will happen by September 2018.
Why Islamic mortgages normally cost more than conventional mortgages
In the UK Islamic mortgages are more expensive than conventional mortgages. There are good reasons for this discrepancy. Islamic banks lack the economies of scale achieved by conventional banks. Islamic mortgages also involve more, and more complex, legal transactions. As Islamic finance grows, the difference should narrow.
The need for more life takaful (insurance) provision
Most people have too little life insurance. This applies even more strongly in the case of Muslims. Some Muslims have religious concerns about life insurance. However there is an Islamic finance version approved by Shariah scholars, known as life takaful. While life takaful is now widely available in Malaysia and the Gulf Cooperation Council countries, I am not aware of it being available in the UK.
The time value of money in Islamic finance
People prefer money now to money later. This is known as the time value of money. Some early writers on Islamic finance appeared to believe that it required there be no time value of money. More recent academic writers generally recognise the time value of money, but then struggle to distinguish its application in Islamic finance from that in conventional finance.
A simple introduction to murabaha (purchase and resale) transactions
I have added "murabaha" to my "Glossary of Islamic finance terms." A murabaha transaction enables a bank to finance the purchase of an asset by a customer without making an interest bearing loan. This page explains how it works.
Introducing external Shariah audit requires abolishing the Shariah Supervisory Board
Islamic financial institutions are required to comply with Shariah rules. Shariah governance presently rests with the institution's Shariah Supervisory Board (SSB), which is normally appointed by the directors. There are concerns about whether the SSB is sufficiently independent or has sufficient auditing skills to give an opinion on whether the institution has complied with Shariah. Accordingly there are calls for the introduction of external Shariah audit (ESA). However, those calling for ESA have not yet addressed the implications of ESA for the SSB.
Do Muslims behave like Homo Islamicus?
Does Islamic banking meet different needs from those met by conventional banking? Not in my view. However Islamic economists envisage Islamic finance as part of a completely different economic system. Underlying Islamic economics is "Homo Islamicus" who behaves quite differently from the classical "Homo economicus." In contradiction, I do not see the economic behaviour of real Muslims as being materially different from that of real non-Muslims.
Why fixed return contracts predominate in Islamic banking
I received an interesting enquiry from a PhD student in Germany. He expected Islamic banks to primarily use profit participating contracts. He found that, in practice, fixed return contracts overwhelmingly predominate in Islamic banking. I already knew this and explained to him that fixed return contracts are used for commercial reasons. Profit participating contracts are actually very unattractive to Islamic banks, and also to their customers.
The introduction of standardised Islamic foreign exchange forwards
International business almost always gives rise to foreign exchange risk. Derivative contracts assist conventional companies to manage foreign exchange risk, but are not considered Shariah compliant. A Shariah compliant foreign exchange forward contract has now been developed. There is standard documentation which should make the contract easy to use.
Achieving Shariah compliant student finance in the UK illustrates how avoiding apathy requires realism
Many people today are apathetic. Some people are apathetic because they wrongly believe the world cannot be changed. Others wrongly believe the world can be changed easily and quickly, and give up when success is not immediate. Both wrong perceptions lead to apathy. The antidote to apathy is belief in the possibility of change combined with realism about how long it will take and how hard it will be. My experience in dealing with the UK Government on Shariah compliant student finance illustrates this quite well. I started meeting the government in 2011, and others had been involved even before that. The Prime Minister promised in October 2013 that change would happen, but I do not expect it before September 2017 at the earliest.
How should VAT systems treat Islamic finance transactions?
My article originally published in the magazine "Tax Notes International" points out that VAT systems developed in an environment of conventional finance. Particularly where one of the parties is not in business, or is carrying on an exempt or partially exempt business, Islamic finance risks incurring higher VAT costs than conventional finance. The approaches taken by four countries, South Africa, Singapore, Malaysia and the UK have some aspects in common, while other parts of their approaches differ. The article also makes some general policy recommendations.
Are UK universities mis-selling Islamic finance masters' degrees?
The two main reasons for studying a subject at university are its intrinsic interest and its value for a career. The relative weights given to these two criteria vary from person to person. Growing numbers of UK universities are offering masters' degrees in Islamic finance. However, if UK students are taking them for career enhancement, mis-selling may be taking place.
The need for Shariah compliant annuities
A growing number of people are in defined contribution pension schemes. Many Muslims in such schemes want Shariah compliant pension arrangements. There is adequate Shariah compliant provision for the investment phase of pension schemes, but not for the retirement phase. In particular Shariah compliant annuities are needed to satisfy retirees' financial requirements. Developing a market for Shariah compliant annuities will also help sukuk issuers to access longer term funds than they can at present.
Bank of England consultation on establishing Shariah compliant central bank liquidity facilities
Conventional banks can hold liquidity deposits with the Bank of England. The Bank of England also lends money to conventional banks when required. However Islamic banks are not able to use these facilities as they are not considered Shariah compliant which makes their treasury management much more difficult. The Bank of England is currently consulting on how it might offer Shariah compliant central bank facilities. I have responded to the consultation, which closes on 29 April 2016.
Don't confuse religious questions and empirical questions
Religious and empirical questions are answered by different methods. Accordingly confusing them is a serious mistake. Whether God says that money should only be gold or silver is a religious question. Whether the economy would function better by replacing fiat money with gold or silver is an empirical question. The empirical answer is clear. All advanced economies use fiat money because they run better than they did with gold as money.
Working in a large firm as an Islamic finance tax advisor
My article for "IFN Education." Islamic finance tax advisors need to be tax experts, but they also need to know about relevant other areas such as Shariah, accounting, company law and treasury management. In addition, good client service also requires strong soft skills such as listening and communicating clearly.
Should Muslims be actuaries? How misunderstandings about Islam spread.
I regularly receive requests for advice, especially about careers. This recent enquiry was from a schoolboy who was under the impression that Islam prohibited Muslims from being actuaries. In response I gave him examples of actuarial practice within Islamic finance. More generally, I stressed the essential requirement to take one's own decisions on religious matters.
Taxation Issues in Islamic Wealth Management
Wealth management is important to individuals and to the financial services industry. For all transactions the tax implications must be considered. However, tax is always country specific. Accordingly this article explains some of the generic tax issues that need consideration, and then goes on to outline how UK law deals with the transactions discussed as a guide to those who need to research similar transactions in other countries.
VAT and Islamic finance transactions
Islamic finance presents challenges for VAT systems because it requires more transactions than the conventional finance assumed by most tax systems. Consequently it can cause extra VAT costs to arise. Malaysia and South Africa have introduced specific VAT rules for Islamic finance while the UK relies upon general VAT law, which can lead to difficulties in certain situations.
Why commodity speculators are socially useful
Commodity futures markets can look irrational and chaotic, while commodity speculators are often criticised for "speculating." I explain why commodity futures markets exist, and how they assist commodity producers and commodity consumers who need to make long term plans to protect themselves from unexpected price changes. Such futures markets would not work without the liquidity provided by speculators.
The language of international Islamic finance is English
International Islamic finance is normally conducted in English. However precision and brevity often require the use of vocabulary derived from Arabic. Such imported words become part of the English language and are no longer foreign words. Accordingly they should not have transliteration signs or use Arabic grammatical formulations.
Becoming an Islamic finance columnist
Although I have been writing technical articles for 18 years, I have just become a columnist for the first time with a monthly column in the magazine "Islamic Finance News." I devoted my first column to explaining how I got involved with Islamic finance, and why I am passionate about it.
What the UK Islamic banks' 2014 accounts tell us
In 2014 all but one of the UK's Islamic banks made a profit. However return on equity is still unacceptably low for all of them. Their accounts show very different strategies and it is wrong to talk of the UK's Islamic banks as if they were a homogeneous category.
Radio interview: 15 Minute Introduction to Islamic Finance
My interview on Radio Algeria International which gives a simple introduction to Islamic finance requiring no previous knowledge. The interviewer's questions are also written out on the page.
Cross-Border Taxation of Islamic Finance in the MENA Region
An article written for the Journal of International Taxation. It was based on the report "Cross border taxation of Islamic finance in the MENA region Phase One" which I wrote as part of a research project supported by the Qatar Financial Centre Authority. The intended audience was MNC tax directors not knowledgeable about Islamic finance. My website page has the full text submitted to the magazine, which was abridged somewhat for publication due to space constraints.
Islamic Finance 2014 Accounting and Tax Developments
During 2014 the International Accounting Standards Board (IASB) finally started to give some serious attention to Islamic finance accounting. It is also a good development that the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is now providing input to the IASB on accounting. While accounting is global, tax developments are always country specific. The trend continues of countries continuing to modify their tax rules to facilitate Islamic finance.
The role of Islamic finance in Britain's international competitiveness
Government action can increase or reduce the country's international competitiveness. In practice this happens with the cumulative effect of many small decisions. The UK Government's encouragement of Islamic finance illustrates this point very well.
Islamic finance in the UK - a look backwards
Outside Muslim majority countries, the UK has been the leading pioneer of Islamic finance. However, after some major announcements in 2006 and 2007, the UK seemed to lose interest. The UK government has recently taken Islamic finance much more seriously. This culminated in the UK issuing the first sovereign sukuk outside Muslim majority countries.
The impact of the OECD's tax policy challenges on Islamic finance
The rules for taxing international business developed in an era when communications were slow and difficult. However electronic communication and fast international travel make them outmoded. Consequently Governments are losing tax revenue as businesses sell via the internet from low tax jurisdictions for example. There is a risk that the likely policy responses could impact upon Islamic finance unless great care is taken with tax law drafting.
UK Government consultation on Shariah compliant student finance
The UK has a generous government provided student loan scheme. However some Muslim students do not use it for religious reasons. In October 2014 the Prime Minister committed to providing a Shariah compliant student finance scheme. The Government is now consulting on a proposed design. The consultation closes on 12 June 2014.
Sukuk - taxation of legal form or economic substance? The role for tax incentives?
In this interview on sukuk taxation I explain that no country taxes purely on legal form or purely on economic substance. I also discuss whether there is a role for tax incentives, and point out that in practice the benefits of incentives get shared between issuers and investors.
How should indirect taxes deal with Islamic finance? - Video
This 33 minute lecture explains the main indirect taxes: transfer taxes, sales taxes and value added taxes (VAT) from first principles. I then discuss how VAT should apply to financial services generally, before considering why VAT presents particular problems for Islamic finance transactions. I also suggest some possible ways forward.
Tax Treatment of Islamic Finance in the MENA Region - video
This 27 minute lecture explains the methodology and findings of a major study on the taxation of Islamic finance in the Middle East and North Africa. As well as summarising what we found, I give recommendations for how MENA region countries should modify their direct tax systems to facilitate Islamic finance.
Should accounting firms undertake Shariah audits?
My seven minute speech outlines the roles of the Board of Directors, the internal Shariah Department, the Shariah Supervisory Board and the external auditors. I explain the role I see for the external auditors in auditing Shariah compliance, and who I believe should report to stakeholders.
A late 2013 survey of the UK Islamic finance industry
The clouds of the global financial crisis are lifting. However the UK's Islamic banks are still unprofitable and the best performer had 2012 ROE of only 2%. The announcement of a UK sukuk was the highlight of 2013 for the industry.
A tale of two banks - video
This is a 26 minute video of my lecture for the Institute of Islamic Banking and Insurance, comparing the accounts of Bank of London and the Middle East plc and Islamic Bank of Britain plc. It explains the business of banking, and shows how much can be learned by reading published accounts.
Career prospects in Islamic finance in the UK
My chapter in a report published by Simply Sharia to coincide with the World Islamic Economic Forum being held in London. I explain that there is only a limited need for Islamic finance specialists in the UK. In practice experience for these careers generally needs to be acquired in the conventional finance industry.
A UK Government sukuk at last!
The UK has been thinking about issuing a sukuk since 2007. However it has kept putting it off as not being value for money. Accordingly David Cameron pleasantly surprised many people when he announced at the World Islamic Economic Forum that he wanted the UK to go ahead with an issue. I wrote an article the same day welcoming the announcement and answering some questions from 2008 about the implications.
A simple introduction to sukuk
Prime Minister David Cameron announced at the London World Islamic Economic Forum that he wanted the UK to issue a sovereign sukuk. This has led many to ask what a sukuk is. I have written a simple explanation.
A late 2012 snapshot of the UK Islamic finance industry
My contribution to the Islamic Finance News global "2013 Guide". In my view UK Islamic finance has struggled since the global financial crisis. The UK Islamic banks were unprofitable in 2011. Figures for 2012 were awaited when I wrote. One key challenge is that the UK retail Islamic finance market is small. If conditions improve, 2013 may see new entrants to the industry.
Report on the cross-border taxation of Islamic finance in the MENA region
I am the principal author of this report published by the Qatar Financial Centre Authority and the International Tax and Investment Center. It looks at the taxation of four common Islamic finance structures: commodity murabaha, sukuk, salaam and istisna in eight MENA region countries: Egypt, Jordan, Kuwait, Libya, Oman, Qatar, Saudi Arabia, Turkey and also in the Qatar Financial Centre. The report recommends how these countries should adapt their tax systems to facilitate Islamic finance.
How can Islamic finance enter western markets?
My response to this generic question is that each country market is distinct, and thinking about western markets as a whole will lead to bad strategic decisions. Each Islamic financial institution needs to decide what markets it can enter profitably and focus on its core strengths.
Some questions about the International Islamic Liquidity Management Corporation (IILM)
The IILM was set up by several central banks from Muslim majority countries. Its aim is to issue high quality Shariah compliant instruments suitable for Islamic banks to hold for their treasury operations. To date, it has not yet issued any such instruments. I pose some questions that must be answered before such instruments are issued.
The evolution of sukuk from asset-backed to asset-based structures
People use terms such as "asset backed" and "asset based" with sukuk without being clear what they mean. After defining the terms, I point out that investors in asset based sukuk have much less protection in the event of default by the sponsor. The credit ratings agencies have been saying the same thing for many years, but few people paid attention until the financial crisis hit some of the Gulf states.
Islamic Financial Institutions and the Implications of Accounting under IFRS
Islamic finance practitioners often question whether IFRS or AAOIFI accounting standards should be used. In practice, local law rarely allows a choice. While IFRS accounting often deviates from the transaction's legal form, so does AAOIFI accounting at times. IFRS accounting can make it harder to assess whether the company's transactions are Shariah compliant.
The impact on Islamic banking of Indonesia's new rules on bank ownership
Many countries have restrictions on foreigners owning banks. These are normally a bad idea. Indonesia's new rules are quite flexible, and therefore should not do any serious harm.
A tale of two banks: a comparison of the published accounts of Islamic Bank of Britain and of Bank of London and the Middle East
I gave a lecture based upon comparing the accounts of this Islamic retail bank and this Islamic investment bank. The accounts show the differing commercial pressures these banks face.
What businesses should Islamic banks finance?
The magazine Islamic Finance News asked: "Should the Islamic finance industry be responsible for funding the global Halal sector? And if so, how should this be facilitated?" This question appears to assume that Islamic banks exist to fulfil a social purpose. In my view, they do not; their sole purpose is to make a profit for their shareholders.
Does Islamic finance need you?
Many young UK Muslims obtain Islamic finance qualifications and want a career in Islamic finance. However the supply of UK Islamic finance jobs is very limited. Moreover, the Islamic finance industry needs specialist skills, which in most cases can only be acquired within conventional finance.
Non-Malaysian companies issuing ringgit sukuk
Like many developing countries, Malaysia has exchange controls. Whether foreign companies should be allowed to issue ringgit denominated sukuk in Malaysia is purely a foreign exchange management question, not an Islamic finance question.
Islamic banks' treasury management challenges
Islamic banks face far more challenges than conventional banks. In particular, the main contracts used by Islamic banks for treasury liquidity management are sometimes frowned upon by Shariah scholars. Also there is a shortage of liquidity management instruments apart from the Shariah compliant inter-bank market.
How industry standardisation in Islamic finance could help promote cross-border transactions
Islamic finance is far less standardised than conventional finance, with little standard documentation. This increases transaction costs. The industry also needs more Shariah standards and would benefit from greater willingness to publish fatwas.
Islamic financial institutions and the shortage of investible products
A short explanation of why Islamic financial institutions are often more liquid than their conventional counterparts, and how they should address this.
Written interview on the UK retail Islamic banking scene
In response to questions from the magazine Islamic Finance News, I explain why the industry has grown so little and the competitive pressures it faces.
When do cross-border Islamic finance payments suffer withholding tax?
As tax law varies from country to country, there is no general answer to this question. However this article, first published in Islamic Finance News, explains how to think about the issues.
The Royal Bank of Scotland disaster: its lessons for Islamic finance
The Financial Services Authority has published a 452 page report "The failure of the Royal Bank of Scotland." Islamic banks are exposed to many of the risks that brought down RBS.
The choice of applicable law for Islamic finance
Students of Islamic finance often wonder why so much of it takes place under English law. An interview with Global Islamic Finance Magazine allowed me to give a brief explanation.
Accounting and tax implications of sale and leaseback
This article first published in Islamic Finance News looks at the accounting under IFRS and AAOIFI accounting standards. It also briefly considers the tax issues that can arise.
Presentation on “Taxation of Islamic finance transactions” at ITIC MENA Tax Forum, Istanbul
The slides and addtional text explain why Islamic finance transactions often suffer a higher tax burden than equivalent conventional transactions. The coverage is not specific to any one country.
Accounting for sukuk under IFRS and AAOIFI accounting standards
My chapter from a new book which uses a hypothetical example to show how the two sets of accounting standards can give very different accounting results for the same transaction.
Liquidity management at UK Islamic banks
Islamic banks face greater liquidity management challenges than conventional banks. I cover the reasons and also review the liquidity management practices of the five UK Islamic banks.
A simple introduction to Islamic mortgages
There is much misunderstanding about Islamic mortgages. Accordingly, I have explained how they work in simple terms with diagrams and illustrative numbers.
Leaked US ambassador's report on UK Islamic finance scene.
The diplomatic cable released by WikiLeaks is a fair status summary with occasional errors, and quotes many people including myself.
What is AAOIFI’s Proper Accounting Standards Role?
A review of GCC Islamic banks shows that AAOIFI's accounting standards are only followed in Bahrain and Qatar. I conclude that AAOIFI should cease issuing its own accounting standards and instead collaborate with the IASB.
The tax treatment of Islamic finance in Western countries and Muslim majority countries
This is my chapter of the book "Euromoney Encyclopedia of Islamic Finance" edited by Aly Khorshid and published by Euromoney Books. My goal in writing it was to explain the different approaches to the taxation of Islamic finance taken by the UK and some Muslim majority countries.
The role of the UK as an international centre for Islamic banking and finance
This is my chapter of the book "Islamic Investment Banking: Emerging Trends, Developments and Opportunities" edited by Sohail Jaffer and published by Euromoney Books. My goal was to explain the factors that have made the UK the leading centre for international Islamic finance outside Muslim majority countries.
Islamic financial products and their challenge to taxation systems
This is my chapter of the book "The Chancellor Guide to the Legal and Shari'a Aspects of Islamic Finance" edited by Humayon Dar. It explains why the UK would tax Islamic finance transactions more heavily than conventional finance, and discusses how UK law has been revised with the goal of parity of tax treatment.
The UK Islamic banking scene
This short article looks at the figures on the five UK Islamic banks as at 31 December 2009. Only one of them is a retail bank, and I explain why retail Islamic banking has not taken off in the UK.
A review of "Islamic Commercial Law: An Analysis of Futures and Options" by Mohammed Hashim Kamali
This is my favourite book on Islamic finance, and the one I always recommend to people new to the subject who want to understand the religious background.
Why has retail Islamic banking not taken off in the UK?
I read a newspaper article which posed this question, and decided to set out my own thoughts.
How conventional insurance and takaful differ numerically
Many people who are new to Islamic finance often ask about the difference between takaful and conventional insurance. I have tried to explain this with the simplest possible example; two people who each have a house that is at risk from fire.
British Government Policy on Islamic Finance
I was asked to contribute an article on Islamic finance for the brochure being prepared by the Muslim Council of Britain's delegation to the World Islamic Economic Forum. As the audience at the WIEF would mostly come from Muslim majority countries, I decided to explain how the UK has been able to promote Islamic finance while maintaining a policy of religious neutrality.
The United Kingdom’s approach to the regulation of Islamic finance
The UK is globally recognised as the leading Western country for Islamic finance.  However from time to time proponents of Islamic finance ask me why the UK does not allow Islamic banks to offer “true” profit and loss sharing investment accounts. This item is a long answer to that short question.
Would Islamic finance have prevented the global financial crisis?
I gave a presentation on this subject to the Institute of Islamic Banking and Insurance in July 2009, and then wrote an article based on the presentation.
Are Islamic banks Islamic enough?
In one form or another, this question often crops up at conferences on Islamic finance. In my view, the answer depends upon the personal religious views of each Muslim, and I have therefore not sought to address it in any of my published writings on Islamic finance. However, the receipt by the Muslim Council of Britain of an open letter required me to address it when composing the response.
Video presentation on "Would Islamic finance have prevented the global financial crisis?"
On 6 July 2009, I gave a presentation on this subject in Australia. The video can be watched free on iTunes.
Islamic finance in Australia
I visited Australia in July 2009. Australia is an important regional financial centre, and I believe it has significant competitive advantages if it chooses to compete regionally in international Islamic finance.
Should Financial Reporting for Islamic Finance be different?-video
This short video of 2 minutes and 17 seconds addresses the question of whether we need accounting standards for Islamic finance which are distinct from the accounting standards applicable to conventional finance. The short answer is no. The video is not very "bubbly"; apart from the subject being accounting, the other reason is that I was speaking without any notes or advance preparation, so I was literally making it up as I went along! It can be watched on the website of the Institute of Islamic Banking and Insurance.
Taxation of Islamic finance - video
The CFA Institute is a body engaged in financial training. I recorded for them a 25 minute video comprising a slide presentation with me talking on "Taxation of Islamic finance."


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