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Mohamed A. Gadhoum and Shamsher Mohamad

Benchmarks serve a critical role financial markets as a point of reference for pricing the riskiness of a financial security, to indicate the relative value or opportunity cost of capital while it also serves as a yardstick for the relative performance of a portfolio. The existence of a transparent, observable, liquid, easy-to-compute and non-manipulative benchmark is vital for efficient financial markets. Islamic finance has yet to develop appropriate benchmarks and currently use LIBOR as the reference benchmark in determining expected rate of return in shariah-compliant securities. This practice has been allowed by scholars as an exception under the law of necessity. Unfortunately, despite being in practice for decades, this exception has become a general rule and the practice is so prevalent that most practitioners in the Islamic finance Industry. The key difficulty lies in obtaining a rate of return in an economy based on profit-and-loss sharing. This chapter discuss in detail the development of a benchmark for shariah-compliant investments taking into consideration the conceptual and practical issues.

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Abbas Mirakhor

Benchmarks serve a critical role in financial markets for pricing the riskiness of a financial security, to indicate the relative value or opportunity cost of capital and to serve as a performance yardstick. The Islamic finance industry globally has yet to develop appropriate benchmarks and currently use LIBOR as the reference benchmark in determining expected rate of return in shariah-compliant securities. This chapter explains the significance and the critical role of LIBOR as a financial benchmark in current conventional banking and financial markets, and discusses the issues arising from the use of LIBOR as a compliant investment. A linkage between the concept of benchmarking and the doctrine of market price in Islam is established and contrasted from the perspective of wealth management in Islam. The risk of using an interest rate-based benchmark by Islamic financial institutions is highlighted and there is an urgent need to create an interest-free benchmark in place of LIBOR is explained.

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Syed O. Alhabshi

This chapter is about how Islamic mutual insurance principles under takaful has been conceptualised to rid from mainstream insurance practices prohibited elements under Islamic insurance: usury (riba), ambiguity (gharar) and gambling (maisir). The success of this new mutual insurance as has happened with the growth of 17 institutions in Malaysia has been well accepted, with the industry growing at double-digit ever since the laws were enacted in 1985. Most other countries have yet developed a comprehensive framework for this market, and growth is likely when more countries adopt the takaful model. To improve its effectiveness and for monitoring of the Takaful operators, the regulator has put in place a comprehensive regulations under the laws.

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Adelina Zuleikha and Shamsher Mohamad

Fara’iḍ covers the principles under the Islamic contracting that covers the way the estate of a faithful is to be dealt with and distributed upon his/her death. It is a fundamental part of how the laws guide how wealth re-distribution is to be done in the case of intestate situation. The laws derive from revelations in the Quran to ensure that the wealth is not hoarded in the hands of a few but re-distributed equitably among the rightful dependents in the society with a larger view to mitigate the income inequality gap. In Islamic inheritance law, there are eight classes of heirs in accordance to their priority to inheritance. The rules and procedures for implementing the laws, the impediments, social-economic impact and practical issues are discussed. The major issues are: lack of awareness of the laws; the need to develop further the legal and operational infrastructure required for effective implementation.

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Jamaliah Abdul Thahir

Waqf literally means holding or preserving certain property that continuously benefits specified beneficiaries for religious and charitable purposes as recognized by the Shariah. The aim here is to seek the pleasure of God to perpetuate good deeds by using wealth. In the contemporary environment, waqf can be incorporated under foundation laws that allows for dynamic wealth transfer, dynastic planning and inheritance management protected within a tax-efficient legal entity. This chapter provides details on the setting up of behest at the Labuan International waqf Foundation (LIWF) as an Islamic foundation to hold and manage properties for identified beneficiaries. The advantages of managing properties under this foundation, using the different types of waqfs under the LIWC, their economic potential and dispute resolution mechanism are in place to safeguard the behest from challenges.

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Zulkarnain M. Sori, Shamsher Mohamad and M. Eskandar Shah Rasid

What are the issues of governance is discussed in this chapter. We describe the practices of world’s first Shariah Governance Framework mandated by the Malaysia Central Bank to enhance the effectiveness and efficiency of financial institutions in that country. Four main functions of Shariah boards are discussed with respect to Risk Management, Review, Research and Audit, each of which has its own board. The perceptions were sought through structured interviews in 2016 of 16 members of the committee on the mandated governance framework. Though most of them perceived this framework as an important mechanism to monitor the interest of diverse stakeholders such as depositors, investment account holders and shareholders, there were also concerns on effective enforcement mechanisms as well as the need to refine continuous improvements in place to achieve the desired effect of this initiative.

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Islamic Wealth Management

Theory and Practice

Edited by Mohamed Ariff and Shamsher Mohamad

From an Islamic perspective, although the ownership of wealth is with God, humans are gifted with wealth to manage it with the objective of benefiting the human society. Such guidance means that wealth management is a process involving the accumulation, generation, purification, preservation and distribution of wealth, all to be conducted carefully in permissible ways. This book is the first to lay out a coherent framework on how wealth management should be conducted in compliance with guiding principles from edicts of a major world religion.
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Mohamed Ariff and Shamsher Mohamad

Zakat is charity payable each year on the excess wealth beyond that needed for one’s station in life. This is mandated as a duty of believers to give to charity a small portion ranging from as low as 2.5% on the excess to 7% (in the case of ornaments of precious items). It is given voluntarily by the faithful to whoever they wish to give and that includes the poor among the family. The sum is unknown and it is thought to be very large because these sums of money are supporting mosques, education, hospitals, and orphanages and support for the needy. Zakat is to be paid first before the balance of wealth could be invested to earn more wealth, which in turn will mandate further zakat payments in the ensuing year. This is pertinent to wealth management because the faithful is to have professional advice on how to compute this amount each year. We believe this is part of wealth management advisory services.

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Magda I.A. Mohsin and Shaikh H.A. Razak

To earn God’s pleasure, the faithful are urged to deploy wealth as bequests (waqf) to promote good deeds that benefits the community at large. The importance of such institutions that have existed for over 1,400 years is highlighted in this chapter. Its main goal is to be a charitable endowment that helps redistribute wealth to bridge the gap between the have-plenty and the have-not. The erosion of this admirable institutions during the 20-th century under secular government actions has led to losses of wealth and damages to assets put under endowments. In the last two decades, these institutions have begun to revive its role, and are starting to engage in beneficial socio-economic role for the communities. Through new financial modes, the old and idle properties have been successfully redeveloped to provide rewards not only for the founders, but also to benefit the society at large in terms of healthcare, job opportunities, expansion of business sector, to shelter the masses in hard times, and educating the needy besides providing food for the poor and the needy. This aspect is the last of the five parts of Islamic wealth management.

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Edited by Mohamed Ariff and Shamsher Mohamad