Mohamed Ariff and Shamsher Mohamad
Adam Smith traced the source of opulence of nation, which he called capital, to the uninterrupted efforts of every man to better his condition. Today we define wealth as the item that has some economic substance, a value such that this wealth can be used for several intended purposes, in modern economics, for consumption as theoretically glorified by the Utility Maximization Theorem (Arrow-Debreu). In this chapter, the reader is introduced to the modern idea of net wealth held by households and entities. The amount of wealth as at 2017 is given as US$ 250 trillion after all liabilities are subtracted from total wealth. In this context, Calvin’s contribution of wealth as God’s gift to man is referred to, which provides a continuity with Islam’s claim that wealth belongs to God, and He apportions who begets it.
Mohamed A. Gadhoum
The secular perspective on wealth has amply been explained in Chapter 1. This chapter is meant to clarify the meaning of wealth from the Islamic (shariah) perspective based on its main sources, the Quran and the Sunnah (Prophet’s sayings-cum-practices). Wealth is earned, accumulated and invested by its owner: contemporary perspective is that wealth is rightfully owned without much thoughts about the community in which it is held. Islam dictates wealth should be earned by permissible means, and should not be invested to harm the community in which the wealth is found. More than that, part of additions to wealth each year from investment returns must be paid as charity while wealth should be optionally be put to promote good deeds to serve the community needs. These differences create challenges to Islamic wealth management and estate planning for those who wish to fall in line with Islam’s injunctions on wealth.
This chapter introduces the reader to a brief description of modern finance ideas as regards wealth management. As at 2016, the total wealth under management as securities is about US$44 trillion managed by some 13,000 management companies. Humanity has accumulated wealth aster in the last century than at any time in history. Most of the wealth – almost three quarters of them - is concentrated in the industrialized countries. How the wealth is managed by advanced IT-based mathematical models is explained in this chapter. None of these methods are excluded if one were to adopt Islamic concept of wealth, which idea leans in ways to make the choices of wealth creation, and management on the basis of moral sentiments of the community in which wealth should be accumulated to benefit the community.
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.
Shamsher Mohamad, Zulkarnain M. Sori and M. Eskandar Shah Rasid
This chapter explains the contemporary structure of Shariah Supervisory Board in banks in an effort to ensure these banks meet the mandatory compliance requirement for all processes involved in providing products and services. The issue arose as a result of a rapid growth of Islamic finance in recent years that has attracted many financial institutions (including mainstream ones) to offer Islamic banking products and some had retrofitted conventional financial products to become compliant. Since it is relatively time consuming and costly to develop shariah-compliant product from scratch, also needing marketing efforts, so it is expedient to offer relabelled financial products as ‘compliant’ so long as it meets the compliance requirements. The approval of Shariah committees or boards are mandatory for these institutions to ensure compliance requirements. However, these committees are faced with practical challenges within the institutions in performing their responsibilities. The authors of this chapter discuss these challenges, and provide possible objective solutions to these challenges.
Saiful A. Rosly
The concept of trading/commerce (al-bay) as opposed to trading in money with usury (riba) requires Islamic banks to take ownership of goods it intends to sell on credit. However, doing so will result in higher capital charges and tax overheads that could adversely affect banking profitability. Due to these rigidities in the modern financial infrastructure, Islamic banks have avoided taking ownership risk in the credit sale transaction which can expose them to Shariah non-compliance risk. The landmark court judgement in 2008 was one critical milestone, where true sale bearing property rights by way of ownership transfer was found non-existent in a credit sale contract: a violation of Sale Agreement. Several pre-emptive actions were sought by regulators to contain the problem including the cancellation of the inter-conditionality clause in credit sales, the tightening of shariah governance process and imposition of monetary penalties for non-compliance transactions. With the introduction of an amendment in investment account rule in IFSA 2014, ownership risk from credit sale contracts become absorbed by the investment account holders, thus relieving Islamic banks from the unwarranted stress on capital.
John Farrar and Mohamed Ariff
Wealth of people is now also found collected at the government level as SWF and Reserves. Truly these are wealth belonging to the peoples of the countries which have set up sovereign funds to manage the people’s wealth at the state level. Some 44 countries have a total of some US$ 5 trillion while the people’s foreign reserves managed by governments amount to some US$12 trillion. We note that these funds often give the countries some leverage in accessing investments in third countries disproportionate to the size of the countries having this SWF. The regulatory and management challenges of these funds are explored in this chapter.
Farrukh Habib and Abbas Mirakhor
Several of the biggest SWF are found in Islamic majority countries. These wealth is from setting aside proceeds from energy resources from these countries. Under the aim of replacing a portion of the depleting values, several governments have set up huge wealth under government management. The author of this chapter examine the mode of management of such wealth, and found it wanting in several aspects.
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.