A Guide To Islamic Finance : In Or From The DIFC
A GUIDE TO ISLAMIC FINANCE – Book Sample
DIFC, THE CENTRE OF ISLAMIC EXCELLENCE
The Dubai International Financial Centre (DIFC), the world’s fastest growing global financial hub, was declared open for business in 2004. The DIFC is ideally located to bridge the gap between existing financial centres of London and New York in the West and Hong Kong and Tokyo in the East and services a region with the largest untapped emerging market for financial services.
The vision of the DIFC is to shape tomorrow’s financial map as a global gateway for capital and investment. Its mission is to be a catalyst for regional economic growth, development and diversification by positioning the DIFC as a globally recognised financial centre.
Critical to the DIFC’s success is Dubai’s established track record of realizing projects of scale in an environment that is safe, vibrant and exciting. HH Sheikh Mohammed Bin Rashid Al Maktoum, the Prime Minister of the UAE and Ruler of Dubai, has continued to lead efforts that have established the Emirate as one of the fastest growing cities in the world. During the period 2000-2006, Dubai GDP grew by cumulative annual growth rate (CAGR) of 13 per cent in real terms.
Dubai has a well-diversified economy based on international trade, banking and finance, information and communication technology, tourism and real estate. In 2005, oil contributed less than 6% of Dubai’s GDP; down from around 50% in 1985 and 24% in 1993. In contrast, by 2010 the share of oil in the economy is expected to be less than 1% of GDP. This economic diversification is continuing with the establishment of new industries, private sector growth through acquisition and increased regional economic integration. The establishment of the DIFC is the next logical step in Dubai’s economic development and aims to cement the Emirate as the region’s main financial hub.
The DIFC has been designed to:
- Attract regional liquidity back into investment opportunities within the region and contribute to its overall economic growth.
- Facilitate planned privatisations in the region and enable initial public offerings by privately owned companies, giving impetus to the programme of deregulation and market liberalization throughout the region.
- Create added insurance and reinsurance capacity.
- Develop a global centre for Islamic finance – this is now an over $400 billion international market serving large Islamic communities stretching from Malaysia and Indonesia to the United States.
SECTION 2: DIFC, THE CENTRE OF ISLAMIC EXCELLENCE
Since its launch, DIFC has attracted international firms such as Morgan Stanley, Goldman Sachs, BNY Mellon, Barclays Capital, Credit Suisse and Deutsche Bank who have all received a licence to operate from the DIFC.
Institutions receive a number of benefits when joining the DIFC, including:
- 100 per cent foreign ownership
- Zero per cent tax rate on income and profits.
- A wide network of double taxation treaties available to the UAE incorporated entities.
- No restrictions on foreign exchange.
- Freedom to repatriate capital and profits without restrictions.
- High standards of rules and regulations
- Ultra-modern office accommodation and sophisticated infrastructure.
- Operational support and business continuity facilities of uncompromis- ingly high standards.
Unlike ‘offshore’ tax havens, the DIFC is a fully fledged ‘onshore’ capital market, comparable to Hong Kong, London, and New York.
The DIFC focuses on several sectors of financial activity: Banking & Brokerage Services, Capital Markets, Re-insurance & Captives, Islamic Finance, Wealth Management and Ancillary Service Providers.
Financial services in the DIFC are regulated to international standards by
the Dubai Financial Services Authority (DFSA).
Islamic finance is the financial services industry which offers finance compliant with Shari’a, the underlying principles and codes of conduct of the religion of Islam.
Islamic finance has commonly been recognised as an interest-free financing system, or a form of ethical finance. Such association has emerged from two perspectives. Firstly the interpretation of the prohibition on Riba, essentially a prohibition on an unjust increment or increase. Interest charged for loan repayments is commonly associated with Riba. In
addition to Riba, Shari’a also prohibits Gharar and Maisir which should also be excluded from Islamic financial transactions.
Secondly, the analogy with ‘ethical finance’ and Islamic finance is often drawn based on the restrictions on engaging in transactions which are ‘Haram’ – i.e., contrary to the underlying principles in Islam – such as avoiding investments in tobacco and the weapons industry. This ‘ethical’ feature of Islamic finance often attracts non-Muslims to Islamic finance.
However, there is much more to Islamic finance than these broad analogies. The underlying principles of Islamic finance involve equity, fairness, justice, and social responsibility and morality. (See Figure 1 below).
To understand the essence of Islamic finance, the subject should be understood from its root and in its entirety as opposed to isolated concepts.
History of Islam
While part of the Abrahamic tree of monotheistic religions tracing its roots to Adam and Eve, the religion of Islam as we know it today began when the Word of God was revealed to the Prophet Mohammed (PBUH). The word Islam means peace and has also been interpreted as meaning ‘submission’, or the total surrender of oneself to God. The followers of Islam are known as a Muslims, meaning ‘one who submits (to God)’.
Muslims believe that God revealed the Qur’an to Prophet Mohammad (PBUH), God’s final prophet, and regard the Qur’an, Sunnah and Hadith (the words and deeds of Prophet Muhammad (PBUH)) as the primary source of Shari’a, supported by secondary sources such as Ijma, Qiya’s and subject to jurisdictional application, Ijtihad.
Islam includes many religious practices. Followers are generally required to observe the Five Pillars of Islam, five duties that unite Muslims into a community.
The Qur’an is recognised by Muslims as the unequivocal word of God and the Qur’an is better described as prescribing a code of conduct or a way of life for Muslims. Islam prescribes codes of conduct for everyday life, commercial interactions, and underlying principles of behaviour, conduct and dealings in certain products which are acceptable – ie, denoted as Halal. Prohibited behaviour and dealings are denoted as Haram. These codes, principles, and classification of Halal and Haram are collectively referred to as Shari’a. Within Shari’a, there are principles which apply to dealings in commerce and business known as ‘fiqh al muamalat’. It is from these principles that Islamic finance emerged in the 1970s with the establishment of the world’s first commercial Islamic bank.
Principles of Islamic finance
These principles are derived from the Qur’an, Sunnah and Hadith (and supporting Ijma and Qiya’s (as well as Ijtihad in certain markets)) which are approximately a thousand years old. These principles underpin the Islamic finance industry, and their application in modern day finance requires persons appropriately skilled in both Islamic jurisprudence (‘fiqh’) and finance to interpret and apply them to financial structures to ensure that they accurately conform with Shari’a compliance. Such persons are referred to as Shari’a scholars and their role is key to the current and future direction of Islamic Finance. (Illustrated in Figure 1).
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