GCC Islamic Finance: New Paradigms for Gulf

Islamic finance resembles to the means by which corporations in the Muslim world, including banks and other lending institutions, raise capital in accordance with Sharia, or Islamic law. It also resembles to the types of investments that are permissible under this form of law. A unique form of socially responsible investment, Islam makes no division between the spiritual and the secular, therefore its reach into the domain of financial matters. We will closely have a brief insight about this way of financial workings;

The Islamic Vision

Although they have been mandated since the beginnings of Islam in the seventh century, Islamic banking and finance have been formalized gradually since the late 1960s, coincident with and in response to tremendous oil wealth which, fueled renewed interest in and demand for Sharia-compliant products and practice.

Islamic law views lending with interest payments as a relationship that favors the lender, who charges interest at the expense of the borrower. Because Islamic law views money as a measuring tool for value and not an 'asset' in itself, it requires that one should not be able to receive income from money (for example, interest or anything that has the genus of money) alone. Deemed riba (literally an increase or growth), such practice is proscribed under Islamic law (haram, which means prohibited) as it is considered usurious and exploitative. By contrast, Islamic banking exists to further the socio-economic goals of Islam.

Central to Islamic banking and finance is an understanding of the importance of risk sharing as part of raising capital and the avoidance of riba and gharar (risk or uncertainty).

Accordingly, Sharia-compliant finance (halal, which means permitted) consists of profit banking in which the financial institution shares in the profit and loss of the enterprise that it underwrites. Of equal importance is the concept of gharar Defined as risk or uncertainty, in a financial context it refers to the sale of items whose existence is not certain. Examples of gharar would be forms of insurance, such as the purchase of premiums to insure against something that may or may not occur or derivatives used to hedge against possible outcomes. 

The equity financing of companies is permissible, as long as those companies are not engaged in restricted types of business - such as the production of alcohol, pornography or weaponry - and only certain financial ratios meet specified guidelines.

Basic Financing Arrangements

Below is a brief snippets of permissible financing arrangements often encountered in Islamic finance:

1. Profit-and-loss sharing contracts (mudarabah). The Islamic bank pools investors' money and assumes a share of the profits and losses. This is agreed upon with the depositors. What does the bank invest in? A group of mutual funds screened for Sharia compliance has arisen. The filter parses company balance sheets to determine whether any sources of income to the corporation are prohibited (for example, if the company is holding too much debt) or if the company is engaged in prohibited lines of business. In addition to actively managed mutual funds, passive ones exist as well based on such indexes as the Dow Jones Islamic Market Index and the FTSE Global Islamic Index.
2. Partnership and joint stock ownership (musharakah). Three such structures are most common:

2.1. Declining-Balance Shared Equity: Commonly used to finance a home purchase, the declining balance method calls for the bank and the investor to purchase the home jointly, with the institutional investor gradually transferring its portion of the equity in the home to the individual homeowner, whose payments constitute the homeowner's equity.

2.2. Lease-to-Own: This arrangement is similar to the declining balance one described above, except that the financial institution puts up most, if not all, of the money for the house and agrees on arrangements with the homeowner to sell the house to him at the end of a fixed term. A portion of every payment goes toward the lease and the balance toward the purchase price of the home.

2.3. Installment (Cost-Plus) Sale (murabaha): This is an action where an intermediary buys the home with free and clear title to it. The intermediary investor then agrees on a sale price with the prospective buyer; this price includes some profit. The purchase may be made outright (lump sum) or through a series of deferred (installment) payments. This credit sale is an acceptable form of finance and is not to be confused with an interest-bearing loan.

3. Leasing ('ijarah/'ijar): The sale of the right to use an object (usufruct) for a specific time period. One condition is that the lessor must own the leased object for the duration of the lease. A variation on the lease, 'ijarah wa 'iqtina provides for a lease to be written whereby the lessor agrees to sell the leased object at the lease's end at a predetermined residual value. Only the lessor is bound by this promise. The lessee, by contrast, is not obligated to purchasing the item.
4. Islamic Forwards (salam and 'istisna): These are rare forms of financing, used for certain types of business. These are an exception to gharar. The price for the item is prepaid and the item is delivered at a definite point in the future. Because there is a host of conditions to be met to render such contracts valid, the help of an Islamic legal advisor is usually required.

Permissible Investment(s)

Here are some permissible types of investment for Islamic investing:

1. Equities. Sharia law allows investment in company shares (common stock) as long as those companies do not engage in lending, gambling or the production of alcohol, tobacco, weaponry or pornography. Investment in companies may be in shares or by direct investment (private equity). Islamic scholars have made some concessions on permissible companies, as most use debt either to address liquidity shortages (they borrow) or to invest excess cash (interest-bearing instruments). One set of filters excludes companies that hold interest-bearing debt, receive interest or other impure income or trade debts for more than their face values. A further distillation of the aforementioned screens would exclude companies whose debt/total asset ratio equals or exceeds 33%; companies with "impure plus non-operating interest income" revenue equal to or greater than 5% or companies whose accounts receivable/total assets equal or exceed 45% or more.
2. Fixed-Income Funds.

2.1 Retirement Investments. Retirees who want their investments to comply with the tenets of Islam face a dilemma in that fixed-income investments include riba, which is forbidden. Therefore, specific types of investment in real estate, either directly or in securitized fashion (a diversified real estate fund), could provide steady retirement income while not running afoul of Sharia law.

2.2               Sukuk :  In a typical ijara sukuk (leasing bond-equivalent), the issuer will sell the financial certificate to an investor group, who will own them before renting them back to the issuer in exchange for a predetermined rental return. Like the interest rate on a conventional bond, the rental return may be a fixed or floating rate pegged to a benchmark, such as LIBOR. The issuer makes a binding promise to buy back the bonds at a future date at par value. Special purpose vehicles (SPV) are often set up to act as intermediaries in the transaction. Asukuk may be a new borrowing, or it may be the Sharia-compliant replacement of a conventional bond issue. The issue may even enjoy liquidity through listing on local, regional or global exchanges.

Insurance Shield

Traditional insurance is not permitted as a means of risk management in Islamic law. This is because it constitutes the purchase of something with an uncertain outcome (form of ghirar), and because insurers use fixed income - a form of riba - as part of their portfolio management process to satisfy liabilities. 

A possible Sharia-compliant alternative is cooperative (mutual) insurance. Subscribers contribute to a pool of funds, which are invested in a Sharia-compliant manner. Funds are withdrawn from the pool to satisfy claims, and unclaimed profits are distributed among policy holders. Such a structure exists infrequently, so Muslims may avail themselves of existing insurance vehicles if needed or required.

In a Nut shell

Islamic finance is a centuries-old practice that is gaining recognition throughout the world and whose ethical nature is even drawing the interest of non-Muslims. A rapid new banking system is emerging in the Gulf region to enhance more and more adoption of Islamic finance and this is bound to grow in the years to come. 

Arab changing to the new waves

Changing Omani Business Environment

Empowering Women

The Global world is changing so is Oman, the Sultanate of Oman a key country in GCC with a great business environment and great living standards is changing rapidly with new Expat work force rules in place which doesn't allows expat to hop jobs, the new stream of Woman workforce is ready to take the challenge forward.

The number of working Omani mothers in both the private sector and the government has more than quadrupled to 40,000 from 8,000 since 1980's, according to statistics from the Ministry of Manpower and the Ministry of Civil Service.

This increase is due to the rising numbers of women enrolling in higher education in universities and colleges. The number of Omani females attending private schools has doubled since 2008, according to the National Centre of Statistics and Information (NCSI). The NCSI says the total number of Omani females studying at school in the 2013/2014 school year was 45,346 compared with 17,218 four years previously. 

The Stats released from the Ministry of Higher Education show that more than 60 + percent of students studying for degrees or diplomas are women, including those abroad. 

The increase of working Omani mothers can also be attributed to a change in attitudes towards a women’s role in the household. The increased opportunities and need of skilled manpower in Oman.

Opinion’s that mother’s roles are limited to just being married and raising children are becoming far less frequent. “Parents of women now put emphasis for men who propose marriage that their daughters will not be housewives but equal partners with careers of their own, unlike the days when a man could force his wife to quit her job and stay at home".

Men’s opinions of their spouses working in Oman are also changing, with extra pay every month becoming more favorable. It was thought that women should be staying at home with children, but thanks to more of them being graduates, they have the credentials to work in professional sectors and make a difference to their household budgets. 

Child psychologists say that working mothers can still be close to their children, with the availability of summer camps and child or toddler groups providing a way for kids to improve their social skills. 

Over a decade, the number of Omani women working in the public sector more than doubled to 68,200 in 2014. During the same period, the number of Omani women working in the private sector trebled to 35,248. 

According to the NCSI, the number of Omani women holding top management, middle management and direct management positions within the Public Sector rose by 50 per cent since 2008. At the end of 2012, Omani women accounted for approximately 10 per cent of all senior public sector roles in the country. With women making up 51 per cent of the country’s population, this is a good starting figure, which is likely to only increase.

The recent technologically advantages and advent of new media is creating new opportunities for both classes and hence the Omani Manpower and Women workers are on rise.

Social media has transformed the way people receive and share information in both personal and business settings. New challenges and new opportunities are been created every single minute and day.

In  Middle East one should always ensure that their use of social media is tailored to the specific cultural and demographic diversity of the region.

The adoption of social media by business is not an entirely new phenomenon. Now, a corporate presence on social networks is even more widely expected as these digital tools touches more deeply in our daily lives.

This creates a number of new risks & challenges for businesses house in MENA region. These include the viral news  of a company can spread over the web in split seconds, the potential for sensitive or confidential information to be published online and the increasing need for businesses to conduct shareholders relations in public domain. In the high-tech world of social media, the potential impact of a company CEO saying the wrong thing at the wrong time has been magnified exponentially with a long lasting impact.

This has not gone unnoticed by corporate leaders. A global study published last year by EY found that, among top executives from 300 major companies, the risk to reputation driven by social media was their biggest cause of concern.

Despite the pitfalls, the potential benefits of social media to a business are undeniable higher. When created effectively, the power of social media can enable companies to be more transparent and accountable and strengthen their relationships with key stakeholders. In this way, social media engagement can create a  better corporate governance practices, leading to greater stakeholder confidence, and ultimately, driving business value creation.

However, it is important that businesses in the Middle East markets do not simply adopt social media strategies from other parts of the world without tailoring them for use in the region. There are unique cultural and demographic factors that should influence the way brands use these digital tools to disseminate information and engage in dialogue with their key partners,shareholders and customers.

Our societies are widely characterized by a relationship-based culture. As more corporate communications move online and onto social networks, businesses should be careful that they do not lose the personal connection when engaging with stakeholders. This might mean ensuring the company’s Twitter account is represented by an actual person rather than an anonymous handle or putting a greater focus on video-based platforms in which real company spokespeople communicate directly with shareholders or the wider public is a great strategy.

Businesses in the Middle East region are required to communicate corporate information to diverse multilingual audiences. This can be challenging when the subject matter is complex or incorporates a lot of industry or regulatory jargon that is not easily translated. 

The use of info-graphics and other visual's  which are well defined to be shared on social media and to augment business communications can help companies overcome the language barrier and increase the chances of their messages being understood by the widest possible audience.

Businesses in the Gulf region should always take into account the Middle East’s increasingly young population. 35 per cent of the region’s population is aged between 15 and 29 creating a youth population of more than 100 million people. The Young generation, many of whom grew up with the digital media tools and apps, will eventually make up the vast majority of customers, partners and employees of regional companies in the years to come.

And to understand  how this growing youth population uses social media and how it prefers to receive and share information should be an integrated marketing campaign part of any company’s reporting and communications strategy. 

Social digital media has undoubtedly become an essential way of sharing information and interacting with others. Many companies around the world are still catching up the phenomenon  with the rapid use of these technologies and their impact on corporate governance and communications and customer acquisition. Rather than simply borrowing social media strategies from elsewhere, businesses in the Middle East should always keep in mind that culture and demographics can be as influential online.

Now the global world is eyeing on new markets and specially the gulf markets indeed holds a key importance this not only helps the world to reach the MENA region but also creates a vital link with the world which doesn't only is by the sea route but now with a Digital highway.

Cpdeux