ISLAMIC FINANCE-TYC FINANCE

INTRODUCTION OF ISLAMIC FINANCE

Islamic finance refers to the financial forms that conform to the Islamic teaching, besides being a religion, Islam is also a lifestyle, which includes considerable teachings and guiding principles in the financial aspect. Islamic countries have adopted the Islamic financial system as early as before the 15^th century. As of present, over a hundred countries worldwide have established and developed Islamic banks or Islamic financial business. According to statistics, the total Islamic financial assets worldwide amount to over USD 4 trillion. During the decade between 2010 and 2020, the global Islamic financial market maintained a 15% compound annual growth rate (CAGR). As a novel financial market and system, Islamic finance has earned the recognition and support of international financial institutions including the United Nations, International Monetary Fund, World Bank and Asian Development Bank, among others. major commercial banks such as Citibank, HSBC and Standard Chartered have all established Islamic financial business branches in their system. Looking ahead, Islamic financial intelligence with a thousand-year heritage shall grow and innovate unceasingly, and continue to flourish vibrantly in the complex and ever-changing global financial market.

ISLAMIC FINANCIAL MARKET

Islam is the second largest religion in the world outsized only by Christianity, and data indicates that there are 1.8 billion adherents, constituting 23% of the total world population. Islamic finance is a new emerging force in the contemporary global financial system, with Islamic financial services in over a hundred countries worldwide. Up to the year 2020, the entirety of Islamic financial business amounts to over USD 5 trillion, practically serving over 250 million Islamic bank customers in different markets all over the world. Currently, Saudi Arabia and Malaysia are the two largest markets, with a 51% and 25% share respectively of the global Islamic monetary assets. According to statistics, during the period of 2010 to 2020, the global Islamic financial market maintained a 15% compound annual growth rate (CAGR). Concurrently, a number of non-Muslim countries and regions such as the U.K., Luxembourg, Singapore, Hong Kong, the U.S., Canada, Japan and the Republic of Korea have conformed to market trends by actively developing Islamic finance and launching Islamic financial products that comply with the Islamic teaching. For example, Islamic finance is considered major expansion segment in the financial service businesses of London and Singapore. In the future, with further development in globalization and networking of worldwide finance, Islamic finance will also keep abreast with the times, effectively complement the modern financial formats, and occupy an increasingly significant role in the global financial system.

Islamic Finance in China

Of the over 1.4 billion population in China, there are approximately 25 million Muslims, and they constitute a vast domestic market, as a considerable number of Muslims in provinces such as Ningxia, Xinjiang, Qinghai and Gansu are looking forward to having an Islamic finance service. Actually, the Ningxia Hui Autonomous Region has previously piloted the establishment of an Islamic bank. At the same time, with the implementation of the “Belt and Road” Initiative, enhanced openness and exchanges are imperative among the Eurasian countries, Islamic states included, and there is no doubt that Islamic financial innovation and cooperation will emerge as one of the new hallmarks of financial cooperation. Furthermore, in light of the limited opening of the Chinese financial system to the outside world, Islamic financial system as a branch complementing the modern financial system should be beneficial to augmenting the development diversification of the Chinese financial system, as well as an effective means for the internationalization of RMB. In due course, China will gradually establish professional Islamic banks and other Islamic financial forms to serve the Muslim population in the nation. Despite the fact that the expansion of Islamic finance in China has had a slow and late start, yet there is tremendous potential for Islamic finance in the Chinese economy because of the implementation of “Belt and Road” Initiative and the corresponding increase in Islamic finance as a matching support for related investment and construction projects. For instance, China’s outstanding capabilities in infrastructure constructions, particularly in energy construction projects such as wind energy and hydroelectric power, go hand-in-hand with the investment preference of Islamic financial system that gears toward long-term, low-risk, stable-income projects, and also suit the endeavors of Islamic countries for the internationalization of their financial system, thus achieving a complementary and win-win partnership that brings mutual benefits to all sides.

ISLAMIC FINANCE & HONG KONG

Hong Kong is an internationally recognized financial, transportation and commercial center. It is also a premier global offshore Renminbi (RMB) business hub, an international asset management center as well as a risk management center. As a crucial financial hub of the world, Hong Kong is the premier locale in China to voice the idea of constructing an Islamic finance platform, and in fact, the Hong Kong Special Administrative Region Government has proposed the development of Islamic finance as early as in 2007. In August the same year, The Hong Kong Monetary Authority signaled the green light to Malaysia Hong Leong Bank (HK) Ltd. to launch the first Islamic banking window in Hong Kong. In November 2007, Hong Leong Bank (HK) Ltd. launched its first Islamic fund that catered to retail investors. In October 2011, the Ministry of Finance of Malaysia had a successful issuance of RMB 500 million of Islamic bonds. During the following years of 2014, 2015 and 2017, the HKSAR Government succeeded in the issuance and sales of three batches of Islamic bonds. It is apparent that China Hong Kong possesses the following favorable basic economic factors conducive to the development of an Islamic financial center, namely, a sound legal system, stable currency, a foreign exchange market with depth and high liquidity, comprehensive regulatory mechanism and settlement system. In addition, as the only international financial center of the Chinese Mainland, Hong Kong is unique in its ability to attract and receive overseas investments, including those from the Middle East. Islamic countries are able to easily develop contact with investors worldwide and garner investments through Hong Kong, which is the largest and most effective offshore RMB business center. Besides contributing comprehensive offshore RMB business support to enterprises in the Chinese Mainland as they grow alongside the construction of the “Belt and Road” Initiative, we trust that in the coming days China Hong Kong will grow into an excellent platform for providing Islamic countries with RMB financial products investments.

“Belt and Road” and Islamic Finance

The “Belt and Road” is a program of gargantuan scale that spans over sixty countries in Asia, the Middle East and Europe, passes through a number of Islamic areas like Ningxia, Turkey, Iran and Malaysia, encompasses a population of 4.4 billion and one-third of the world’s gross national product. Along with the unrelenting forward drive of the “Belt and Road” Initiative comes an increasingly closer collaboration and integration between China and Islamic countries in aspects from economy and finance, to education and culture. Islamic finance in China has had a slow and late start, but that being said, there is tremendous potential for Islamic finance in the Chinese economy because of the implementation of “Belt and Road” and the corresponding increase in Islamic finance as a matching support for related investment and construction projects. China is going to invest in and launch constructions in dozens of countries along the route of the “Belt and Road,” and such large-scale infrastructural constructions will need to mobilize greater transfer from financial capital to production capital. Stimulated by the “Belt and Road,” Chinese enterprises are more inclined to attempt Islamic finance, consequently bringing about more spending of liquid asset on dynamic and healthy economic activities in the market. With persistent strengthening of cooperation with Islamic countries through the “Belt and Road” Initiative, the internationalization process of the Chinese RMB will accelerate accordingly, while Hong Kong can enable the introduction of more overseas capitals for Islamic countries. China Hong Kong boasts many favorable conditions in this regard, such as its command of widespread international networking and contacts, possession of a high concentration of funds and asset management businesses in the region, as well as its position as the premier choice of base location for multinational corporations, international commerce chambers, global organizations and media institutions. In addition, as a world-leading stock market, and center for financing, banking and private equity, Hong Kong has the capability to become a financial hub for Islamic states along the path of the “Belt and Road.”

THE CORE CONCEPT OF ISLAMIC FINANCE

Shariah rules, or Islamic law, apply to all aspects of Muslim life, including their financial services. The foundation of Islamic financial services is based on the fact that money itself has no intrinsic value. Money should not be regarded as a commodity, but as a unit of account. Islamic law forbids the collection and earning of interest on borrowing or receiving money, as interest (known as riba in Arabic) is forbidden. In short, money can't beget money. However, Islamic rules allow wealth creation through trade and asset investment. The following is a brief list of other Islamic rules and their impact:

Prohibited by Islamic Law

Interest (RIBA)
Uncertainty (Gharar)
Speculation/Gambling (Maysir)
Return without risk

Encouraged by Islamic Law

Trade; Commodity trading
transparency
fair economic participation - sharing profits and losses

Impact

Real economic growth;
Fair distribution of wealth
Full disclosure of rights and obligations
No exploitation
Share risks and rewards

ISLAMIC FINANCE TERMS

Ijarah (Lease Finance)

A lease agreement, whereby a lessor buys for a customer and then leases it to him over a specific period, thus earning profits by charging rental.

Ijarah Thumma Bai' (Hire Purchase)

The principle of such a contract is that at the end of a lease period, the lessee can buy the asset for a pre-agreed depreciated price.

Ijarah-Wa-Iqtina (Lease-to-Own)

The principle of such a contract is that at the end of a lease period, the lessee becomes the asset owner.

Istisna'a (Factoring)

A contract of acquisition of goods by specification or order, where the price is paid in advance, or progressively in accordance with the progress of a job.

Murabahah (Markup Financing)

A form of credit that enables customers to make a purchase without having to take out an interest bearing loan. The credit union buys an item and sells it to the customer on deferred basis.

Musharakah (Joint Venture)

An investment partnership in which all partners are entitled to share the profits of a project in a mutually agreed ratio.

Sukuk (Islamic Bonds)

An asset-backed bond which is structured in accordance with Shariah.

Wadiah (Safekeeping)

The safekeeping of goods with a discount on the original stated cost. Acting as the keeper and trustee of depositors' funds.

Wakalah (Fiduciary/Trusteeship)

Agency or Power of Attorney. A specific agreement whereby a representative is appointed to undertake transactions on another person's behalf.

Kafalah (Guarantee)

A guarantee in support of a debt transaction in the event of a debtor failing to fulfill his/her obligations.

Riba (Interest)

Riba is an Arabic word meaning ‘to increase’ or ‘to exceed’. Riba is commonly translated to ‘interest’ or ‘usury’ in English and is a charge for the use of another’s money. It also includes unequal exchanges. An example of this would be taking a loan from someone who expects it to be repaid in addition to 5% per month on anything that has not been paid at the end of each month. So for example you lend £100 for one month. At the end of that you would repay £105.

Gharar (Uncertainty)

Gharar is a broad concept, involving scenarios including: When the claim of ownership is unclear or suspicious. When the existence, quality or characteristics of the commodity are not certain. Pure speculation where an outcome depends on excessive uncertainty and this risk is not shared. Where consequences are concealed due to lack of openness between parties or a lack of information of the contract or the nature and quality of the subject matter or where a deal is made based on a misunderstanding. To clarify- selling something without physical possession is not inherently gharar so long as the promise of delivery carries some credibility.

Zakat

Zakat (‘zakat al-mal’) is the third pillar of Islam. More than just a compulsory tax on wealth, it is a form of worship mentioned together with salah (prayer) 28 times in the Quran. It involves Muslims giving 2.5% of their wealth annually towards certain charitable causes.

Halal investment

Halal means ‘permissible’/‘lawful’ and an investment is an asset or item that is purchased with the hope that it will generate income or increase in value in the future. In order for an investment to be halal, it must be compliant with the regulations and principles set out by Islam in the Quran and sunnah (known as ‘shariah law’). There is nothing inherently haram (impermissible) about earning money through profit distributions from business activity or from the increase in value of an assets.