The historical role of the Financial Industry

The fiscal industry has historically played an of import function in the economic system of every society. Banks mobilise financess from investors and use them to investings in trade and concern. The history of banking is long and varied, with the fiscal system as we know it today straight falling from Florentine bankers of the 14th – seventeenth century. However, even before the innovation of money, people used to lodge valuables such as grain, cowss and agricultural implements and, at a ulterior phase, cherished metals such as gold for safekeeping with spiritual temples. Around the fifth century BC, the ancient Greeks started to include investings in their banking operations. Temples still offered safe-keeping, but other entities started to offer fiscal minutess including loans, sedimentations, exchange of currency and proof of coins. Financial services were typically offered against the payment of a level fee or, for investings, against a portion of the net income. The positions of philosophers and theologists on involvement have ever ranged from an absolute prohibition to the prohibition of exorbitant or extra involvement merely, with a prejudice towards the absolute prohibition of any signifier of involvement. The first foreign exchange contract in 1156 AD was non merely executed to ease the exchange of one currency for another at a forward day of the month, but besides because net incomes from clip differences in a foreign exchange contract were non covered by canon Torahs against vigorish. In a clip when fiscal contracts were mostly governed by Christian beliefs forbiding involvement on the footing that it would be a wickedness to pay back more or less than what was lent, this was a major advantage.

During mediaeval times ( 1,000 – 1,500 AD ) , Middle Eastern shopkeepers would prosecute in fiscal minutess on the footing of Sharia’a, which by the way was guided by the same rules as their European opposite numbers at the clip. The Arabs from the Ottoman Empire had strong trade relationships with the Spanish, and established fiscal systems without involvement which worked on a profit- and loss-sharing footing. These instruments catered for the funding of trade and other endeavors. As the Middle Eastern and Asiatic parts became of import trading spouses for European companies such as the Dutch East India Company, European Bankss started to set up subdivisions in these states, which typically were interest-based. With the progressively of import function Western states started to play in the universe economic system, conventional fiscal establishments became more dominant. On a little graduated table, recognition brotherhood and co-operative societies based on profit- and loss-sharing rules continued to be, but their activities were really much focused in little geographical countries. Although it was non until the mid 1980s that Islamic finance started to turn exponentially.

Literature reappraisal

Islamic finance is based on sharia law, an Arabic term that is frequently translated into “ Islamic jurisprudence. ” Shariah provides guidelines for facets of Muslim life, including faith, political relations, economic sciences, banking, concern, and jurisprudence. Shariah-compliant funding ( SCF ) constitutes fiscal patterns that conform to Islamic jurisprudence. Major rules of sharia law that are applicable to finance and that differ from conventional finance are:

Prohibition on involvement ( riba ) : In conventional signifiers of finance, a differentiation is made between acceptable involvement and exorbitant involvement. In contrast, under Islamic jurisprudence, any degree of involvement is considered to be exorbitant and is prohibited.

Ban on uncertainness: Uncertainty in contractual footings and conditions is non allowed, unless all of the footings and conditions of the hazard are clearly understood by all parties to a fiscal dealing.

Risk-sharing and profit-sharing: Parties involved in a fiscal dealing must portion both the associated hazards and net incomes.

Ethical investings that enhance society: Investing in industries that are prohibited by the Qur’an, such as intoxicant, erotica, gaming, and pork-based merchandises, are discouraged.

Asset-backing: Each fiscal dealing must be tied to a “ touchable, identifiable implicit in plus. ” Under sharia law, money is non considered an plus category because it is non touchable and therefore, may non gain a return. Some inquiry how loaners profit from fiscal minutess under Islamic jurisprudence. For case, in a existent estate scene, SCF takes the signifier of leasing, as opposed to loans. Alternatively of borrowing money, the bank obtains the belongings and leases it to the sharia law compliant investor, who pays rent alternatively of involvement. Net incomes of net incomes or returns from assets are permitted so long as the concern hazards are shared by the loaner and borrower.

Ijarah: An Ijarah contract refers to an understanding made by the Islamic Banking Institution ( IBI ) to rent to a client an plus specified by the client for an in agreement period against specified episodes of rental lease. An Ijarah contract commences with a promise to rent that is adhering on the portion of the possible leaseholder prior to come ining the Ijarah contract.

Istisna: An Istisna contract refers to an understanding to sell to a client a nonexistent plus, which is to be manufactured or built harmonizing to the purchaser ‘s specifications and is to be delivered on a specified hereafter day of the month at a preset merchandising monetary value.

Murabaha: A Murabaha contract refers to a sale contract whereby the IBI sells to a client at an in agreement net income border plus cost ( selling monetary value ) , a specified sort of plus that is already in their ownership.

Mudarabah: A Mudarabah is a contract between the capital supplier and a skilled enterpriser whereby the capital supplier would lend capital to an endeavor or activity which is to be managed by the enterpriser as the Mudarib ( or labor supplier ) . Net incomes generated by the endeavor or activity are shared in conformity with the footings of the Mudarabah understanding, while losingss are to be borne entirely by the capital supplier unless the losingss are due to the Mudarib ‘s misconduct, carelessness and breach of contracted footings.

Musharakah: A Musharakah is a contract between the IBI and a client to lend capital to an endeavor, whether bing or new, or to ownership of a existent estate or movable plus, either on a impermanent or lasting footing. Net incomes generated by that endeavor or existent estate/asset are shared in conformity with the footings of Musharakah understanding whilst losingss are shared in proportion to each spouse ‘s portion of capital.

Salam: A Salam contract refers to an understanding to buy, at a preset monetary value, a specified sort of trade good non available with the marketer, which is to be delivered on a specified hereafter day of the month in a specified measure and quality. The IBI as the purchaser makes full payment of the purchase monetary value upon executing of a Salam contract. The trade good may or may non be traded over the counter or on an exchange.

Sukuk: A Sukuk ( certification ) represents the holder ‘s proportionate ownership in an undivided portion of an implicit in plus where the holder assumes all rights and duties to such plus.

Takaful: An equivalent to the modern-day insurance contract whereby a group of individuals agree to portion a certain hazard ( for illustration, harm by fire ) by roll uping a specified amount from each individual. In instance of loss to any one of the group, the loss is met from the gathered financess.

Islamic finance in Mauritius

With the sub-prime crisis disputing conventional banking and fiscal merchandises, there is mounting involvement in Islamic merchandises which comply with the rules of shariah jurisprudence. The size of the planetary market for shariah compliant merchandises is estimated at $ 800 billion. The addition in wealth in Islamic states ( particularly in the Middle East with its accretion of petrodollars ) , the growing in the Muslim population, the immense capital demands for substructure undertakings across the Muslim universe every bit good as the active engagement of investors and autonomous states in Islamic capital market have non merely resulted in a singular growing in the Islamic finance industry but have besides led to the development of a broad scope of sharia law compliant merchandises.

Mauritius has a long tradition of commercial banking dating back to 1812 and has historically adopted a cautious attitude to banking development. Until 2004, banking was split into two separate banking governments – offshore and onshore – with merely approximately 10 offshore banking units admitted in Mauritius. The application procedure was strict and needed appliers to subject audited fiscal statements for the old five old ages. Since 2004, nevertheless, the legal model has been rationalized and the Banking Act amended such that all Bankss are now governed by one individual Banking license. The banking statute law provides for prudential ordinances with regard to Bankss ‘ concentration of hazard, weighted capital adequateness ratio, income acknowledgment and categorization of loans and progresss for purveying intents, care of accounting and other records and internal control systems.

The Bank of Mauritius, the regulative and supervisory organic structure, has endorsed the Basle II Capital Accord and adopted the Basle Committee ‘s Core Principles for effectual supervising of Bankss. The Bank of Mauritius has besides set up a calendar for all Bankss to be compliant to the commissariats of Basel II model by December 2008. Furthermore, the Bank of Mauritius signifiers portion of the Offshore Group of Banking Supervisors and are a founding member of the Eastern and Southern Africa Banking Supervisors Group which is a Fiscal Action Task Force ( FATF ) manner organic structure for the part. In August 2008, amendments were made to the Banking Act 2004 that now allows Bankss in Mauritius to supply Islamic Banking services. Many Bankss showed an immediate involvement in puting up Islamic Windowss, therefore paving the manner for Islamic banking in Mauritius. With the debut of Islamic finance, Mauritius has a great chance to diversify its fiscal sector and supply new services in the Fieldss of banking, wealth direction and investing based on shariah Conformity.

Since so in Mauritius excessively, there is a turning demand for shariah compliant merchandises based on the sharing of hazards and wagess. Over the past few old ages the authorities has taken an array of steps to promote the development and publicity of Islamic banking and fiscal services. This has led to HSBC offering Islamic banking services in Mauritius. Islamic insurance ( takaful ) and Islamic leasing ( ijara ) are besides available in Mauritius while microfinance is being offered by recognition concerted societies based on Islamic rules such as murabaha ( deferred sale ) .Mauritius is besides an active participant in the planetary Islamic finance industry. Indeed, a combination of financial and non-fiscal factors has made Mauritius peculiarly attractive as a legal power in which to construction Islamic fiscal merchandises. A figure of shariah compliant planetary financess have already been set up in Mauritius and there is an increasing involvement in Mauritius as a topographic point to construction Islamic bonds ( sukuk ) .

A figure of shariah compliant financess have been set up in Mauritius because of its attractive revenue enhancement government. Mauritius by and large imposes a level rate of income revenue enhancement of 15 % . However, financess keeping a Class 1 Global Business Licence are efficaciously taxed at a maximal rate of 3 % and can stop up paying no income revenue enhancement depending on the foreign revenue enhancement recognition. Dividends paid by a Mauritius company are exempt from revenue enhancement and there is no capital-gains revenue enhancement in Mauritius other than on sale of immoveable assets in Mauritius. More significantly, Mauritius has entered into dual revenue enhancement understandings ( DTA ) with 33 states ; this makes it peculiarly attractive for efficient revenue enhancement constructions. For illustration, a Mauritius fund does non pay any capital-gains revenue enhancement upon the disposal of portions in an Indian company.

Mauritius ‘s strategic place in the center of the Indian Ocean between Africa and Asia, and its clip zone ( four hours in front of Greenwich Mean Time ) makes it a preferable legal power for structuring investings into those emerging markets. It has a multicultural society and a pool of qualified professionals able to talk English, French, and an hereditary linguistic communication such as Hindi or Arabic, therefore easing communicating with clients in the Middle East and other Arabic-speaking states. Mauritius has equal anti-money laundering statute law and KYC ( Know Your Client ) ordinances in topographic point to control the hazard of pulling improper financess. In add-on, Mauritius is non blacklisted by the OECD or Financial Action Task Force ( FATF ) .

How it is regulated in Mauritius

Amendments were brought to the Banking Act 2004 by the Finance Act 2007, that bing Bankss licensed under the Banking Act 2004 are deemed to be licensed to transport on Islamic banking concern through a window and may be granted license by the BOM to carry on Islamic banking concern eclusively.

Every IBI shall carry on its concern on the premiss that its operations and fiscal agencies are in consonant rhyme with the ethos and value system of Islam. The parametric quantities specifying fiscal intermediation as conducted by the IBI shall be drawn in conformity with Shari’ah regulations and rules. IBI shall either put up a Shari’ah consultative board consisting a lower limit of 3 members or name a Shari’ah adviser.

As an interim step, IBIs may, among themselves but with anterior consent of the Bank of Mauritius, set up a common Shari’ah consultative board, capable to the undermentioned conditions:

( I ) the common Shari’ah consultative board shall be instituted at the enterprise of the IBIs that do non mean to hold their ain Shari’ah advisory board/ Shari’ah adviser, or instead by the Mauritius Bankers Association Limited.

( two ) the common Shari’ah consultative board shall supply consultative support in Shari’ah affairs, including the proof of fiscal merchandises, entirely to the IBIs that do non hold their ain Shari’ah advisory board or Shari’ah adviser ;

( three ) while guaranting that every member of the common Shari’ah consultative board abides by the rule of confidentiality, equal steps shall be put in topographic point to measure and cover with any struggle of involvement that may originate out of the agreements made for the IBIs to hold resort to a common Shari’ah consultative board.

The Bank of Mauritius shall reexamine the feasibleness of go oning the above agreement at an appropriate clip in the visible radiation of future developments, more peculiarly the growing of Islamic banking in Mauritius.

General Principles

The prudential demands of IBIs shall chiefly subscribe to the Core Principles for Effective Banking Supervision of the Basel Committee on Banking Supervision ( BCBS ) , and construct upon the international criterions set by BCBS by suiting for specificities of Islamic finance. The current model as prescribed is loosely based on the planetary prudential criterions and steering rules advocated by the Islamic Financial Services

Board ( IFSB ) which is an international standard-setting organisation that promotes and enhances the soundness and stableness of the Islamic fiscal services industry.

Risk Management Processes

An IBI shall take an integrated and holistic attack in the direction of hazards that are borne on history of specificities of the Islamic fiscal merchandises offered by it. An IBI shall, in conformance with Shari’ah ‘s rule of prohibition in bring forthing net income without the bearing of hazards, implement a comprehensive hazard direction scheme in regard of the manners of funding which are basically either

( a ) asset-based,

( B ) profit-and-loss sharing, being partnership or joint venture understandings between two parties based on Shari’ah ‘s rule of Musharakah, or

( degree Celsius ) profit-sharing and loss-bearing as defined under Mudarabah contracts.

Consequently, the IBI shall specify and follow hazard extenuation techniques appropriate for each type of Islamic fiscal instrument held in its portfolio. 33. The IBI shall implement a sound investing scheme that is in harmoniousness with its concern aims, while giving due consideration to the hazard profile of its fiscal instruments and the involvements of its investing history holders. A comprehensive attack to the investing scheme shall be put in topographic point and shall consist:

( I ) feasibleness surveies of undertakings and appropriate due diligence of investing

spouses ;

( two ) acceptance of consistent rating methodological analysiss applicable for each

fiscal instrument ;

( three ) monitoring of the transmutation of hazards built-in at each phase of the

investing lifecycles ;

( four ) the puting up of a well-designed direction information system for

coverage and monitoring of hazard exposures ;

( V ) changeless rating of market hazard exposures originating from monetary value

fluctuations of the tradable assets held ; and

( six ) application of Shari’ah allowable hazard extenuation techniques that will

cut down the impact of any capital damage on the investing undertakings.

The IBI shall develop instruments of hazard extenuation that are allowable and enforceable under Shari’ah regulations. Such instruments may include collateral that shall be capable to regular rating, insurance coverage for value of the assets, and compensation of claims from a leaseholder following a loss that materializes due to negligence or breach of contract on the portion of the leaseholder. The IBI shall hold an equal procedure for finding allowances for dubious debts that include counterparty exposures, and for gauging damage in the value of leased assets. Capable to relevance for each type of fiscal instrument held in its portfolio, the IBI shall put aside commissariats for the losingss in conformity with the demands of the Guideline on Credit Impairment Measurement and Income Recognition.

An IBI shall set up a liquidness policy model that chiefly takes into history the liquidness exposures built-in in current history sedimentations which are placed in the detention of the establishment and are collectible on demand. An effectual system of liquidness direction shall be put in topographic point such that hard currency flow projections incorporate all committednesss and support demands refering to fiducial responsibilities of the IBI towards its investing contracts. In order to run into its overall liquidness demands, the IBI shall a priori have recourse to Shari’ah compliant financess while holding due consideration to the restraints existent in the

fiscal market.

Transparency and Market Discipline

An IBI shall set up an effectual revelation government that promotes and reinforces international criterions on transparence of fiscal coverage by turn toing elements that are specific to Islamic fiscal services. Transparency is a basic rule of Shari’ah which has a decree prohibiting privacy of grounds. Lack of transparence is viewed as emanating from an dissymmetry of information which may give rise to unjust advantage in a dealing. Consequently, an IBI shall do accurate, seasonably and meaningful revelation with regard to the

investing histories held in its portfolio, while giving due acknowledgment to the protection of properness and confidential information.

An IBI shall follow revelation rules that will enable market participants to measure relevant cardinal information to enable them to supervise the public presentation of their investings, and to hold an apprehension of the methodological analysiss used for net income computation, plus allotment, and whenever applicable, the mechanics of smoothing of returns. It is viewed that revelation of stuff information leads to market subject in footings of prompt accommodation in monetary value and measure, and will supply inducements to the IBI to avoid inordinate risk-taking in the chase of its activities. An IBI shall stay by crystalline fiscal and non-financial coverage patterns that will work towards advancing soundness and stableness of Islamic fiscal system.

July 13, 2017