Introduction to Islamic Finance: Interview with Rod Ringrow of State Street Global Advisers

Introduction to Islamic Finance: Interview with Rod Ringrow of State Street Global Advisers

State Street Global Advisers senior vice president and managing director of the Doha Office, Rod Ringrow, tells Business Spectator’s Isabelle Oderberg how Islamic finance works and why it is set for enormous growth amid the meltdown of western style financial systems.

Isabelle Oderberg: I was wondering if just to start with for some of our readers who aren’t familiar with Islamic finance if you could just go through the fundamentals of it?

Rod Ringrow: The underlying principle for Islamic finance is it’s based on Islamic law and there are a number of key tenets that are critical to how the whole thing hangs to together. So, there’s the underlying premise that social and economic justice go hand in hand. There is a ban on interest. There is a ban to the extent possible on uncertainty. There is the promotion and the concept of risk and profit sharing between the provider of the finance and the recipient. Ethical, socially responsible investments.

So for example, nothing in gambling, armaments, alcohol, pork, obviously for Muslims, and in almost all cases there’s an underlying financial and physical asset that go with the transaction, so the concept of money making money is really what’s behind what is prohibited. So, in many ways it appeals to the Muslim community and also I think a great number of non-Muslims, in the fact that it is back to basics almost in terms of Western finance where there’s a physical asset underlying it, there’s not excess of leverage, etc.

IO: So you can’t invest in, for instance, bonds or anything like that because they pay interest. What kinds of investments would an Islamic fund manager be making?

RR: Well, there’s short-term and longer-term and we’ll come to the bond concept later, but a good example of a short-term fund would be a trading transaction, so the promoter buys a shipment of sugar or iron ore and pre-sells it at a predetermined price, so you buy it at 100 and sell it for 120 and that’s considered acceptable, because as I say, there’s an underlying physical asset and you’re pre-financing that shipment. The uncertainty element’s gone, because you know what you’ve bought it at and you know what you’re selling it at. That’s one example.

You’re right in the true sense of a bond not being able to be invested in, but there are some instruments called sukuks, which are really referred to as ‘Islamic bonds’ and there’s been a huge interest in those. In 2007 there were US$47 billion issued. The market took a bit of a tumble in 2008, but there’s a lot of potential demand out there for sukuk issuance.

There are 14 different kinds of sukuks and that creates another problem which we can come back to later, but in the 14 kinds of sukuks, there’s one called an ijara and that’s more like a lease transaction. Again, there has to be a physical asset underlying the financing here, but that ijara is closest probably to a leasing transaction in western finance. So somebody buys the asset then leases it for a monthly fee to the user. There are bonds issued, backed by that kind of structure, and there are a number of fund management houses beginning to look at how to create investment funds using sukuk as the kind of underlying investment. The traditional sort of Islamic investment funds have traditionally been equity based investment.

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Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

Interview with Pervaiz Ahmed, CEO Pak-Qatar Family Takaful Limited

Shahzaib Khanzada interviewed Pervaiz Ahmed, the director and chief executive officer of the Pak-Qatar family Takaful Limited.
Pak-Qatar Family Takaful Limited is the pioneer of the Takaful family in Pakistan. The company is regarded as a technology-driven shariah-compliant company providing need-based and cost-effective Takaful solutions in Pakistan.

SK: Ten months ago, your company was new and your plans were aggressive, and I had spoken to you back then about how realistic those plans were, keeping the situation of the country in view. What difference have you observed over the last 10 months?

PA: When I first spoke to you 10 months back, we had only just received a license and our company was in its launching phase. We had divided our expansion plans into two parts. Firstly, we thought of developing a company with a complete product range and one that is strong operationally, which means making your own house and order.

The second stage was to go into the market in front of the people, and to present an image that was consistent with the Takaful. The operational phase was very challenging, and we were supposed to do some expansion in the second phase. It was critical at that point in time that we should go out in the market and we did not know what kind of response we were going to receive. Generally when we made plans, we thought we were going to have 4,000 to 5,000 consultants over a short period of time, say three to four years. It generally looked optimistic because no other company had been able to achieve that mark.

Alhamdolillah over this short period of time, we have managed to launch a range of products, both for corporate customers and for individuals and now, we are present in all the major cities of Pakistan. We have opened up our offices in 13 cities so far and we are expanding very rapidly; we even have an office in Azad Jammu and Kashmir (AJK). Almost 800 consultants are working for us, we have trained and developed almost 12,000 to 13,000 people, and on the business side, a significant number of corporate clients have come onboard and are doing business with us and similarly a good number of customers have come onboard too.

By the end of the partial year on the 31st of December 2008, we had done business worth Rs 31 million, which is a very good number for a new company like ours. So now we have a full range of products in place, we consider ourselves one of the major players in the market, comparing our product line with any other established player that has been in the market for 12 years or more.

SK: When the country’s situation is such that, there is an inflationary scenario, an economic slowdown, the disposable income of the people has been hurt badly and they have to think twice even before purchasing the basic necessities; there can be two strategies of doing business. One is to carry out test marketing and taking things slowly. Your company on the other hand penetrated very rapidly and the numbers are all very surprising. What was the reason behind that? How is company so aggressive even during these hard times that Pakistan is going through?

PA: Generally, it happens that when you are strategising, there are always two parts to it. Firstly, the situation at the macro level, then there is the sector that you are focusing upon. Usually a lot of companies make the mistake of moving very cautiously in the desired sector just by considering the situation at the macro level. When we were launching this company, we analysed the market closely and found that the market has a lot of potential. The insurance penetration is very low and Islamic finance is needed in the market, so we should go out in the market regardless of the macro level situation.

Because there are a lot of gaps in the market, during this period the whole world including Pakistan was going through a financial and economic crunch. But some of the companies entered the telecommunications industry and they ended up doing pretty well, so basically we were focused on that sector. The nature of our business is actually long term. For example, when we sign a contract with someone; we always sign it for 15 to 20 years. Secondly, expansion in downtime is always easy because you can get quality human resource from the market, and you get the resources at good prices. Then, expansion does not take much.

I think it was a very focused approach, and we are still focused because of the response that we have received in a short period of time. There is only 0.3 percent penetration of the life insurance sector in Pakistan, which can go up to three to four percent. I believe that even if 10 to 15 more companies come, and work here, they will still have opportunities to make inroads.

SK: What you said happens to be a blessing in disguise because we keep saying that Pakistan’s economic boom started in 2002. If the Takaful had entered the market at that time, it would have progressed a lot better. But you think it is the other way around? If there is an economic slowdown, does it offer benefits of its own too?

PA: Yes of course, it has its own benefits. Pakistan did have an economic boom starting from 2002, but the situation of economic uncertainty in Pakistan has continued since the bomb blast in 1998, and the foreign ministers did not consider this a certain situation. I have been working with some foreign investment companies, and I know that we have now learnt how to live and survive in an environment that is uncertain. So if you are living in an uncertain environment, you learn to live and adapt with that, and it is true that this has some of its own advantages. If you are planning any expansion during a slowdown, and if you are doing it wisely, you can make a fortune out of it.

SK: I was going through your company profile and found it very interesting because all the people related to insurance, whether conventional or Takaful, have started talking a lot about the technologies that the bigger companies are investing in this field.

Others say that when they carry out cost benefit analysis, they don’t think that they is any need to invest in technology. You have actually mentioned in the first line of your company’s description that you want to be a technology-driven, Shariah-compliant company. Why is it so important that you have mentioned it in the first line?

PA: Technology is the heart of all the strategies that we are implementing. We are working in the service industry and generally in the service industry, customers’ satisfaction is considered to be the top most priority. Unfortunately, Pakistan is not a service-oriented country, as compared to the Western countries. So there are two elements to providing satisfactory services to the customers.

Firstly, it is the attitude of the people who are working, and number two is basically the tools. Both of these things are very important. For example, if you have the attitude but you lack the tools, you will not be able to survive in the industry. Similarly, if you have the tools but you lack the attitude, you would not be successful then either.

We have invested millions in our business technology, we brought up our business system from Malaysia, which gave us an edge to offer products and services that even the established insurance companies could not offer in the market. We believe that operation efficiency can only be achieved through technology. We wish to work at a low cost to pass on more benefit to the customers. Customer benefit is directly related to our cost, and without technology this is not possible.

SK: Your strategy seems to work well. Best of luck for your plans and thank you for your time.

PA: You are welcome.

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IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com: Dr. Mahathir Mohamad speaks on Islamic finance

IslamicAdvisory.com interviews Dr. Mahathir Mohamad as part of their “Meet the Market” podcasts and discuss the global financial crisis, capitalism, and the role of Islamic finance.

Access the podcast here.

Azerbaijan and Islamic finance: Interview with Faig Mammdov, Special Adviser to the Chairman of the International Bank of Azerbaijan

Azerbaijan and Islamic finance: Interview with Faig Mammdov, Special Adviser to the Chairman of the International Bank of Azerbaijan

The Muslim Central Asian countries (CIS) including Azerbaijan are fast opening up to the global Islamic finance market. After many years of brutal Soviet rule, Azerbaijan, the oil-rich Caspian country with a population of about 9 million and a member of the Jeddah-based Islamic Development Bank (IDB), is reaching out to Islamic finance, especially in the wake of the near collapse of the global conventional banking system as underlined by the credit crunch and the international financial crisis.

More importantly, Baku – the capital – is in the process of reviewing its legislation with a view to introducing laws to facilitate Islamic banking in the country.

Faig Mammdov, special adviser to the chairman of the International Bank of Azerbaijan (IBA), Jahangir Hajiyev, focuses on the current developments and future prospects for Islamic finance in the country and region.

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Interview with Shiro Kutsuma, CEO of Japan-based Deira Asset Management

Interview with Shiro Kutsuma, CEO of Japan-based Deira Asset Management

Sensing opportunities in the cash rich Middle East, Daiwa Asset Management overcame numerous challenges to become the first Japanese-based company to offer Shari’ah-compliant ETFs. Mohamed Hairul Borhan caught up with Shiro Kutsuma, Executive Officer at Daiwa’s Global Business Development Department.

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