London Conference on Somalia delegates by Foreign and Commonwealth Office @ Flickr

And yet. Yet, I am strangely optimistic. It has less to do with the conference itself and more to do with the change in tone and tenor. Today was one day and it was never meant, nor could it, change Somalia. We will see what happens. The cynicism that I felt today among my Twitter stream was palpable and came from both Expat and Somali corners. Here are a couple of icons of what I saw:

Why does it feel like only Turkey are willing to help Somalia? #LDNSomalia

— Amal آسية (@HopesDesire) February 23, 2012

RT @joshuafoust: What do the London conferences on #Yemen #Somalia & #Afghanistan have in common? All talk and zero action #LDNSomalia

— Mark Anderson (@mark_anderson13) February 23, 2012

To be honest, neither are a true representation of reality. And both are largely informed by the freedom that attends to not living the existence that Somali’s in the Horn live.

Somalis, like most Africans, are much more politically aware and involved than their “developed” world brethren. Here is why this is important. See all of the big, powerful men (and except for Clinton they were nearly all men – who often talked about empowering women) in the room can stay in their bubbles for only so long. The affects of social media and the proliferation of internet which disseminates this information levels (somewhat) the playing field. Even Somalis who aren’t hooked up to the inter-tubes are able to raise their voices thanks to great initiatives like #SomaliaSpeaks (a brilliant, socially-conscious joint venture between Al Jazeera and ushahidi). YouTube + Twitter + Storify is bringing unprecedented exposure to events.

Think about the London Conference not for what you didn’t have access to, but to what you DID have access to. The point of events like this is to capture the attention of the world. This is an increasingly difficult thing to do, but when it is accomplished it can be a powerful thing. Look at this:

Fascinating graphic of aid to #Somalia & media, twitter, search coverage – by @GdnDevelopment & @datastore. #LDNSomalia twitter.com/espry/status/1…

— Espen Beer Prydz (@espry) February 23, 2012

The money follows the attention. This is nothing new, it is simply a new way of accomplishing an old thing. Here is where the UK government (despite what all the don’t come at me with your neo-colonial detractors were saying) succeeded. And they really did a masterful job. For weeks leading up to this conference they were using every social media outlet I could think of not only to get the word out as to what was happening but to encourage conversation on a scale and level that I simply have never seen before. In a way, what is happening is that we are ALL being invited into the room – to some extent or another.

The result of such a collective effort that is less reliant on big powers and further decentralized into communities. This is what I was driving at when I noted in passing that Somalis were politically engaged. Why is this important? Agility. When dealing with complex problems (which Somalia’s problems certainly are) you need to have agility to find solutions, reinforce success, and pivot quickly from failures. You can only do these when you have decentralized power & really good information flows. Technology is handling the latter, we as a society need to insist upon the former. And they reinforce one another.

In this land, where there is little to no democratic accountability, other accountability methods matter. In the Somali context, it is the community that matters. The major problem with the south in most Somali’s minds is that there has been no check (which in the North came from the Elders – a mechanism that may or may not translate into the South) on the gangsters ability to hijack state assets. Social media focused like a laser may help provide some of this assistance via information flows and an alternate way of thinking about communities.

A note to Somalia’s leaders: Montezuma was stoned by his own people b/c of his complicity with the Spaniards #LDNSomalia

— Maxamed Ibrahim (@masaafur) February 23, 2012

It isn’t a perfect solution, but it may be the best solution we (as humanity) have right now to prevent state capture and ensure a representative, indigenous, legitimate political reconciliation process.

At the end of the day everyone I heard speak was (as expected) focused on stability, piracy, and terrorism. Yet a few joyous nuggets emerged. My favorite (and not because I’m an American and a Democrat) was Clinton’s speech. Although it hit the boilerplates above, there were some very interesting key nuggets of insight. And if the Foreign Minister of any big country gets at some insight then you can bet her or his staff surely get these insights well. Clinton talked about the environmental devastation and the ban on charcoal exports. This matters deeply at the lowest, and most under represented levels, of Somali society.

What I appreciated even more was her optimism at the end. Let us stop putting all our energy in worrying about preventing this and that. Let us put our energy into building. This my friends, this insight, if the #LDNSomalia Conference gives us absolutely nothing else but the insight that the US administration wants to assist Somalis in building rather than in containing and preventing, if this is the truth. Then I will consider #LDNSomalia a qualified success. It met its standards of getting the focus back on where it should be. Building a better Somali region. So without further adieu I leave you with the comments by the United States’ Secretary of State Hilary Rodham Clinton.

Read more: #LDNSomalia: On Cynicism, Social Media and the London Conference

For a while now I have been hoping to start an annotated readings series, I hope you enjoy this small departure. The first presentation is a Meeting Report from a Chatham House meeting last sumemr of various Somali diaspora and policy makers to discuss the follow-on actions when the TFG’s mandate expires in August of 2012. The report is a VERY good report and we have the highest regard for the work Chatham House is doing on Somalia. Please let us know if you like or dislike this annotated readings and if you have any ideas for improving that would be helpful. The original report is available here. This annotated reading while not preserving the style of the original piece, has preserved its content. I am working on a more formal response as we approach the London Conference, but it is not ready for presentation yet. If you want to see my notes, simply click the small “N” at the end of the highlighting (if there’s a note for that highlight). Click the “N” again to Hide the Note. This was my work flow for achieving this annotated reading.

1. Download .pdf
2. Send to Kindle and Convert using Amazon’s Personal Document Conversion Service
3. Read Report & Highlight
4. Plug Kindle into Computer to Download Highlights & Notes
5. Convert .azw to .html file using Calibre
6. Markup .html file to show highlights & notes
7. Build small style & javascript methods to present.
8. Upload to blog.

I am currently working on programming a small script which will automate steps 5-8 into as smooth of a workflow as possible. This presentation is the first part of that process. More with each annotated reading to come. So without further adieu, the reading.

Read more: An Annotated Reading of Chatham House’s Report on Somalia’s Sub-National Entities

Affaires Plus by Kelly Schykulski @ Flickr

For developing countries like Somaliland, a sound financial sector is integral in fostering economic growth, principally through the efficient mobilization and deployment of financial resources. Researchers in the field of international development continuously cite weak and fragmented financial institutions within developing countries as barriers to economic activity and as a source of great vulnerability to fluctuations in the global economy.

For quite a while now there has been talk of Somaliland instituting a legislative bill with respect to the establishment of banking institutions in the country. Accordingly, the time has come for Somaliland to establish a supervisory and regulatory agency that carries out the prudential and systemic regulation of financial institutions. Yet, how that legislation is drafted makes all the difference in the world.

This entry speaks to the necessity of a strong regulatory framework and highlights some of the major decision points we stress that Members of Parliament should be keeping in mind when they debate this legislation which is on the agenda for the upcoming sessions in the House of Representatives. In particular, this article layout a framework for the guiding principles in the regulation of financial institutions and some of the problems the oversight of these institutions is designed to address.

Regulatory Regime is Instrumental in the Financial Sector

A properly structured and functioning financial sector has the potential to expedite Somaliland’s developmental agenda by ensuring economic growth through the supply and efficient allocation of credit. Further, a functioning and integrated financial sector has the potential to enhance the scope and strength of Somaliland’s monetary policy thus improving its ability to combat inflationary forces and stimulate economic growth.

Financial sectors are composed of a regulatory framework such as legislative bills, regulatory bodies that govern the provision of financial products, and financial institutions (i.e. a central bank and commercial banks). In this article, the term ‘financial institutions’ refers to deposit taking institutions, this includes for instance banks, investment firms and financial planning firms.

Despite the fact that Article 5 of the Constitution stipulates that the laws of the country should be grounded in Sharia, the successful implementation of dual banking system (composed of both conventional and Islamic financial institutions) in Malaysia and Indonesia is worth noting and highlights the potential for a dual system to exist in a largely Muslim society. Those nations have not found that the presence of a dual banking system violates Sharia principles. A dual banking system has several advantages, namely that it fosters a highly competitive banking sector which breeds innovation and consumer satisfaction, hence it can theoretically stimulate a higher degree of economic growth than a banking system which allows only one of the major types of financial institutions (conventional or Islamic).

Rationale for the Regulation of Financial Institutions

The recent financial crisis and ongoing European sovereign debt crisis has highlighted the growing importance of the stability of the financial sector and the need for policy makers to consider the systemic impact that failures in the financial sector can have on the overall well being of the economy. While financial institutions in the developing world were not directly associated with the recent and ongoing global financial crisis, they have suffered through indirect channels (i.e. contraction of remittances or reduction in foreign direct investments). Moreover, financial crisis have taken place in developing countries in the past. A study conducted by IMF in 1996 entitled Bank Soundness and Macroeconomic Policy (available here), details the various crisis and measures taken by 133 IMF member countries who have undergone some form of a financial crisis.

Prudential and System Regulation

The regulation of financial institutions by governments or institutions at arm’s length of the government is premised on two fundamental principles:

• The need to protect depositors and policy holders (investors)
• The need to avoid systemic failure in the financial sector

These two principles highlight the fact that the case for the oversight of financial institutions rests on prudential and systemic regulation.

Prudential regulation refers to the idea that there exists information asymmetry between depositors and financial institutions. Namely,  most consumers are not experts in the field of financial products and thus not in a position to judge the safety of financial institutions.

The systemic concerns underpins the second fundamental principle and posits that it is best to guard against systemic failure in the financial sector in which case the social costs of a systemic failure to the system may outweigh the private costs of such a failure. This was the economic and policy justification used by the Obama administration when it pushed for legislation that “bailed out” large US banks in 2008/2009 – despite the general idea prevalent within the US that the government should stay out of private enterprise. A systemic failure can occur for instance if suddenly the majority of depositors in financial institutions withdraw or demand their deposits (bank runs) or contagion caused by linkages (i.e. European sovereign debt crisis). In cases of drastic systemic failure, efforts to restore systemic stability and confidence in the banking sector may require expenditure of public funds (bailouts) or stagnate economic growth (liquidity crisis). Accordingly, a systemic failure can pose disruptions to the nation’s payment system (both internally and externally), and disrupt both economic growth and poverty reduction goals.

Risks and Challenges to Conventional and Islamic Financial Institutions

Financial institutions such as banks accrue earnings primarily through financial intermediation, which can entail substantial risk. Traditionally financial institutions in the business of financial intermediation made their profits from the income spread of their assets and liabilities as well as from user fees. Accordingly they often faced market risk resulting from the business cycle, credit risk from defaults and interest rate risk from changes to the expected rate. Since the 1980’s the emergence of secondary markets (i.e. derivatives market), new financial products, globalization and securitization have provided financial institutions with risky new opportunities to generate more wealth. Consequently, banks and their subsidiaries (i.e. investment and financial planning firms) have begun to engage in activities that are outside the scope of their traditional activities. Both conventional and Islamic banks can be exposed to some if not all of the following risks:

• Liquidity risk
• Capital risk
• Interest risk
• Foreign exchange risk
• Actuarial risk
• Operational risk
• Market risk
• Sovereign risk

Islamic banks (as detailed in our Islamic Finance series which begins here) are premised on the Islamic economic model as dictated by the Quran and Sunnah which provide for the values and principles that are to guide the dealings and relationships of individuals in economic matters. It is often cited that one of the main defining features of the Islamic economic model is the prohibition of interest or riba. While Islamic banking is an growing field within Islamic and non-Islamic countries, in particular Britain, their share of the global financial market is still smaller than to that of non-Islamic financial institutions. Within nations where a dual banking system exists such as Malaysia, Islamic banks have taken to increasing diversifying financial products and activities in order to to compete with conventional banks for market share. However, the designation of a particular financial product as being in compliance with the values and principles of ‘Sharia’ in terms of how it is structured requires the opinion of scholars. This is where we can expect some of the risks common to Islamic banks to arise.

The risks and challenges that are unique to Islamic banks that are discussed here do not necessarily represent the full spectrum of the risks that Islamic banks may face. These risks however serve to highlight the potential for a discrepancy in the activities and products Islamic banks are engaged in and their compliance with the principles of Sharia. Accordingly, a discrepancy between the financial institutions status as being in compliance, can both distort the risk assessment of their balance sheet and thus the need to take prudential measures and it can also be misleading to consumers. Differences in opinions of Sharia scholars, and changes during the financial products lifecycle can be sources of such a discrepancy. Therefore this poses a challenge to the supervisory and regulatory agency in terms of protecting consumers.

The issue of contract and documentation risk is one that is much more pertinent to Somaliland, where secure definitive documents that attest to one’s identity and enforcement channels such as individual credit scores are not as developed. Thus risks that emanate from defaults and missed payments to the banking institutions may be heightened and will need to be taken into account in the feasibility evaluations of banks, with regards to how they go about ensuring a level of documentation and probability of repayments (i.e. requirement of collateral).  Further,  the need for trained professionals and scholars in the field of Islamic banking is a recurrent issue that many institutions face in the field of Islamic banking and one that exasperate the aforementioned risks.

It is important to note that there some potential adverse effects that an overly prescriptive regulatory framework can have on the financial sector. Moreover, it is important such regulatory frameworks be structured in a manner that promotes due diligence on the part of the shareholder and consumers of financial institutions. In this regard, there is widespread agreement a principles-based approach to regulation rather than rules based approach is the better method. This is because strict rules regarding what specific activities or products to engage in for instance can stifle financial innovation and foster ‘creative compliance’. On the other hand a principles based approach to regulation promotes dialogue between financial institutions and regulators, and puts pressure on management and board of directors to meet a set of standards. In that regard it allows for a degree of flexibility in terms of financial products and activities and places responsibility for the safety and soundness of individual financial institutions on management. However, for principles-based regulation to work properly, the set of standards to abide by should be broad enough to encourage flexibility and innovation, and be backed up a set of clearly stated severe penalties for financial institutions found to be in non-compliance.

Guidelines for Somaliland Financial Institutions Regulatory Agency

The mechanisms whereby a regulatory regime ensures that financial institutions are taking into account the various risks they may be exposed to, may include investigative work by the regulatory agency with regards to the accounting measures of financial institutions, governance mechanisms and compliance regarding standards.

For instance the Basel Committee on Banking Supervision (BCBS) is a global forum for banking regulators that acts as a ‘standard-setting’ agency for the supervision and regulation of banking institutions. The latest round of talks referred to as Basel III at BCBS has resulted in an agreed upon set of guidelines for banking regulators. These standards speak to the ability of banks to absorb shocks to their funds as a result of ‘financial and economic stress’. Some of their publications include a liquidity coverage ratio for specific scenarios so as to ensure a level solvency.

In addition, where Islamic Finance is concerned there are extensive guidelines and best practices which have been adopted by the Islamic Financial Services Board (IFSB). The IFSB is an international body of the heads of Islamic finance regulatory bodies from the primary nations leading the development of Islamic finance.

The main gist of this article is to underscore the importance of having a financial sector framework that facilitates and promotes the emergence of financial institutions that are conducive to the developmental goals of Somaliland and that makes it easier for its business community to engage with the international community through formal financial channels.

Read more: Role of Regulatory Framework in Financial Sector Development

A visit, board, search and seizure team assigned to USS Anzio by Official U.S. Navy Imagery @ flickr

They are quite the buggar those Somali pirates. They just won’t seem to go away, will they. For most of the time I have been working with Somalis they have been little more than a simple nuisance. That changed a while ago when a friend and colleague was taken by them. This blog isn’t personal, however, it’s business so let us talk about what the avenues the international community and external supporters of stability within the region could agitate for.

As most know, the former Republic of Somalia functions as three different state entities, and a number of smaller micro-states. If you want the general background on Somalia, Somaliland, Puntland, or the pirates check out lots of other places. Really, this is about what could be done.

Overall, throughout the region, in my opinion, there needs to be an integrated five-prong response to truly address the issue: (1) increased self-defense measures on ships (something I don’t particularly like to endorse but it seems to be working), (2) continued diplomatic pressure on the state structures in the Gulf States, Puntland and Mogadishu, (3) a full scale DDR effort for those on the ground with a well thought out alternate employment plan, (4) an increased effort to track and freeze pirate assets (particularly in East Africa), and (5) increased engagement to Somaliland’s relatively stable law enforcement structures. This five prong would address both the supply and demand sides of the piracy issue.

The first response is the most immediate response. Although there is danger in arming ships on many levels – legally, culturally, etc. – it is likely the best short term solution – “best” being highly qualified by the operating context. As the UK Foreign Policy committee said in its recent Piracy report, there is “compelling evidence” that this is a viable short term solution. The UK Prime Minister has ordered his government to ensure that the legal and practical safe guards are put in place to allow this to happen on UK flagged ships. But UK flagged ships have never really been the issue. Although I haven’t done a full research, I cannot remember (off the top of my head) any UK flagged ships being taken hostage since I’ve been here. The majority of ships in the world are flagged under flags of convenience such as Liberia or Panama and the actions taken by those governments in this context are very important. On top of ensuring this was in place for UK flagged ships, the UK would be wise to assist the other governments who may be less capable of making the necessary changes to their legal frameworks to allow this. One thing that the UK Committee pointed out – and I hadn’t thought about before – was a method by which the security guards are able to safely (and with their weapons) get off of the ships once those ships are out of the danger zone. Any country willing to play ball here would reap a lot of money since I would expect that most contractors would have their teams running a circuit. Start in Dubai/Gulf ride the ship to Alexandria or Zanzibar. Stay over night there, fly back to Dubai/Gulf and repeat. There is no shortage of decently well trained security contractors in the world right now so they could have a role to play – although I remain a bit reticent to fully endorse this. If the contractors are able to arrest / apprehend any pirates that came onto the ship they were protecting, they could then hand them over to the closest task force navy vessel. However, the contracting companies should also be sure that their teams were trained in how to collect evidence and also how to track that evidence. They should also be aware that if the pirates were prosecuted in NA/Europe their contractors may be called on for chain of custody certification. Lastly, the security contractors need to have very clear rules of engagement because without it the entire system will oscillate towards further violence.

The second response is to keep the diplomatic pressure on the state entities in Mogadishu and Garowe. These states nominally have control over the areas where pirates are freely operating. Diplomatic pressure should be exerted to begin chipping away at the current resolve within these areas not to take concerted action against the gangs. There is little that can be done here in the short (or even medium) term. And I’m not incredibly optimistic about the result. Similar to this, some pressure should be put on the Gulf States to make a more concerted effort to figure out how the information as to ships, cargoes, and routes is being leaked to the foot soldiers. If this information stream was disrupted, it would substantially impede the ability of the people who make the actual kidnappings to succeed.

Third, would be a full scale DDR effort. This is a long (or medium) term situation. The basic gist is that the foot soldiers of the pirate gangs, the ones who are really taking all of the risks now should be treated roughly the same as how we have learned to deal with demobilizing, dearming, and reintegrating rebel groups. There are tons of lessons learned there for when the time comes (if ever) that the international community is able to go into the real pirate areas and provide programming and services. The most important aspect of the DDR program would be viable alternative livelihoods. This will be incredibly difficult, given the type of lifestyle most people that currently go into piracy expect as well as the distinct lack of resources in the coastal communities throughout the Somali region. This effort would provide the pull that complements the push of the first prong. Indeed, they really go hand in hand in my mind. Somalis are excellent at risk analysis. If an alternate method of gaining employment/revenue for one’s family was combined with significantly increased risk fewer DIY efforts would be launched (financed by community efforts or the pirate stock exchange) and fewer foot soldiers would join the existing/established gangs. This is a demand side initiative, but in combination with the supply side initiative detailed above, would provide some added deterrence to the mix of solutions.

The fourth response is somewhat linked to the second response and is the demand side response to its supply side initiative. More efforts need to be made to track what happens to the money once it is paid. Although it is often paid in cash, and a good sum of it is quickly distributed deep into the communities to pay for debts amassed during the detention of the ship as well as normal clan contributions which are expected, the big piles of money which go to the big financiers and leaders should be easier to track. Although it certainly will not be a simple endeavor, the capabilities are well developed from tracking of drug cartels and terrorist organizations and those should be leveraged to reduce the incentives to launch further attacks.

The last response is to bolster Somaliland’s existing frameworks. Somaliland has the political will to do some things to assist in the international piracy effort. This political will can be a bit amorphous, and it can be fleeting. It will not be a simple engagement, but it will be worthwhile. Somaliland has the capability to prosecute many of the captured pirates. It has, considering its neighborhood, a quite good human rights reputation (which will enable prison transfer agreements without violating non-refoulement principles), and it does not have a language or cultural barrier. Currently, Somaliland doesn’t prosecute pirates for per se piracy because the penal code is not structured to recognize these acts as crimes. However, the pirates are routinely prosecuted for the underlying act of piracy, such as illegal use of weapons, kidnapping, murder, etc. Somaliland has expressed an interests in reviewing its penal code to ensure that it is up to date with modern international / transnational crimes and that the criminal procedure code allows for modern law enforcement and trial methods to be steadily integrated into the Somaliland system. There is a Somaliland Coast Guard (headquartered in Berbera) who have the will but lack the resources and capacity to play a productive role. Strengthening Somaliland’s law enforcement (including Coast Guard), trial procedures, and jail system would be the best solution for what to do with the pirates once they are caught.

These five prongs are – to varying extents – currently being either acted upon or considered for action. Yet, if the international community wants to seriously address the issue it will need a deeper approach. It remains to be seen whether there is political will in the powerful capitals for that to happen.

Read more: On the Somali Pirates: They are Human, but They Must be Dealt With

Islamic Bank by Kojach @ Flickr

This is the third in our Islamic Finance Series. To see the Introduction Post, please click here. To see the Post on Islamic Finance Instruments, please click here. In this post we speak briefly about off shore banking.

Introduction to Offshore Banking

In principle, Somaliland could set up an offshore business to encourage the deposit of extra wealth by super rich individuals, and in so doing would bolster the reserves of the Soamliland Central Bank. The modus operandi being not to encourage the wealthy to hoard their money in Somaliland offshore system per se but to encourage them to deposit their extra wealth in a safe and secure system where they would not incur extra expenses / taxes for so doing. Before speaking to whether this would be a good idea for Somaliland, let us first talk about what an offshore banking system is.

Historically, an ‘offshore bank’ was given this nomenclature because it was typically located on an island, for example: Bermuda, British Virgin Islands, Cayman Islands, Guernsey, Hong Kong, Isle of Man, Jersey, London, Mauritius, Seychelles. However, subsequently and with the development of this banking system, the term offshore has become a misnomer. Because, as well as, being likely located on an offshore islands, today, offshore banks can be as likely located in landlocked cities such as, Zurich, Luxembourg, or Andorra.

The Organisation for Economic Co-operation and Development (OECD) defines the Offshore Banking Centers as: countries or territories whose financial institutions deal primarily with non residents. As a corollary, an offshore bank can reasonably be described as: a financial institution located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

• Greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act);
• Low or no taxation (i.e. tax havens);
• Easy access to deposits (at least in terms of regulation); and
• Protection against local political or financial instability.

Offshore Banking and Secrecy

Bank secrecy (or bank privacy) is a legal principle in some jurisdictions under which banks are not allowed to provide to authorities personal and account information about their customers unless certain conditions apply (for example, a criminal complaint has been filed). In some cases, additional privacy is provided to beneficial owners through the use of numbered bank accounts which never have the depositor’s name on the account. Offshore banks, typically, have no obligation to report income to tax authorities due to protection given under the country’s bank secrecy laws. Typically, this will not create a situation where the depositor is participating in tax evasion by not paying tax on that income. Offshore banks, typically, have no obligation to report income to tax authorities due to protection given under the country’s bank secrecy laws. Typically, this will not create a situation where the depositor is participating in tax evasion by not paying tax on that income.

Created by the Swiss Banking Act of 1934, which led to the famous Swiss banking system, the principle of bank secrecy is always considered one of the main aspects of private banking. After September 11, 2001, there have been many calls for more regulation on international finance in particular concerning offshore banks, tax havens, and clearing houses such as Clearstream, based in Luxembourg, being possible crossroads for major illegal money flows.

Defenders of offshore banking have criticised these attempts at regulation. They claim the process is prompted not by security and financial concerns but by the desire of domestic banks and tax agencies to access the money held in offshore accounts. They cite the fact that offshore banking offers a competitive threat to the banking and taxation systems in developed countries, suggesting that the Organisation for Economic Co-operation and Development (OECD) countries are trying to stamp out competition.

The Offshore Group of Banking Supervisors (OGBS)

The first meeting of the Offshore Group of Banking Supervisors (OGBS) was held in 1980 in Basel when representatives of a number of offshore centers met with members of the Basel Committee on Banking Supervision.  The proposal to form an Offshore Group was welcomed by all concerned as a means of allowing offshore centers to define their common ground more clearly, to participate in the defining and implementation of international standards for cross border banking supervision, and to hammer out a positive, constructive and coordinated response to the approaches made by other supervisory authorities for assistance in the effective supervision of international banks.

Since 1981 the Chairmanship of the Offshore Group has been held by Colin Powell, who is also the Chairman of the Jersey Financial Services Commission: the body with responsibility for regulating Jersey’s financial services. The Offshore Group has worked closely with the Basel Committee on the supervision of cross border banking.  The Offshore Group also works closely with the Financial Action Task Force on money laundering, and is represented on three working groups set up by the Financial Task Force as part of the general review of the FATF’s Forty Recommendations (available here). Membership of the Offshore Group calls for a clear commitment to the Basel Committee on Banking Supervision’s Core Principles, the Financial Action Task Force’s (FATF) Forty Recommendations on money laundering, and the FATF Eight Special Recommendations on terrorist financing.

Members of the OGBS: Aruba, Bahamas, Bahrain, Barbados, Bermuda, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong (China), Isle of Man, Jersey, Labuan (Macau), China, Mauritius, Netherlands Antilles, Panama, Singapore, and Vanuatu.

Advantages of Offshore Banking

An Islamic offshore banking system which acts as a savings depository system where the system shall enjoy stringent protective regulatory procedures and low taxation. Under such system, the depositor shall have immediate unfettered access to his saving upon demand. The risk involved shall be minimal to the depositor, as long as, the Central Bank ensures the reserves held in the Central Bank for such banks are relatively high. An Islamic offshore system will enhance the country’s ability to attract foreign investment because the stability of the system and the confidence it generates will have a ripple effect enhancing the general investment capabilities of the country as a whole.

This is a unique opportunity and if used craftily will benefit from the mass of wealth which escapes Africa annually to find home in Europe and other offshore centers. Somaliland can, furthermore, discourage the depository of dirty money in its offshore system by implementing fair and stringent supervisory majors in the offshore business procedures.

Offshore banks can sometimes provide access to politically and economically stable jurisdictions. This will be an advantage for residents in areas where there is risk of political turmoil, who fear their assets may be frozen, seized or disappear. For example, during the 2001 Argentine economic crisis where on December 2, 2001, the Argentine government announced measures restricting deposit withdrawals. At that time the Argentine government announced that withdrawals were to be limited to 250 pesos per week per account. However it is often argued that developed countries with regulated banking systems offer the same advantages in terms of stability.

Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of government intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits. Offshore finance is one of the few industries, along with tourism, in which geographically remote island nations can competitively engage. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. Interest is generally paid by offshore banks without tax being deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income.

Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, lower rate loans based on risk and investment opportunities not available elsewhere. Offshore banking is often linked to other structures, such as offshore companies, offshore trusts, or private foundations which may have specific tax advantages for some individuals.

Many advocates of offshore banking also assert that the creation of tax and banking competition is an advantage of the industry. The advocates of this argument expound that tax competition, in fact, allows people to choose an appropriate balance of services and taxes. Critics of the industry, however, claim this competition as a disadvantage, arguing that it encourages a “race to the bottom” in which governments in developed countries are pressured to deregulate their own banking systems in an attempt to prevent the offshoring of capital.

Bahrain (the geographically nearest offshore banking zone to Somaliland) is the leading financial services hub in the Middle East. One of its traditional specialties is its offshore banking. Al Baraka Banking Group is an example of an Islamic-oriented institution with prominent offshore bank in Bahrain.

Disadvantages of Offshore Banking

The disadvantage of ‘conventional’ offshore bank accounts is the fact that they maybe less financially secure. In the banking crisis which swept the world in 2008 the only savers who lost money were those who had deposited their funds in offshore branches of Icelandic banks such as Kaupthing Singer & Friedlander. Those who had deposited with the same banks onshore received all of their money back. In 2009 the Isle of Man authorities were keen to point out that 90% of the claimants were paid, although this only referred to the number of people who had received money from their depositor compensation scheme and not the amount of money refunded. In reality only 40% of depositor funds had been repaid 24.8% in September 2009 and 15.2% in December 2009.

Both offshore and onshore banking centers often have depositor compensation schemes. For example the Isle of Man Compensation Scheme guarantees £50,000 of net deposits per individual depositor or £20,000 for most other categories of depositor and point out that potential depositors should be aware that any deposits over that amount are at risk. However, only, offshore centers such as the Isle of Man have refused to compensate depositors 100% of their funds following the collapse of any bank in that jurisdiction. For example, deposits made at Jersey branches of Bank of Scotland PLC and Lloyds TSB Offshore Limited are covered by the Jersey Depositors’ Compensation Scheme which came into effect on 6 November 2009. The scheme compensates people who have money in current and deposit accounts in Jersey with up to a maximum of £50,000 of deposits per individual depositor per Jersey banking group. The compensation is payable, irrespective of which country they live in.

Offshore banking has been associated – in the past – with the underground economy and organized crime through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized crime gangs, terrorist groups, and other state or non-state actors. However, offshore banking is a legitimate financial exercise undertaken by many expatriate and international workers.

Offshore jurisdictions are often remote, and therefore costly to visit, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem for customers. Accounts can be set up online, by phone or by mail. Offshore private banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. However, simple savings accounts can be opened by anyone and maintained with scale fees equivalent to their onshore counterparts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

Conventional offshore bank accounts are sometimes touted as the solution to every legal, financial and asset protection strategy but this is often much more exaggeration. However, a model of offshore banking based on Islamic financial principles will, to a large degree, overcome the debilitating ‘Achilles heel’ difficulties associated with the conventional system, which potentially made vulnerable by the regulatory system which regulates it being feeble and uncertain (usurious).

General Conclusion

In conclusion, it is my opinion that Somaliland and its people will, with some sustained effort and persistence, benefit immensely from setting up an Islamic finance system – a credible system and one which will be unique to Somaliland /Africa. This success will depend on setting up a system which is rigidly based on rule of law. This is the key. It would be inescapable, but to set up a Commercial Court which has the jurisdiction to settle any financial / commercial disputes which may arise, in future, as result of setting up the envisaged financial system. Even those in the diasopora, alone, can constitute the constituents of an Islamic finance system and this will gradually thereafter attract an international clientele.

Generally, the Hawalla system utilized by those in the diaspora and the NGOs is based on Islamic financial principle which proves my point. It is a simple system which if employed systematically and awarded the protection of the law will be highly beneficial to the people of Somaliland.

Read more: Islamic Finance: The Way Ahead for Somaliland? (Part 3: Islamic Offshore Banking)

Islamic Bank by Kojach @ Flickr

This is the second in our Islamic Finance Series. To see the Introduction Post, please click here. In this post we speak briefly about the various major instruments which are crucial to a functioning Islamic finance system. 

Instrument 1: Trust Finance (Mudaraba)

(Rab-ul-mal or A) provides the capital. While (Mudarib or B) manages the investment using his expertise. Typically, Mr. A (Rab-ul-mal) provides QR 50,000 for investment as a grocery shop in Hargaisa City. Mr. B (Mudarib) manages the shop. Profit is determined separately and distributed by applying a pre-fixed sharing ratio. Any loss is carried by A (Rab-ul-mal) unless B (Mudarib) was negligent. All the assets are owned by A (Rab-ul-mal). B (Mudarib) can buy out A (Rab-ul-mal). Mudaraba can be ‘restricted’ or ‘un-restricted’.

Instrument 2: Partnership Finance (Mosharaka)

All parties provide capital towards the financing of the investment. The profit is shared on a pre-arranged ratio. The loss is shared on the exact proportion to the capital invested by each party. All parties participate in the management of the investment but not necessarily required to do so. An extra amount can be paid to the investor bank to reduce its holding shares in the company. Another scenario is where a Bank (non-active Mosharik) invests QR 100,000 in a company established by A (active Mosharik) in a pharmaceutical company, where A invests QR 100 and manages the company.

Instrument 3: Cost-Plus Financing (Morabaha)

A (Financier) buys a factory on behalf of B, for in a Cost-Plus agreement. B (the buyer) agrees to purchase the factory from A (the investor) in one of two ways: (a) immediate payment or (b) a deferred payment. The mark-up is a means of rewarding the bank for: seeking out the factory at best price, locating the factory at best price, or purchasing the factory at best price. The mark-up does not relate to time – it does not increase with the passing of time and remains as prearranged. The investor bank owns the property between the completions of the two sales and assumes all risk.

Instrument 4: Leases (Ijar)

Ijar is defined as sale of Manafa’a (i.e. sale of right to utilize the goods for a specific period.) It is similar to a conventional lease. Ijar is a contract under which a Bank (Lessor) buys and leases out an asset or equipment required by its client A (lessee) for a rental fee. Lessor assumes ownership right. Lessor can intermittently re-negotiate the value of the rental to ensure the rental charge is in line with its equivalent mark value.

Instrument 5: Advance Purchase (Salam)

This type of finance usually refers to a finance contract of Agricultural Products. It involves forward purchase of specified goods for full forward payment. A forward sale is for property, the delivery of which is deferred, against a price payable immediately.

Instrument 6: Commissioned Manufacture (Istisna’a)

Banks finance construction and manufacturing projects under this type of financing. A (investor) buys goods from B. B undertakes to manufacture the goods according to pre-agreed specifications for a profit.

Instrument 7: Interest-Free Loan (Quard-Hassan)

Security may be taken. A nominal Administration Fee maybe applied – this cannot be made proportional to the amount lent or the term of the loan.

Instrument 8: Islamic Banking Insurance (Takaful)

Takaful is a method of creating a pool of payments contributed by a group of participants making up an agreed sum which is put in turn into a common fund that will be managed according to Sharia.

Read more: Islamic Finance: The Way Ahead for Somaliland? (Part 2: Instruments)

Power On Button by LivingOS @ Flickr

Power. We all want it. But it comes in different flavors. For this entry I would like to zoom in a bit to a specific type of power: the power to govern. The Somaliland Government, while it has its many critics both generally (of Somaliland at all, of the current Silanyo administration) and specifically (as to discreet acts which the government has taken), has undeniably matured leaps and bounds over the almost four years I have been welcomed into Somaliland. This maturation process has ebbed and flowed; there have been many growing pains along the way.

One of the major growing pains has been the constant fluctuation of power between co-equal branches of government. Between the Government and Parliamant and the Judiciary; between the Houses of Parliament; between Ministries of the Government; between various sectors within the Judiciary. This is inevitable within a governance sector which is not ruled by an authoritarian dictator. Even after over 200 years, my country, America, still struggles with this notion on a daily basis. There is no problem with changes to the relative power of the branches when we talk about a specific sector. Indeed, it is often a good thing as the governance sector of a given state should evolve the same way biology evolves if it is going to work. It cannot be externally supplanted and have a high chance of survival. It needs to be grown organically.

This is not to say that I’m laissez faire about power. For it is an important component of governing. Indeed, it may be the most important component of governing. We have had a lot of work for clients toward the end of last year and early this year whereby our clients (be they a public entity, from the development sector, or from the private sector) are struggling with the relative power of a specific actor within the governance framework. While there may not always be a clear answer (particularly in a country where the Constitutional Court has yet to develop any corpus of Constitutional Law, much less rule on a single constitutional case), there is a fairly straight-forward way in which one can think about how to break down the power a specific entity may or may not possess.

The first question to ask when thinking about power: has the entity been given the power in question by a valid legal instrument? There are two subquestions which must be asked: did the instrument give the power explicitly; did the instrument give the power implicitly?

Begin your analysis at the top, which is often the constitution. Look at the constitutional provisions for the governance entity in question to see if the constitution (either directly or indirectly) gives the entity the power to do whatever it is you are analyzing. Then move down one notch on the legal instrument heirarchy. For most countries, legislation (and also treaties) will be the next level below the constitution. Look at the duties which have been given to the entity by legislation (and perhaps, but less often, treaties). Do those duties answer your question about the entity’s power? Then repeat the same process by moving down to the next notch on the legal instrument heirarchy. For most countries, this will be regulations, by laws, or decrees. As the same questions.

If you can affirmatively answer the question as to the entity’s power by only looking at the constitution do you need to continue the analysis? It depends, you always should because every constitution in the world is riddled with gaps and ambiguities that are later interpreted by legislation, regulations, and judicial decisions.

The second qustion to ask when thinking about power: what is the scope of that power?

It is not enough to determine whether a particular entity has a given power. You also have to determine the boundaries of that power. Just as I have the power to eat a sambusa, I don’t necessarily have the power to eat your sambusas (at least if I don’t want to be slapped in the head, or if we are residing in Shabaab territory). It is important to retrace the analysis described above but to look at whether any other entity has been given the power you are analyzing? If another entity also has been given the power then where are the boundaries between the two entities? How is the power shared or allocated? It is similarly important when you think about the boundaries of the power to look in detail at what the legal instruments say exactly. Often, for instance, when you look at a piece of legislation it will have a list of criteria which must be met by an applicant for this or that. These criteria will be collected, analyzed, and approved often by an entity other than Parliament (usually a ministry). Do the lists provided by Parliament create the scope of the Ministry’s power in this example? Sometimes yes; sometimes no. It will depend on the words Parliament has chosen to adopt when it passed the legislation. The difference of one or two words can change this answer from a yes the Ministry can add more things to the list to a no the Ministry cannot add more things to the list. Details matter, friends. They matter very much.

The third question to ask when thinking about power: what is the prevailing practice?

What happens if we go through every legal instrument in the country and cannot find whether the entity has been given the power or not? Logically there are only two possible results: the entity has the power; the entity does not have the power. In my mind the predominant question here is what is the prevailing practice within the state? Until the legal instruments authoritatively change the status quo, the current status quo  is likely the best that can be achieved. Although this may not be optimal for a variety of reasons, I would posit that it is valid for lawyers to look at this. In a democracy governments are only able to govern because the people have consented to those individuals being in those seats. Not every person has consented to every seat, because that would be wholly inefficient way to run a society, but that is a topic for another day. The major point is that where people are unhappy with a situation (whether there is a legal instrument in place or not) they will seek to change the status quo. Where they are do not seek to change the status quo the best approximation of what is happening is that the people have consented to a particular state of affairs. So look at what is actually happening in the country as this can be extraordinarily helpful. Particularly in an country with a developing legal sector where all of the powers necessary to govern  may yet to pass through Parliament this is an importatnt criteria to analyze.

The status quo argument works slightly differently depending on the type of governing philosophy adopted within the country. In some countries, the lack of an affirmative grant of power by a valid legal instrument means that the governing entity does not have the power. Full Stop. The federal government in the US works under this philosophy. Where there is no affirmative grant of power by the US Constitution to the federal government to regulate a given area the federal government may not regulate that area. In other countries, the lack of an affirmative grant of power by a valid legal instrument does not hinder the governing entity’s ability to claim that it has the power. By contrast, the states in the US work under this philosophy. Each state has its own constitution in addition to the US Federal Constitution. Silence in state constitutions does not hinder a state government’s ability to regulate a particular area. 

The fourth, and last, question to ask when thinking about power: what are the competing interests that may restrict the entity’s power?

In parallel with the practice, you should also look at the particular norms which the legal instruments that are in place give to the populace. If ther is a strong right to free speech given by the constitution, but the government is seeking to impinge on those rights – even where the legal instruments and prevailing practice may side with the government you should balance those powers against the competing interests that the populace have in free speech which is given to them by the constitution.

In summary, this is the framework that we humbly posit when thinking about the power of a governing entity. Ask yourself these questions, in order, and you will likely be able to obtain a very decent picture as to the entity’s power. First, is the entity given the power in question by a valid legal instrument? Second, what is the scope of that power? Third, what is the prevailing practice? Fourth, what are the competing interests that may restrict the power?

How do you think about power? Have we left anything out of this framework? Please let us know what you think.

Read more: On Power: A Framework for Thinking About the Power of Governing Entities

Islamic Bank by Kojach @ Flickr

Somaliland has been standing on its own two feet for the last twenty years. And it is doing relatively well! On the whole, self-rule and self-reliance has brought on its wake congruous determination, and engendered respect for the current, as well as, to the previous government. This awakening, I think, is based on innate political savvy of the ordinary man on the street, which, in turn, emanates from seminal degree of respect for the rule of law, or at least, the realisation that only with the safeguarding of peaceful coexistence between various sub-clans, Somaliland may achieve its highly sought after goal of self-determination, despite of all exogenous obstacles. This, in turn, led to a commendable level of political stability of a nation, unrecognized internationally. A step forward, in this process towards self-determination, has been witnessed in the peaceful transition of governmental powers from the previous President, Mr. Dahir Riyale Kahin, to the current incumbent Mr. Ahmed M. Mahmamoud Silanyo.

It is as a result of such determination that, today, the Government and Parliamentarians of Somaliland are seeking to build a consensus amongst its populace to maintain estimable regard for the principles of the rule of law, and to indoctrinate the people of Somaliland to give due respect to the constitution of this nation, and in this pursuit are promulgating laws which are hoped to secure their revolution, long-term.

It is in this regard, now, that a Paliamentary committee is debating a law which will regulate the financial/banking contractual obligations and specifically debating whether such transactions should be based on Islamic principles (i.e. a banking based on Islamic principles of finance), or ‘conventional’ principles (i.e. banking principles in which banks will charge interest) or a mixture of the two.

It is my opinion, as a legal practitioner, that Somaliland will be well advised to promulgate banking laws based on Islamic principles of finance. The Somaliland people are inherently biased toward the tenets of Sharia, generally. They have a natural affinity towards Islamic law and jurisdiction, and this predisposition is reflected in their unwavering adherence to Islam, whence nearly 100% of the people are Sunni Muslims. It follows that the people of Somaliland are more likely to support a banking system based on Islamic principles than a ‘conventional banking’ system.

In addition, banking systems based on Islamic principles of finance are showing to be resilient against failure and have is proved easily integrated into global financial systems, although most globalized instruments are based predominately on ‘conventional’ principles.  And as American President Barak Obama put it when commenting on the risks of dealing with a conventional financial system in a recent speech (December 2011):

Now, for many years, credit cards and home equity loans [both based on Riba transactions] papered over this harsh reality. But in 2008, the house of cards collapsed. We all know the story by now: Mortgages sold to people who couldn’t afford them, or even sometimes understand them. Banks and investors allowed to keep packaging the risk and selling it off [sale of debt to a third party]. Huge bets — and huge bonuses — made with other people’s money on the line. Regulators who were supposed to warn us about the dangers of all this, but looked the other way or didn’t have the authority to look at all.

It was wrong. It combined the breathtaking greed of a few with irresponsibility all across the system. And it plunged our economy and the world into a crisis from which we’re still fighting to recover. It claimed the jobs and the homes and the basic security of millions of people — innocent, hardworking Americans who had met their responsibilities but were still left holding the bag.

The concerned committee should have the courage and foresight to instill a banking regime based on Islamic financial law. It is my opinion, that such a move will be most beneficial to the people of Somaliland who, I opine, are most likely to receive this system and to use it for their financial business. Over the coming weeks we will talk in more depth about the types of Islamic Financial instruments which can be utilized for the success of the financial services industry. But before we dive into the specifics, we must first talk about the differences between an Islamic and conventional financial system.

What is Prohibited?

The term usury, in western oriented terminology, defines a transaction in which the lending of money is made at an exorbitant rate of interest. Exorbitant interest refers to an financial transaction where the lender demands from the one to whom the money is lent an unusually high or large rate of interest for the lent money.

One therefore needs be clear about the circumstances under which the two terms (usury and interest) are employed interchangeably: therefore, although one may, for the purpose of writing this legal opinion use the term interest interchangeably with the term usury (and vice-versa), occasionally, the reader should be aware and forewarned that the two terms are not the same term when viewed through the lens of ‘conventional’ financial systems. When used in connection with ‘conventional’ financial systems, usury implies that the lending transaction is made at an illegal or exorbitant rate of interest far above fair market value for the loan or which has not been sanctioned by government policies. One should be cognizant of this fact: a western bank (or a conventional banking) will charge a specific set interest rate to its customers (this may vary subject to the type of transaction), but the rate will not be considered usury, because it is ‘legal’ as it is inline with the fair market value of interest typically chargeable for the type of loan at issue and it is within established legal criteria.

On the other hand, interest, of whatever magnitude is forbidden (haram) and not sanctioned by Sharia (Islamic Law). Indeed, any transaction in which the element of interest is present is considered to usurious.

Riba (ربا)

Islamic fiqh forbids literally any add-on to the original amount loaned. Such transactions become usurious if in exchange for the lent gold the lender receives more then he lent to the borrower. Any transaction, to avoid becoming usurious, has to be carried out in a way which is called “measure for measure.” In an Islamic finance system one cannot exchange X amount of gold (or any item of value) for “X plus Y” amount of gold (or any item of value). This type of transaction is haram because the add-on interest (the ‘plus Y amount’) received by the lender on top of the original lent amount is called Riba.

At a fundamental level, riba is money which someone earns but has not performed work for. There are two types of riba discussed by Islamic jurists: an increase in capital without any services provided or risk taken by the lender. This type of riba is prohibited by the Qur’an. The second type of riba is prohibited by the Sunnah and it entails exchanges of unequal quantities of any commodity (which are physical goods like gold or frankincense or sheep).

The definition of riba in classical Islamic jurisprudence was “surplus value without counterpart.” When currencies were first introduced in the Islamic world, repaying a debt with a higher number of units of this currency was not considered riba. At the time, jurists were concerned with the real value of money, which was determined by its weight rather than its numerical value or the amount of physical pieces handed from one to another. For example, it was acceptable for a loan of 1000 gold dinars to be paid back as 1050 dinars if there was an equal aggregate weight of gold. In other words, the value of the loan was calculated in terms of the total weight of the gold lent rather than the amount of coins lent because at the time there was no standardized exact weight of a dinar. Two classic examples of a riba transaction are below.

(i) Conventional Banking transactions where a depositor deposits certain amount of money in a bank and then awaits the accumulation an increase on the deposited amount – i.e. the usual method of dealing of ‘conventional’ banking, which is based on Riba interest; and

(ii) The sale by the bank of debt owed to it by the debtor to a third party. The Qur’an states:

يَا أَيُّهَا الَّذِينَ آمَنُواْ لاَ تَأْكُلُواْ الرِّبَا أَضْعَافًا مُّضَاعَفَةً وَاتَّقُواْ اللّهَ لَعَلَّكُمْ تُفْلِحُونَ
3:130 O you who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful.

وَأَحَلَّ اللّهُ الْبَيْعَ وَحَرَّمَ الرِّبَا
2:275 Allah has permitted trade and as forbidden interest.

There is no difference of opinion between any of the schools of thought on the subject matter of the prohibition of Riba in Islamic Sharia. Islamic Sharia considers Riba as a tool of oppression and a means to unjustly take others’ money by exploiting their needs and circumstances. Hence it forbids a Riba transaction altogether and promotes Charity as an alternative. The Prophet Mohammad (PUBH) said: “God has judged that there shall be no riba” [Last Sermon]. The crimes of dealing in Riba are so serious that God has declared war against those who deal in Riba. Prophet Mohammad (PBUH) has cursed anyone who deals with Riba, the one who takes it, the one who pays it and the one who records it, as their sins are considered equal under the Quran. Riba is considered to be a greater sin than that of eating pork or drinking alcohol. Prophet Mohammad (PBUH) had declared the practice of Riba worse than adultery: worse than “to a man committing adultery with his own mother”.

Gharar

Any financial transaction that lacks defined parameters of certainty are also forbidden by fiqh. Many ‘conventional’ financial instruments are are characterised by an element of Gharar (غرر or excessive uncertainty). The Prophet has forbidden Gharar transactions: لايجوز بيع الغرر. Transactions where the basis of the transaction is unclear or ambiguous are Gharar transactions. There many different transactions which maybe classified as Gharar; however, here are two examples, which are relevant to ‘conventional’ banking way of business:

• Contracting for a camel before the camel is born. This is Gharar because there is uncertainty that the mother will ever give birth, so paying money or anything of value to a dealer or the owner of the mother which is conditioned upon the birth of the baby is an uncertain transaction.
• When a customer delivers their car to a garage and tells the garage to fix what is broken. If the garage does not provide the customer with an exact quote of how much the maintenance will cost yet will not give the keys to the car back to the customer until the customer has fully settled their bill – this is also a Gharar transaction. The type of uncertainty here comes not from the presence of the thing being bought (as in the first example) but rather from the price point of the contract.

Gharar transactions are at times difficult to define, but whenever there is uncertainty to any of the essential elements of a conveyance (or any financial transaction) the issue of gharar should be addressed.

In the coming installment we will discuss in more detail some of the typical scenarios which may be addressed by Islamic Finance.

Read more: Islamic Finance: The Way Ahead for Somaliland? (Part 1: Introduction)

The business fair took place earlier this week and was a gigantic success. Our deepest respect and admiration for the organizers of this event. Watershed participated in the event as the only law firm in Somaliland to do so. We had a booth and numerous informational brochures. If you did not have a chance to attend you can get a small flavor of the event by watching the video below.

Read more: Here is the Advert About Watershed at the Hargeisa Business Fair