Monday, December 18, 2006

Grameen Bank, non-Muslims using Islamic banking, Ethical finance, Malaysian sukuk, Islamic MBA

Grameen Bank

"Nobel prizewinner using micro-credit for macro benefit", International Herald Tribune, December 18, 2006

In an article on Dr. Muhammad Yunus, founder of the Grameen Bank and recently a Nobel Peace Prize winner, they quote him discussing the tension he feels with those who favor strict adherence to Shari'ah Law:
Not everything is rosy in Bangladesh, either, as the tension between secular and Islamic law grows. A question on sharia-compliant finance, which does not permit charging interest, provokes a rare grimace.

“In Islam, interest is banned because it is a tool of exploitation. In our case that doesn’t happen, because this bank is owned by the borrowers. So we can at least argue. But they always say ‘we would be very happy if you would run the bank on Islamic principles’.”

I think Dr. Yunus' complaint is one area where much of the current Islamic financial industry loses its relevance and special appeal by focusing on form rather than substance. The Grameen Bank has been instrumental in poverty reduction and by reducing the need for exploitative conventional finance and the poor's reliance on usurious moneylenders. Incorporating lenders as co-owners gives each borrower an equity stake in the lending portfolio and, I belive, should assuage concerns about the use of interest in the Grameen model of micro-credit.

Ethical & Islamic Finance

"Non-Muslims snap up Islamic accounts", BBC News, December 18, 2006

Islamic current accounts in England are becoming more popular with non-Muslims as concern about what projects deposits are used to finance. The article quotes Emma Dellaway, "I don't have much money [...] but what I do have should not be used unethically. I hate to think of arms going to some African country funded, however indirectly, from my account." The appeal of Islamic finance in this regard is the prohibition on investing in haram projects (e.g. alcohol, pork, tobacco & weapons). However, the current structure of Islamic finance lowers this appeal because there is a cost to holding the account. While Ms. Dellaway's friends "can see how closely ethical finance and the Islamic financial models fit together," they do not hold Islamic deposit accounts, perhaps because of the additional cost. The closer Islamic finance borrows tools from the Socially Responsible Investing (SRI) industry, the lower the costs. When the industry is based upon Shari'ah-based ethical finance more than relying on mimicking the conventional financial industry, the costs will be lower due to both reducing the fees paid to lawyers and consultants and higher demand from the more socially-concerned so-called "Generation We".

Malaysian debt market

"2006 landmark year for Malaysian bond market", Business Times (Malaysia), December 18, 2006

"Aseambankers Malaysia Bhd, one of the top bond advisers in the country, projects some RM40 billion worth of bonds to be sold next year, of which 70 per cent is expected to be Islamic-based."

Islamic MBA

"Oil wealth paves way for Islamic MBA", Financial Times via Zawya, December 18, 2006

The Financial Times article today on the prospects of an Islamic MBA program presents good ideas but neglects a couple of important reasons and features of any Islamic MBA program. First, most professionals in the Islamic finance industry and the regulatory bodies which oversee them, particularly in the Middle East and Asia, could benefit greatly from specialized training in business with a focus on the Islamic financial industry. However, the lack of mention of socially- and ethically-responsible business practices highlights a continuing hole where the Islamic finance industry could broaden its appeal and lower costs by using already well-established practices.

Murabaha is most used financing method

"Murabaha Remains Most-Favored Source of Islamic Financing", MENAfn, December 18, 2006

In an article focused on the $300 million Murabaha commodity facility, a couple of points are noteworthy:
• "Islamic banks in particular have a huge exposure to investment and financing in the real estate market"
• "Bankers agree that the internationally-accepted Murabaha will remain a most-favored source of financing for banks, corporates and even utilities, in tandem with the emerging Sukuk (Islamic bond), which has gained increasing prominence over the last year or so."
This reliance on real estate- and commodity-based products could become the biggest liability for the Islamic financial industry. The former is in its greatest boom period in decades and the latter is highly volatile. While the markets are going well for firms that use real estate- and commodity-based products, a cyclical decline could be magnified in the real estate and commodity markets. This would be a huge (and hugely unnecessary) blow to a potentially large industry. It is unnecessary because using sukuk and murabaha transactions are only necessary to fill the form of Shari'ah-compliance and are a least-common-denominator product because they most resemble conventional banking products (pre-arranged fixed markup vs. interest) and are widely seen as Shari'ah-compliant. A more sustainable model would be to focus on the socially- and ethically-responsible financial industry.

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