Wednesday, May 23, 2007

Financial Times section on Islamic finance


"Backwater sector moves into global mainstream"
"'Most of it is a question of structuring,' says [Cyrus] Ardalan [head of emerging markets at Barclays Capital]. 'And now people are taking a more flexible approach [as to what is Sharia-compliant].' Yet it is precisely this flexibility that creates frustration among devotees to the industry and feeds scepticism about the sector. The question that is raised is whether mirroring existing products and returns through financial engineering is a sound basis on which the industry should develop."

Innovation:"Frenzied race to develop new ideas"
"A few devout Muslims argue that these innovations [derivatives and structured finance products] increasingly contravene the spirit of Islamic finance - even if they might match its letter. Concepts such as derivatives and hedge funds, for example, are considered particularly controversial, given the Koran's ban on gharar (speculation)."

Opinion: Mahmoud El-Gamal: "Incoherent pietism and Sharia arbitrage"
"If all interest is forbidden, then, in principle, the solution is to build all financial intermediation on equity-based profit sharing. The practical solution - which I call "Sharia arbitrage" - is to use legal devices to restructure interest-bearing debt, collecting interest in the form of rent or price mark-up. Designing such instruments and their certification as "interest free" constitutes the bulk of Islamic finance."
• On his blog, Dr. El-Gamal adds a couple of points that were not included in the final article.

Products: "No interest - but big deposits of ingenuity"
"Commodity murabaha replicate short-term money market deposits, usually taken out for fixed terms between one week and one year, and medium-term syndicated loans. A commodity murabaha is a contract between a bank and its client for the sale of goods at a price plus an agreed profit margin for the bank. As the bank is making profits rather than earning interest, this is considered Sharia-compliant. Profits are allowed under Islamic law. The instrument is called a commodity murabaha because the profits are made on the buying and selling of a commodity, usually metal, such as copper, aluminium or lead."

Insurance: "Putting a premium on a foothold in the market"
"Despite the expected growth of takaful insurance and re-takaful, they are likely to remain facets of the overall insurance market, particularly in areas outside the Muslim world, where consumers face a barrage of insurance products competing largely on price."

Supervision & regulation: "Experts see need for a common approach"
"Although everyone agrees on the need for harmony in accounting and on the merits of more uniform Shariah standards, there is a debate in the industry over whether Islamic institutions should have separate licensing regimes, as is the case in Kuwait, for example. Some analysts argue that the sector requires clear and specific regulations while others say this would shield Islamic institutions from competition and promote complacency."

Investment banks: "Wide array of new names join the party"
"The pattern [of Western banks entering the Islamic financial industry] also reflects a distinctive point about the way that Islamic finance operates: namely, that the religious "brand" of any product typically rests not in the reputation of the institution that has produced it - but with the religious scholars who have approved it. Thus, western banks have entered this field by engaging the service of esteemed religious scholars who can rule on the Islamic merits of products."

Profile: "HSBC: Islamic business is part of the global fabric"
"HSBC Amanah believes that there are now plenty more frontiers to explore. It is trying to widen the pool of investors and issuers engaged in Islamic finance. It is also looking to apply a host of techniques developed in traditional western financial markets to deal with factors such as inflation risk or currency risk in a way complies with Islam."

Profile: "Saudi Arabia: Demand leads to dominance"
"Saudi Arabia may be the most conservative of Muslim states, but its banking sector has been dominated by conventional banks, with, until recently, only one fully Islamic bank, al-Rajhi Bank."

Profile: "Malaysia: Experience and regulation bring strength in depth"
"[Malaysia] faces a difficult challenge convincing overseas Muslims, especially those in the Middle East, of the credibility of its code of Islamic Sharia law. Unlike the Middle East, which has a more diverse set of interpretations through the work of different scholars, Malaysia has tried to follow a more uniform code."

Historical contextx: "Principles from the past guide usage in modern world"
"Since the dawn of Islam, devout Muslims seeking to follow religious tenets more than 1400 years old have relied on verses from the Koran, the Islamic holy book, to press their case in favour of following only those financial principles which are permitted by religion."

Profile: "Bahrain: New battleground to reassert credentials"
"A broader attempt to cement Bahrain's role in Islamic finance, however, comes from the multilateral institutions hosted by the islands. These include the Accounting and Auditing Organisation for Islamic Financial Institutions, the Liquidity Management Centre which contributes to the sukuk market, and the Islamic International Rating Agency."

London: "Capital takes a leading role"
"David Testa, an executive director at West LB, believes London will remain unchallenged as the western hub for Islamic finance. 'London has established itself as a leading centre and the government is determined to keep it that way, as the sukuk summit clearly shows,' he says."

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