Tuesday, August 07, 2007

Islamic finance expands to Japan, sukuk and 'innovation'

Farhan Bokhari, a correspondent of the Financial Times, writes on FT.com about the many challenges Islamic finance will face entering Japan. Between conservative markets and a large language barrier between Japanese and Arabic, there has only been a small entry made by Japanese firms like Daiwa into Islamic finance.

There have been $24.5 billion of sukuk issued so far this year, 75% more than last year.

Two buzzwords in the Islamic financial conference industry are 'innovation' and 'standardization'. But really what 'innovations' are created and why is 'standardization' beneficial. These topics are rarely addressed, in large part because many of the 'innovations' may not be in the long-term interest of the states goal of moving from Shari'ah-compliant products to Shari'ah-based products. The historical track of Islamic finance has been towards replication of conventional finance with different contractual forms which avoid interest. This path is understandable when trying to create a new basis for financial transactions, but may not lead to the desired end result. In a similar way, standardization may hamper development of new products and more efficient, more Shari'ah-based methods by forcing a cookie-cutter framework which reinforces the present state of the Islamic finance industry. Instead of 'innovation' and 'standardization', the industry would do better to promote 'transparency' and 'differentiation' by creating new products, serving new groups of clients and developing a substantive difference between itself and the conventional financial industry.

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