Tuesday, November 06, 2007

The Central Bank of Bahrain executive director Abdul Rahman Al Baker discussed the possibility that the Arboon contract could be used to mimic a short sale for use by hedge fund managers. He also suggested the possibility of using a Salam sale in a similar way. The Arboon contract is used by Shari'ah Capital's hedge fund platform. The use of Shari'ah-compliant short selling is still controversial as many people have not been provided with more of a description of the Shari'ah principles which allow short-selling through the arboon contract. Shari'ah Capital will release a Q&A on their technique shortly, according to Chief Shari'ah Officer Sheikh Yusuf DeLorenzo in response to a question at the recent Islamic Finance in North America conference in New York.

The Times newspaper discusses the slowdown of sukuk issuance during the subprime crisis. The article contains two glaring errors. First, it describes Islamic finance as being based on the idea that there is no time value of money. There is still the recognition of a time value of money in Islamic economics, it is just that a fixed compensation for the time value of money loaned (typically included in an interest rate along with compensation for the opportunity cost of the money) is not present. For example, a sale on the spot market of a widget could occur at price $x (the cost of the good). If the buyer wanted to defer payment for 1 month, the seller could require that the buyer pay in 1 month at price x*(1+m), where m is a markup (the profit rate). This profit rate would reflect the time value of money, but would be profit on a sale, not interest on a monetary loan. Second, the article disputes that sukuk are no different from conventional bonds, and instead draw Western interest only because "there is an element of fashion that is flirting with novelty". As the working paper released by the IMF describes, sukuk do behave differently than sukuk.

A Swedish bank is operating an 'interest-free' loan program.

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