Saturday, February 09, 2008

Islamic finance in the West, new products may attract criticism within the industry

An editorial in Middle East Times by an Indonesian journalist, Wahyuana, describes the growth of Islamic finance in Indonesia, which has been rather subdued and less visible than growth elsewhere in the world like the GCC, Malaysia and the U.K. In something that is not as frequently mentioned is that the prohibition of interest-based finance is contained not just in the Qur'an (2:275, 278-279) but also the New Testament (Luke 6:34-35 - "And if ye lend to them of whom ye hope to receive, what thank have ye? for sinners also lend to sinners, to receive as much again. But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil.") and the Torah (Exodus 22:25 - "If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.")

The Investment Dar, the Kuwaiti investment firm, is considering an investment in European or American telecom companies, which could include a 3 percent stake in SprintNextel. The Investment Dar also plans on opening an Islamic bank in the U.K. The familiarity of financial regulators with Islamic banking in the U.K. have made the country a gateway into the European market. Countries like France and Germany have minimal Islamic financial services available and Muslim populations between 5 and 10 percent of the population. European Finance House, the U.K. subsidiary of the Qatar Islamic Bank, received FSA approval to begin banking in the U.K. Initially, the bank will focus on commercial and investment banking, but has authorization to operate personal banking as well.

In the wake of comments about Shari'ah law made by the Archbishop of Canterbury, a paper in North East England describes how Islamic finance has become widely accepted and available in the country, even outside of London. The BBC has a general Q&A about Shari'ah law. There is also a thoughtful editorial in the Guardian by Asim Siddiqui.

Reuters describes the challenges facing Islamic finance in the United States, including differing state banking regulations, concentrations of Muslims in a few areas of the country and the lack of national financial institutions offering Islamic financial products, issues I have addressed in two articles I have written for Islamic Business & Finance magazine.

Sukuk growth in the GCC (largely issued in US dollars) has been led by the UAE but the majority are still coming from Malaysia, denominated in Ringgit. Credit Suisse says that the Islamic financial sector has been largely insulated from the credit crisis, despite several sukuk being delayed in the last few quarters of 2007. One of the challenges to Islamic financial growth is Islamic banks liquidity management, something I will discuss in the forthcoming issue of the Institute of Halal Investing newsletter. To be added to the mailing list, please email me at

The International Islamic Financial Market (IIFM) is planning to initiate greater research about sukuk, the fastest growing area of Islamic finance. The organization is also working with the International Swaps & Derivatives Association on developing a framework for Shari'ah-compliant derivatives. A key challenge is how to ensure that any derivatives are used for hedging purposes and not speculation. In addition, Islamic financial institutions are using real estate investments as an alternative to long-term bonds since long-maturity sukuk are not yet common. Deutsche Bank sees future growth in Islamic hedge funds, still seen as controversial by many people within the Islamic finance industry.

Morgan Stanley plans to be the first multi-national corporation to issue a sukuk. Given that most of the company's business is in conventional finance, there could be question about whether financing a conventional financial institution with an Islamic bond, whether or not the deal is structured to be Shari'ah compliant.

The Kuwait central bank governor Sheikh Salem Abdul Aziz Al-Sabah says Islamic banks need greater liquidity management tools. The Islamic Development Bank Solidarity Fund to fight poverty is continuing to receive contributions towards the $10 billion target. The fund has raised $1.6 billion so far.

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