Saturday, March 08, 2008

London & Islamic Finance, Shari'ah screens can mitigate risk, Marketplace looks at Islamic finance

The credit crisis has damaged London's reputation as a financial center, but the growth in Islamic finance, particularly sukuk has provided an alternative source of strength as the U.K. is fast becoming the largest hub for Islamic finance in the West. The growth of Islamic finance, aided by flexible regulators at the Financial Services Authority (FSA) who look to create an even playing field for both conventional and Shari'ah-compliant finance, has given the U.K. a significant edge in attracting Islamic finance. Other western countries like the U.S., and other European countries have not been as proactive in attracting Islamic finance and are now being forced to run to catch up with the U.K.

Oops, says the U.K. Treasury when the rules on the stamp tax to accommodate Shari'ah-compliant home financing are used by commercial builders to circumvent taxes. The Treasury says it will fix the problem while still maintaining the equal treatment of conventional and Shari'ah-compliant home financing products.

A freelance piece in Gulfnews posits that the Shari'ah screens, particularly those around debt and interest, remove the riskiest companies from the universe of Shari'ah-compliant investments. This is certainly the case for avoiding the subprime crisis and most of the leveraged private equity problems. A year or two ago, it was very tempting for private equity firms to borrow large amounts of money to purchase companies because the economy was working fine and interest rates were low, so interest payments were low, even for very highly leveraged companies. However, as a Wall Street Journal article (quoted in Seeking Alpha) points out, private equity firms "are pushing companies further out on a limb in the process. In some cases, this gives their newly private companies little breathing room to execute growth plans and stay afloat were economic and market conditions to turn sour." The last six months have seen "economic and market conditions turn sour" and now these highly leveraged firms are running into difficulty. If the investments adhered to the debt and interest limits required for them to be Shari'ah-compliant, some returns may have been sacrificed at the height of the market, but the downturn would not be nearly as harsh.

Sheikh Taqi Usmani's criticisms that 85 percent of GCC-based sukuk created a stir in the Islamic finance industry and the Accounting and Auditing Organization for Islamic financial institutions (AAOIFI) is receiving criticism for its handling of Sheikh Usmani's comments.

Sheikh Ahmed bin Mohammed al-Khalifa, Bahrain's minister of finance has suggested that the Islamic financial industry in the GCC is composed of too many smaller firms and needs larger Islamic banking firms to undertake 'megaprojects'.

The American Public Media show, Marketplace, has a few recent stories on Islamic finance, including an interview with Mahmoud El-Gamal and segments on Shari'ah compliant mortgages, student loans, mutual funds and finally a segment in which American Muslims are asked about what they think about Islamic finance.

Although this story is not specifically about Islamic finance, I thought it should be included because, in the current environment of misunderstandings and near-hysteria about the term 'shari'ah', it is heartening to see a magazine like US News & World Report sit down with an Egyptian mufti to learn about his efforts to educate people about Shari'ah.

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