Saturday, April 05, 2008

Social responsibility and Islamic finance, subprime crisis impact on Islamic finance, retakaful

The Islamic equity fund industry is beginning to promote itself based on similarities with socially responsible investing. This is an overdue development because although many people, both Muslims and non-Muslims, understand how socially responsible investing works, many are unaware of how many similarities there are between socially responsible investing and Shari'ah-compliant investing. Both use negative screens to exclude companies operating in unethical industries and both exclude largely the same types of companies. Islamic screens exclude those producing alcohol, tobacco, weapons, pork, gambling and financial services. Socially responsible screens generally exclude alcohol, tobacco, weapons, meat processing , gambling, 'exploitative' financial services like payday lenders, and those companies with poor labor and environmental records. The similarities are so great because both are looking at a double bottom line: creating profits and avoiding social harm. Islamic finance has potential to grow in popularity among non-Muslims who are looking to invest ethically by the ethical underpinnings of Islamic finance, says the head of the Islamic Bank of Britain. Faith-based funds based on many different faiths are also attracting attention.

In the wake of the subprime debt crisis, more attention is paid to the benefits of Islamic finance that could have avoided the problems encountered by investors who weren't aware of what they were actually buying in the CDOs and CDSs they held. The Reuters article highlighted the additional transparency in Islamic financial products, as well as the protections provided by the prohibition of trading debt and speculation inherent in Islamic finance. One area in which protection could be provided is by the asset-backed nature of Islamic financial products. However, this should also provide some protection to many of the securitized products, the value of which have been written down to near zero, which were based on a very tangible asset, real estate.

The subprime crisis and the likely US recession have taken a toll on Islamic finance. Sukuk issuance in the first quarter was only $2.3 billion, less than one-half the level in the first quarter of 2007. However, the sukuk issuance in 2008 is expected to rebound and many of the sukuk have been delayed, not scrapped altogether. One forthcoming sukuk will be issued in Malaysia by the Islamic Development Bank. The controversy over the structure of ijara sukuk will continue when rules are debated at the International Islamic Finance Forum in Dubai.

The growth in the takaful industry is likely to produce growth in Islamic reinsurance, retakaful.

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