Saturday, May 10, 2008

Indonesia, Africa have potential for growth in Islamic finance, IIFM standardized commodity murabaha contract near completion

A Bloomberg columnist argues in an editorial piece that the slow development of Islamic finance in Indonesia compared with Malaysia is in part due to the change in control from the British to the Dutch in 1816 which led the country to be governed under civil rather than common law. The impediment caused by civil law is that Special Purpose Vehicles (SPVs), a mainstay of the Islamic finance industry, particularly for sukuk are not recognized under the law. Qatar, also a country governed under civil law, has gotten around this difficulty by establishing the common law Qatar Financial Center (QFC) whereas Indonesia is working towards changing the civil laws to allow the development of Islamic finance, a long process. Three banks in Indonesia are now opening Shari'ah-compliant units.

The Economist discusses the potential for growth in Islamic finance in Africa, particularly in the northern half of the continent where most Muslims live. However, the lack of development of the financial sector in general have hampered the growth of Islamic finance. However, the article does point to the continent's need for infrastructure projects for which it will need to attract foreign capital to finance and Islamic finance could be a vehicle to finance these projects using money from the Middle East where the coffers are filling rapidly as the price of oil rises over $125 per barrel.

The Bahrain-based International Islamic Finance Market (IIFM), a standard-setting body, announced it was in the final stages of Shari'ah review on a standardized contract for Islamic treasury management using commodity murabaha. The February 2008 issue of the Institute of Halal Investing (available as a pdf) discusses some of the controversy surrounding commodity murabaha which involves trading commodities to provide cash in exchange for a liability of cost plus markup.

Malaysia's Security Commission recently released guidelines on Islamic venture capital.

Sukuk could grow up to 20 percent a year according to bankers despite the credit crunch.

Citigroup announced a new head of their Islamic finance division, Citi Islamic Investment Bank, which has operated since 1986 (Citigroup has been involved in Islamic finance since 1981).

Hong Kong continues to work on developing its Islamic financial sector, but PriceWaterhouseCoopers recommends that it follow the model of Malaysia rather than the U.K.

Fitch says that the tightening of Shari'ah standards could hamper the development of asset backed sukuk.

The head of Emirates Islamic Bank answers questions on the regulation of Islamic finance and the difference between Islamic financial institutions aiming to provide Shari'ah-compliant products versus those he describes as "those who have found Islamic financial services a profitable business and are just trying to benefit from this trend for commercial reasons".

US News & World Report published a list of mutual funds in which stimulus checks could be invested because they have low minimum investments which includes the Amana Funds which invest in a Shari'ah-compliant way. FTSE predicts that Islamic equity funds and ETFs will see significant growth over the next few years.

1 comment:

Haris said...

Dear Mr. Goud,

I hope you are doing well. I have been following your blog posts for quite some time and have benefited from them. I like the way you summarize all the latest Islamic Finance information in one post.

I have attempted to set up an Islamic Finance blog of my own, do you visit when you have the time: