Economist articles on two primary challenges in Islamic finance; Pakistan sukuk; Islamic banking in India - the Rajan Report

The Economist turns its eye towards Islamic finance in an article that, in addition to describing Islamic finance, highlights two significant dilemmnas in Islamic finance:

1) How to balance innovation versus authenticity (the subject of the Harvard Forum on Islamic Finance this past April at which I presented a paper on microfinance) and
2) The liquidity problem with Islamic banks created by reliance on short-term depositor funding (liability side of the balance sheet) while holding long-term assets.

. The Economist describes them each:

1) "The AAOIFI ruling on sukuk earlier this year neatly captured the contradictory pressures on the industry. On the one hand, bankers are worried that the narrow enforcement of sharia standards is liable to stifle growth; on the other some observers fear that Islamic finance is becoming so keen to drum up business that its products, with all their ingenuity, are designed to evade strict sharia standards."
2) "Islamic banks depend on short-term deposit funding, which, as Western banks know all too well, can disappear very rapidly. “Lots of assets are generally of longer term than most deposits,” says Khairul Nizam of AAOIFI. “Banks have to manage this funding gap carefully.” If there were a liquidity freeze like the one that struck Western banks a year ago, insiders say that the damage among Islamic banks would be greater. "

The Economist also provides a brief overview of the development of Islamic finance.

Pakistan plans to launch its first sukuk in the first week of Ramadan (August 31-September 6), according to Central Bank governor Dr Shamshad Akhtar. Given that it is September 5th today, the timeline for the ijara sukuk issue appears very tight and likely will be the announcement of a timeline and not include much substantive details relating to the eventual issue.

A committee studying the financial industry in India headed by former IMF chief economist Raghuran Rajan is expected to advocate the development of Islamic banking to reduce the marginalization of Muslims in the country's financial industry. It is also expected to promote the development of equity-based microfinance products for Muslim clients who want to avoid interest-based microfinance. One member of the panel, the chairman of microfinance institution Basix, Vijay Mahajan said "We have recommended that micro-equity financing as a product should be included in mainstream banking. All banks and microfinance institutions should offer these micro-equity financing products"