Friday, September 26, 2008

Is Islamic finance linked with conventional finance?

A few recent articles predict that one of the few winners from the credit crisis will be Islamic finance. This presumption is based on the assumption that the underlying restrictions from the Shari'ah force a more conservative approach to financial services that can restrain the speculative excess that has caused so much harm in the conventional financial system. To a degree, this is true and provide a methodology for a more conservative approach to finance that has greater appeal in a climate of significant deleveraging across the financial markets. However, there remains a link between conventional and Islamic finance that creates some limitations on how much Islamic finance can gain from the problem in the conventional financial industry. To wit, Islamic finance uses LIBOR and other interbank interest rates as a way to price Shari'ah-compliant products and therefore any disruption in the LIBOR market can spill over into the Islamic finance market by raising the cost of Shari'ah-compliant products which are benchmarked to LIBOR or another interest rate. It is unlikely that the Islamic financial market will ever be de-linked from conventional financial markets and it is uncertain whether this is a desirable goal.

The Moroccan government is planning on allowing Islamic banks to operate within the country according to the head of the country's central bank.

Despite a weak credit market globally, Indonesia is still planning the US dollar-denominated sovereign sukuk issue for later this year, followed in the first half of 2009 by a retail sukuk.

The number of Islamic financial institutions in Kuwait surpasses the number of conventional financial institutions, although Islamic financial institutions' total assets is still lower than conventional financial institutions' total assets.

Dubai Bank, an Islamic bank, will issue up to $5 billion in sukuk between now and 2013 starting with an issuance of about $500 million in the next few months to finance its growth. The structure of the bonds will be ijara and musharaka.

State-owned Islamic Bank of Thailand plans to issue sukuk to attract money from the GCC to fund infrastructure projects.

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