Hong Kong, U.K., Dubai all want to become the leaders in Islamic finance

Sheikh Yusuf DeLorenzo, the prominent American Shari'ah scholar recently wrote a paper criticizing the recent approval of financial products which have been approved by Shari'ah boards and pay returns that are linked to non-Shari'ah-compliant products. The editors at Dinar Standard, sat down with Sheikh DeLorenzo who provided further comments about the products, as well as presenting his hope that the products will be rejected in the market by investors. The decision, he argues, follow from a focus on a literalistic interpretation and lose focus of the maqasid (purpose, intent) of the Shari'ah. Sheikh DeLorenzo's paper, "The Total Return Swap and the 'Shari'ah Conversion Technology' Stratagem" is available in pdf form.

The leader of Hong Kong Donald Tsang is on a tour of GCC countries, in part to try to attract funds to Hong Kong as it begins to develop a Shari'ah-compliant finance industry.

Standard and Poor's has launched three new Shari'ah-compliant equity indices, large-cap, small cap and U.K.

The U.K. now has an option for money transfer that is Shari'ah-compliant through Lloyd's TSB.

The DIFC wants to be the center of Islamic finance worldwide, while London is making its own try at that position, being the leading Western country in the industry. The International Financial Services London, an organization promoting London's financial services industry worldwide, issued an 8 page report (pdf)on making London a center for Islamic finance.

Interesting notes from the IFSL report:

• "the customer base [for Islamic finance] in Western countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance"
• Top 5 sectors where sukuk are used: infrastructure (39%), finance (18%), energy (16%), real estate (11%), manufacturing (9%)
• U.S. is fourth in number of Shari'ah-compliant equity funds, trailing Saudi Arabia, Malaysia and the U.K.
• The U.S. is second in the number of Islamic banks among Western countries with 20, trailing the U.K. with 23

HSBC Amanah argues that Shari'ah-compliant insurance (takaful) needs to become more widely available.

American Public Media's show "Marketplace"

Yesterday, I was contacted by a journalist with American Public Media's show "Marketplace", which is the daily business show playing on National Public Radio. They are looking for Muslim families' input with personal and/or professional experience in Islamic finance (either as a client or practitioner) to understand the way Islamic finance is viewed and used in the United States. Anyone interested in participating in their brief survey (which may lead to a follow up conversation for their feature), should go to their website:

http://www.publicradio.org/public_insight_network/forms/cij/form_display.php?form_code=07fd8ded3c65

Note: Any information submitted through this query is seen only by reporters and editors. As such, it is treated confidentially and used ONLY for editorial purposes.

Sukuk, ETFs, Shari'ah scholars, Islamic finance interfaith efforts

Six years after Malaysia became the first country to issue a sovereign sukuk, the Malaysian news agency Bernama describes how much the industry has developed since then. One of the primary indications of this development is the rush of non-Muslim financial centers like London and Hong Kong. Arab News also has a summary of the growth in Islamic finance, specifically the rapidly growing demand for sukuk.

The Indonesian Sharia Banks Association (Asbisindo) says there needs to be a more concerted effort to promote Islamic banking in the country. Despite being home to the largest Muslim population, neighboring Malaysia has a much more well developed Islamic finance sector. The Islamic Corporation for the Development of the Private Sector, an organization affiliated with the Islamic Development Bank has plans to invest in the Islamic financial sector in Indonesia.

Qatar plans to develop a secondary market for sukuk and Shari'ah-compliant ETFs on the Doha market. Malaysia recently launched an Islamic ETF.

The shortage of Shari'ah scholars is once again in the spotlight, this time in an article in Forbes magazine.

Devon Bank in Chicago, Illinois recently received an award for a Shari'ah-compliant financing of a purchase of property by an Islamic Foundation from a Lutheran church, which played a significant role in the spirit of inter-faith cooperation.

Education on Islamic finance in the U.K.

The Independent (U.K.) discusses the growth and demand for education in Islamic finance in the U.K., currently offered at the Cass Business School, Lancaster Business School, Bangor Business School, Durham University and the Chartered Institute of Management Accountants (CIMA).

JBIC sukuk

The Japan Bank for International Cooperation, a government organization in Japan, will make Japan the first G-7 country to issue a government sukuk, with the announcement that it will launch a $300 - $500 million sukuk with the technical assistance from Malaysia. In addition to the JBIC sukuk, Japanese financial companies are entering the industry as well.

The IFSB and the Hong Kong Monetary Authority (HKMA) jointly held a conference on Islamic finance and, in particular, ways for Hong Kong to begin catching up with other Asian countries, particularly Malaysia, in developing an Islamic finance industry. The keynote speaker was Dr. Zeti Akhtar Aziz, the central bank governor of Bank Negara Malaysia.

Faith-based investing grows

The Financial Times, in a front page article, report that the highest-performing religiously-based fund was the Christian Timothy Fund, which reported growth of 17 per cent during the previous year and has averaged 18.6 per cent per year for the previous five years. Shari'ah-compliant fund manager Amana Mutual Funds Trust saw its Income fund come in second with growth of 14.1 per cent for the previous year.

The blog at Christianity Today remarks on recent news that AAOIFI Shari'ah board chairman Sheikh Taqi Usmani believes up to 85 percent of ijara sukuk, those with repurchase agreements, may be Shari'ah-non-compliant. The conclusion of the post by Rob Moll is that "Christians should pay attention to this debate. While the church has long since become comfortable with loaning money with interest, it can be helpful to see another religious group wrestle with modern capitalism. After all, why was it that for centuries Christians forbade usury and then heavily regulated it? Hmm, maybe the mess created by the sub-prime mortgage lenders has something to do with it."

Ijara sukuk compliance, WOCCU paper

The Shari'ah board of AAOIFI will meet January 15th to review the Shari'ah-compliance of ijara sukuk following the announcement by Sheikh Taqi Usmani, the board's Chairman, that the repurchase agreements contained in up to 85 percent of all ijara sukuk issued in the GCC region. Some criticize the way in which the announcement was made first in the media before the Shari'ah board met to discuss the issue.

The World Council of Credit Unions (WOCCU) released a paper yesterday describing the use of Shari'ah-compliant products by 2 credit unions it has established in Afghanistan. The paper highlights the advantages presented by the credit union model. One advantage that is easily grasped is the role of depositors as owners. This allows the credit union to replace deposit account interest with profits determined by the profitability of the credit union. The full report in pdf form is available on the WOCCU website under Research Monographs.

Recently launched Dubai-based Noor Islamic Bank may have plans for expansion through acquisition into the U.K. market. Of Western countries, the U.K. has one of the better developed markets for Islamic finance, much of this due to an accommodating regulatory environment which takes a 'no obstacles, no special favors' approach to Islamic finance.

Despite having a Muslim population that is less than 1/12th of the total population, Sri Lanka has adopted significant regulatory flexibility to allow Islamic finance and a company which offers ijara products in addition to other leasing products, People's Leasing Company, will issue a sukuk to raise funds.

The UAE is seeing the growth of Johara, all women branches of Dubai Islamic Bank, headed by Rana Al Hindawi. Mrs. Al Hindawi describes how "for many years it was difficult getting people to accept that we needed a separate banking service. Women have different needs when it comes to money and finance and we want to reach out to all types of women, including professionals and housewives". The branches will focus on allowing "women to be able to handle their own finances and for them to learn how to get the most out of their earnings".

Why Islamic Banking?

The Motley Fool (UK) has a good article on why non-Muslims in the U.K. might prefer to switch from conventional banks to Islamic banks.

Missed articles: renewable energy, foreclosures and Islamic bank capital

During the past month, I have been quite busy finishing the paper that Mohammad Rahman, Dr. Ehsan Feroz and I have been invited to submit to the Harvard Islamic Finance Project's 8th Forum on Islamic Finance, being held in mid-April 2008 in Cambridge, MA. Our paper, "The Development and Implementation of Shari’ah-based Microfinance using the Grameen Group Financing Methodology," deals with the development of a murabaha- and mudaraba-based microfinance project we plan on testing within the next month in Sri Lanka. Being focused entirely on this, a few interesting articles have come out that I missed that I think are worthwhile enough to be mentioned, even a month later.

The Jeddah-based Islamic Development Bank issued a press release announcing the formation of a Clean Energy Fund. The fund part of the IsDB's efforts to provide funding to energy-related projects (commitments for which now total about $2.7 billion). This effort ties into a post I wrote about 2 months ago describing one of the first sukuk issued to fund a renewable energy project by Doha Bank. This is an issue where I think the social imperatives from Islamic finance and the sukuk financing mechanism can be linked together to fund often-capital intensive renewable energy projects. I will be writing an article in the next couple of months for the Business Islamica magazine about this subject.

The Wall Street Journal had two articles that I missed last month about Islamic finance. In the first, the Journal describes a troubled real estate investment in Connecticut, the financing for which was structured to be Shari'ah-compliant. After the project ran into trouble, the lower income renters who were supposed to be forced out to make way for conversion to high-cost condominiums decided they didn't like the idea, the investors were confronted with the difficulty of how to deal with a foreclosure when the financing is done in a Shari'ah-compliant manner. There hasn't been a resolution, but this issue presents one of the benefits of doing Islamic finance in a country with a highly developed and flexible legal system like the U.S. The resolution will force a re-think of the way the deals are structured in the future and prevent similar such dilemmas from occurring in the future.

The second Wall Street Journal article looks at the sukuk market, which was very rapidly growing in 2007, and projects that subordinated debt will play a large role in financing, particularly by Islamic banks looking for cheaper forms of financing to meet regulators' capital requirements.

Weekly Update, January 5th

A U.K. banking industry publication, Banking TImes, reports that the Islamic banking industry will grow by 20 percent in 2008, making it one of the fastest growing areas of finance. The growth estimate is from the Islamic Financial Standards Board (IFSB), the Kuala Lumpur-based standards-setting organization, which will hold its fifth annual summit in Amman, Jordan on May 13-14, 2008. The summit will focus on "Financial Globalisation and Islamic Financial Services".

Qatari-based Doha Bank is expanding into Yemen by acquiring a 'strategic' stake in Yemen's Credit Cooperative & Agricultural Bank.

Islamic investment and finance is developing in India, albeit slowly.

The International Bar Association (IBA) will hold a conference on "Islamic finance in the Middle East" on January 13, 2008 at the Dubai International Financial Centre (DIFC).

Islamic finance in Sri Lanka, sukuk and sukuk trading

Riyazi Farook, a Master’s student at Middlesex University London, writes in the Sri Lanka Sunday Times (based on an article originally published in Islamic Finance News about the Islamic banking industry in the country. Although only 7 percent of the population is Muslim, the country's banking laws specifically deal with Islamic banks and a number operate in the country.

Kuwait Finance House, an Islamic finance provider in Kuwait and Malaysia, announced that it will create a subsidiary to trade sukuk. The limited liquidity of sukuk may provide one of the greatest challenges to the growth of sukuk. Only some sukuk can be traded at values different from par.

Sukuk issuance in 2007 totaled $30.8 billion, according to Bloomberg.