Monday, March 02, 2009

First U.S. state agency to offer Islamic finance, Gold ETC, harmonization in Shari'ah-compliance

Minnesota Housing, a state agency, becomes the first in the U.S. to offer Muslims home finance that is Shari'ah-compliant (using murabaha) through Devon Bank, a bank in Chicago, Illinois which offers Islamic home finance nationwide. The first borrowers closed on the purchase of their first home and there are reportedly up to 10 more clients in the pipeline. The offering of home finance products to Muslims structured to be similar to conventional mortgages, but done in a Shari'ah-compliant way were pushed by Hussein Samatar, the director of the African Development Center (ADC) in Minneapolis.

Dubai Multi-Commodity Centre (DMCC), a Dubai-based commodity exchange, launched the first Shari'ah-compliant Exchange Traded Commodity (ETC). The ETCs are fully backed by physical gold stored at HSBC and each certificate is equivalent to 1/10th of 1 troy ounce of gold. The ETC website provides information about the security and the NASDAQ Dubai website has additional information.

The President of the Islamic Bank of Thailand says that while Shari'ah standard harmonization is likely in the long-term, it is neither possible nor desirable in the near term. The bank's president uses the example that it uses bay al-inah (a similar transaction to murabaha but involving a repurchase of a good by the financial institution). The rationale for the use of the product, which is not viewed as Shari'ah-compliant in the GCC region, is that it is used in transactions to provide microfinance and "the poorer people, what kind of asset could they sell to us?" for use in a sale and lease-back (ijara) financing. I think that, although it will lead to some inefficiencies particularly on products that are attempting to bridge the Asia-GCC divide, in general, it is better to have products available that meet the needs of consumers in the short-run and over the longer-term, as the industry matures, there will be more harmonization of Shari'ah standards and the process of moving this direction will be driven by both consumer demand and the requirements of Shari'ah scholars to ensure that products are moving towards convergence near the (high) optimal level of Shari'ah-compliance and not the sub-optimal race to the bottom level.

Total banking assets in the Shari'ah-compliant banking system of Malaysia grew by 23% in 2008, a year that saw significant trouble in the global banking market. In addition, the risk rated capital of Islamic financial institutions was 15.2% and non-performing loans declined to 2.4%.

Despite having a small relative share of the financial system being Shari'ah-compliant institutions, the Indonesian Vice President believes that the laws passed to facilitate the industry's growth will spur it over the next few years. However, the Vice President who was being quoted also declared that "We all know that Muslim countries with Islamic economic systems during this current [crisis] situation are relatively unaffected by serious problems". Although I do believe that there are benefits from development of Islamic financial institutions, it is extremely myopic to declare that Islamic finance has and will always be immune to crisis. Dubai has one of the most developed Islamic financial systems, but the over-dependence on property as a physical asset (which now backs about 20% of all Islamic bank assets) made the Emirate extremely vulnerable to global economic and credit conditions.

I found this interview transcript quite interesting. It is with K.K. Ali, the CEO of a musharaka-based finance company (Alternative Investments and Credits Limited) in Kerala, India affiliated with Jamaat-e-Islami Hind, a Muslim organization in the country. It provides, I think, a more ground-level view of the difficulties associated with using musharaka finance.

Scotland believes its tradition of having faith-based and ethical finance makes it a logical step to try and attract Islamic finance. A Scottish organization is holding a conference on Islamic finance in Edinburgh at the beginning of April.

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