Islamic finance and risk management, an extra layer of scrutiny

Roger Smee, a former soccer player in the U.K. who is now a businessman involved with Islamic finance,is quoted describing the benefits from Islamic finance in an article in the Times:

Instead of looking down on what we are quick to reject as cumbersome legal restrictions, we should take a page out of the Middle East’s book and use the principles of Sharia to begin building real and sustainable economies.”

This alludes to the primary benefit from Islamic finance versus conventional finance: the restrictions created by the need for Shari'ah-compliance serve as an extra layer of risk management. It is not necessarily the fact that it is a faith-based method of finance, but the specific rules that are followed that provide Islamic finance with its relative resiliency in times of financial turmoil. Sure, the benefit in some cases is offset by the lack of access to inter-bank lending as I have stated before as well as concentration in certain sectors, but the real key is in how the rules are applied.

In addition to conventional risk management and credit analysis to determine suitability, Islamic banks are forced to focus to a greater extent on the actual structure of the transaction and has a quasi-independent board (the Shari'ah board) who do this. They look at the structure to decide whether it is excessively speculative or onerous on each party in order to come to a decision on the product's Shari'ah-compliance. Although in the retail Islamic banking business, this is not done in any case, there are internal Shari'ah auditors who review the execution of the transactions to ensure they follow the strictures set down by the scholars.

Other News

• Another Minneapolis-St. Paul news site has a story on the public-private partnership that is offering Islamic home finance to local Muslims using murabaha.
  
• Mukhtar Hussain, CEO of HSBC Amanah, was interviewed by the Jakarta Globe on Islamic finance globally and in Indonesia.
  
• First Global began offering Islamic microfinance in the Colombo, Sri Lanka area using murabaha
  
• Indonesia plans to raise $580 million in its first global sukuk later this year.
  
• Malaysia is launching the Commodity Murabaha House, an inter-bank market based on trading in palm oil that is relatively controversial
  
• Two Malaysian economists wrote a paper on the growth and development of Islamic finance around the world, including in the U.S. and U.K.