Islamic finance liquidity, hedge funds and virtual banking

• Many Islamic finance practitioners believe that hedge funds are 'unsuitable' for Islamic finance because the costs would make them uncompetitive compared with conventional hedge funds. There is also significant disagreement about the Shari'ah-compliance of many products used in hedge funds such as leverage, swaps and derivatives. The head of Malaysia's Securities Commission, the country's capital markets regulator, believes that hedge funds could help add to market liquidity and they would "assess and consider whether they meet licensing criteria" if an application were submitted.
  
• Islamic banks are hurting their resilience and ability to manage liquidity, market and credit risk by relying too heavily on debt-based products like murabaha because they cannot be securitized to meet liquidity needs of banks according to an article in Asharq Alaswat. The article cites the role of Fannie Mae and Freddie Mac in the United States as a model of how securitization can help banks expand and increase the liquidity of their assets.
  
• Although only four of Yemen's 18 banks are Islamic banks, they have been gaining market share according to the Central Bank of Yemen and now account for 31 percent of the total assets held by banks in the country. The growth rate of 22 percent in Islamic banks' assets represent 40 percent of the total growth during 2008, a greater than proportional increase.
  
• Indonesia's growing deficits are providing a source of supply of sukuk that could increase the country's involvement in the Islamic finance industry. The country just sold $650 million in its first dollar-denominated sukuk and the issue was seven times oversubscribed. The five-year ijara sukuk was sold to a geographically diverse set of investors including 30% from the GCC, 19% from the US and 11% from Europe. The junk-rated (BB-) issue offering a return of 8.8% is rated on par with other external debt issued by the country by Standard & Poor's.
  
• Neil Miller, a lawyer with Norton Rose, says that Islamic firms in the GCC are eyeing acquisitions in the West in the wake of the credit crisis and economic recession and could act in the second or third quarters of 2009. He cautioned that the merger process within a Shari'ah-compliant framework is still not well developed.
  
• With many investment banks reducing headcount there is a growing pool of experienced bankers looking to enter the Islamic finance industry. The managing director of Global Islamic Banking at Calyon Simon Eedle says that this means "the days of a shortage of Islamic bankers and the outrageous compensation that some were being paid are finished". However, Hidayathullah Baig, the head of Islamic finance at Islamic bank, the First Energy Bank, warns that "there is a danger of these conventional investment bankers trying to impose their ideas onto Islamic structures" that he believes is "very dangerous".
  
• Malaysia is continuing to increase the centralization of the country's Islamic finance industry under proposed legislation that would force civil courts to look to Shari'ah advisory board at either the Central Bank, Bank Negara, or the capital markets regulator. The move which comes following several contentious cases looking at the Shari'ah-compliance of the bai bithaman ajil (BBA) contract. BBA is a form of financing similar to murbaha but it is viewed as non-Shari'ah-compliant outside of Malaysia because of its similarities with conventional interest-bearing loans. Judges currently have discretion about whether to seek the advise of the national Shari'ah advisory boards.
  
• Islamic banks in the GCC could expand into the West by setting up virtual banks or an online Islamic bank in the UK, Canada or the US according to Mohammed Badi, Principal at the Boston Consulting Group.
  
• While there is not universal consensus among Shari'ah scholars of the compliance of several products including BBA and bai al inah, the products in common use are converging towards similar forms. Some of the controversial products like BBA are being phased out in order to attract more clients.
  
• The uncertain regulatory environment around Islamic finance, particularly relating to Shari'ah-compliance could hamper the industry's growth. In addition, the economic crisis has led to a near halt in the issuance of sukuk during 2008 and the first quarter of 2009 and, although there is a significant amount of sukuk in the pipeline, if liquidity is not restored to the industry, "there is a real threat to the business of Islamic banking" and "we may not be able to continue doing our business" according to the CEO of Dar al-Shari'ah, Sohail Zubairi. A recovery in the global economy, however, could help the industry recover, as could mergers between institutions.