Tuesday, June 02, 2009

Islamic finance regulatory risk, US Islamic mortgages, Islamic financial practices and the crisis, IsDB/ADB Infrastructure Fund announced

The Islamic finance industry is at risk from an over exposure to equities and real estate and a lack of regulatory oversight in some jurisdictions may leave Isalmic financial institutions less able to withstand further deterioration in the real estate or equity markets. Reuters quotes Raj Madha an EFG-Hermes banking analyst describing the quasi-debt products used by Islamic finance institutions:
"Quite often you have a lot of mezzanine products so banks have a lot of latitude on whether to report those things under one or the other category [...] It allows for opacity which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses"

An article in a UAE-based newspaper, The National, provides as good an article about the Islamic home finance market in the US as I have seen recently. The article focuses on Guidance Residential, one of the Islamic finance companies in the US which has financed 6,000 customers home purchases for a combined value of $1.5 billion. Although a tiny slice compared to the overall housing market in the US, the Islamic mortgages have experienced far lower rates of delinquincy, approximately half of the nationwide rate of 7.8%, and the company has only served five foreclosure notices.

The Islamic Development Bank and the Asian Development Bank agreed to set up the first Asian multi-country Islamic infrastructure fund. It is the Asian Development Bank's first foray into the Islamic finance market. Providing for infrastructure is a challenge globally and Asia is no exception and this could provide a model for other Islamic infrastructure projects to meet the needs of many countries not only just in Asia.

Khurshid Khan is interviewed in an article about the lessons that can be learned from looking at Islamic financial principles in the context of the recent crisis.

Other News
  • Dawood Ahmedji, head of Deloitte's European Islamic finance unit, believes that Islamic finance would be able to fund some projects derailed by the onset of the credit market crisis by attracting funds from the GCC.
  • The Monetary Authority of Singapore revised its regulations to put Islamic financial products on a level playing field with conventional products but decided against instituting a separate regulatory regime for Islamic financial institutions.
  • Islamic Finance Info Inc, an online company providing information on the Islamic finance industry, has launched a website with information about Islamic financial institutions, Shari'ah scholars and Islamic financial products, IslamicFinanceInfo.com
  • Qatar's planned bond issuance may include some sukuk as a way of diversifying the government's financing needs.
  • An interview with the head of Kauthar Bank, an Islamic bank in Azerbaijan, describes how the bank uses mudaraba, musharaka and ijara on both sides of its balance sheet. While most Islamic banks have a heavy reliance on murabaha, Kauthar is restricted by banking laws from using this product. The success of a bank that does not use murabaha could provide an indication about the direction that Islamic banking is heading as there is some criticism of murabaha because of its similarity with conventional interest-bearing loans.
  • An article summarizes some of the recent developments in the Islamic finance market including planned issuance of sukuk by the Islamic Development Bank and a sovereign issue from Bahrain as well as improved sukuk prices in the secondary markets and developments in the UK.

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