Wednesday, December 22, 2010

Year End Survey on Islamic Finance

Rushdi Siddiqui's latest opinion piece (in Malaysia's Business Times) offers a 14 question, multiple choice quiz with some tongue-in-cheek, but with a serious point as well. As I was reading it I wrote down my own responses and I thought it was worthwhile sharing. I encourage all readers to go and see what your answers would be. It was refreshingly stimulating to go through compared with most of the "year in review" articles. It might help to have the article up in another window to glance at the other answers.

Question 1. Best source for insights into Islamic finance?

1: A. I enjoy Dr. Zeti's speeches and while blogs are good sources of information, there are far too few out there, but one notable one is the blog by the editors of the Opalesque Islamic Finance Intelligence monthly newsletter led by Bernardo Vizcaino. That blog, Islamic Finance Research who put up all kinds of research they run across in addition to the Islamic Finance Intelligence newsletter. While the surveys/reports from consultancies provide a nice data dump of information, they are generally presenting a rear-view mirror view. The FT has done the best job of covering Islamic finance in the Western media, there is sadly almost nothing valuable coming out of the US.

Question 2. For Islamic finance, 2010 may be best described as year of:

2: C/D. 2009 was the year of regrouping and reflection. Starting with the rather imperfect (but still a nice precedent for the industry, despite its flaws) resolution of East Cameron, there were many sukuk issues, followed by the new Shari'ah board standards, which are a step in the right direction, but too vague and unenforceable (in general). They (AAOIFI/IFSB and national regulators) are still trying to feel their way from having a few prominent scholars to a more professional method of Shari'ah review. There has still been cheerleading, which I always find surprising after the crisis showing that Islamic finance products were susceptible to economic recessions.

Question 3. The Islamic finance highlight for 2010 was:

3: A. The stability of Islamic banks is always at risk without the proper tools to facilitate inter-bank lending and there can't be a real repo market without short-term, high grade sukuk to underpin the IIFM proposed Shari'ah-compliant repo structure. The IILM sukuk will also avoid the possibility of a freeze up in inter-bank markets if there is an Islamic bank failure.

Question 4. Should there be an Islamic finance award for a category with different winners from different conference organisers?

4: I don't know. I'm happy to be nominated for an award (I was nominated in the IB&F Awards in the Islamic Finance Research category), but I don't know what value they add to the industry.

Question 5. Should there be an award for the most accessible syariah scholar?

5: A. I think that Shari'ah board accessibility should be encouraged, but I think there should be more fatawa available with the reasoning behind them to provide greater clarity of the Shari'ah review process. For example, the Al Baraka compilations of fatawa, although I think most of those are not current.

Question 6. Today, marketing of Islamic banking is only about reaching out to Muslims?

6: B. It could be A, but right now, Islamic finance is marketed to Muslims. There are areas where it could be appealing to non-Muslims, but not the way it is currently done. I think broadening the marketing to ethical finance at this point would be somewhat misleading because it doesn't incorporate enough positive screens.

Question 7. Islamic finance needs to reach out new channels, like social media, to reach their bankable customers?

7: B. I agree that focusing on depth is valuable, but with (6) I think the substance has to be improved to become more accessible and relevant to more people. If there was more Islamic microfinance, I would say C, but there are plenty of people with internet access who could be reached by better use of social media.

Question 8. Islamic finance needs to pay immediate attention to:

8: All except for E. Takaful is still behind the rest of Islamic finance, microfinance is nearly nonexistent. Important asset classes (and particularly access to those asset classes like sukuk funds) are left out while more complex products are developed to be the "first" or to capture higher fees. Secondary markets and treasury instruments are underdeveloped. The connection with Islamic financial products' Shari'ah-compliance is unclear in secular dispute resolution processes. I have been so busy with Islamic finance that I have not taken the time to look more into the rest of the halal industry, but it seems a natural fit to use Islamic finance to finance the halal industry and it's large enough that it could be big for Islamic finance.

Question 9. What is the biggest threat/risk to future of Islamic finance?

9: B. I think the other answers matter, but to a much lesser degree. If the industry keeps growing relying on the same 10 scholars, at some point, they will miss something in a document they approve that hits the headlines.

Question 10. Today, what are the systemic risks to Islamic finance?

10: B. I think that a depositor run without the repo markets/lender of last resort/enough liquid, high-grade investments is not just possible, but likely. It won't necessarily cause contagion, but it will hit one of the more solid areas of Islamic finance (banking).

Question 11. Research is needed immediately on:

11: A. See (10).

Question 12. In 2011, stock exchange contribution to development of Islamic finance will be from:

12: B/E. I think the flood of GCC issuers to Malaysia will make Bursa Malaysia the center of activity for a while, marginalizing some of the GCC exchanges, despite some efforts to encourage sukuk trading. I am intrigued by the participation of the central bank of Luxembourg in the IFSB and the governor's appointment as deputy chairman of the IILM. The LSE seemed to be the exchange of choice for sukuk, but the Luxembourg Stock Exchange has attracted other products that the LSE lost to Dublin.

Question 12. In 2011, stock exchange contribution to development of Islamic finance will be from:

13: A/D. I don't think that the domestic market in Malaysia will be as significant as its role in the global Islamic finance industry through the IILM and by attracting GCC issuers with its liquid sukuk secondary markets. I do worry that the strengthening MYR against the dollar could hurt GCC issuers if it continues (particularly if the MYR is above current levels when those sukuk mature).

Question 14. Qatar's victory in hosting the 2022 Fifa World Cup finals will mean:

14: C.

If you go through the survey and get different responses (or even if you agree with my picks, but think I left something out), please drop them in the comments.

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