Monday, October 17, 2011

S&P disconnect on Islamic finance

One of the longstanding themes of coverage of Islamic finance is that it will grow rapidly once it starts to be tapped to fund infrastructure projects.  This may be the case--one could reasonably expect some of the money in the GCC looking for a long-term, relatively stable investment (not to mention something which is needed in many areas)--but when S&P takes this type of thesis one step further to suggest that Islamic finance (sukuk in particular) would be well suited for funding the $8 trillion in infrastructure projects needed in Asia over the next decade, it might be one step too far. 

What is this really saying?  Is there really demand enough among Asian investors for $8 trillion in new sukuk during the next decade.  That's $800 billion, more than 10 times the likely issuance this year.  S&P does not suggest that Islamic finance will play a "key role" in funding the infrastructure projects.  Perhaps the phrase "Islamic finance" might just be a way of saying "oil money from the Middle East". 

Ok, perhaps I'm too cynical about S&P's analysis.  But they finish the press release: "In our view, Islamic finance would be a good match for financing Asia's infrastructure funding gap, especially sukuk bonds. The Sharia principles governing Islamic finance ban speculation and specify that income must come from shared business risk. What's more, Islamic finance is based on the concept of asset-backing." 

S&P, a company that has standards for rating different types of sukuk--asset-based, asset-backed and other--yet it falls into the same old "Islamic finance is based on the concept of asset-backing".  When I see simplistic (and incorrect) descriptions of Islamic finance used by people or organizations who should know better, it makes it more likely in my opinion that the article found an area where there is a funding gap, noticed that there are large flows of capital into the GCC and used Islamic finance as the link between that supply of and demand for that money.

No comments: