Islamic finance may face challenges from economic slowdown; another call for focus on the ethical basis of Islamic finance

Although there has been a lot of suggestion that Islamic finance is immune to the credit crisis (although it may be hurt by the follow on economic slowdown), the Islamic financial industry has not yet gone through a period where the legal structure has been tested if the issuers of sukuk, for example, default. For example, there has not been a challenge of whether sukuk holders have a claim on the asset used to back sukuk. According to an article in Asian Banker, the IFSB says that they should, but the fallout from the economic slowdown may result in an actual test of whether or not sukuk holders get ownership of the underlying asset in the case of default.

A EFG-Hermes report on the UAE says that the merger of Islamic finance companies Amlak and Tamweel will be a balancing act and that "one thing we can be reasonably confident is that while Amlak and Tamweel may make it to the beginning of the year, they are unlikely to make it to the end".

Farmida Bi argues that focusing too narrowly on specific rules as opposed to the intent of Shari'ah guidelines hampers growth and that "If Islamic finance is seen in its true guise as a form of ethical financing, of interest to all rather than only as a faith-based activity of interest to the Muslim population, it is likely to find favour with a different type of conventional investor who would be potentially willing to consider different types of risk-reward stuctures." I wholeheartedly agree that Islamic finance should focus on the objectives (maqasid) of the Shari'ah and should work to attract non-Muslims. This will ensure that the industry does not just become an exercise in structured finance, but promotes a greater ethical cause that is shared among peoples of all faiths.

Japan's largest bank, the Bank of Tokyo-Mitsubishi UFJ is planning to offer Islamic financial services in the Middle East and Asia. Japanese companies have been exploring growth into Islamic finance and some have started to become involved in the industry.

Islamic finance in India is finally beginning to develop some momentum.

Sri Lanka Islamic microfinance & Opposition to UK Islamic gilts

Sri Lankan Islamic microfinance

Islamic financier Amana Investments introduced an Islamic microfinance program on a limited scale (20 entrepreneurs will be selected out of 1,000 applicants). The initial capital for the program will be Rs. 1.5 million (US$13,639). The bank will work with Muslim Aid, an aid organization with significant capacity building in Islamic microfinance, and initially offer murabaha (cost-plus asset sale) but as the program develops they plan on offering mudabara (investment with a profit-sharing agreement with the entrepreneur). The program will not limit the program by religion or ethnicity and will begin in Slave Island, a suburb of Colombo, Sri Lanka.

Plans for U.K. Islamic gilts encounter first resistance

In an editorial in the Financial Times, Andrea Minichiello Williams of the Lawyers' Christian Fellowship, an evangelical Christian organization whose self-stated mission is to "is to influence lawyers and the law for Christ" complains about the proposed U.K. Islamic government bond. She argues that issuing sukuk would hamper the ability of the British government to use the funds received and, while it would, Ms. Williams goes to great length to make the requirements made by Shari'ah scholars seem unreasonable by adding to the commonly used ethical guidelines and suggesting that sukuk funds could not be used for "animal welfare (which promotes the welfare of non-halal animals)[, the] furtherance of many individual freedoms, or in the promotion of any idealistic or political worldview other than Islam (including secular democracy)." While the complaints are unlikely to influence the government's decision on their own, they demonstrate some of the potential hurdles Islamic finance needs to overcome in the West in spreading knowledge about how Islamic finance works, the role of Shari'ah scholars and the ethical screens used to decide Shari'ah-compliance.

Other News

Dubai Islamic Bank will offer a new product to high net worth individuals incorporating the principles of Socially Responsible Investing with the ethical screens of Islamic investing. The product, a Shari'ah-compliant four-year principal protected note with a 'minimum guaranteed annual return' of 2% and a 'maximum potential annual return' of 11%, would be based on a basket of 10 stocks involved in purification, desalinization and waste management.

Another discussion of the new S&P and MSCI Shari'ah indices.

Hong Kong-based Bank of East Asia will raise its stake in Malaysian bank, Affin Bank, in part to avail itself of the Bank's participation in the thriving Malaysian Islamic banking market.

Plans for Dubai Islamic Bank to issue sukuk to fund a Jakarta monorail project have been disrupted by the lack of a proper regulatory environment. Two bills on Islamic banking are under consideration by the Indonesian House of Representatives; one would set the regulatory environment for Islamic banking and one would do the same for sukuk.

The agreement between al Rajhi Bank and e-Kencana Sdn Bhd (a company involved in the MEPS Cash system in Malaysia) was signed which will create a Shari'ah-compliant fund transfer system between Saudi Arabia and Malaysia with future plans to expand to other countries.

CIMB Islamizing products, Interview with CEO of Sharjah Islamic Bank, Japanese Islamic financial conference

Japanese hold conference on Islamic finance, plan issue of sukuk

The Japanese Minister of Finance, Hiroshi Watanabe, expects Islamic money and financial systems to become more influential. Mr. Watanabe expects the increase to come "amid high crude oil prices" and wants Japanese businesses to look to attract funds from the Islamic financial markets through the issue of sukuk.

The Japanese Bank for International Cooperation announced that it will issue sukuk, becoming the first G-8 country government-linked institution to do so.

GCC could see Islamic capital flight

Limited investment opportunities and low levels of liquidity within Islamic financial markets in the GCC could cause a flight of Islamic capital out of the GCC region, according to Rushdi Siddiqui, Global Director of the Dow Jones Islamic Market Index Group.

Interview with CEO of Sharjah Islamic Bank

AMEinfo has an audio interview with Mohammad Abdulla, CEO of Sharjah Islamic Bank on the future of the industry, particularly within the UAE.

CIMB announces plans to Islamize every product they offer

CIMB Islamic Bank, the Islamic arm of CIMB Bank in Malaysia has announced plans to Islamize all the conventional products it offers, working on 63 products over the next year. The latest product, Islamic All-Stars Global Restricted Mudharabah Structured Investment-i, which offers capital protection, a return based on the future returns of twenty global blue-chip companies. The "indicative gross profit rate" will be 8 percent for the first year and between 8.5 and 10 percent for years two through five.

Miscellany

The Qatar Islamic Bank has announced plans to seek a license in the U.K. as a part of its expansion into Europe by providing 51% of the £25 million ($49.6 million) capital for the Europe Finance House. No further details are available about the Europe Finance House.

Malaysian national mortgage firm Cagamas Bhd will offer bonds in Q2 of 2007, according to an unnamed source. Although it has not been announced yet, the bonds are expected to be Islamic bonds (sukuk).