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Friday, 23 March 2012

What Can We Learn From Islamic Finance?

In over 70 countries, from financial centers in Malaysia to the Middle East, Islamic finance has been growing rapidly around the world. In fact, Shariah-compliant financial assets have increased from about US$5 billion in the late 1980s to about US$1 trillion in 2010. Even more impressive is that this class of financial instruments appears to have avoided many of the worst effects of the recent crisis, making it an increasingly attractive investment vehicle.
Given its rapid growth and relative stability, are there lessons we can garner from Islamic finance? Three years after the onset of the global financial crisis -- as regulators are still grappling with how to deal with predatory lending practices, opaque derivatives, and overly leveraged financial institutions -- can Shariah-compliant finance challenge our notion of conventional banking?
Perhaps it can. By and large, Islamic finance relies on the core principles of Islam concerning property rights, social and economic justice, wealth distribution, and governance. Two of its main tenants are the prohibition of interest on debt in any form and the removal of ambiguous contracts to enhance disclosure and proscribe deception. Among its other key precepts is a commitment to back all financial contracts by assets and activities in the real economy, as well as an emphasis on the principles of morality and ethics in conducting business.
According to the most recent Economic Premise, authored by World Bank Managing Director Mahmoud Mohieldin, these underpinnings have generally helped Islamic banks escape some of the worst effects of the 2008 financial crisis. To be sure, Mohieldin notes that "The recent financial crisis affected the asset quality of conventional banks adversely. In contrast, as shown in recent research, Islamic banks had higher asset quality, were better capitalized, and more likely to continue their financial intermediation role during crises than their conventional counterparts." As they were not exposed to subprime and toxic assets and had instead maintained a close connection to the real sector, only when the real economy contracted and real estate prices dropped did Islamic financial institutions begin to feel the second round effects of the crisis.
Yet as Islamic finance continues to grow, some challenges still need to be met. For example, theEconomic Premise notes that many aspects of Islamic finance suffer from emulation and reengineering of conventional instruments, which result in inefficiencies and higher transaction costs. In addition, challenges associated with Basel III core capital requirements -- which place Islamic financial institutions at a disadvantage -- need to be addressed. By dealing with these and other issues, Islamic finance could increasingly meet the preferences of local cultures, augment financial inclusion and intermediation, and contribute to financial stability and development in the years ahead.

(HuffPostWorld/22 March 2012/by Otaviano Canuto Vice President, Poverty Reduction, World Bank )

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Private sector to spur sukuk market in Gulf

Growing trade in Islamic bonds or sukuk in the Gulf region this year could be driven further by increased private sector interest in sukuk on the back of strong activity by banks, said an expert ahead of a world financial congress in Dubai.

More than $6 billion of sukuk have been sold in the GCC so far in 2012, compared to issuance of $7.3 billion for all in 2011, with the UAE's Majid Al Futtaim Group paving the way for more private sector involvement in Islamic finance through a recent sukuk sale, according to Emirates NBD head of fixed income research Nick Stadtmiller.
With Islamic financial institutions currently holding Sharia-compliant assets worth an estimated $1 trillion, he said the global annual sukuk market was valued at $180bn.

"Regional banks have been especially active in tapping the sukuk market in recent months," said Stadtmiller, who will be among a team of experts analysing the intricacies of sukuk trading at the ACI Financial Markets World Congress.

"Another interesting development in the sukuk market was Majid Al Futtaim Group's $400 million sukuk sale in February. The groups's sukuk issuance may open the market to other purely privately owned regional companies," he added.

Stadtmiller said the growth in sukuk sales in the Gulf region in recent months stems from high demand for the current limited supply of Islamic bonds, while many financial institutions with good liquidity are looking to put money into new investment channels.

"Malaysia is the oldest and largest market for sukuk, but the GCC sukuk market has grown considerably in recent years," he said.

"By selling sukuk, issuers can reach a wider audience of investors, including Islamic institutions that are required to invest in assets that do not pay interest. Many Islamic institutions, particularly in the Middle East and Southeast Asia, have ample liquidity and are looking to deploy money into new investments," he added.

"Sukuk is a relatively new product, and currently supply of sukuk is small compared to the potential demand for these assets.

"The supply-demand imbalance in the sukuk market means that issuers can place sukuk among a wide investor base and attract competitive pricing on sales," he concluded.

(TradeArabia News Service / 22 March 2012)

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