Dubai: The latest initiatives by Dubai Government to a set up a comprehensive platform of Islamic economy products and services will strengthen its position as a global centre for Islamic economy, analysts say.
The move will see new comprehensive regulatory regime being set up to standardise and regulate Islamic products, services and practices that will strengthen a ‘parallel economy’ – free from conventional and interest-based financial practices.
“UAE is a regional business and trade centre. The country already has world class ‘hard’ infrastructure. The initiative intends to add to the ‘soft’ infrastructure to encourage and attract Sharia compliant activity in, for example, financial services and the food industry,” Dr. Giyas Gokkent, Chief Economist of National Bank of Abu Dhabi, told Gulf News.
“Officials have indicated that this is also part of an effort to increase inward foreign direct investment which would boost economic growth.
With Islamic economic principles playing a growing significance in today’s global business environment, with Islamic economy size reaching $2.3 trillion and a growing community of 1.6 billion Muslims, the new initiatives are expected to further promote investments in Dubai, especially from economies spanning the Middle East, Africa, South Asia and Southeast Asia, Dubai Government said in a statement.
“This appears to be an initiative to attract foreign investment and establish the country as a centre for Sharia compliant finance and so on,” Gokkent says. “Sharia compliant activity in various sectors already exists and is subject to regulation.
Bahrain is also pursuing a strategy to become a hub for Sharia-compliant finance.
“The GCC accounts for a large proportion of Islamic finance activity given the size of its economy (13th largest in the World in aggregate). For example, about half of the global Sharia compliant mutual fund activity is in the GCC,” Dr Gokkent says.
Azhar Nazim, Partner, Global Islamic Banking Centre of Excellence at Ernst & Young, told Gulf News, that the move needed to be backed by a solid roadmap and set of actions. “Following the announcement, implementation will be key and it needs to be backed by roadmaps and actions,” he said.
Global Islamic banking assets are expected to reach $1.8 trillion by 2013, according to Ernst & Young’s World Islamic Banking Competitiveness Report 2013, up from the $1.3 trillion of assets held in 2011. This forecast is significantly higher than some of the earlier industry estimates. Globally, the Islamic banking industry continues to record robust growth, with the top 20 Islamic banks registering a growth of 16% in the last three years and Saudi Arabia emerging as the largest market for Islamic assets, it says.
According to the report, in 2011, the Islamic banking industry in Saudi Arabia, with an estimated $207 billion of Islamic assets, was ranked first. Malaysia, ranked second with total assets of $106 billion in 2011 and UAE ranked third with total assets of $75 billion.
Nazim said, he sees significant opportunities for the UAE to gain from Islamic banking as the UAE’s Islamic Banking sector represents only 17 per cent of the total banking sector. He said, if implemented properly, the country has a lot to gain from the global Islamic economic growth.
“The initiative is very timely and it is a broad-based approach,” he told Gulf News. “With this, Dubai could take a leadership role in the linkages of Islamic Economy with the real economy and the various sectors – finance, commodities, home finance, banking and insurance, etc.
“Also, it is important to have regulatory clarity – both for the financial system and the real economy,” he stressed.
Demand for Islamic tradeable securities – or sukuk, is expected to jump from $300 billion in 2011 to $950 billion by 2017, he said.
“The top 20 Islamic banks hold 57 per cent of the total global Islamic banking assets and are concentrated in the seven core markets for Islamic banking which include: Saudi Arabia, Kuwait, UAE, Bahrain, Qatar, Malaysia and Turkey,” he added.
The move comes four years after the global financial crisis that has affected the world economy – from which the major economies are still trying to recover.
Islamic banking and finance – which gained momentum following the global financial crisis, offers better returns, as they are based on real assets.
Regulations will be key, analysts say.
“Discussions with management and boards of leading Islamic banks suggest that major transformation is happening around Regulations, Risk and Retail Banking or the 3 R’s,” Ashar Nazim says.
“These 3 R’s of transformation are geared towards efficient capital planning, risk modelling, mitigating Sharia risk and building customer centric organizations. There are also meaningful developments on the regulatory front although a lot more needs to be done to create the right enabling environment for Islamic banks to implement the reform agenda,” said Ashar.
Although most people think about Islamic Banking when talked about Islamic Economy – which is much wide and covers all aspects of the economic life of a person to a society – has not been brought under a simple set of regulations. There are also issues relating to standardization and regulatory uniformity. Banks’s Sharia compliance varies globally – due to the lack of a single regulatory regime to govern Islamic banking or other aspects of finances.
Islamic economics in practice, or economic policies supported by self-identified Islamic groups, has varied throughout its long history, although these are prescribed to be sourced from the teachings of the holy Quran and the sermons issued by Prophet Mohammad (PBUH) about 1,400 years ago. Islamic economy is linked the lifestyle, governance prescribed by the Islamic theology.
Islamic theory and practice formed a “coherent” economic system with “a blueprint for a new order in society, in which all participants would be treated more fairly”. Michael Bonner, for example, has written that an “economy of poverty” prevailed in Islam until the 13th and 14th centuries. Under this system God’s guidance made sure the flow of money and goods was “purified” by being channelled from those who had much of it to those who had little by encouraging zakat (charity) and discouraging riba (usury/interest) on loans.
Trading in assets have been at the core of the Islamic economic principles.
Social responsibility in commerce was stressed in Islamic sociology. The development of Islamic banks and Islamic economics was a side effect of this sociology: usury was rather severely restrained, no interest rate was allowed, and investors were not permitted to escape the consequences of any failed venture — all financing was equity financing (Musharaka). In not letting borrowers bear all the risk/cost of a failure, an extreme disparity of outcomes between “partners” is thus avoided. Ultimately this serves a social harmony purpose.
The move to develop Islamic Economy is an age-old one. Although it actually started with the development of the first Islamic bank in the 1960s, it gained momentum in the 1990s.
However, in order to address the overall Islamic economy, various sectors have developed Sharia-compliant principles, such as: Islamic Banking, Islamic Insurance, Islamic Finance, Islamic Bonds – Sukuk, Islamic Equity – stock indices, Islamic Derivatives, Islamic Tourism, Halal Food, Halal commodities.
FIRST IN MALAYSIA: Much anticipated retail exchange-traded infrastructure bond now open to public
KUALA LUMPUR: PRIME Minister Datuk Seri Najib Razak yesterday launched the country’s first retail Exchange-Traded Bonds and Sukuk (ETBS).
It is the first infrastructure bond issuance to be opened to the public. Najib said the ETBS, with a maiden issuance by DanaInfra Nasional Bhd, would enable the people to have a stake in the country’s success.
DanaInfra is allocating RM300 million under this issuance for retail investors, the initial tranche of RM1.5 billion to fund the first phase of the Kajang-Sungai Buloh MRT line.
“We are here to commemorate yet another innovation in Islamic finance and the opportunities available for investors. These opportunities are open to more people, and Islamic bonds will be traded more widely.
"By opening up our economy, we are offering the rakyat a stake in our nation's success. And we are making our capital market stronger and better connected.
"The funds raised will support the Kuala Lumpur MRT project, a landmark commitment that will play a prominent part in Malaysia's future success," he said when launching the ETBS on Bursa Malaysia.
Quashing a rumour that he had suffered a mild stroke over the weekend, Najib quipped: "So, this shows Bursa Malaysia is healthy, the market is healthy, the sukuk market is healthy, I'm also healthy."
The DanaInfra retail sukuk is guaranteed by the government. The first issuance on Feb 8 will have a tenure of 10 years.
Najib said the development showed how fast the world of Islamic finance was revolutionising and how technology could be the catalyst for that change.
"It also offers one a glimpse of Malaysia's future.
"In a time of rapid development and in a region characterised by strong growth, we must maintain our focus.
"Malaysia must remain an open, outward-facing economy, a world leader in strategic sectors and a key player in a multi-trillion dollar regional market.
"To continue to be the leader in capital markets, we have to develop and maintain the market infrastructure, with firm support from regulators, issuers and investors.
"We also need to widen the investor base, which is what today's launch is all about," he added.
Najib said for investors who had been buffered by the financial crisis in Western markets, Islamic bonds offered an alternative growth market.
He said by its nature, Islamic finance was not prone to the same excesses which had damaged the world economy.
"No wonder sukuk is the world's fastest growing financial instrument and no wonder when investors seek knowledge or expertise, they look to Malaysia.
"For when it comes to Islamic finance, we have turned an early lead into a clear advantage."
Najib said Malaysia now accounted for three-quarters of the global sukuk market and was a hub for issuing, trading, regulation, standards, marketing and training.
"It is one of the few places in the world to offer retail investors the chance to participate in the fast-growing, fast-changing market.
"Our challenge now is to make sukuk part of the global mainstream investment.
The Islamic approach to finance was once the most advanced in the world. The period of pre-eminence ended six or seven centuries ago, but the religion’s fundamental insights into the field could help form a financial system suitable for the 21st century.
From the beginning, Muslim teaching took a religious view of commercial relations and responsibilities. There are a few injunctions in the Koran and far more in the teachings traditionally attributed to Mohammad. I am not an expert, but the basic ideas seem clear enough: merchants should be fair, risks should be moderate and understood, and God condemns all rapacious financial practices.
During the first centuries of Islam, Muslims became great traders, providing an economic bridge between Asia and Europe. Europeans adopted and then further developed the Islamic techniques of providing credit and of sharing responsibilities, risks and rewards. Christian thinkers continued the Islamic debate over what was fair and just, and church authorities copied the Islamic teachers’ practices, ruling on the legitimacy of transactions, and exhorting merchants and investors to restrain their greed.
Of course, those exhortations often fell on deaf ears. However, until well after the start of the Industrial Revolution few Muslims or Christians would have argued with the notions that trade should be just and finance should serve the common good.
Indeed, much of the Western world’s financial system looked more Islamic than hard-edged capitalist until about 30 years ago. The vast majority of banking assets in Europe and a substantial minority in the United States were held by institutions which did not have profit-seeking shareholders. Rather, these mutuals, thrifts, savings banks, French caisses, co-operative banks, church banks and credit unions aimed first of all to serve their members and their communities. Insurance was also largely a mutual business.
Then came the era of demutualisation, when selfish profit-seeking became the norm. In the new era, the worst possible aspects of a financial system – greed, exploitation of the ignorant and excessive risk-taking – were allowed to run wild. Bankers became ridiculously rich while debts expanded at an unsustainable pace.
The free rein of financial selfishness ended in tears, as any traditional Islamic (or Christian) teacher would have predicted. Unfortunately, contemporary Islamic efforts in finance were too influenced by the free-market model. Jurists and bankers worked together to design instruments, from mortgages to hedge funds, which would be both compliant with the jurists’ interpretation of sharia (Islamic law) and economically identical to conventional financial products.
This finance of “sharia arbitrage”, as Mahmoud A. El-Gamal of Rice University calls it in his book “Islamic Finance”, is largely based on a narrow understanding of two prohibited practices: riba and gharar, usually translated as interest and risk. For example, jurists declare that riba is avoided if a loan can be portrayed as a sale at one price and a gradual repayment at a higher price, even if the gap between the two equates to an interest rate of 100 percent. El-Gamal is highly critical of this sharp practice.
I am not competent to opine on Islamic law, but the current approach to Islamic finance certainly misses what is most valuable for non-Muslims about riba and gharar: the way they fuse ethics with practice.
If El-Gamal is right, riba is best understood as unjust financial advantage, akin to certain legal definitions of usury. Following that definition, there is no riba when lenders and borrowers justly share the wealth created by a loan. Loans, which have fixed interest rates and must be repaid, can be free of riba. Equity investments (common shares) are usually even more just. The forced repayment of principal on loans at maturity can be unjust on the borrower; that possibility is avoided with the permanent capital of equity. Also, while fixed interest payments are sometimes unjustly low or high, shares’ variable dividends can reflect changing circumstances.
Finance always involves commitments in an uncertain world, so risk can never be avoided completely. Gharar, according to El-Gamal, properly refers to unnecessary or inappropriate risks, as exemplified in the classical example of selling the pearl diver’s future catch before the actual dive. Gharar seems to take in all unnecessary speculation. The prohibition is just, because financial gains should come from providing something of economic value, not from luck or from outwitting a trading partner about the risks of a bet.
The excesses and dishonesty which led up to the financial crisis show that the current system has lost its moral compass, but a new one cannot be plucked straight out of some previous era. Traditional banks and insurers would be too small and unsophisticated for today’s global economy.
Still, we can renew the best ideas of the past. Between them, riba or gharar account for most of the objectionable practices of contemporary finance.
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