September 16,2010The Rise of
Islamic Finance
By Ron Robins, Founder & Analyst - Investing for the
Soul
A proposed new mosque near Ground Zero in New York may
symbolize a new berthing for Islamic ideals—and
finance—in the heart of arguably the world’s most
important financial centre. Michael Bloomberg, Mayor of
New York City and majority owner of Bloomberg L.P., the
global media colossus, is an adamant supporter of the
mosque. And with his Bloomberg media in the forefront of
global Islamic finance reporting, he just might be a
champion of Islamic finance too.
Islamic finance is spreading around the world.
Governments realizing its potential for profits and jobs
are duelling with each other to create the best
regulatory and supportive framework for it. Western
money centres with growing participation in Islamic
finance include London, New York City, Paris, Frankfurt,
Tokyo, and Toronto. Islamic financial activities in
these centres usually encompass the licensing of Islamic
banks and the offering of Shariah-compliant financial
products that include bank accounts, home loans, and
bonds.
Among countries, the growth and acceptance of Islamic
finance varies considerably. For obvious reasons, it is
in Muslim countries where its growth appears fastest.
However, the financial storms of recent years have drawn
increasing attention to it globally.
The ethics and morals behind Islamic finance and
Shariah-compliant investing have similarities to ethical
investing and finance, yet with significant differences
too. Islamic financial structures avoid gambling style
speculation, the paying of interest, and all trading,
loans, and investing have to involve real assets.
There are varying estimates as to the size of Islamic
finance globally. Abdul Rahman Al Baker, executive
director of financial institutions supervision at the
Central Bank of Bahrain (CBB) believes it to be now more
than $1.5 trillion. Bloomberg reports that Moody’s
research indicates global Islamic finance totals about
$950 billion. Malaysian based Islamic Financial Services
and Saudi Arabian Islamic Development Bank are
projecting the market to grow to $1.6 trillion by 2012.
Going even further is another report quoting Moody’s
that Islamic finance could eventually reach $5 trillion.
The countries with the largest Shariah-compliant banking
assets are Iran, Saudi Arabia and Malaysia.
However for 2010, Bloomberg says that Malaysia leads in
the international issuance of Islamic bonds. (These
bonds, called sukuk, are asset-backed and the holder
usually receives a percentage of profits rather than
interest.)
By August 26 of this year, Bloomberg reports that
Malaysia had 72 per cent of the total $9.8 billion
issuance of international Islamic bonds. The Gulf States
issued $2.5 billion representing about 26 per cent of
the total. Also, they report that Gulf sukuk issuance is
down by 24 per cent from last year due to Dubai’s real
estate problems and the sukuk defaults by Saad Group
(Saudi Arabia) and Investment Dar (Kuwait).
The money centres with the biggest trading in sukuk are
London, Dubai and Malaysia.
Bloomberg elaborates further on the size and
significance of Malaysia’s quest to lead in
Shariah-compliant finance. It reports that Malaysia’s
Shariah-compliant assets are around $93 billion and
account for 19.6 per cent of its banking industry. Also,
the country is attracting foreign funds and asset
managers with Shariah-compliant operations. These
include Saturna Capital, Nomura Securities, Reliance
Capital Asset Management, Franklin Templeton GSC Asset
Management Sdn., HSBC Holdings Plc and Standard
Chartered Plc. A total of 14 licences have been issued
to foreign companies by the Malaysian government for
Islamic fund-management activities.
Bloomberg also says that Malaysia last year established
a commodities trading platform based on ‘murabahah,’
where the prices are governed by a negotiated profit
margin that is Shariah-compliant, and that Bahrain is
establishing a similar trading platform that will also
include the trading of sukuk, real estate investment
trusts, and options.
Other recent developments in Islamic finance include:
Bloomberg reports of Turkey’s quest into Islamic finance
which began in April with a $100 million sukuk issue by
Kuveyt Turk Katilim Bankasi AS; in August, according to
Lawyers Weekly, the U.K. completed its first corporate
sukuk deal of $10 million for International Innovative
Technologies Limited (IIT); and France wants to issue
its first sukuk offering this year using French law and
is building a Shariah-compliant regulatory framework
that is compatible with foreign currencies for banking
and investment applications all over Europe.
Shariah-compliant mutual funds now exist in several
countries including the U.S., Canada, and India.
Interestingly, some precious metals mutual funds are
becoming Shariah approved as well. Furthermore,
according to ETFdb.com, “Shari’ah compliant ETFs
[exchange traded funds] are becoming popular investment
options around the world – over the last year they have
been introduced in Britain, India, Singapore, Malaysia,
and South Africa.”
All Shariah-compliant financial products have to be
approved by Shariah scholars. Concerns exist about the
lack of standards and uniformity regarding the selection
and qualifications of these scholars. “Banks try to
search for competent [Shariah] advisers, sometimes they
get the right person, sometimes they get the wrong
person,” said Aznan Hasan, the president of the
oversight committee of the International Shariah
Research Academy for Islamic Finance in Kuala Lumpur,
Malaysia, in another recent Bloomberg report. His
organization is endeavouring to create a worldwide
professional organization to certify and organize
Shariah finance scholars.
In some respects, Mayor Bloomberg of New York and his
media empire’s global coverage of Islamic finance are
reflective of a rising consciousness in world finance.
In a financial world where greed has run amok and deceit
and dishonesty is commonplace, the morality and ethical
basis of Islamic finance may have much to offer. That is
being realized as countries, East and West, North and
South, Muslim and non-Muslim, compete to adopt and
integrate Islamic finance into their own financial
systems.
Islamic finance is beginning to rise from its ancient
past.
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