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September 16, 2010

The 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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Disclaimer: This website does not make investment recommendations. Nothing in this site should be interpreted as a recommendation or solicitation to buy/sell any securities or investments. Investing for the Soul is a source of general information and resources for ethical investing and socially responsible investing (SRI). Investors should consider their actions thoroughly and consult their financial advisers and other professionals, prior to taking any investment action. This website does not necessarily agree with the opinions expressed in articles on its pages or offered on the web pages to which it might be linked. Such opinions are the responsibility of the writers themselves. Furthermore, this site does not offer or provide any warranties, representations, guarantees, implied or otherwise, as to the accuracy, legality, copyright compliance, timeliness or usefulness of the information, materials or services on this, or other sites, to which it is linked. Also, Mr. Ron Robins is not an investment advisor, nor is he licensed with any professional investment related body, and thus is not able to, nor does he make, any investment recommendations.

 

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