Islamic Finance appeal growing in face of credit crisis

Category: Life & Society Topics: Economy And Finance, Islamic Finance Views: 9170

The global credit crisis presents the $1 trillion Islamic finance industry with an opportunity to expand its appeal beyond Muslim investors, as a haven from speculative excess.

The message may have particular resonance in the West after the crumbling of the U.S. mortgage market left banks holding hundreds of billions of dollars of nearly worthless credit instruments tied to home loans by a web of complex structures.

While conventional banks worldwide are nursing losses of more than $400 billion from the credit crisis, Islamic banks are virtually unscathed. And they are playing up the contrast to scalded shareholders, bondholders and borrowers and fearful depositors.

"It's very much a return to old-fashioned conservative lending," said David Testa, chief executive of Gatehouse Bank, which began operations in April as the fifth Islamic bank in Britain.

"The current global market condition has given Islamic finance a great opportunity to show what it can do - help to fill the liquidity gap," he said.

Investors traumatized by the credit crisis could seek comfort from the stricter rules imposed on lending by Islamic law, which bans some of the structures and financing methods that quickly unraveled during the U.S. mortgage crisis.

Testa said that Islamic finance practices were more fiscally conservative, with direct participation by investors in plans that do not involve parking assets in off-balance-sheet vehicles.

Islamic finance is based on Shariah, or Islamic law. It requires that gains be derived from ethical and socially responsible investments and discourages interest-based banking and investments in sectors like pork, gambling and pornography.

The Asian Development Bank estimates that Islamic assets globally have a combined value of about $1 trillion, with annual growth of 10 percent to 15 percent a year. Al-Rajhi Bank of Saudi Arabia and Kuwait Finance House are the two biggest Islamic banks in the Gulf region. In Malaysia, the largest Islamic lender is Maybank Islamic, a subsidiary of Malayan Banking.

The jump in popularity of Islamic finance is drawing the interest of companies outside the Middle East.

City Developments, one of the largest developers in Southeast Asia, said last week that it could issue Islamic debt and sell hotels to enhance its ability to make acquisitions.

The Islamic finance industry, which was nearly nonexistent 30 years ago, has certain distinguishing features that make it less risky, analysts say.

Islamic bonds, or sukuk, replace coupons with payments backed by the performance of tangible assets. Islamic law prohibits the payment of interest and requires transactions to be linked to assets, thus deterring the kind of complexities prevalent in conventional financing operations.

Debashis Dey, the Dubai-based head of capital markets at the law firm Clifford Chance, said that although the Islamic finance industry was adapting conventional products to make them compliant with Shariah, it was a long way from sophisticated products like collateralized debt obligations.

But while Islamic products are coming into favor, analysts say market commentators and intermediaries may be too zealous in promoting the merits of Islamic finance as a safe product.

Mohamed Damak of Standard & Poor's cited the case of the boom in real estate financing in the Gulf mainly by Islamic banks in the past three years, amid soaring property prices.

"A correction of the real estate sector would impact Islamic banks involved in this business line. Islamic finance is not immune from risk," he said.

Even as experts are weighing the degree of insularity that Islamic financing provides, there are differences in the way accounts are prepared and in how Shariah law is interpreted.

Banks in Britain differ in their accounting operations from banks in Bahrain, for example, which in turn differ from banks in Malaysia and Indonesia.

Dey, at Clifford Chance, said the lack of standardization posed a hurdle to growth, but others said that a cookie-cutter approach was not desirable and that regional differences would remain.

"Complete standardization may not happen - there will always be variants," said Raj Maiden, managing director at Five Pillars in Singapore, who added that it was more important to tailor products according to the needs of each market.

While the debate rages on whether Islamic finance provides a safer bet or is merely a potential source of irrational exuberance, most agree the industry should make the most of the attention it is now receiving.

"If Islamic banks step up to the mark, then they will gain traction," said Testa, of Gatehouse.

 

Source: International Herald Tribune


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  17 Comments   Comment

  1. Oruk Gul from US

    I agree with the writer but in practice, at least in the US, the reality is quite different. I have not found a single true halaal Islamic Finance organisation in the US. I have approached a number of Islamic Finance companies and in each case their proposal was simply no different from the regular mortgage only interest was called by another name. In a true Islamic mortgage the Lender and Borrower become partners, with each owning a percentage of the house representing their capital investment. The Lender then is really an Investor with the Borrower who is an Investor and a Renter. The Borrower/Renter then rents from the Lender/Investor his portion of the property for a fair market rent value and is free to add to his payment an extra sum to slowly buy out the Lender Investor's percentage ownership. But I do not see a single Islamic finance company practice this. They are all about protecting their investment and hedging it with exorbitant escrow payments imposed on the Borrower/Renter. In fact the monthly payments ended up being higher than conventional. I just don't think that Muslims in power are truly ready to embrace Islam completely without any strings attached and accept all of Islam's tenets without question. The Bank of Kuwait in NY had a similar scheme going and it was nothing more than a regular mortgage under Islamic names. Islam is not a box of candy that you can selectively pick and choose the flavours you like and discard the rest. It's the whole package or nothing at all. So if making money is the main concern for these "Islamic Lenders" and loosing it in a risky business venture is unacceptable risk then stick with sin and earn & eat interest but don't hoodwink other Muslims for your own gain and pretend to have an Islamic based system when it is clearly not.

  2. muhammadnadim from pakistan

    as a being a muslim i am completley satisfied of this artical who wrotes this articale he is a very good person

  3. Romesh Chander from USA

    How does one do international commerce using "Islamic Finance"? How does one convert US$ (also known as Funny Money created out of thin air) to Islamic "Money"? Saudis and other petrosheikhdoms take all kinds of Funny Money (Euros, US$, etc) for they oil they sell.

    To do islamic finance, there has to be islamic "money". Does any country has that?

  4. Julia from USA

    Syaza, I think you will find your answer in this segment: Islamic law prohibits the payment of interest and requires transactions to be linked to assets, thus deterring the kind of complexities prevalent in conventional financing operations.

  5. syaza from malaysia

    i'm not really into neither islamic finance nor conventional system..for me, it really make me suffer a lot in order to seek for the answer of what is the benefit of the islamic finance compare to non-islamic financial system which is conventional. i've a task; to do the research on the perception of this thing, can anyone help me up? i'm in the haze...blur... can anyone give me feedback? owh, anyway, this article is good, it juz need a lii of touching here and there.. thanx.

  6. mauroof from canada

    hi .chander ramesh. you think you are extra intelgent.but believe me, your heart, ears ,eyes are all sealed.you were created in the best of moulds,but do not become to the lowest of the low.

  7. Romesh Chander from USA

    When are muslims going to sponsor their version of Nobel Prize for Islamic Economics/Finance? Are they just pay lip service to Islamic Economics?

  8. IC Reader from USA

    Good, thoughtful article. Another reader commented "Biblical Christianity" is the "best shelter". At varying times, God of all, God of the universe, gave us on earth directions and reminders of a way of life that is best. It is our turning away that brings problems. The Qur'an tells us that people of the Torah, the Gospel, and the Qur'an . . . we must judge affairs and act by that guidance we claim to follow. (e.g.you might read from ch. 5 - Surah Ma'idah)

    Salaamu alaykum

  9. John Lawrence from USA

    It is not Christian or Islamic financing that is the answer but Biblical Christianity as a way of life that is the answer to the financial meltdown.

  10. Azeez from US

    Re: Victor Kelly " Biblical Christianity is the best shelter from any financial storm". Sir I dont think you notice carefully that this financial crisis are been caused by the christian and Jewish Nations. You both believe in taxes, interest (Riba) and all kind of Haram (forbidden) things. The financial mess start from US and US is considered a christian nation to many. So your point that Biblical christinity is the best shelter form any financial storm is irrelivant.

  11. Aziz Huq from USA

    Question to Victor Kelly:

    "What is Biblical Christianity?"

    I have never heard of a Biblical Christian Bank as we always hear of Islamic Banks. The Quran clearly prohibits interest taking and giving. Is this also the message of the Bible? While many Muslims stay away from interest based banking, is this also true in the case of Christians?

    Also a comment on the Islamic banking:

    Muslims do not go to Islamic finance because they are safe, give higher return or cost less but because of their desire to follow the Commandment of God as revealed in the Quran. In many cases it costs more, has less return and is more risky.

    Aziz Huq

  12. Babandi A. Gumel from U.K

    As time goes the truth is gradually coming to light.Praise be to Allah whatever He mentions in the Quran is gradually being understood from giving or taking interest which has been forbidden by Islam more than 1400 years.Now after the economic or credit crunch facing the whole world people are now coming to realise the evil consequences of taking or giving interest which makes rich richer and poor poorer. We should sit down ponder and reflect as Islam has the answer to all these problems.It is up us to acknowlege or turn aside. Another evil facing the rich nations and the whole world in general is alcoholism which is also becoming a kind of disease eventhough it has no germs or any kind of viral cause.The disease is only sold in bottles legalised and advertised in papers radios and Tvs generating revenue for both the governments and advertising companies at the same time people dying destroying families and crimes are on the increase due to this so called disease of alcoholism. Similarly another evil facing the world is adultery sodomy and their likes being championed by the so called human rights groups who are working against all religious groups. In the 60s and 70s adultery was not common but now is no longer a sin in other religions apart from Islam.

    Eating Halal meat is regarded as foreign while people enjoy eating pork a source of so many diseases not less than 70 including roundworm tapeworm that could cause memory loss blindness and damage in the liver. Gambling is another thing which is prohibited by Islam but because people enjoy getting money without hard labour this is why it is stil prevalent in the west. As

    time goes the truth is coming to light and baatil is disappearing.In sha Allah one day the whole humanity would realise the importance of what Islam has been telling us unfortunately one cannot grasp unless and until he or she has hidayah guidance which we should all pray for before it is too late when our eyes close i.e after death.

  13. mauroof from canada

    ALLAH says / soon you will see His signs. this is also a sign, now only islam can save this world and this finance system.amen.

  14. Uncle Logic from UK

    Yup, hundreds of billions have been blown on Islamic media. Fat lot of good it's done. The Saudi investments so far have done nothing but alienate Muslims from non Muslims. This is just another attempt to make money from religion.

  15. Mohamed Samatar Farah from Canada

    Bismillah irrahman irrahim

    Assalamu alaikum

    The bottom line is no Usury. The Quran and the hadith have made is clear what is allowed and what is forbidden. It is a big sin to makeup thinks (bida). The Sharia must be follow with no deviation. May Allah protect us. (Subhanallah)

    Al-Baqara (The Cow)

    2:278 O you who have attained to faith! Remain conscious of God. and give up all outstanding gains from Usury, if you are [truly] believers; [266]

    2:275 THOSE who gorge themselves on Usury [262] behave but as he might behave whom Satan has confounded with his touch; for they say, "Buying and selling is but a kind of [263] Usury" - the while God has made buying and selling lawful and Usury unlawful. Hence, whoever becomes aware of his Sustainer's admonition, [264] and thereupon desists [from Usury], may keep his past gains, and it will be for God to judge him; but as for those who return to it -they are destined for the fire, therein to abide!

    It is haram to deal with riba (interest) in any way. That means that if you take out a loan and they say if you don't pay it back by a certain time, there will be interest, it is then haram for you because you could die and that debt will be your family's responsibility and they will have to deal with riba. Both you and your family will then be in the wrong and will have to answer to Allah for that on Yomo Qiyamma.

    We must stay away from the forbidden and anything unclear.

  16. Mr. Ghetto from East Oakland, Ca

    Allah subhanahu wa ta ala gives us (and we have the SHARIA) the criteria to do HALAL business if we use it we are SUCCESSFUL, if not we suffer!

    Lets not forget that the U.S economic history is laden with thievery,SLAVERY, HARAM RIBA(interest),broken treaty after treaty etc!!!!!

    IT HAS FINALLY CAUGHT UP WITH THEM AND IT WILL BE UGLY!

    "Got HIJIRAH"

  17. Victor Kelly from USA

    Biblical Chrisrianity is the best shelter from any financial storm.