ISLAMIC FINANCE GAINS SPECTACULAR GROWTH

Even as banking segments like securitising subprime mortgages and financing leveraged buyouts suffer from the current crisis, Islamic finance is seeing spectacular growth, reported Karina Robinson of International Herald Tribune recently.

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Even as banking segments like securitising subprime mortgages and financing leveraged buyouts suffer from the current crisis, Islamic finance is seeing spectacular growth, reported Karina Robinson of International Herald Tribune recently.
Islamic law, or Shari’ah, prohibits the payment and receipt of interest, emphasising profit sharing instead. It also bans investment in businesses like tobacco, alcohol and gambling.
Over the past year, Shari’ah-compliant assets have grown almost 30 per cent, to more than $500.5 billion, according to analysis of the industry on a global scale, published last month by The Banker with input from a business consultancy, Maris Strategies.
That growth outstrips most other business segments in financial services and looks set to continue as banks – including Western banks like Standard Chartered and Goldman Sachs – feed increasing demand from the world’s 1.6 billion Muslims.
A major factor in the boom has been the high price of oil leading to increased wealth in the Gulf Cooperation Council states and Iran, among others. In addition, countries like the United Arab Emirates, Saudi Arabia and Malaysia aim to broaden government revenues and create jobs by making their capitals centres for Islamic finance.
The industry is in its adolescence when it comes to issues like transparency, accounting and ratings, with very different standards being used. This also means that The Banker’s analysis probably understates Shari’ah-compliant assets. “Islamic banks in the U.K. differ in their accounting operations from banks in Bahrain, which in turn differ from banks in Malaysia and Indonesia,” said Nabeel Shoaib, global head of HSBC Amanah, the Islamic finance unit of the global bank HSBC. “Standardization in Islamic finance is necessary to avoid fragmentation and to ultimately create a new asset class that can fully compete with conventional finance.”
Disagreements among scholars on what is Shari’ah-compliant and what is not impedes progress. Shari’ah is not a set of codified laws, but a set of interpretations based on the Qur’an, and it follows that rulings are affected by personal beliefs and cultural influences, noted Joe DiVanna, managing director of Maris Strategies.
There is also a shortage of experienced Shari’ah scholars because of the huge growth in the Islamic finance industry in recent years. And those scholars need to look at ever more sophisticated products that are starting to emerge – Shari’ah-compliant hedge funds and equity-linked structured baskets in which the stocks selected are Shari’ah-compliant.
The Banker study underlines that the vast majority of the uptake comes from customers under 30 who are interested in their cultural and religious identity. Yet there is often a trade-off, since in many markets, conventional savings products can provide better value. This should be less and less the case as more Islamic products are developed, providing one of the main areas of growth for the industry.

In addition, growth will come from providing services to high net worth Muslims and, at the opposite end of the wealth scale, to the many Muslims who do not have access to bank accounts. A form of microcredit that avoids interest payments is an obvious area.