Contemporary financing techniques underpin development of Islamic finance

As uncertainty persists in certain parts of the global economy, it has created an opportunity for Islamic finance to continue to flourish and expand into new economies.

Contemporary financing techniques underpin development of Islamic finance

Contemporary financing techniques underpin development of Islamic finance

This was clearly evident at this year’s World Islamic Economic Forum (WIEF), held in London at the end of last month. At the forum, the British prime minister David Cameron announced Britain’s intention to become the first non-Muslim state to issue sukuk (Islamic bonds).

The issue size is expected to be fairly modest – in the region of £200 million (Dh1.17 billion). But the announcement has been viewed as a symbolic backdrop to Britain’s clear ambition to capture more of the growing Islamic finance market.

Earlier this year, Dubai declared its own intention to become the capital of the global Islamic economy, estimated to have a total value of US$8 trillion, including the Islamic finance industry.

Sheikh Mohammed bin Rashid, Vice President of the UAE and Ruler of Dubai, set a three-year timetable for Dubai to achieve its goal. It has already been confirmed that the emirate will host next year’s WIEF, marking the 10th anniversary of the forum.

The growth of Islamic finance is attributable to many different factors, but that growth would not have been possible without the development of the contemporary financing techniques or structures that underpin the industry.

These techniques have developed in accordance with strict Islamic principles. They all tend to have a common reliance upon a trade or transaction involving underlying assets as a fundamental part of each Islamic contract. This structuring avoids some of the fundamental prohibitions that would otherwise be associated with these kinds of financing products.

What are the main characteristics of sukuk? They are a type of certificate or note that represent a proportionate interest (sometimes also described as a participatory interest) in an underlying asset or investment.

They are generally considered to be debt securities (akin to bonds) which, depending on the underlying asset or transaction, can also be traded in the secondary market.

The sukuk certificates are often “layered” on top of other underlying Islamic financing techniques, which themselves are intended to derive a return from an underlying asset or investment. For example, ijara (or leasing), mudaraba (or investment partnership), or wakala (or investment agency) are commonly used to generate the periodic distributions (in other words, amounts comparable to the “coupon” on a bond) which are payable to the investors.

However, for modern-day purposes, the vast majority of sukuk structures are best described as being “asset-based” because the primary credit risk remains that of the issuer/obligor who is obliged to pay the sukuk holder irrespective of the performance of the underlying asset or investment.

This is to be distinguished from less prevalent “asset-backed” sukuk (in other words, securitisation) where recourse to, and revenues from, the underlying asset or investment play a more critical role.

The Islamic finance industry has developed on the basis of the following strict principles of Sharia (or Islamic law:

1. No interest: under Sharia, money is regarded as having no intrinsic value and also no time value. Money is considered as a means of exchange to facilitate trade. As such, Sharia principles require that any returns on funds provided by an investor should be earned by way of profit derived from a commercial venture in which that investor is involved. The payment and receipt of interest (riba) is prohibited and any obligation to pay interest is considered to be void. This rule also prevents an investor from charging penalties.

2. No uncertainty: uncertainty (gharrar), especially any uncertainty as to one of the fundamental terms of an Islamic contract (such as subject matter, price or delivery), is also considered to be problematic under Sharia. This principle is fairly broad, as it requires certainty on all of the key terms of a contractual arrangement.

http://www.thenational.ae/business/industry-insights/finance/contemporary-financing-techniques-underpin-development-of-islamic-finance

Race to lead Islamic finance

At last month’s World Islamic Economic Forum in London the British prime minister, David Cameron, said the United Kingdom’s capital aims to become a top centre of Islamic finance – echoing similar ambitions voiced by Dubai, Malaysia and others.

Race to lead Islamic finance

Race to lead Islamic finance

Related

■ Dubai will host next World Islamic Economic Forum
■ Australia has chance to ride high on an Islamic finance wave
■ Dubai Crown Prince launches Islamic banking centre
Topic Islamic finance Finance Financial literacy

So far, there does not seem to be much more than talk going on in the financial capitals of the world and it is unclear exactly where each country is in the race to dominate the fast growing Islamic finance sector, valued currently at around US$1.6 trillion.

There was $275.2 billion of global sukuk outstanding as of August 31, according to figures from Malaysia’s finance ministry. Ernst & Young forecast in a December report that international demand for Islamic debt will reach $950bn by 2017.

And Islamic finance has been expanding faster than conventional finance according to the Islamic Finance Secretariat, a British lobby group.

The Islamic Corporation for the Development (ICD) of the Private Sector,a Jeddah-based body, has launched a series of numerical studies of Islamic finance to help policymakers to develop the industry. It is collaborating with Thomson Reuters to produce the finance studies, known as the Islamic Finance Development Indicator (IFDI).

The IFDI will track five areas of industry development, which can be broken down by country: social responsibility, quantitative development, governance, knowledge and awareness.

There are many issues that need to be resolved if Islamic finance is to grow into the truly global industry that most analysts expect it to. These challenges include the substantial differences between the Arabian Gulf and South East Asia in the design and use of Sharia-compliant financial products.

Analysts also warn that the industry has often become narrowly fixated on measures such as asset growth.

The expansion of Islamic finance education is also an important part of the industry’s development.

According to a study by the ICD, Britain is at the top of the list with 60 institutions offering Islamic finance courses and 22 universities with similar degrees. Malaysia, the UAE and Pakistan come next.

A total of 655 research papers were issued globally on Islamic finance in the past three years, of which 354 were peer-reviewed. Malaysia published 169 papers in the period and Britain and the United States published a combined 184.

Japan

The country’s lenders provide Islamic financing only via foreign-incorporated units, which is hindering growth.

Japan, which introduced equal tax treatment for Islamic bonds last year, is in a similar position to Hong Kong, which hasn’t made much progress in forming a Sharia finance hub because of lack of local demand and familiarity, according to Davide Barzilai, a partner at Norton Rose Fulbright in Hong Kong.

“Japan needs to allow the banks there to facilitate Islamic transactions instead of limiting them to undertake such activities outside the country,” Badlisyah Abdul Ghani, the chief executive at CIMB Islamic Bank, a unit of Malaysia’s second-biggest sukuk arranger this year, told Bloomberg News. “A market requires players. Without players there are no markets.”

Mr Barzilai said: “Islamic finance in Japan is being purely driven from the underlying projects that their companies are involved in. It might be a joint venture with a Saudi entity, which has a Sharia-compliant component. I don’t think it will be coming from the Japanese side unless there’s a specific requirement or reason.”

There are only 183,000 Muslims in Japan, although interest in Sharia-compliant finance has recently experienced a revival and is gaining popularity among Japanese companies operating in Malaysia and other Islamic countries.

Mohd Effendi Abdullah, the head of Islamic markets at AmInvestment Bank said: “There’s a good chance Japan may amend the relevant laws to enable [state-owned banks] to issue sukuk and follow the UK’s footsteps to strengthen its involvement in Islamic finance.”

Malaysia

The world’s biggest sukuk market, Malaysia is not slacking off in its efforts to maintain its lead.

http://www.thenational.ae/business/personal-finance/race-to-lead-islamic-finance