Islamic finance would have prevented credit crunch

The global financial crisis could have been avoided if banks had abided by Islamic rules that forbid investment in collateralised debt obligations and other toxic assets, UK entrepreneur James Caan said.

“One of the questions we always ask is if the global economy operated under Sharia-compliant finance would we have had a credit crisis,” said Caan, the former star of the BBC series ‘Dragon’s Den, during an interview in Dubai. “I think the answer is no actually.”

Sharia-compliant banks fared better than conventional lenders during the downturn, thanks to rules that forbid speculation and insist loans must be backed by collateral.

Banks are also deterred from repackaging debts, as financial instruments generally have to sold for face value.

Caan, who recently purchased an apartment in Dubai’s Burj Khalifa, is touring the Gulf in a bid to drum up interest in a £45m ($69m) student housing product, offered through the Islamic investment firm 90 North, in which he holds a stake.

“When you think today that half the world’s population today is Muslim, as a businessman I see this as one of the biggest growth market opportunities that is under-exploited,” Caan said.

“Potentially over the next five or ten years I can see this as being a very attractive position. I think there is an incredible increase in demand for Sharia-compliant opportunities and products.”

Independent advisory firm 90 North was co-founded by Philip Churchill, formerly of Kuwait-backed Gatehouse Bank. The company has placed nearly £1.1bn ($1.7bn) on behalf of Gulf investors in Islamic-compliant real estate assets to date.

Sharia law forbids gambling, investments in alcohol and receipt of interest, so fund managers have to select investments deemed halal, or permissible.

“Most of the product that we have sourced is UK-based,” Caan said. “The UK is a natural place that I think Middle East investors find very comfortable, because of the governance, the laws and the transparency.”

Islamic banking assets with commercial lenders will reach $1.1trn in 2012, a jump of 33 percent from their 2010 level of $826bn, Ernst & Young said last week.

Islamic banking assets in the Middle East and North Africa (MENA) region increased to $416bn in 2010, representing a five-year annual growth of 20 percent compared to less than 9 percent for conventional banks, the consultancy said.

90 North hopes to tap into the Gulf’s wealthy residents by offering Islamic-compliant property assets with secure long-term returns, Caan said.

“We have identified an investment opportunity in the student housing market. Well respected universities are still getting more applications than they can cater for so the demand side is very high but most universities are not able to meet the demand in terms of accommodation,” he said. “You have predictability of income.”

In ‘Dragons’ Den’, Caan was one of panel of entrepreneurs courted by start-up firms in a bid to secure their investment in return for an equity share.

Caan, who invested $1.5m in 14 companies while on the show, said Dubai remained the leading destination for investment among the six Gulf states.

“If I was being pitched in Dragon’s Den by Abu Dhabi, by Qatar, by Dubai – which one would I back? [Dubai] has the least and has made the most out of it,” he said.

“Look at the region, Dubai probably has the least natural resources so it doesn’t have an option. Its drive and determination is much greater than somewhere like Qatar.”

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