The global turmoil that has ravaged the international banking sector is breathing fresh life into alternative investments like Islamic finance which has undergone an image makeover in recent years and improved its appeal among conservative investors.
Behind that appeal is the trillions of petrodollars that arose out of a quadrupling in the cost of crude since 2001 and the sharp increase in the number of Middle East investors seeking to expand their portfolios beyond their traditional oil and construction remits in the desert kingdoms.
Saiful Azhar Rosly, the head of Islamic banking at the International Centre for Education in Islamic Finance (ICEIF), said Islamic financing was not without its problems, however, the rigours imposed by shariah law would have prevented the collapse of Wall Street institutions and the $700 billion rescue package that has since followed.
“Prudent lending was a root cause of the sub-prime crisis in the United States. The borrower did not have to make a down-payment for a home loan, he was just asked whether he could pay it back, that I can presume will not happen in Islamic banking where you would have to pay much closer attention,” he told Bangkok Post Sunday.
Islamic finance in the modern era is a late-comer when compared with the different styles of Western capitalism.
Its development first emerged in the early 1970s with the establishment of Gulf banks on the back of an earlier oil boom, however, the philosophies of Islamic finance go far deeper and back to the times of the Prophet Muhammad and the beginnings of shariah law in the 7th century.
Under shariah law, speculation, the payment of interest and complicated derivative products like those that brought Wall Street to its knees are prohibited.
“You’re not allowed to sell a loan,” Rosly adds, with reference to the re-packaging and selling of bad loans in the US.
Companies that are considered heavily in debt are shunned, and those that deal in gambling, alcohol, pornography or illicit products like pork are strictly off limits.
As opposed to a mortgage, Islamic finance operates more along a lease basis. Officially, the lender owns the property while the borrower makes a substantial down payment and enters a rental agreement. Ownership is transferred once the total value is paid out.
Islamic banks and insurance companies also profit share among customers and are much more geared towards spreading risks when compared with their Western counterparts.
It’s for Muslims who are prepared to pay a piety premium, to ensure their investments measure-up to the moral standards imposed by the shariah code.
“The growing preference for Islamic financial instruments is all the more meaningful with the spread of Islamic banking into new markets,” Standard & Poor’s wrote in its 2008 outlook on Islamic finance.
“Banking customers in the Arab world and a large part of Asia as well as Muslims in the West are increasingly attracted by the Islamic model.”
This has resulted in $500 billion worth of shariah-compliant assets around the world which have grown at an average 10 per cent a year for the last decade.
Malaysia has invested heavily by pioneering sukuk, or Islamic bonds, which are mainly backed by property assets. Equally important, Malaysia wrote benchmark laws that underpin and secured its Islamic financial market. Coherent regulations have been the biggest issue confronting the industry.
Also more and more non-Muslim countries are vying for a share of the market. Governments around the world want to tap Islamic finance particularly if they can raise cheaper funds to finance big ticket projects like electricity, roads and mass transportation projects.
The UK and Germany have been prominent while in Asia, Thailand, Hong Kong, Singapore and Indonesia are attempting to follow Malaysia’s lead.
Hong Kong has launched an Islamic China Offshore Index on its stock exchange where sharia-compliant companies can list and raise capital to further leverage themselves into Mainland China.
Indices that contain shariah-compliant companies are becoming increasingly popular in the West and in non-Muslim Asia. Standard & Poor’s already covers 30 shariah stock market indices and screens close to 30,000 global stocks for potential Islamic investment.
But Rosly said uncertainty faced by Western investors, the liquidity crisis and freefalls in global equity markets would rub off on Islamic finance.
“The global crisis is creating a lot of uncertainty and this will hurt the issue of sukuks,” he said, adding that sukoks were more suited to governments and sovereign wealth funds as opposed to companies.
In July, Thailand – home to six million Muslims – scrapped plans to issue its first $500 million Islamic bond this year due “to several issues”. Although Finance Ministry deputy permanent secretary Sathit Limpongpa insisted “we should see a bond issue in the next fiscal year”.
Rosly added that ratings issues would impact on a government’s ability to launch an Islamic bond and this need to be considered.
Malaysia, for instance, which is “A” rated and holds about two-thirds of the global sukuk market enjoys slightly stronger ratings than Thailand, where agencies are warning that ongoing political turmoil could lead to downgrades.
And this, Rosly says, will challenge Bangkok’s ability to raise cash for its economy whether through a sukuk or a regular international government bond tender.
source : bangkokpost