Sharia depositors’ funds may be haram in Indonasia

A discussion at Nahdlatul Ulama’s (NU) 32nd national congress in Makassar, South Sulawesi, ended on 25, March, 2010 with a conclusion that Sharia banks in Indonesia had yet to provide fully ‘halal’ fund management.

A young scholar who was also the deputy head of the contemporary religious issues deliberation division at NU headquarters, Cholil Nafisia, said Islamic institutions in Indonesia still lacked ability to verify funds managed by Sharia banks.
“It’s still possible that the funds of Sharia banks’ depositors are managed or invested in ‘haram’ ways,” Cholil said during a meeting at Makassar’s Sudiang haj dormitory.

Depositors usually did not realize this, he said, as the initial process of the investment generally appeared halal.
“When a depositor first makes the [transaction deal] to invest funds at a Sharia bank, everything will look fine and ‘halal’.
“The mess will happen after that, when the bank invests the funds into various investment schemes,” he said.
A sharia investment will not benefit its customer with interest. Sharia banks invest the funds in the stock market and share only a certain percentage of the profits with customers.

Each Sharia bank implements unique methods of sharing and profit calculation, making it harder for Muslims to determine whether the funds are really managed accordingly.

Once a single rupiah of a fund is invested in a haram business, the entire investment of a particular depositor would be haram, Cholil said.

“That’s why it’s hard to supervise all of the investing processes.”
Cholil suggested that the NU play a significant role in tackling such issues.
“Make more ulema into auditors and make more auditors become ulema,” he said.
“I have asked the auditors association and they confirmed that only a small number of auditors in Indonesia were skilled in auditing Sharia investments,” he said.

Cholil refused to comment if banks only used the label “Sharia” to attract customers.

source : jakatapost

Islamic finance gets the nod

THE Rudd government is pressing ahead with plans to develop Islamic finance in Australia to help position the nation as a leading global financial services hub.

Assistant Treasurer Nick Sherry told funds managers yesterday he would travel to the United Arab Emirates, Qatar and Bahrain at the end of next month for talks on the regulation, promotion and export of Islamic finance, banking and insurance.

Estimated at $US729 billion at the end of 2007, the Islamic financial services sector has been growing rapidly, and the government sees it as an alternative source of capital for Australian business and consumers.

“Australia sits as one of the closest neighbours to Indonesia, a rapidly growing developing economy and the largest Muslim nation in the world,” Mr Sherry said at a function hosted by the Investment and Financial Services Association and Deloitte.

“We have close and growing business ties to the Gulf region and beyond. We must do more.”

Charging interest is prohibited in Islamic financial services, as is speculation, and financial transactions must be underpinned by a tangible asset and require both parties to share the risk.

The government-appointed Australian Financial Centre Forum has recommended equal access for such products be introduce by removing regulatory and tax barriers.

Mr Sherry said the government was also considering ways to improve the tax treatment of managed investment trusts to attract foreign investment.

“In 2008, we asked the Board of Taxation to review these tax arrangements, and now we are considering the board’s final report,” he said.

He said the government strongly supported foreign investment in Australia.

source : the australian

Islamic Banking – A Myth of A Reality

The Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic laws (Sharia) and its practical application through the development of Islamic economics.

These are the views of a leading economist, Umer Chapra while addressing at a conference on the topic “Islamic Banking-A Myth of A Reality” at ICAP. Umer was of the view that Sharia prohibits the payment or acceptance of interest fees for the lending and accepting of money respectively, (Riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (Haraam, forbidden).

While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

He further elaborate that banking is a basic need of human since the beginning of the civilisation. Banking Concept existed before Islam and in early days it called ‘Saraaf’ who took deposits from investors and offer to trade people. When Islam arrived it gave guidance for trade, finance & banking and hence Islamic banking come in existence. Islamic financing is not myth it is a reality from hundreds of years.

Though Islamic banking launched on commercials basis very late, in modern world Dubai Islamic Bank was the first Islamic Banking bank, which was developed in the Islamic World. It is very unfortunate that total global assets of Islamic banks are just $1 billion as compared to conventional banks that have trillions of dollars. Despite this fact, we consider it a positive sign as Islamic banking are in growing stage and growing day-by-day and country-by-country. Islamic financing and banking are not only existing in the Islamic world but also practicing and teaching in the western countries.

Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah. Hence the Islamic system caters to all the needs that a Modern banking does. The conventional products offered such as Working capital requirement, Leasing, Running Finance, Export Refinance Scheme and Auto finance have Islamic Finance Alternatives such as Murabeha, Ijarah and Diminishing Musharakah, Running Musharakah, Islamic Export Financing Scheme and Car Ijarah/ Medium term car Murabaha/ Car DM respectively.

Islamic Banking has the similar rate of return for consumers, the rates are based on the same benchmark and risks have been reduced comparatively to conventional banking. The facilities provided by the Islamic banks are similar to any modern banking such as ATMs, Debit Card and branch network.

source : dailytimes

Islamic Finance Offers Stability As a Financial System

As the world reels from the knock-on effects of the US subprime crisis, many are questioning the validity of the current financial regime and asking what should replace this flawed system. Leading Islamic Finance experts Iqbal, Mirakhor and Krichene make a strong case for adopting principles of Islamic Finance.

Sydney, Australia – infoZine – The validity of the current financial regime has been in question since the 2007 global financial crisis exposed its vulnerabilities that stem from high leveraging, a complex system of transactions and instruments, and a disconnect between the real and financial sector.

Published by John Wiley & Sons (Asia) Pte Ltd, The Stability of Islamic Finance: Creating a Resilient Financial Environment for a Secure Future develops an analytical case for the inherent stability of an Islamic financial system, a system that is based on equity financing and risk sharing. The authors, who have written numerous books and articles on Islamic finance between them, bring a wealth of knowledge and experience to the discussion of the Islamic finance industry and its place in broader efforts to reduce the volatility of global financial markets.

Focusing on the historical, analytics and empirical discussion of the comparative stability of the two systems, this book first considers episodes of turbulence and instability in a historical context recalling the occurrence of such events from mid-19th century to the present. It then offers various theoretical explanations along with solutions and alternative financial systems that avoid instability provided by various scholars dating back to mid-19th century to present. Discussing the architecture of an Islamic financial system, it shows that the Islamic financial system shares at its core many characteristics of a stable financial system proposed by Western scholars throughout history to avoid the inherent instability of the present dominant system.

Scholarly, insightful, yet highly-readable, this book makes a convincing case for the world to shed its reliance on debt, interest and leveraging, and revamp the global financial system to rely more heavily on equity and risk sharing, the foundation of an Islamic financial system.

Prof. Hossein Askari received all his university education, including a Ph.D. in economics, at MIT. He has taught at MIT, Tufts University, the University of Texas at Austin and is now the Iran Professor of International Business and International Affairs at the George Washington University. He served for two and a half years on the Executive Board of the IMF and was Special Advisor to the Minister of Finance of Saudi Arabia. In the mid-1980s he was the director of a multinational team that developed the first energy plan and energy planning models for Saudi Arabia. He has written extensively on economic development in the Middle East, international trade and finance, agricultural economics, oil economics, economic sanctions, and on Islamic economics and finance.

Dr. Zamir Iqbal works as Lead Investment Officer in the Treasury of the World Bank in Washington, D.C. He earned his Ph.D. in International Finance from the George Washington University, where he also serves as adjunct faculty of International Finance. He has extensive experience with capital markets, structured products, risk management, financial sector development, and financial modeling. His research interests include Islamic finance, financial engineering, structured finance and risk management. He is co-author of several books on Islamic banking and finance.

Dr. Noureddine Krichene received his Ph.D. in economics, University of California, Los Angeles, 1980; joined the International Monetary Fund (IMF) in 1986; and held the position of advisor at the Islamic Development Bank.

Dr. Abbas Mirakhor received his Ph.D. in Economics from Kansas State University in 1969. After teaching at various universities in the USA and in Iran he joined the staff of the Research Department of the IMF in 1984. He became an Executive Director of the IMF from 1990 until his retirement in 2008. He is the author of a number of articles and books on Islamic economics and finance. He is now the first holder of the INCEIF Chair in Islamic Finance.

source : infozin

Hong Kong investors interested in Indonesian Islamic instruments

Several Hong Kong investors are interested in investing in the domestic Islamic capital market instruments this year as they have expressed during their visit to the Capital Market and Financial Institution Supervisory Agency (Bapepam-LK) office.

“They are interested in domestic capital market investment instruments. They have been asking questions about Islamic instruments and tell us they will invite investors here at the next meeting,” informed Accounting and Transparency Standard Bureau Chief at Bapepam-LK Etty Retno Wulandari to Bisnis yesterday.
She told it after a meeting between several Bapepam officials, including herself, and Financial Secretary Special Administration Region (SAR) of Hong Kong John Tsang.
However, she had not been able to tell for sure when the next meeting would be held. The Accounting and Transparency Standard Bureau at Bapepam-LK supervises Islamic securities regulations and implementation in the capital market.
On the same occasion, Chairperson of Bapepam-LK Ahmad Fuad Rahmany disclosed Hong Kong and China currently have a huge investor base of 16,000 investors, creating big opportunities for Indonesia to market its capital market investment product.
“They are interested in Islamic instruments in Indonesia due to our potential.”
Separately, Real Sector Companies Financial Assessment Bureau Chief of Bapepam-LK Anis Baridwan regretted the lack of Islamic investment instrument issuance by issuers or other capital market players.
He further called for product variation so that Islamic instruments would have better sales value and better chance to be eyed by investors.
“As long as there are no regulations violated, product variation will be good to attract interests.”
He explained compared to other countries, Indonesia is one of the countries most ready in terms of legislations and regulations to accept product variant, posing smaller risk to argument about Islamic value.
Data by Bapepam-LK showed Islamic instrument currently only represented 3% of IDR3,850 trillion’s worth of conventional instruments consisting of insurance, banking product, T-notes, corporate bond, and mutual fund products.
Anis Baridwan added Bapepam would encourage market players to maximize Islamic securities.
President Director of PT Financorpindo Nusa Edwin Sinaga forecasted Islamic securities would have better growth ahead. “Evaluations and research show the potential amount of fund placed in Islamic securities is huge, but the number of products is instead still small.”
source : Bisnis

Issuing of Islamic instruments are recommended- the conference of Yemeni Islamic banks

At the conclusion of the conference of Yemeni Islamic banks, participants recommended the need to carry out standards for the issuance of Islamic instruments because of their benefit to the community development.

This is the first conference of Islamic banks organized by the Yemeni Businessmen’s Club on 20-21 March in Sana’a under the slogan “Yemeni Islamic Banks: Reality and Future Prospects.”

The participants called for the appointment of a legitimate body in the Central Bank of Yemen to catch oversights in Islamic banks and to enable them to follow-up on all the work and activities of the Islamic banks. They asked Islamic branches of conventional banks to be abided by the  standards and controls of the Islamic banking system.

The recommendations also suggested the establishment of a religious independent national body responsible for the issues of Islamic banks and interdependence insurance. The participants urged the establishment of a payment fund for the the liquidity needs in the Islamic banks. The recommendations called for the establishment of a joint committee between the private sector and government to follow-up on the implementation of the recommendations to improve the performance of Islamic banks and insurance institutions and activate its role in the development of society.

During the launching conference, Minister of Industry and Trade Dr. Yahya al-Mutawakel said that, “The conference comes at a time when Yemen’s circumstances are influenced by the negative repercussions of the global financial crisis.  These circumstances require cooperation between the government and private sectors in order to collectively alleviate those repercussions.”

Al-Mutawakel pointed out that Islamic banks had a major role in terms of increasing monetary stability and strengthening the development, investment and social role of Islamic banks as being investment institutions having social objectives.

The funds and loans given by Islamic banks to finance private sector activities increased from 39.3 percent in 2008 to 44.5 percent  in 2009 while the rest were funded by commercial banks in 2008, 2009.

Governor of the Central Bank of Yemen, Ahmed al-Samawi, spoke of the importance of the conference in providing an in-depth discussion of Islamic banking and deepening of the concepts and expansion of its role, especially as Yemen was among the first states to issue Law No. (21) in 1996 on the Islamic banks and the amendments made to it, including allowing conventional banks to open branches operateing in accordance with Islamic law.

The central bank governor said that many European countries prepare themselves to be the capitals of Islamic banking.  He explained that the U.S. Congressional Research Service prepared a search for Islamic banking which described the Islamic finance lifeline of the financial crisis which is more robust in face of the global economic decline.

Ahmed Ba-Zara’a ,chairman of the Yemeni Businessmen’s Club, delivered an opening statement in which he referred to the objectives and themes of the conference to assess the experience of Yemen and the Islamic banks to achieve a comprehensive awareness of Islamic banking.

The conference addressed a number of themes, including the strengthening of the banks’ capacity to accommodate developments and the promotion of investment banking partnerships between divergent Islamic banks. The conference also highlighted the experiences of Islamic insurance policies in Yemen as well as the whole region, while assessing the role of Islamic banks in development. The conference evaluated the legitimacy of Islamic banks in Yemen and the impact of Islamic financing of macroeconomic variables and development in Yemen, comparing Islamic branches of conventional banks with those of banking sectors.  The conference discussed the problems of liquidity management and investment in Islamic banks as well as the legislative and legal environment of Yemeni Islamic banks. it urged corporate governance within Islamic banks in Yemen.
The conference aimed to assess the experience of Islamic banks and raise awareness of Islamic banking, through the attendance of various members of the boards of Islamic banks in Yemen and local and foreign economists. According to a report issued by the Central Bank of Yemen, there are four Islamic banks from among 18 independent banks in Yemen.

Chairmen and members of boards and CEOs of banks, Islamic banking and Islamic insurance experts, businessmen and senior leadership of the Yemeni companies and economic professors as well as concerned people attended the conference.

source : yobserver

Muslim clerics launch Islamic investment advisory board, pitch for Islamic banking

New Delhi: India’s eminent Islamic clerics today pitched for introduction of Islamic banking and financial system in the country while opening to the public the Islamic Investment & Finance Board, an advisory committee headed by clerics to assist both corporations and markets as well as common people regarding Shariat-compliant investment and finance.

“Islamic Finance and Ethical investments are gradually evolving into one of the most important asset classes in the financial services industry in the world today. This is seen as an alternate to the failure of conventional financial system to achieve the higher objective of bringing economic justice. Another driving force for this phenomenon is the sheer size of the Indian Muslim population who are looking for alternate interest free financial system,” said Mufti Mohd. Yahya Qasmi, Member, Islamic Investment & Finance Board (IIFB), at the national conference titled “A Search for an Alternate Financial System” at India Islamic Cultural Centre in the National Capital today.

Building on the strong fundamentals and importance of the alternative investment & finance, Islamic Investment & Finance Board was evolved under the leadership of Maulana Mohammad Wali Rahmani, Sajjada Nasheen, Khanqah Munger and Secretary of All India Muslim Personal Law Board, said Mufti Qasmi while introducing the IIFB and opening the conference.

The primary responsibility of the board is to ensure that all the Islamic Financial products made are Shariah compliant as an alternate means. The work of IIFB will be supervisory to guide and advise the financial corporation regarding Islamic investment and finance including Islamic Banking. The board upon going through the Shariah validity of financial products presented by financial corporation would certify the financial products after a thorough examination according to the Shariah compliant criteria. The IIFB Board shall have continuous dialogue with economist, bankers and other scholars to assess the feasibility of new proposals and assisting in project development and execution of new financial products in compliance with Shariah Principles. IIFB also makes sure that the work of an organization is Compatible with Shariah rules according to the accredited and agreed legal opinions (Fatwa), Mufti Yahya said.

The IIFB comprises prominent Ulama such as Maulana Khalid Saifullah Rahmani, General Secretary of Islamic Fiqh Academy- India, Maulana Fuzail ur Rahman Hilal Usmani Panjab, Maulana Fuzlur Raheem Mujeddi Jaipur, Mufti Shoibullah Khan- Bangalore, Mufti Ahmad Nadir Al-Qasmi, Mufti Ajaz Arshad Qasmi, Mufti Riyaz Ahmad Qasmi Munger, Mufti Anwarul Haque Qasmi, Mufti Mohd Yahya Qasmi and Market Expert Imtiaz Merchant.

Addressing the gathering Maulana Khalid Saifullah Rahmani said interest is prohibited not only in Islam but also in Christianity and Hinduism. Islamic banking system which will be free from interest will have little risk for the common people. He said that to fix benefit and dividend and to not accept the risk of loss is unnatural.

H Abdur Raqeeb, Convener, National Committee on Islamic Banking and General Secretary, Indian Centre for Islamic Finance demanded the government to allow Islamic Banking system in India as many many European countries and US have done. He said he has met RBI Deputy Governor and Union Finance Minister Pranab Mukherjee. Both have given positive response. For introduction of Islamic banking in India, the present Indian banking law will have to be amended. So he urged the gathering to meet their local MPs and convince them about Islamic financial system.

Talking to on the sidelines of the program, stock market professional Tauqeer Anjum from Chennai-based stock broker ITI Financial Services Ltd. said in the last few years there has been rise in number of people who are coming to enquire about Shariat-compliant stocks. His company though does not have any such index, however provides the Muslim investors with information about Shariat-compliant shares and products where they can invest. Excerpt.

Stock market professional Tauqeer Anjum

Do you get Muslim customers/investors who want to know from you about Shariat-compliant products/shares in which they want to invest?

Yes, such people come though in limited number and they want to invest but they have no option or alternative to work, they do not have full information either.

Do you see rise in number of people who are coming to enquire about Shariat-compliant shares?

Yes, for the last five years I have found rise in the number of such people. Earlier I was with MK stock broker and now with ITI Financial Services Ltd for some years. A lot of people come to get information about shares which are not based on interest and are completely Shariat compliant. They show interest in equity shares.

Do you have any list of Shariat-compliant products and shares?

We do not have any such index, but we have information about Shariat-related shares and share this information with the investors who want.

Can you name some companies/products in which Muslims can invest without fear of getting involved in interest?

Sun Pharma, Reliance Industries, Reliance Capital, Dabur these are some stocks/companies in which we can invest.

Such programs are necessary. We in the share market seek to get information about Shariat-compliant finance. We got information about this program. And I am here to attend it.

source : two circle

Experts say Islam can fix global financial woes

An interest-based global financial system is at the root of the global economic crisis, and there is an Islamic solution to the problem, experts at the Dubai Peace Convention said yesterday.

“Since the decline of communism and the emergence of one superpower, the global financial system has been purely based on interest,” said Dr Hussein Hamed, who is on Sharia boards of several banks and financial institutions, who is considered the father of Islamic finance and is an expert on Islamic banking. “Currency value has become interest-based and, therefore, when the crash happened, the only monetary system that was not affected was the interest-free Islamic system.”

Mohammed Akbar, a Dawa scholar from India, suggested that the current woes were a symptom of a deeper problem with the capitalist system.

“The bankers’ panic of 1907, the 1929 Great Depression, the Black Swan event of 1987 as well as the dotcom crisis in 2000” all hurt the global economy and were all caused by capitalism, he said.

According to speakers at the event, the problems can be solved using two major principles of Islam – the Quran and the Sunnah.

“Islam would, in a heartbeat, stop the spread of worthless debt notes,” Mr Akbar said.

It would also “terminate the system of interest which are the two underpinnings of the capitalist enterprise”, he said.

Dr Hamed said: “In the Islamic system, the monetary value of currency has to be valued with commodities – the value of gold is for gold, the value of silver is for silver, barley for barley and wheat for wheat.

“Therefore, depending on the availability of commodities, the value rises or drops.

“The interest-based system is forbidden in Islam, and the economic systems are built within moral guidelines, so, therefore, a family would not lose their home because a banker has placed a floating rate on it.”

Mr Akbar, though, pointed out that the modern Islamic banking system was not operating at its full potential.

“Islamic banking has had to be subjected to the current global monetary model to operate,” he said.

“If the system runs on its own ethical values and under proper administration, it would represent an irrevocable setting for global recovery.”

Currently, European banking institutions and global players were borrowing from the Sharia-based system to correct the deviation in the markets, said Dr Hamed.

“Islamic banks are popping up in the UK. Sukuk is being practised in Germany and China. The world is realising its true value.”

By awad mustafa

source : the national

Tunisia: The Islamic finance growing

It is a small revolution in the Tunisian banking landscape.  After the Al Baraka Bank and Noor Islamic Bank, Tunisia has just acquired its first Islamic bank 100% local: bank Zaytuna.

Islamic banking is gaining ground. With assets amounting to some $ 700 million, representing a penetration rate of 11.9% worldwide, it is necessary as a means to introduce more ethics in transactions Financial.  The products of Islamic finance, which have weathered the global crisis, are now adopted by several developed countries and international banks, seduced by a system which brandishes his principles as much preventive vaccines ban on speculation of interest, the uncertainty of sales and financing of illicit activities.

In Tunisia, the phenomenon continues to grow.  In 1983, the first Islamic bank was established in that country: the Best Bank or Beit Ettamouil Saoudi Tounsi (recently renamed Al Baraka Bank-Tunisia).  It is held up to 10% by the Tunisian State, 10% by Caisse Nationale de Sécurité Sociale (CNSS), 1.6% by private Saudi and 78.4% by the Saudi Al Baraka Banking Group, a global leader in the field of Islamic finance.  In June 2008, it was the turn of the Noor Islamic Bank to settle in the country.  A subsidiary of Noor Islamic Bank and Dubai Investment Group (DIB) of Sheikh Maktoum, Ruler of Dubai, it is also the sixth Islamic bank in UAE.  The regional office in Tunis focuses primarily on corporate banking and investment. Recently, a third Islamic bank to 100% of Tunisia has enhanced banking landscape: the bank Zaytuna ( “olive” in Arabic).  With an initial capital of 30 million dinars (25 million dollars), it was formally established last October 21.  A small revolution in the banking landscape previously dominated by Western practices.

Unlike the Best Bank, which develops only products for businesses, the bank Zaytuna covers all banking segments (receiving deposits from the public, regardless of the length and shape; grant funding; exchange transactions; Management of payment …) in accordance with the principles of Islamic finance, which forbids riba (usury credits) and is based on the concept of sharing risk with the client.  Founded by Mohamed Sakhr El Materi, a young Tunisian businessman, also deputy head of the group and Princess El Materi Holding – which already operates in the automotive, agribusiness, real estate, tourism and the media — the latest sector is, according to Tunisian financial community, with a bright future.

Seven shareholders would share the capital. Sakhr El Materi carves the lion’s share, with 51%.  The rest is divided among six of the most powerful private Tunisian: Map, Poulin, Tunisian Travel Service (TTS)-Delice Danone, Utica (Ulysse Trading & Industrial Companies) and the group Bouchamoui.  With this new bank, which means “universal citizen, modern and open to its international environment”, in the words of Mohamed El Matteri Tunis looks set to become a regional privileged place in Islamic finance.

Source  : Continentalmag (google trld)

Islamic Finance Emerging as Blue Ocean

  By Yoon Ja-young
Staff Reporter

While major economies were rattled by the global financial crisis following the U.S. subprime mortgage trouble, some were relatively safe. Islamic finance is one of them. It survived the crisis thanks to stable management of assets based on Islamic law, and the world is paying attention to it as an alternative to Western-style finance.

Islamic Finance Growing Rapidly

Though still alien to most Koreans, Islamic countries form a major pillar of the world. They make up 17.8 percent of the global economy and the Muslim population represents 24 percent of the world’s total. The number of Muslims is expected to reach 3 billion in 20 years.

Islamic finance, or financial transactions and products that suit Islamic law, has been growing by between 15 and 20 percent each year.

The total assets of Islamic finance stood at over $700 billion as of 2007, and are expected to breach the $1-trillion mark within two years, upon oil price hikes and the growing interest of oil-producing countries in financial investment as they ponder how to manage huge amounts of oil money.

“The continuous oil price hike between the 1990s and 2000s enabled the Middle East to accumulate ‘oil money.’ Oil producers with political stability like Saudi Arabia, the United Arab Emirates, Kuwait and Iran had the fund grow steeply,” the Korea Trade-Investment Promotion Agency (KOTRA) said in a report.

The issuance of Sukuk, or Islamic bonds, grew to $42 billion as of 2007, increasing by over 40 times from 2002. The issuance of Sukuk, mainly used to fund infrastructure projects in the Middle East, is estimated to reach $150 billion by 2012.

Islamic funds are also experiencing explosive growth. The number of Islamic funds stood at around 100 in 2000, but snowballed to reach 680 in 2008. As the funds marked better investment returns than Western ones amid the global financial market crisis, investors are increasingly turning their eyes to them as a stable investment alternative.

“The Islamic finance industry felt the influence of the credit crunch and downturn in the global economy in 2008, with a drop in Sukuk issuance and a fall in the value of equity funds,” International Financial Services London said in a report.

“Islamic banks, however, have been less affected than many conventional banks because they are not exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds, as they are prohibited from these activities,” it added.

Humane, Socially Responsible Islamic Finance

Islamic finance has some unique features as it is based on Shariah law, the Islamic code that entails the spiritual and moral obligations and duties of Muslims.

The most interesting is Sukuk, which is the Arabic name for a financial certificate and the Islamic equivalent of a bond. They are, however, very different from traditional bonds.

The Islamic world came to develop the unique type of bond as fixed income, as interest bearing bonds are not allowed in the religion. Shariah, which takes equitable distribution of wealth and equality in human rights as principles, regards Riba, or interest, as immoral profiteering. It doesn’t acknowledge the time value of money either.

Hence, collecting interest on bonds is prohibited. So how does one borrow money? The Islamic law only allows taking profit from tangible transactions like investing in real estate or leasing facilities.

With Sukuk, principal is paid back at maturation just as with other bonds. However, instead of receiving interest, those who lent or invested money get dividends from the investment. Those engaged in funding, or the bank, are regarded as partners in business, and receive part of the profits. Hence, it is like project financing or leasing.

Sukuk is an attractive way of funding as it offers money at a rate some 1.5-percent lower than the interest rates of U.S. or European lenders. The cost of raising money is also smaller as it does not require collateral.

Islamic finance requires that the investment comply with Islamic law and its investment principles. Assets should be managed according to Islamic investment principles.

It bans investing in “unethical” industries like gambling, cigarettes, pornography or armory. It also prohibits contracts that entail uncertainties, or transactions that are speculative. As such, hedging or derivative products are banned.

Currently, diverse financial products comprising not only bank products but also insurance and funds are being launched in Islamic finance, all of which should comply with Islamic law. Companies will go through probes by a Shariah committee ahead of providing products or services to see whether they fit the regulations.

It is also notable that Islamic finance levies only small arrears. It comes from the Islamic idea that businesses that fail to pay back on time are experiencing difficulties and they should receive assistance to survive hard times. Islamic finance, in this regard, is comparable to socially responsible investment.

Islamic Finance in Spotlight

Though the Islamic financial market also experienced a slowdown last year amid the global financial crisis, efforts are increasing around the world to lure the Islamic funds, refurbishing law and regulations and providing tax benefits.

“Since Islamic finance prefers long-term investment that lasts five years or more, it will help businesses in setting up funding portfolios,” KOTRA said.

It suggested that businesses that have difficulties in funding here should consider issuing Sukuk. “Since Sukuk pays part of profit from projects as dividend instead of interest, they can be more favorable than bank loans that levy high interest,” it explained.

It added that small-and medium-sized businesses, which have good business projects but little to offer as collateral, should consider Islamic finance as new funding source. Since one does not have to pay for funding until profit is incurred, the initial cost of funding is small.

Construction companies engaged in mega civil engineering projects in Islamic countries, especially in Southeast Asian countries, also have advantages if they choose funding through Sukuk. Shipbuilders and airliners can also think about it.

When Sukuk is issued in the country, biotechnology and IT businesses will enjoy the merits of Islamic finance. “Biotechnology and IT are industries that require long-term investment, and that comply with Shariah. These businesses can come up with huge profits when they succeed. It’s a win-win model for both,” KOTRA said.

Hence, countries around the world are noting the huge potential. Other Asian countries such as Japan, China and Singapore ― as well as the United Kingdom and the United States ― are aggressively seeking opportunities in Islamic finance.

Korea, a latecomer to the field, is bolstering efforts in Islamic finance, especially after the global financial crisis. The country, which has been depending too much on U.S. dollars, determined that Islamic money could be an option for diversification.

Its financial regulators, the Financial Services Commission and Financial Supervisory Service, also joined the Islamic Financial Services Board (IFSB) in 2008 as observers, and the country hosted a seminar on Islamic finance early this year.

Local financial businesses are also paying interest in the financing system, starting alliances with Islamic players.

source : korea times