Cameron Wants London to Be Islamic Financial Capital read more
CBN News Finance
Cameron Wants London to Be Islamic Financial Capital read more
CBN News Finance
THE last two years have shaken traditional western forms of finance to the core. Lax regulation combined with complex trading products proved to be a lethal cocktail and governments across the developed world are now picking up the bill for hefty bailouts.
But should investors be looking at other financial models to invest their cash? Islamic finance, which conforms to the principles of Sharia law, has predominantly been based in the Middle East but there are ways to access it in the UK and one way is through listed products. Exchange-traded fund (ETF) provider iShares offers an Islamic ETF that tracks the MSCI USA Islamic index.
So how does the ETF work? It doesn’t offer exposure to the Middle East or Islamic companies per se; instead it looks at companies that are part of the MSCI US index, and uses a filtering mechanism to include companies whose activities are allowed under Sharia.
The first filter looks at the companies’ business lines. Some business would be excluded because their activities are banned under Sharia law, for example alcohol and pork production, tobacco, financial products and gambling, explains Fahad Mehboob, relationship director at Europe Arab Bank, who is based in London.
The index also excludes companies that derive significant income from interest and have excessive leverage levels. This actually helped the index to outperform during the financial crisis, says Mehboob, because the conventional banks, which make up a significant part of the MSCI index, were sharply sold off.
A BETTER RISK PROFILE
Obviously non-Muslim investors don’t stand to gain anything from a religious point of view by investing in a Sharia-compliant ETF but there are other benefits. Sharia-compliant investing is a bit like ethical investing. But financial ratio screening actually makes sense for non-Muslim investors who don’t want excessive risk in their portfolio: “The general principle is that excessive leverage is not true to the essence of Islamic finance. This makes it inherently less risky,” Mehboob says.
Western indices that are Sharia compliant could prove to be popular with Middle Eastern investors that are awash with petro-dollars, says Mehboob. Middle Eastern investors have traditionally had huge exposures to their home market, especially real estate, and are starting to diversify, he adds.
The iShares MSCI USA Islamic ETF, which came into existence in 2007, has outperformed the actual MSCI USA Islamic Index. In the last three months it has posted returns of 6.24 per cent relative to 6.01 per cent for the index. it also pays a bi-annual dividend of 1.3 per cent.
If you want to help diversify your portfolio then sharia-compliant investing could be for you.
source : cityam
Islamic banking created a shelter for these countries, though a small one, when their economies were hit by the worst economic depression in 80 years. Having proven its robustness, many pundits confidently claim today that Islamic finance has a bright future ahead with growing recognition all around the world. Badlisyah Abdul Ghani, the CEO of CIMB Islamic Bank Berhad, which was voted Best Overall Islamic Bank at the 2010 Islamic Finance News Awards, believes a bright future lies ahead for interest-free banking. Abdul Ghani says the outlook is very positive as Islamic banking is gaining prominence among customers, adding that with greater consumer awareness, the demand will likely grow in tandem. In Malaysia, Islamic finance already commands 20 percent of the total banking sector, 70-80 percent of the primary debt capital market, more than 60 percent of the total outstanding corporate bonds, 88 percent of the listed stock and 10 percent of the asset management industry. “The expectation is for these market shares to grow further in the next five years,” Abdul Ghani said. In fact, when it comes to Europe, the UK and France have already introduced Islamic finance into their financial system and the Kuveyt Türk Participation Bank is vying to gain a stronger footing in Germany with its interest-free banking applications. Jamzidi Khalid, CEO of Deutsche Bank AG International Islamic Banking and the head of Islamic Structuring for Asia ex-Japan, said in a bank press release dated March 1 that the bank hopes to increase its leading niche in the market. “Making our conventional product platform available to clients in a Shariah-compliant format greatly increases our competitive position, while contributing to the market’s broader development. This is particularly true of the Islamic bond market, where we hope to leverage our position as the number one arranger of conventional international bonds in Asia,” he said. Islamic banking banks are not confined to commercial and retail banking and have also tremendously expanded in asset management through Shariah-compliant fund management. According to an S&P report, assets of the top 500 Islamic banks expanded by 28.6 percent to total $822 billion in 2009, compared to $639 billion in 2008. Although Islamic finance survived the 2009 economic depression largely undamaged, it was not fully immune. The biggest Islamic banking market is held by Saudi Arabia. However, after the Middle East, Malaysia emerges as the leading nation in the Islamic banking system, due to its organization and long-term vision. Malaysia is recognized as Asia’s Islamic financial hub by PricewaterhouseCoopers. The firm concluded that as of the end of 2009, Malaysia’s Islamic banking assets equaled RM113.5 billion ($35.2 billion). In addition to that, according to a 2009 report by the Malaysia International Islamic Financial Center (MIFC), Malaysia had the largest “sukuk” — the Islamic equivalent to a bond — market in the world by 2007 with a total of $25 billion. Islamic banking has a similar rationale as conventional banking except that it operates in accordance with Shariah rules on transactions, forbidding interest as well as investment in businesses that provide goods or services considered haram, or contrary to Islamic principles. The obvious differences between Islamic banking in Malaysia and in the West are its products and services. For example, partly due to the fact that the majority of Malaysians are Muslims, Malaysia has more varied players, including Islamic banks, investment banks, insurance companies, development banks, savings institutions, fund management companies, stock brokerages and trusts. There is also a Pilgrims Management and Fund Board (Tabung Haji) to help people save for hajj, the pilgrimage to Mecca. There is little difference between Islamic banking in Malaysia and in the Middle East as Malaysia works closely and emphasizes strategic alliances through Islamic finance with emerging countries of the Middle East, Africa, Central Asia and Latin America, countries expected to experience the most rapid economic recovery. Malaysia has also taken several initiatives into account, including exempting a wide range of taxes across the Islamic finance spectrum, pioneering numerous global Islamic banking and finance initiatives, adopting a liberal foreign exchange regime and creating a comprehensive regulatory and supervisory framework to ensure transparency and accountability, all of which are important to its Muslim and non-Muslim constituents. Banks from all around the globe have taken an interest in Malaysia’s Islamic banking market, including Japan’s Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad (BTMU), Germany’s Deutsche Bank AG and Saudi Arabia’s Al Rajhi Bank. Abdul Ghani underlines that investors have been confident about investing in Islamic banking in Malaysia. “Malaysia is one of the most successful and mature Islamic financial markets in the world thanks to our focus on the robustness, integrity and stability of the market — due to an effective and facilitative legislative, regulatory, legal and Shariah framework. This approach helps build confidence in the industry,” he added. Islamic banking has its critics. Many doubt, for instance, that its principles and the products are attractive enough to interest non-Muslims. For that reason, therefore, conventional banking is also regarded as a significant part of the financial system in countries where Islamic banking takes place. There is also the issue of human resources and expertise scarcity in Islamic banking, which hinders the system’s global growth. In Malaysia, the International Shariah Research Academy (ISRA), the Islamic Banking and Finance Institute Malaysia (IBFIM), the International Center for Leadership in Finance (ICLlF) and the International Center of Education in Islamic Finance (INCEIF) were established to ensure a deep pool of talent and expertise to support Islamic financial development. Jordan’s central bank governor, Umayya Toukan, told Reuters in March that it is important for Islamic banking to be part of the global banking system, noting that it should not be isolated and that the international standards of financial systems such as accounting standards, regulations and capital adequacy requirements must be available for Islamic banking, too. To achieve this standardization, Malaysia has established prudential standard-setting bodies. The Islamic Financial Services Board (IFSB) and the Association of Islamic Banking Institutions Malaysia (AIBIM) have adopted two standardized agreements, which are the Interbank Murabahah Master Agreement (IMMA) and the Master Agency Agreement (MAA) for deposit-taking and placement transactions. Vatican suggests Islamic system as model for Western banks L’Osservatore Romano, the semi-official newspaper of the Holy See, reported during the global economic crisis that the Vatican favors Islamic financing and noted that banks should use Islamic finance as a model in their efforts to increase consumer confidence. The Vatican suggested that Western banks, which have been negatively affected by the global crisis, should look at rules governing Islamic finance to restore confidence among their clients.
source : todayzaman