Islamic Finance An Alternative

Islamic finance is the fastest growing market in ethical finance with an annual average growth of between 10 and 20 percent.

Current global Islamic finance assets stand at $800 billion and are expected to rise to $4 trillion by 2015. The credit crunch has provided Islamic finance with a unique opportunity to assert its values of ethic-based financing, which could help shape the global financial industry as a whole.

According to Moscow Times, Islamic finance distinguishes itself from conventional finance in its compliance with the principles of Islamic commercial jurisprudence.

Islamic finance seeks to promote ethical and socially responsible investment while providing an alternative to interest-based finance.

The main tenets of Islamic commercial jurisprudence prohibit interest payments on monetary loans or securities, speculation, uncertainty in certain contractual terms and anti-social business activities.

Islamic Techniques
Some of the main Islamic financing techniques include murabaha (cost-plus financing), sukuk (Islamic bonds), ijara (based on the leasing of an asset), istisna'a (production/construction financing) and musharaka (equity investment).

The recent defaults in the Islamic finance industry have shown that the Persian Gulf has been affected by the same liquidity issues as the West, with central banks actively intervening to encourage interbank lending.

However, there are significant differences in the views about long-term prospects expressed by bankers in western banks, conventional local banks and Islamic banks, with the latter being the most optimistic.

The general view among all bankers is that market performance in the first two quarters of next year will verify the resilience of Islamic banks.

As European economies come to terms with the effects of the economic crisis, Islamic finance is attracting greater attention because of the ethical and socially conscious principles that underpin the industry.

A number of countries in Europe such as the United Kingdom, France and Italy are ensuring that their legal systems create a level playing field for Shariah-compliant structures.

In Asia, Singapore, Indonesia and Hong Kong are vying to be the hub for Islamic finance, despite Malaysia's traditional dominance.

The entire financial system in Iran is Shariah-compliant, while interest from China, Turkey and India is on the rise.

These are all significant trading partners for Russia.

Russian Prospects
There is a growing interest in Russia (as well as elsewhere in the CIS) among banking and corporate borrowers as well as potential arrangers in the diversification of sources of financing through access to the Islamic financial markets.

However, Islamic finance is very new to Russia and marrying the principles of Islamic finance with the legislative framework in Russia is going to be an evolutionary process.

The London and Moscow offices of Norton Rose LLP have recently been involved in structuring a Russian murabaha trade financing as well as a Russian sukuk.

During this process, they identified a number of corporate, commercial and tax issues that should be noted by any parties seeking to engage in similar transactions in the Russian market.

They were able to work within the limits of the existing Russian legislative framework to find solutions to the challenges that we faced. But it would be helpful if Russia, like the UK and France, for example, considered making certain changes to the existing tax and commercial laws to remove some of the current barriers to Islamic finance and create a level playing field with conventional transactions.

In the current economic climate, Islamic finance is a real alternative for financiers who face a lack of liquidity in the debt capital markets and are looking for attractive ways of raising finance.

Link: http://www.zawya.com/Story.cfm/sidZAWYA20091229051836/Islamic%20Finance%20An%20Alternative

Germany's first Islamic bank to open in early 2010

Germany's first Islamic bank, a unit of Kuveyt Turk Bank of Turkey, is to open its doors in early 2010 in the southern city of Mannheim, an executive confirmed Tuesday. Under Islamic banking principles, interest on loans is forbidden and money cannot be lent to enterprises that flout Sharia law. Instead, borrowers must offer collateral and lenders receive a share of business profits. The unit will open by March at the latest in Mannheim, a factory city with a large ethnic Turkish population, Istanbul-based Kuveyt Turk Bank said. It would seek a full local banking licence for Germany later.

 

An area newspaper, Rhein Neckar Zeitung, broke the news. The bank executive, who asked not to be named, said Kuveyt Turk Bank intended to establish further branches in Germany, then in other European nations. Some German retail banks offered banking advice in Turkish, but walk-in branches with Islamic products would be new in the country. In Germany, 5 per cent of the 80-million-strong population has a Muslim background, according to Berlin government data. The Central Council of Muslims, an Islamic group, says its data show three quarters of them feel a strong bond to Islamic tradition and at least one fifth are interested in Islamic-approved investing.

 

The council said it was only a matter of time before German banks also realized there was a domestic retail market for Islamic banking investments, which are usually certified by Islamic scholars who review how they work to ensure they conform with Sharia. The certifiers also make sure the money is not being invested immorally, such as in gambling or sex, or in enterprises that are obviously on the brink of collapse. Germany's biggest bank, Deutsche Bank, runs a major Islamic investment arm, DWS Noor Islamic Funds, in the Middle East and North Africa. A German state, Saxony Anhalt, has raised 100 million euros (140 million dollars) internationally via a sukuk, or Islamic bond.

Link: http://www.earthtimes.org/articles/show/301380,germanys-first-islamic-bank-to-open-in-early-2010.html

Malaysia Needs New Strategies To Remain Asia's Islamic Finance Centre

New initiatives and strategies must be put in place by the Malaysian government and regulators if the country wants to remain the investors choice for the banking business, says a senior economist.

Chairman of the Russian Centre For Islamic Economic and Finance (RCIEF) International Advisory Panel Professor Datuk Dr Sudin Haron said despite Malaysia's supremacy as the leading Islamic financial centre, other countries in the Asia were also capable of providing Islamic financial services and ultimately becoming the leading Islamic financial centre.

" Hong Kong for example, is trying to become a leader in capital market.

Hong Kong's financial regulators believe China's booming economy will attract investors and fund managers to place their money in China, thus Hong Hong is the better place and choice for them.

" Singapore, on the other hand, is trying to establish itself as the Islamic financial centre for the wealthiest.

Therefore, they are now trying to focus themselves in the area of Islamic wealth management," he told Bernama in an interview.

However, he said any new policy and incentives introduced by the government can be emulated by other countries.

In most cases, these countries would introduce more attractive incentives compared with incentives introduced earlier by the Malaysian government.

" Besides providing incentives to players in the Islamic financial system, the government must also be susceptible to the needs of those who use the products and services of the Islamic financial system.

" Therefore, a good market intelligence system should be introduced as this would provide a true picture of the market, hence, appropriate strategies and action must be implemented," he proposed.

Sudin, a scholar with vast experience in the field of banking and finance, management and business management is also the President of the Kuala Lumpur Business School and Executive Chairman of Vision Bridge Sdn Bhd.

Currently, products and services of the Islamic financial system are used by domestic customers, as such, efforts should be made to lure international customers to use Malaysian Islamic banks.

He said Islamic local banks could only be attractive to the foreign customers if the level of service was at par if not better than those offered by international Islamic banks.

Saying that local banks should focus on productivity and efficiency, he added that another important element that needed to be carefully structured is the transaction cost related to the products and services of Islamic banks.

" The regulator must ensure the cost incurred by players and the users of Islamic banking products are much cheaper than the transaction cost of conventional banks," he pointed.

Beside Malaysia, Sudin said there were many other countries and cities which want to be known as the leading Islamic financial centre.

" New York, London, Dubai, Manama, Doha are already in the race, whereas, Moscow, Frankfurt, Paris, Hongkong, Singapore and Bandar Sri Bengawan are starting to equip themselves with the infrastructure prior to entering this new alternative financial structure," he disclosed.

He explained the Islamic financial industry was no longer a privilege to a certain group of people or to a specific country.

" The Islamic financial system is seen as a viable alternative to the conventional system. Therefore more countries will try and introduce this into their financial system.

" Any country which wishes to become the industry leader must offer better products and services to meet users demand," he said.

Sudin said Malaysia is seen by many as a leader in propagating the Islamic financial system and there were several reasons why Malaysia managed to position itself as the front runner.

The government's commitment in implementing the Islamic financial system as an alternative to the conventional system was the main reason why Malaysia emerged as the leader in this area.

Secondly, Sudin said the regulator of the financial system was able to formulate well coordinated short and long term plans for the development of an Islamic financial system in Malaysia.

He said the Financial Sector Master Plan, introduced by the Central Bank, laid out strategies toward strengthening the Malaysian financial system in line with the globalisation and liberalisation of the world financial system.

Islamic financial institutions are efficiently managed and they are seen by customers as better banks than their conventional counterparts judging from the stream of non-Muslims customers who have begun to patronise these banks.

Sudin served Bank Negara Malaysia between 2005 and 2006 as an expert in the Islamic Banking and Takaful Division.

In 2006, he was appointed the Deputy Chief Executive for his brainchild project, the International Centre for Education in Islamic Finance.

Before joining the central bank, he served with Universiti Utara Malaysia as an academician and administrator and was also involved in the banking sector.

Link: http://www.bernama.com/bernama/v5/newsbusiness.php?id=465159