ECB Noyer: Islamic Finance Must Interact Smoothly With System

PARIS -(Dow Jones)- Western banking authorities need to tackle a number of issues before licensing Islamic banks, in order to ensure a smooth interaction with the rest of the banking systemand preserve financial stability, European Central Bank Governing Council member Christian Noyer said Tuesday at a conference in Paris.

"Banking authorities need to ensure that islamic banks will interact with their conventional environment in France as soundly as possible," Noyer said at a conference organized by Euromoney onIslamic finance.

Noyer, who is also governor of the Bank of France, cited in particular the need to clarify the governance of Islamic banks and the role of their 'shariah boards,' as well as liquidity management issues and the access of Islamic banks to the Eurosystem funding.

Although it is hard to say whether or not Islamic finance is in itself conducive to financial stability, Noyer noted Islamic banks pose specific risks to the financial system because of the way they operate, which differ from risks presented by conventional banks.

Islamic banks face specific obstacles in liquidity management because the prohibition of interest under Islamic rules has led to the underdevelopment of funding sources, he said. The lack of product standardization as well as the lack of harmonization of Islamic standards, which depend on the interpretation of Shariah scholars, create operational and legal uncertainties.

His remarks come after France recently enacted a number of legal and regulatory changes to foster the development of Islamic finance in the country, and thus grab a slice of the fast-growing Islamic finance business which still essentially goes to London in Europe.

-By Nathalie Boschat, Dow Jones Newswires; +33 (0) 1 40 17 17 40; nathalie.boschat@dowjones.com

Dow Jones Indexes named best Shari'ah-compliant index provider

Dow Jones Indexes, a leading global index provider, announced on May 2nd, 2009 that it has been named 'Best Shari'ah-Compliant Index Provider' by Global Finance magazine for the second consecutive year.

Dow Jones Indexes, a leading global index provider,  announced on May 2nd, 2009  that it has been named 'Best Shari'ah-Compliant Index Provider' by Global Finance magazine for the second consecutive year. The Global Finance awards for World's Best Islamic Financial Institutions honor those financial institutions that make significant contributions to the growth of Islamic finance and successfully meet their clients' needs for Shari'ah-compliant products, while creating the foundation for continued fast growth in the future. 'We are honored to receive this award for the second year in a row, particularly as we commemorate the tenth anniversary of the Dow Jones Islamic Market Indexes in 2009. The Dow Jones Islamic Market Index series is one of our greatest achievements in terms of innovation, concept, design, and market acceptance. It's been a tremendous decade for us as our Islamic indexes have gained popularity and an increasing user base,' said Michael A. Petronella, president, Dow Jones Indexes. 'We are committed to continue providing meaningful, new Islamic indexes in the years to come.' Award winners were selected by the editors of Global Finance, after extensive consultations with bankers, corporate finance executives and analysts worldwide. Selection criteria included objective factors such as growth in assets, profitability, geographic reach, strategic relationships, new business development and innovation in products, as well as subjective feedback from Islamic finance analysts, consultants and other industry participants. Launched in 1999, the Dow Jones Islamic Market Indexes seek to measure the global universe of investable equities that pass screens for Shari'ah compliance. The Dow Jones Islamic Market Indexes combine Islamic investment principles with Dow Jones Indexes' objective, transparent and rules-based methodology. The index family includes more than 100 regional, country and industry indexes derived from the flagship Dow Jones Islamic Market World Index. In 2006 the index family expanded to include the Dow Jones Islamic Market Sustainability Index, which combines Islamic investing principles with sustainability criteria; Dow Jones Citigroup Sukuk Index, the first index to track Islamic bonds; and Dow Jones Islamic Market BRIC Equal Weighted Index, which tracks Shari'ah-compliant stocks in Brazil, Russia, India and China. Islamic indexes for the ASEAN region, Hong Kong-listed Chinese stocks, and Indian and Malaysian blue-chips were launched within 2008. There are currently more than 150 licensees with more than $7bn in assets benchmarked to the Dow Jones Islamic Market Indexes. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3212&Cat=0

Dow Jones celebrates 10 years of Islamic Market Indexes

Dow Jones Indexes is currently celebrating the 10th year of the foundation of its Islamic Market Indexes (DJIMI), the first benchmark to measure the performance of Shariah-compliant investable equities.
Probably given the present financial crisis, the event is being celebrated with a rather low profile as though it were not really important. And in any case, hardly anyone today remembers the revolutionary breakthrough for the Islamic financial markets the indexes assisted in making possible.

Michael A. Petronella, the president of Dow Jones Indexes, asserts that the decade of Dow Jones Islamic Market Indexes has been a prolific success story of its own. "Dow Jones Indexes has turned what was considered an exotic idea into a cutting edge series of Shariah-compliant indexes and has been playing a leading role in further fostering and shaping the Islamic indexing world ever since," said Petronella in a statement last month to commemorate the 10th anniversary of the launch of the index.

"We have not only continuously expanded the Dow Jones Islamic Market index series, but were also first movers in Sukuk indexing and combining Islamic with sustainability criteria in the Dow Jones Islamic Market Sustainability Index," he added.

Indeed, what appears to be normal now -- trading of shares by Muslim investors on global stock exchanges -- needed some bold decisions 20 years ago in order to make the equity investment universe available to the compliant investor.

What has become known as the July 1987 fatwa from Sheikh Taqi Usmani (Pakistan), Professor Salih Tuğ (Turkey) and Sheikh Muhammad al-Tayyeb al-Najjar (Egypt) -- setting preconditions for investment in publicly listed companies -- ultimately played a pivotal role.

One of the other steps undoubtedly was Resolution No. 63/1/7 from the seventh session of the Fiqh Academy held in Jeddah in May 1992. The modern limited-liability company and the trade in its shares was officially recognized, together with the use of investment funds. In theory, this threw the doors to global equity markets wide open for compliant investors.

Islamic industry sponsors from that time, such as National Commercial Bank (now controlling shareholder in Türkiye Finans), Albaraka and some Islamic mutual funds further played a pioneering part in paving the way for the big boost that ultimately was given by the Islamic equity indexes.

How to select appropriate shares for investment out of the vast scale of noncompliant companies was indeed another hurdle to be overcome.

The RHB Islamic Index (1996), the FTSE Global Islamic Indexes (1988), the Dow Jones Islamic Markets Indexes (1999) and the KLSE Shariah Index (1999) standardized industry selection criteria (excluding unlawful activities such as dealing in pork, arms, liquor and conventional interest-based finance, etc.) and financial screening ratios (excluding companies with too much debt or cash). Suddenly the indexes provided easy-to-understand lists of acceptable companies. Both professional and private ethical investors gained easy access to global stock exchanges.

Also in the next phase, Turkey's presence in the progress was visible. In January 2006, it hosted the first Islamic exchange-traded fund (ETF) tracked by BMD Securities on the Dow Jones Islamic Market Turkey Index, which is listed on the İstanbul Stock Exchange (İMKB).

The Dow Jones Islamic Market Indexes have grown into an industry standard. The index series has been expanded to more than 100 indexes for all major financial markets, regions and sectors. Amongst these are Islamic indexes for the ASEAN, BRIC and GCC regions, for India as well as for global and Malaysian blue chips.

Today, the Dow Jones Islamic Market Indexes are designed to serve as underlying or benchmark for compliant financial products such as exchange-traded funds, mutual funds and structured products. There are currently more than 75 licensees with more than $7 billion in assets tied to the Dow Jones Islamic Market Indexes.

Together with the efforts of rating companies such as Moody's, Standard & Poor's and the Islamic International Rating Agency (IIRA), the indexes catapulted compliant equity to become trustworthy, mainstream investment products that are part of most contemporary portfolios worldwide.

[*] Paul Wouters is a consultant to Bener Danışmanlık.

(Today's Zaman)