tag:theconversation.com,2011:/ca/topics/islamic-finance-3825/articlesIslamic finance – The Conversation2022-09-29T19:39:36Ztag:theconversation.com,2011:article/1911682022-09-29T19:39:36Z2022-09-29T19:39:36ZIslamic finance provides an alternative to debt-based systems<figure><img src="https://images.theconversation.com/files/486401/original/file-20220925-56614-ux1ea3.jpg?ixlib=rb-1.1.0&rect=0%2C98%2C6000%2C3889&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The growth of Islamic banks provides Muslims living in North America with options that reflect their beliefs.</span> <span class="attribution"><span class="source">(Shutterstock)</span></span></figcaption></figure><p>For years, Muslims in North America have struggled to find ways to purchase homes while complying with Islamic law, or shariah. The Qur'an prohibits both the collection and payment of interest. For more than a million Canadians, <a href="https://www.theglobeandmail.com/business/article-muslim-homebuyers-flock-to-halal-financing-options-as-new-companies/">these religious structures limited access to conventional mortgages</a>.</p>
<p>Recently, however, companies such as the <a href="https://www.halalfinancialcorp.com/">Canadian Halal Financial Corporation</a> have emerged to fill this void. The creation of a vehicle in North America to enable Muslims to finance home ownership is part of an emerging global movement in finance.</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/OvnF2f2MZug?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The International Monetary Fund explains Islamic finance.</span></figcaption>
</figure>
<p>I spent over a year documenting <a href="https://press.uchicago.edu/ucp/books/book/chicago/B/bo29124010.html">one centre of this global movement in Malaysia</a>. There, the government has sought to create an Islamic Wall Street. It seeks to make the country’s capital, Kuala Lumpur, what one official called the “New York of the Muslim world.” </p>
<p>I am continuing my research on Islamic finance at the <a href="https://ccl.uvic.ca">Counter Currency Laboratory</a> at the University of Victoria, where we study emerging debates on the future of money.</p>
<h2>A network of Islamic banks</h2>
<p>The <a href="https://www.bnm.gov.my/islamic-banking-takaful">Central Bank of Malaysia has engineered</a> a comprehensive Islamic financial system consisting of a network of banking institutions. They have also fostered an Islamic money market, Islamic capital markets and an Islamic insurance, or takaful, system.</p>
<p>Across the country, institutions such as Bank Muamalat, HSBC Amanah and Standard Charter Saadiq, have readily sought to develop this market. Today, Islamic financial institutions aggressively promote shariah-compliant credit cards, home loans, and insurance policies. The government has also sought to spur innovation by opening its borders to competition from Islamic financial institutions based in the Arabian Gulf region.</p>
<p>On the streets of Kuala Lumpur, the ubiquity of Islamic banking and finance in the country was hard to miss. Bright advertisements offered consumers credit cards that provided “<a href="https://doi.org/10.1007/978-3-030-59840-2">free takaful coverage, low fees, and no compounding finance charges</a>.”</p>
<p>Inside Kuala Lumpur’s massive ultramodern train station, eye-catching advertisements promoted Islamic finance. <a href="https://www.alrajhibank.com.sa/en">Al-Rajhi Bank</a>, a Saudi firm that bills itself as the world’s largest Islamic bank, encouraged potential customers to “Get There Fast” with “Al Rahji Personal Financing.” On the other side of the station, the mainly Qatari-held <a href="https://www.mbsbbank.com/">Asian Finance Bank</a> boldly proclaimed that it was “moving the world to Islamic banking.”</p>
<p>Malaysian currency is readily available at the numerous ATMs owned by one of the over 20 Islamic banks operating in the country. Long lines often snaked back from the terminals during peak shopping times. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="customers line up in front of bank machines" src="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487357/original/file-20220929-25-e56ozt.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">During peak shopping times, queues at ATMs can be quite long.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Shariah contracts</h2>
<p>The growth of Islamic finance has spurred a compelling intellectual and practical problem. As one Islamic finance professional in Malaysia relayed it to me: “What, exactly, is the ‘Islamic’ in Islamic finance?”</p>
<p>This raises the question of what is entailed in the Islamic prohibition against interest.</p>
<p>Two distinct techniques have been developed to avoid the payment of interest. One interlocutor described these options as either “shariah-compliant” or “shariah-based.”</p>
<h2>Mortgage alternatives</h2>
<p>A shariah-compliant contract, such as a murabaha, uses the sale and repurchase of an asset on a deferred-payment basis. </p>
<p>There are various ways a murabaha can be structured. In Malaysia, the type of murabaha commonly used as a substitute for a mortgage involved four steps. First, the customer identified a property that they would like to own. Second, the financial institution purchased the property from the current owner. </p>
<p>Third, the institution sold the property to the customer at a markup, with repayment scheduled on an instalment basis. Finally, the customer paid the required instalments on a periodic basis until all agreed upon payments are complete. </p>
<p>These contracts circumvent the Qur’anic prohibition on charging interest by having two distinct sales. The institution buys the property from the current owner and then immediately sells it at a markup to the customer. </p>
<p>Many bankers prefer shariah-compliant contracts — such as the murabaha — because they use a workaround to replicate a conventional loan contract. All of the infrastructure already held by a bank, such as the computer systems and back office process, can be easily adapted to this type of arrangement.</p>
<p>However, the rate of the markup on this contract closely tracked prevailing interest rates. Many experts in Malaysia were critical of this contract. They thought that, while it met the letter of Islamic law, it did not conform to its spirit.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="a man walks in front of a bank with a yellow sign that reads MAYBANK ISLAMIC" src="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/487354/original/file-20220929-14-qut1hs.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Maybank Islamic Bank is one of Malaysia’s largest Islamic financial institutions.</span>
<span class="attribution"><span class="source">(Shutterstock)</span></span>
</figcaption>
</figure>
<h2>Sharing profits</h2>
<p>Critics and reformers favour a second technique for enabling financing, which they contend is “shariah-based.” This technique is premised on partnership principles and is called a musharakah. </p>
<p>This type of joint venture contract was commonly used on the Arabian peninsula even prior to the revelation of Islam. <a href="https://press.princeton.edu/books/ebook/9781400820474/partnership-and-profit-in-medieval-islam">It became a standard economic arrangement in the classical Islamic world</a>. </p>
<p>A musharakah is a profit-sharing contract in which two or more parties agree to pool their assets and labour for the purpose of making a profit. </p>
<p>In Malaysia, Islamic finance experts developed what they called a “<a href="https://doi.org/10.18646/2056.41.17-003">diminishing musharakah</a>.” In this contract, the financial institution and the homeowner would jointly purchase a home together. Over time, the homeowner progressively buys out the equity held by the financial institution by paying a monthly instalment. </p>
<p>In addition to the equity portion, the instalment also consisted of a profit margin. The profit margin was indexed to the prices of rent for comparable homes in the adjacent neighbourhood.</p>
<h2>What kind of alternative?</h2>
<p>Those seeking to reform Islamic finance favoured shariah-based contracts. They viewed them as a more authentic alternative to the shariah-compliant contracts.</p>
<p>Questions regarding the legitimacy of shariah-based and shariah-compliant contracts illustrate the vibrant debates that lie at the heart of Islamic finance. Which option Muslim consumers ultimately choose will determine the extent to which Islamic finance becomes an alternative to the debt-based system that prevails in most of the world today.</p><img src="https://counter.theconversation.com/content/191168/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Daromir Rudnyckyj receives funding from the Social Sciences and Humanities Research Council of Canada. </span></em></p>Shariah law informs financial contracts and credit systems, and the growth of Islamic financing options provides an alternative to current debt-based banking systems.Daromir Rudnyckyj, Professor, Anthropology, University of VictoriaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/842432017-10-20T13:28:11Z2017-10-20T13:28:11ZHow Islamic financial markets are a safe haven in conventional market crises<figure><img src="https://images.theconversation.com/files/190646/original/file-20171017-30406-1ttt9nl.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">shutterstock</span> </figcaption></figure><p>Islamic finance is enjoying a surge in popularity, with <a href="http://www.ey.com/Publication/vwLUAssets/ey-world-islamic-banking-competitiveness-report-2016/$FILE/ey-world-islamic-banking-competitiveness-report-2016.pdf">14% annual growth</a> in recent years. And the interest in sharia-compliant stocks and bonds is growing across the non-Muslim as well as Muslim world. </p>
<p>My <a href="http://www.sciencedirect.com/science/article/pii/S0927538X17301579">recent research</a> shows that there is good reason for this growth. In fact, Islamic markets were not rocked by the 2007-08 financial as much as conventional markets and can be considered a new safe haven for investors.</p>
<p>The popularity of Islamic financial instruments among Muslims is not surprising. Islamic law prohibits any forms of interest (<em>riba</em>) or gambling (<em>qimar</em>). Transactions that lack transparency (<em>gharar</em>) are also banned. In finance, this means that the vast majority of assets and popular trading strategies (such as short-selling and speculation) are prohibited according to Islam. </p>
<p>To circumvent this problem Islamic banks issue sharia compliant bonds known as sukuk. Conventional bonds involve a contractual obligation to pay bondholders interest and principle on a certain date. When sukuk bonds are sold to investors the money is used to invest in an asset, of which the bondholders have partial ownership. Payments to sukuk bondholders them comes from whatever after-tax profit is made on the asset. When they reach maturity, the issuer is contractually obliged to buy the bond back at the value it was bought for.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/191179/original/file-20171020-23000-1sta7gp.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">The Quran prohibits interest and gambling.</span>
<span class="attribution"><span class="source">shutterstock.com</span></span>
</figcaption>
</figure>
<p>There are also sharia-compliant stocks, which must comply to risk-averse criteria such as a low debt to income ratio. Plus, the company should have limited engagement with activities that are considered sinful in Islam, such as alcohol and tobacco. So Islamic stocks are attractive for Muslim investors, but also for non-Muslim investors, since these assets can be seen as more ethical. </p>
<h2>Wider benefits</h2>
<p>There are two popular beliefs that attract non-Muslim investors to choose sharia compliant assets. First, Islamic financial instruments can offer higher profits than non-Islamic assets. For example, for borrowers, high demand for ethical assets increases the marketability of sukuk in comparison to conventional bonds. </p>
<p>Second is the idea that Islamic financial markets are decoupled from conventional markets. There is a belief that the markets move in opposite directions during crisis periods so when conventional markets decline, Islamic ones grow. So, Islamic markets offer an important way for investors to diversify their portfolios and protect themselves against downturns in conventional markets. </p>
<p>As a result, Islamic finance is often placed in the category of alternative finance, with good potential for risk reduction. Myself and colleagues in the US, Saudi Arabia and Tunisia decided to put this idea to the test. After all, Islamic bonds are, generally speaking, not much different from traditional bonds in terms of their structure. And Islamic stocks are often affected by the same global risk factors as conventional stock markets such as the crude oil price and the volatility index. </p>
<h2>A safe haven</h2>
<p>There have been a number of financial crises to rock stock markets over the years. The last two decades have seen the 1997 Asian financial crisis, 1998 Argentinian crisis, 2007-08 US and UK financial crisis to name a few. This causes significant volatility across markets, causing substantial loses for investors. They are therefore constantly searching for markets that are less influenced by crisis shocks.</p>
<p>In a <a href="http://www.sciencedirect.com/science/article/pii/S0927538X17301579">recent study</a> we compared Islamic indexes with their conventional counterparts during crisis periods in last two decades, across five regions: the US, UK, Canada, Japan, eurozone and the Asia-Pacific. We found that during turbulent periods the Islamic indexes decoupled from non-Islamic markets. </p>
<p>There was limited spillover of the crisis shock from conventional indexes to Islamic ones and so they did provide an opportunity for risk reduction. For example, with Canada’s Islamic and conventional indexes, during tranquil periods the volatility spillover from conventional to Islamic index reaches close to 40%. But after the 9/11 terrorist attacks the Canadian Islamic index receive just 10% of volatility. This reflects the fact that volatility levels are quite similar during tranquil periods, but there is a separation when turbulence hits conventional markets.</p>
<p>These results are also true for the global financial crisis and the eurozone debt crisis. The behaviour of the net volatility spillovers between Islamic and conventional markets shows that the Islamic indexes move against conventional indexes during the turbulent periods. </p>
<p>Shariah compliant assets will not save investors entirely from loses – it does not act as a cushion against all financial shocks that affect the conventional markets. And, in periods of economic stability, investors would not benefit much from investing in Islamic markets, as the correlation between Islamic and conventional markets is high during calm periods. But, nonetheless, Islamic markets have been less heated by global financial shocks and so can claim the status of a new safe haven, particularly from a non-Muslim investor’s perspective.</p><img src="https://counter.theconversation.com/content/84243/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Larisa Yarovaya does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Islamic markets were not rocked by the 2007-08 financial as much as conventional markets.Larisa Yarovaya, Lecturer in Accounting and Finance, Anglia Ruskin UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/629932016-07-27T18:10:49Z2016-07-27T18:10:49ZIs Islamic banking more risky compared to conventional banking?<figure><img src="https://images.theconversation.com/files/132131/original/image-20160727-5656-16c5m7i.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Research has found Islamic banks are less risky than conventional banks.</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>Islamic banks are less risky and more resilient than their counter parts in terms of bank capital requirement and mobilisation of deposits. </p>
<p>Somewhat perversely, the global financial crisis presented a big opportunity to the Islamic banking and finance industry. In 2008-2009, <a href="http://www.worldscientific.com/doi/pdf/10.1142/S1793993311000270">the Islamic banking industry was estimated</a> to have experienced asset growth of 31.8% compared to 12.6% in the conventional banking. The Islamic bank total assets range between US$1.88 trillion to US$2.1 trillion in 2016 and are expected to reach US$3.4 trillion by 2018 globally. It provides an alternative financial services option to all consumers and investors. </p>
<p>As opposed to conventional banking, depositors to Islamic banks <a href="http://www.palgraveconnect.com/pc/doifinder/view/10.1057/9780230503229">are entitled to be informed</a> about what the bank does with their money and to have a say in where their money should be invested. Another difference is Islamic banks avoid interest at all levels of financial transactions and promote risk-sharing between the lender and borrower. </p>
<p>In case of profit, both the Islamic bank and its customer share it in a pre-agreed proportion. In the case of loss, all financial loss is borne by the lender.
In addition to this Islamic bank can’t create debt without goods and services to back it (such as physical assets including machinery, equipment, inventory). </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=408&fit=crop&dpr=1 600w, https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=408&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=408&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=512&fit=crop&dpr=1 754w, https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=512&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/132146/original/image-20160727-5660-w1etzi.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=512&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Depositors at Islamic banks are entitled to a say in how their money is invested.</span>
<span class="attribution"><span class="source">Magharebia/Flckr</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Nevertheless, Islamic banks have fewer instruments to mitigate risk due to the prohibition of trading associated with uncertainty, although one might argue that this same restriction reduces Islamic banks’ exposure to the type of assets associated with most of the losses that many conventional banks experienced during the global finacial crisis. Recently, Shariah-compliant <a href="http://thomsonreuters.com/content/dam/openweb/documents/pdf/tr-com-financial/fact-sheet/iibr.pdf">interbank benchmark rate has been developed</a>. Shariah-compliant money markets and government securities are underdeveloped in most countries and Islamic banks’ access to lender-of-last-resort facilities operated by central banks are often limited.</p>
<p>Bank for International Settlement (BIS) regulators are in close contact with Islamic Financial Services Board (IFSB) when devising policies and standards particularly, in relation to how much capital banks should hold and to develop a level playing field for banks across the world. However it is unclear whether bank capital reflects the riskiness of Islamic banks. </p>
<p>The issue of what effect capital has on bank risk, and how this effect may evolve over time, begs the question: compared to conventional banks, are Islamic banks overall more risky? </p>
<p>My current research on 22 countries (including 15 Gulf Cooperation Council (GCC) countries and G7 countries) from the period of 1998-2011 shows that bank capital increases bank liquidity risk for conventional banks. One possible reason for this finding may be that bank capital reflects the bank credit risk (as devised by the <a href="http://www.bis.org/publ/bcbs107.htm">Basel Accord</a>) and perhaps ignores the importance of liquidity risk. However, until very recently with the formulation of <a href="http://www.bis.org/bcbs/basel3.htm">Basel III accord</a>, the BIS has introduced two new liquidity risk measures; namely <a href="http://www.bis.org/publ/bcbs271.pdf">net stable funding ratio</a> and <a href="http://www.bis.org/publ/bcbs238.pdf">liquidity coverage ratio</a> to promote resilient banking sector. </p>
<p>On the other hand, Islamic banks do not show any appreciable evidence between bank capital and liquidity risk, suggesting that bank capital is of a less concern in that riskiness shoots up less when capital is low. Perhaps, depositor and investor conflict at Islamic banks is less acute given their financing and lending is tied less to capital.</p>
<p>My research also confirms that deposits, in particular demand deposits, reduce bank insolvency and credit risks, particularly over post-crisis period (from 2009-2011) for conventional banks and for Islamic banks from 1998-2011. This finding is not surprising because it is consistent with the traditional function of a financial institution, to mobilise deposits. </p>
<p>This result is also consistent with regulators push across the world for banks to reduce dependency on wholesale funding and increase reliance on deposits in order to maintain bank safety and soundness. </p>
<p>Formulating policies that are relevant and effective across the various stages of the business cycle for both conventional and Islamic banks presents itself as a formidable challenge to policymakers. </p>
<p>Although my analyses show that the impact of capital on risk (insolvency risk) reduction is observed in post-crisis period, it is still unknown as to whether this will persist in the longer term.</p><img src="https://counter.theconversation.com/content/62993/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mamiza Haq receives funding from Australian Institute for Business and Economics, Australian Research Council. </span></em></p>Islamic banks are more risk averse than conventional banks in terms of capital and mobilising funds.Mamiza Haq, Lecturer in Finance, The University of QueenslandLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/525852015-12-21T17:02:59Z2015-12-21T17:02:59ZHow plummeting prices are spurring reform in oil producing countries<p>It has been a turbulent year for oil. Prices were strong in summer 2014, before plummeting in the <a href="http://www.tradingeconomics.com/commodity/crude-oil">second half of that year</a>. After a modest stabilisation in early 2015, they dropped even further and are now more than two thirds lower than in <a href="http://www.tradingeconomics.com/commodity/crude-oil">summer 2014</a> – as the graph below shows. It’s bad news for oil producers but is forcing some, at least, to reform their economies as a result.</p>
<p>Russia is losing an estimated US$2 billion in revenues <a href="http://www.bbc.com/news/business-29643612">for every dollar fall in the oil price</a>. Its economy is heavily dependent on energy revenues, which account for <a href="http://dupress.com/articles/global-economic-outlook-q2-2015-russia/">50% of its federal budget revenues</a>. Even a dramatic interest rate hike to 17% has not helped the steep devaluation of the ruble, the stock-market drop or the amount of money leaving the country.</p>
<p>The situation is even worse for the world’s largest exporter of oil, Saudi Arabia, which is expected to end the year with a deficit of $150 billion – about 20% of its GDP and <a href="http://www.wsj.com/articles/oils-drop-puts-spotlight-on-saudi-arabia-1440459727">the largest in its history</a>. It has already started cutting project budgets and military acquisitions as a result. It is <a href="http://www.independent.co.uk/news/world/middle-east/six-gulf-states-will-start-taxing-people-for-the-first-time-a6768206.html">even introducing VAT</a> for the first time. </p>
<p><div data-react-class="Tweet" data-react-props="{"tweetId":"678833280037355520"}"></div></p>
<p>The severity of falling oil prices on Saudi Arabia’s economy can also be seen in its decision to open its stock market to foreigners <a href="http://www.bbc.co.uk/news/business-33132166">in June 2015</a>. It has also relaxed rules to allow qualified investors direct access to stocks <a href="http://www.bloomberg.com/news/articles/2015-10-28/oil-below-50-signals-saudi-stocks-can-t-defy-history-for-long">to reduce the economy’s dependence on crude</a>. </p>
<p>In Venezuela, the economy was <a href="http://www.ibtimes.com/venezuelas-economy-will-continue-suffer-2014-analysts-predict-further-recession-1535334">already in a shambles</a> when oil was at $120 a barrel. And in Malaysia the government is realigning its budget <a href="http://www.straitstimes.com/asia/se-asia/malaysia-plans-more-subsidy-cuts">by removing gasoline and diesel subsidies</a>. Similar steps were taken by governments across the world <a href="http://www.nytimes.com/2015/02/04/business/low-energy-prices-offer-opening-for-subsidy-cuts.html?_r=0">to remove oil subsidies</a> – Indonesia abandoned a four-decade-old policy of subsidising gasoline while India also stopped subsidising diesel and raised fuel taxes.</p>
<p>Of course, falling oil prices are not bad for all. They increase households’ scope for consumption and at the same time decrease companies’ production and transportation costs, which normally leads to higher profits and increased investments. Rapidly developing economies such as <a href="http://www.cnbc.com/2015/12/09/oil-prices-to-benefit-asian-ems-refining-hubs.html">China and India</a>, which are net importers of oil, are experiencing the most obvious immediate benefits. They are able to use savings on oil imports to reduce their trade deficit, improve government budgets, reduce inflation and redistribute money to infrastructure projects.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=349&fit=crop&dpr=1 600w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=349&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=349&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=439&fit=crop&dpr=1 754w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=439&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/106815/original/image-20151221-27890-lm899p.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=439&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Out of pocket: drivers in India will no longer benefit from government diesel subsidies.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/figar/395267474/in/photolist-5Ja3sq-4mqQTt-7UWoWg-r9WEP-4fh9uc-8SzK7Y-6kQgFT-6kWgMf-92ZpUf-egxPHt-5V4CbP-7MdXJa-7Kc12R-5V92Ab-d8uDoC-7GoCEX-ANJ4L-7KXGEG-7KTJi2-6HGqz-A8iac-A8hYw-9MuMhR-6HGPh-6HGuU-JsYhF-AVRfs-ooQzA3-7xVxsH-eBUPF-tGepT-6KrKwt-cwFxCJ-cwFyeh-8uuDz2-8QLEHZ-8SRMDP-eBmaEo-buPgi7-7SuUXc-7Rj6ga-bHJ2Ng-4ui5gz-ir7pV-51ZjVd-dpMPaE-e4t3XM-57RyRi-6345V2-5Ztvhk">Steve/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span>
</figcaption>
</figure>
<h2>Blessing in disguise</h2>
<p>This is not the end of the rout. OPEC’s commitment to glutting the market, along with the prospect of US and Iranian supplies joining it, has sparked predictions that prices <a href="http://www.bloomberg.com/news/articles/2015-12-14/opec-history-shows-it-can-deal-even-bigger-blows-to-oil-price">could drop to $20 a barrel</a>. OPEC recently <a href="http://www.marketwatch.com/story/opec-hikes-production-quota-to-315-million-barrels-a-day-reuters-2015-12-04-991123">raised its production ceiling</a> to 31.5m from 30m barrels a day. Iran, meanwhile, is gearing up to pump an extra <a href="http://uk.reuters.com/article/uk-iran-nuclear-oil-idUKKCN0SD11Z20151019">500,000 barrels per day onto the market</a> as soon as sanctions are eased, which could be within months. And the US Congress has just <a href="http://news.yahoo.com/house-passes-bill-freeing-u-oil-exports-senate-161742293.html">lifted the country’s 40-year export ban</a>. </p>
<p>Nations that are dependent on oil revenues will therefore require immediate economic and financial reforms in 2016 to balance their budgets. One method being adopted by many Islamic states is the issuing of sharia law-approved bonds, known as sukuk. These bonds can be used to finance big projects such as the building of important infrastructure, including airports, and developing other natural resources. </p>
<p>Malaysia has been leading the way on this, banking on its burgeoning Islamic finance industry to reduce its oil earnings shortfall. It is planning to sell $1 billion to $1.5 billion of sovereign credit in 2016 <a href="http://www.bloomberg.com/news/articles/2015-12-16/oil-squeezed-malaysia-seen-selling-sukuk-as-1-2-billion-matures">on top of global Islamic bonds this year</a>. </p>
<p>The Saudi Arabian government is similarly depending on both conventional sovereign bonds and sukuk to finance its budget deficit. In 2015, the kingdom issued sovereign bonds worth around 100 billion riyals ($26.5 billion) <a href="http://goo.gl/sZ8YXg">to ease the shortfall</a>. It’s all part of a $130 billion spending plan <a href="http://www.bloomberg.com/news/articles/2015-12-16/oil-squeezed-malaysia-seen-selling-sukuk-as-1-2-billion-matures">to diversify its economy away from oil</a>. But to increase its share of the Islamic finance market, it will need to follow Malaysia’s lead in making the regulations clear for trading sukuk. </p>
<p>Many more oil exporters are turning to sukuk bonds to cover their deficits, including Bahrain, Oman, Qatar and Nigeria, Africa’s largest oil producer. The sukuk bond market is forecast <a href="http://www.albawaba.com/business/sukuk-market-forecasted-grow-15-percent-2016-777836">to grow by 15% in 2016</a> as a result.</p>
<p>The emergence of sukuk has been a significant development in Islamic capital markets for many oil rich nations in the Middle East and South East Asia. Funds raised through sukuk can be allocated in an efficient and transparent way. Sukuk issuance has proven its resilience during recent periods of turbulence <a href="http://aibim.com/dev/index.php/newsroom/global-news-aibim/146-sukuk-in-the-south-asian-stock-market">in global capital markets</a> and it is showing its potential to act as a cushion for falling oil prices for oil rich countries.</p><img src="https://counter.theconversation.com/content/52585/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis Alam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Oil exporters have had a tough year … but there is hope for economic reform via the Islamic bond market.Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/407852015-05-05T15:48:18Z2015-05-05T15:48:18ZHow Islamic finance could be about to take off in China<figure><img src="https://images.theconversation.com/files/80428/original/image-20150505-16643-1wvptjo.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">An Islamic finance centre-to-be.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/gustavlindqvist/13836614065/in/photolist-3bNcmr-jsPxZm-dAXzLK-qVXyHG-kyuh8p-3cvxr1-3cjood-n5Ggit-ndzYwr-nbudpX-nbuj4x-dAXAuB-ndwLBv-5Fm7J5-a8ff78-ndAahn-ndC6f1-ndzKB8-nbxuso-5ntjEX-9anqqi-gXNZTE-amuC8Z-exHPvK-395jYR-q9Lvwr-byDrBb-ph8uym-kAmUTe-ascQeQ-bmsmF1-pms9hb-5qoFkF-cnEQFY-eQ4tgq-8BV5Tx-nVTSvw-8UUGpg-cfnTRu-asacdK-9zteJx-cfojzY-bmrjWt-bzewkR-5S9j4p-5vi7Vc-9i8ASW-6Mg7om-oGsZPL-6rAPq6">Gustav Lindqvist</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Islamic finance has been growing rapidly across the world in recent years. Today, the operation of Islamic banks and their associated financial institutions has created a <a href="https://theconversation.com/islamic-finance-goes-global-but-malaysia-still-leads-the-way-27347">trillion-dollar industry</a> and is becoming a crucial mechanism for countries looking to increase their trade with Muslim nations in Asia and the Middle East especially. </p>
<p>Its popularity largely stems from operating under the principles of risk sharing and interest-free transaction. In contrast to conventional finance, transactions under Islamic finance operate under strict, risk-averse conditions.</p>
<p>Britain became the <a href="https://theconversation.com/islamic-finance-the-gulf-and-londons-future-as-a-global-hub-19866">first non-Muslim country to issue an Islamic bond or sukuk in 2014</a>. Hong Kong then <a href="http://www.reuters.com/article/2014/09/11/hongkong-sukuk-idUSL5N0RC01S20140911">raised US$1 billion</a> from its inaugural issuance of sukuk in 2014. And recently, Goldman Sachs became the first conventional US bank to issue a sukuk, <a href="http://www.reuters.com/article/2014/09/16/goldman-sukuk-launch-idUSL6N0RH2RH20140916">raising US$500m with its debut sale of one</a>. And the Bank of Tokyo-Mitsubishi UFJ, Japan’s largest lender, has <a href="http://www.reuters.com/article/2014/06/05/bankoftokyomitsubishi-sukuk-idUSL3N0OM20120140605">also got in on the game</a>.</p>
<p>Despite this global spread, mainland China remains a major market that Islamic finance has not yet reached. But this could be set to change in the coming years – and one province in particular is leading the way. Ningxia, in the north-west of China, is an autonomous region where 35% of the population is Muslim and there has recently been talk of establishing an Islamic Financial Centre there <a href="http://www.china.org.cn/travel/Ningxia/2012-12/19/content_27461800.htm">in the next five to seven years</a>. </p>
<h2>Developing the Chinese market</h2>
<p>The development of an Islamic capital market in Ningxia could be the start of a new financial relationship between China and the Islamic world. For this to flourish, however, Islamic finance must be open to and adopted by non-Muslims as well, so that it can gain a larger foothold in the country. </p>
<p>Perceived by many in China as being for Muslims only, Islamic finance has struggled to take off. Ningxia’s initial focus should therefore be on developing a wholesale Islamic capital market, including Islamic bonds, equities and funds and making sure it is seen as a real alternative to the conventional market. </p>
<p>Ningxia can learn from the best practice of its neighbours, where Islamic finance is the norm: Malaysia, Indonesia and Singapore. This includes establishing separate regulatory standards for Islamic finance and developing a well-functioning Islamic capital market. This way the region can immediately serve the international Islamic market. </p>
<p>There is also a need to change local laws so that Islamic finance is on an equal footing with conventional finance. Local laws and tax regulations need to be modified to permit shariah-compliant investments. This needs the central and local government to set up an administrative mechanism to push things through to make it happen.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/80448/original/image-20150505-16663-1tdwilv.jpeg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Tongxin mosque in Ningxia province.</span>
<span class="attribution"><a class="source" href="http://en.wikipedia.org/wiki/Tongxin_County#/media/File:Tongxin_mosque.JPG">Wikipedia</a></span>
</figcaption>
</figure>
<h2>Attracting outside interest</h2>
<p>Ningxia is also spearheading the development of a halal market in China, which will play an important role in boosting the country’s ties with the Muslim world. In September 2014, Ningxia Halal Food International Trade Certification Centre that established in January 2008 became the first Halal certification body in China with <a href="http://www.globaltimes.cn/content/893789.shtml">government’s stamp of approval</a>. This is an important signal that they are serious about shariah-compliance. </p>
<p>China must be careful that it comes across as sincere in this endeavour, however. The effort could be undermined by cultural insensitivities such as allowing Muslim restaurants to serve alcohol alongside halal food. This is commonly found in big cities such as Shanghai, Beijing and Guangzhou. Muslims outside China may conclude that these restaurants are not Halal and may lose confidence in China’s commitment to it – and by implication, Shariah law more generally.</p>
<p>In recent years, trade between China and the Middle East has considerably increased. For example, trade between the UAE and China has increased five-fold over the past ten years – <a href="http://gulfnews.com/business/economy/uae-china-trade-grows-nearly-400-over-last-10-years-1.1072666">a growth rate of 395%</a>. This will only have a positive influence in developing Islamic finance in China. </p>
<p>The launch of the Shanghai Free Trade Zone in 2013 has generated a great deal of interest in the growth possibilities of financial services in general. Many of the big Islamic banks have stated their interest in opening branches in China and Bank Muamalat Malaysia has already teamed up with China’s Bank of Shizuishan to establish its first Islamic bank in Ningxia. </p>
<p>Banks from the Gulf are taking a greater interest in China too. Qatar International Islamic Bank and its compatriot QNB Capital recently signed an agreement with China-based Southwest Securities <a href="http://www.stuff.co.nz/business/world/67882509/china-readies-for-islamic-finance-with-helping-hand-from-gulf">to develop Shariah-compliant finance products in the country</a>.</p>
<p>These banks are no doubt attracted to the huge number of infrastructure projects that China has planned. With <a href="http://economia.icaew.com/opinion/august-2014/gr-infrastructures-class-of-its-own">9% of GDP per year spent on infrastructure projects</a> and an expression of interest in Islamic finance for projects from hospitals to metro stations, <a href="http://www.bloomberg.com/news/articles/2015-04-19/china-readies-for-islamic-finance-with-a-little-help-from-gulf">according to London-based Dome Advisory</a>, there is a huge market to tap.</p>
<p>The growth potential of Islamic finance in China is huge given the country’s 1.3 billion population. If we take on an optimistic approach, that Islamic finance is for everyone and is just an alternative to conventional finance, there is a tremendous pool to tap, given the huge banking and capital market opportunities in China. But even if you take the worst-case scenario and narrow the target to just the Muslim population, the prospects are still bright. At 2% of the Chinese population, there are still about 23m Muslims in China.</p><img src="https://counter.theconversation.com/content/40785/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Already a trillion dollar industry, Islamic finance is making inroads in China, where it is being trialled in a small province in the country’s northwest.Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of NottinghamChew Ging Lee, Professor of Quantitative Methods and Dean, Faculty of Social Sciences, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/354002015-03-06T11:04:37Z2015-03-06T11:04:37ZIslamic finance’s global surge remains a missed opportunity for banks in US and Canada<p>Islamic finance is surging across the globe, gobbling up an ever increasing share of the more than $220 trillion in international assets outstanding. It’s a trend that has accelerated since the 2008 crisis shook confidence in conventional banking, prompting most of the world’s financial capitals from London to Dubai to join the battle to dominate the industry. </p>
<p>That is, everywhere except in the US and Canada. How come? We can blame a combination of regulatory hurdles, a lack of proper rules and standards and general Islamophobia. But the result is that banks in the region risk missing out on a fast-growing and lucrative market and the patronage of wealthy foreign investors – not to mention the millions of Muslims living in North America eager for products and services that match their beliefs. </p>
<p>To be fair, most countries are struggling to craft rules and regulations that standardize Islamic finance and enable it to compete with its conventional counterpart. It’s just that North America is falling further and further behind. </p>
<p>To understand why – and see how the region’s banks could still grasp the industry’s reins – we must first explore the world of Islamic finance.</p>
<h2>What is Islamic finance?</h2>
<p><a href="http://www.islamic-banking.com/islamic_banking.aspx">Islamic finance</a> is much like traditional finance except that the services and products it creates conform to <a href="https://theconversation.com/explainer-what-is-sharia-law-and-does-it-fit-with-western-law-31972">Islamic teachings,</a> also known as sharia. The most well known of these is the prohibition against charging interest, known as riba in Arabic and a term whose explicit meaning is in dispute (more on that below). </p>
<p>Anyone who’s ever used a credit card knows you can’t borrow a dime without paying interest, but in Islamic finance, banks must find other ways to make money off their loans and other products. They usually do this by charging a service fee and/or engaging in profit-and-loss-sharing contracts. The most popular of such methods for home financing, for example, is called murabaha, which is similar to rent-to-own schemes. A bank purchases a house for a customer and then sells it back at an agreed-upon markup. </p>
<p>Islamic assets must also follow other ethical norms. Investments in high-risk ventures, gambling, non-halal foods, alcohol, pornography, and so on are all off limits. In addition, the rules generally require that risks be shared between the lender and borrower, and that all finance be directly backed by real assets – a far cry from some of Wall Street’s exotic creations that bear only a distant relation to an actual asset. </p>
<p>The industry is growing so quickly because its primary demographic comprises one-sixth of the world’s population, most of which is based in the Middle East and increasingly interested in parking its growing wealth outside the region. This is creating a pressing need for financial products and services that conform to Muslim beliefs. </p>
<h2>A fast-growing market</h2>
<p>The overall market in Islamic assets has grown at an average pace of <a href="http://www.ifsb.org/docs/2014-05-df">20% a year</a> since the financial crisis struck in 2008.</p>
<p>According to the Dubai-based Al Huda Centre of Islamic Banking and Economics, the industry is projected to boast more than <a href="http://www.out-law.com/en/articles/2015/january/rise-of-islamic-finance-and-banking-to-reach-new-heights-in-2015/">$2.5 trillion in assets</a> this year. </p>
<p>Islamic bonds, or sukuk, are perhaps the most prominent segment, with companies and governments expected to sell about <a href="http://www.zawya.com/story/Global_Sukuk_issuance_to_reach_USD145bn_in_2015-GN_11022015_120243">$145 billion</a> of the debt in 2015. </p>
<p>Iran, Malaysia, and Saudi Arabia <a href="http://www.gifr.net/publications/gifr2014/ifci.pd">currently dominate the industry</a>, but many Western countries are vying to become European and international hubs for Islamic finance. </p>
<p>The UK in particular has been pushing hard to get in the game. Last year, it became the <a href="http://www.ft.com/intl/cms/s/0/7c89467e-fc4e-11e3-98b8-00144feab7de.html#axzz3Sb1DPaFD">first Western country</a> to issue an Islamic bond. The former lord mayor of London, <a href="http://www.bloomberg.com/news/articles/2014-10-19/u-k-hub-pursuit-needs-corporate-sukuk-to-work-islamic-finance">Roger Gifford</a>, went so far as to say that Islamic finance should be as British as fish and chips. </p>
<p>Yet in a <a href="http://www.gifr.net/publications/gifr2014/ifci.pdf">2014 ranking of 42 countries</a> with some form of Islamic finance activity, the US placed 15th and Canada last – a puzzling reality given the importance of each country’s banks to the global financial system. </p>
<h2>Why did they fall behind?</h2>
<p>It’s not that Islamic finance is new to the New World. Mutual funds and mortgages that adhere to Islamic laws have been around <a href="http://www.cfr.org/economics/rise-islamic-finance/p32305">since the 1980s</a>. And in 1998, the US comptroller ruled that certain Islamic mortgages were equivalent to mainstream mortgages, as far as banks were concerned, encouraging Freddie Mac and Fannie Mae to purchase millions of dollars worth of sharia-compliant housing loans. </p>
<p>But such activity was short-lived despite rising demand. </p>
<p>One key explanation why can be found in regulations and laws that discourage Islamic finance, even ones ostensibly designed to keep the overall financial system safe. Meanwhile, the overlapping regulatory layers between the states and federal government that make setting standards incredibly complex.</p>
<p>One example involves a Tennessee mosque that <a href="http://www.forbes.com/sites/peterjreilly/2015/02/16/islamic-teaching-on-usury-kills-property-tax-exemption-in-tennessee/">lost its property tax exemption</a> after it took out an Islam-compliant mortgage, which makes the bank the owner until the debt is paid off. Since the technical owner of the property was no longer a religious institution, the tax exemption (for the property) was lost. </p>
<p>Another is the requirement that US banks keep their risk ratios fairly low. In order to be compliant while also maximizing profit, banks usually invest in the huge supply of fixed-income securities such as Treasuries and conventional corporate bonds, which are prohibited by Islamic laws. </p>
<p>An entirely different reason also appears to be xenophobic fears of sharia spreading across the country. This even sparked an inquiry by the US senate in 2005 to look into whether Islamic finance supports terrorism. Experts at the hearing testified that there is <a href="http://www.gpo.gov/fdsys/pkg/CHRG-109shrg30837/html/CHRG-109shrg30837.htm">no evidence</a> suggesting Islamic finance is more prone to facilitate terrorism than its conventional counterpart. </p>
<h2>Lack of standards a global problem</h2>
<p>More broadly, the lack of standards in Islamic finance and costs and complexities involved in entering the market have made some mainstream financial institutions wary. For example, there continue to be disagreements over what actually makes an asset permissible under Islam and who is qualified to determine this in the first place. </p>
<p>In fact, even the most fundamental tenant of Islamic assets – the prohibition of interest – is under dispute. More orthodox schools of thoughts claim all forms of interest are forbidden, while modernists contend only its most excessive and exploitative forms (namely usury, the ninth-greatest sin) should be prohibited. </p>
<p>There are now increasing fears that this lack of standards will <a href="http://www.saudigazette.com.sa/index.cfm?method=home.PrintContent&action=Print&contentID=0000000072150">hurt the industry in the long run</a>. But rather than serving to put off banks in North America, this actually presents an opportunity to lead the way in crafting regulations that set standards globally and developing products at the cutting edge of the industry. </p>
<h2>A fresh opportunity</h2>
<p>Both the US and Canada are a natural fit as homes to the bustling and dynamic Islamic finance industry, despite the above challenges. </p>
<p>The region’s energy and natural resources, as well as its stability, are a strong draw for wealthy investors from the Middle East, while the presence of highly educated and high-income Muslim populations offers a sizable domestic customer base. </p>
<p>This is a segment that has been much neglected despite its desire for sharia-compliant financial products. A new survey of US Muslims by <a href="http://www.dinarstandard.com/wp-content/uploads/2014/11/Amercan_Muslim_Executive-Summary-2014_DinarStandard.pdf">Dinar Standard</a> shows that 65% of respondents want Islamic finance available at their local bank and 57% want to know such products are verified as sharia-compliant.</p>
<p>As they are unable to find avenues within institutional finance to invest in ways that conform to their beliefs many Muslims have fallen victim to ponzi schemes and other scams. High profile cases involving an <a href="http://www.chicagobusiness.com/realestate/20101117/CRED03/101119894/condo-developers-charged-with-defrauding-muslims-banks">alleged ponzi scheme</a> in Chicago and <a href="http://www.reuters.com/article/2011/12/05/canada-islamic-bankruptcy-idUSL5E7MT3KY20111205">insolvency of a mortgage provider</a> in Toronto point to the vulnerability of the nascent industry.</p>
<h2>Regulators need to clear the way</h2>
<p>Fortunately, banks have been showing <a href="http://www.usatoday.com/story/money/business/2014/10/11/shariah-compliant-islamic-financing-usa-europe/16828599/">increased interest</a> in recent years in adding Islamic finance to their offerings, and mainstream lenders are exploring how to tailor their contracts to meet sharia’s requirements. Goldman Sachs <a href="http://www.bloomberg.com/news/articles/2014-09-22/goldman-sukuk-seen-too-risky-for-u-s-imitators-islamic-finance">issued its debut</a> sharia- compliant bond last year, becoming the fourth US-based issuer to do so. </p>
<p>And there is also much interest in fusing the similarly fast-growing halal food industry with Islamic finance. </p>
<p>But even if the banks are growing more interested, regulators must get involved to provide sufficient guidance to allow them to move ahead. The fundamentals of Islamic finance need to be strengthened and standardized if it is to emerge as a viable alternative. </p>
<p>At its heart, the purpose of Islamic finance is to promote the social good through financial markets, allowing companies and consumers to raise money while following the moral precepts enshrined in the Koran. But the way it is currently practiced is far away from realizing this goal. </p>
<p>North America has the potential to start afresh and create products that meet both the letter and spirit of Islamic law and lead the world in that effort. That requires creativity, innovation and a great deal of financial engineering –- something US banks in particular have proven to be especially adept at.</p><img src="https://counter.theconversation.com/content/35400/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammed Khan does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Financial assets compliant with sharia are growing at a much faster pace than the conventional kind, yet North American banks are still stuck on the sidelines.Mohammed Khan, PhD candidate in the Department of Political Science, McMaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/374902015-02-11T17:43:41Z2015-02-11T17:43:41ZLessons from Islamic Finance for a Greek debt swap deal<p>Greece and its creditors remain locked in a heated debate over how its debt should be financed. The newly elected Syriza government need to renegotiate their current bailout programme, in order to carry out their proposals to repeal austerity and re-invest in public services.</p>
<p>Greek finance minister Yanis Varoufakis’s <a href="http://www.reuters.com/article/2015/02/02/greece-politics-bonds-swap-idUSL6N0VC4GU20150202">strategy</a> for doing this is to swap the outstanding Greek debt for bonds linked to growth. So far he has been rejected by Greece’s German creditors who are, naturally, keen to ensure they are paid back in full. But perhaps there is another way.</p>
<p>Varoufakis’s proposal recognises that Greece’s problem is one of insolvency, not liquidity. To distinguish these two concepts let us imagine a car with that is leaking oil. Naturally the driver would have to keep refilling to be able to cover even a small distance but no matter how much oil you put the leak will be there as a different approach is required. This is insolvency. To pretend it is a liquidity issue is like trying to argue that the leak would have been fixed had we put more oil in the engine. And so Varoufakis aims to direct and relate the external financing of Greece’s debt to some well-defined business outcome.</p>
<h2>The Islamic finance model</h2>
<p>A resemblance of products and practices of <a href="https://theconversation.com/explainer-how-does-islamic-finance-work-19670">Islamic finance</a> is apparent in Varoufakis’s debt swap suggestion. The “no money for money” principle followed by Islamic banks entitles the investor to a profit share only when sharing the business risk. In this way the economic burden of a fixed interest rate, which is not linked to the business outcome, is reduced. </p>
<p>Plus, the risk is not assumed by the bank; it is passed directly to the investors who have exchanged their contractually fixed interest rate for a profit share. In other words an Islamic bank can avoid profit distribution to its investors if the banks’ business ventures have not been profitable. Islamic banks operating along these principles have demonstrated <a href="http://www.imf.org/external/pubs/ft/survey/so/2010/res100410a.htm">greater resilience to the recent financial crisis</a>, higher profitability and capitalisation compared to the debt-based conventional banks.</p>
<p>In the current situation, Greece may be thought of as the bank, the EU taxpayers would be the investors, while the business venture is Greece’s recovery. Shifting Greece’s debt to Islamic bonds linked to growth would alleviate the pressure of meeting with the next debt repayments as these become due. </p>
<p>This would enable the government to change the orientation of its policies from the short-term to the medium- or even long-term. In practice, this could mean less austerity for the already heavily burdened Greek employees, but more flexibility and determination to fight the bureaucracy, tax evasion, trade unions and corruption that are the reasons for Greece’s insolvency. </p>
<h2>European interest</h2>
<p>Why would the rest of Europe want such a deal? In the past few weeks we have observed a confrontational stance between Greek officials and various members of its international creditors. </p>
<p>What, however, may not have been accounted for in Varoufakis’s debt swap proposal is that these members would need to be present on a more permanent basis to ensure that the Greek program stays on track (and reduce any <a href="https://theconversation.com/syriza-must-face-facts-and-take-responsibility-for-greeces-debt-37289">moral hazard issues</a>). Greece would therefore be tying itself to a constant monitoring by the technocrats from the European Commission, European Central Bank and International Monetary Fund. They may, however, be able to work with the politicians towards a common goal. </p>
<p>The other benefit of swapping the current debt (even in part) with growth linked bonds would be a vote of confidence to the Greek efforts in staying part of an EU that is supportive of all its members and aspires in persisting as a union. Otherwise, speculation on a Spanish or Italian exit may follow suit.</p><img src="https://counter.theconversation.com/content/37490/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Vasileios Pappas does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Greece and its creditors remain locked in a heated debate over how its debt should be financed. The newly elected Syriza government need to renegotiate their current bailout programme, in order to carry…Vasileios Pappas, Lecturer in Finance, University of BathLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/333822014-11-03T15:09:22Z2014-11-03T15:09:22ZSaudi bank’s IPO brings financial redemption after religious controversy<figure><img src="https://images.theconversation.com/files/63538/original/h44cdzz8-1415015389.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Riyadh's market on the rise?</span> <span class="attribution"><a class="source" href="http://www.flickr.com/photos/saqibkhan/8355868313">KhanSaqib</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-sa/4.0/">CC BY-NC-SA</a></span></figcaption></figure><p>Saudi Arabia’s largest lender, National Commercial Bank (NCB) has <a href="http://www.bloomberg.com/news/2014-11-03/fatwa-no-obstacle-for-ncb-s-6-billion-ipo-islamic-finance.html">attracted 215.8 billion riyals</a> (US$58 billion) of bids from about 1.2m investors following its initial public offering. Despite attracting religious controversy for being un-Islamic, the retail portion of the US$6 billion sale was oversubscribed by almost 16 times. </p>
<p>Initial results show that the sale is the second biggest of the year behind Chinese e-commerce giant, <a href="https://theconversation.com/alibaba-investors-gamble-on-rise-of-ecosystem-internet-in-record-breaking-ipo-31807">Alibaba’s US$25 billion IPO</a>. It is also the largest IPO ever in the Middle East, surpassing the US$5 billion raised by Dubai’s DP World Ltd in 2007.</p>
<p>NCB was the only unlisted lender of Saudi Arabia’s 12 domestic banks, with total assets of US$100.5 billion. It was the most profitable bank in the kingdom last year and this IPO is sure to be part of a careful plan by the Saudi government to spur financial activity.</p>
<h2>The kingdom opens its gates</h2>
<p>This IPO has a long term financial implication for Saudi Arabia. The kingdom is preparing to open up its stock exchange, <a href="http://www.bloomberg.com/news/2014-10-01/saudi-arabian-bank-ncb-to-raise-6-billion-in-share-sale.html">valued at about US$590 billion</a>, to foreign investors in the first half of next year. Though currently closed to foreign investors, rules were proposed in August 2014 that would allow them to hold as much as <a href="http://www.bloomberg.com/news/2014-09-21/saudi-regulator-clears-share-sale-of-largest-lender-ncb.html">10% of the value of Saudi Arabia’s Tadawul stock exchange</a>. So this IPO plays an important role in the national economy by boosting confidence in the Saudi stock market.</p>
<p>The IPO also boosts the status of Saudi Arabia in the growing Islamic finance market. The kingdom has been ranked second in <a href="https://www.zawya.com/islamic-finance-development-indicator/">Reuters’ list</a> of the 15 largest Islamic finance economies, with US$3.4 billion in assets.</p>
<p>But if we look at a comprehensive set of <a href="https://www.zawya.com/islamic-finance-development-indicator/">Islamic finance development indicators</a>, which assess the growth potential of Islamic finance in countries as well as their current state, Saudi Arabia does not rank as highly. This indicator measures not just existing assets, but also how the industry is governed, what research is being done and the level of corporate social responsibility. When these other factors are included, Saudi Arabia ranks ninth on the list.</p>
<h2>Courting controversy</h2>
<p>The IPO has <a href="http://uk.reuters.com/article/2014/10/14/nationl-comml-bk-ipo-islam%20idUKL6N0S93PU20141014">not been free from controversy</a> in the conservative Muslim nation. In the build-up, some clerics suggested it violated Islamic principles. Sheikh Abdullah al-Mutlaq, a member of the Council of Senior Scholars, Saudi Arabia’s highest religious body, said that subscribing to the NCB IPO was not permissible since the bank had too many dealings forbidden by Islamic law on its balance sheet. He emphasised the point by saying: “Religion comes above everything.” </p>
<p>This view was supported by a fellow council member, Sheikh Saad al-Khathlan, who said the prospectus showed NCB had a high proportion of loans based on interest payments, which are banned by Islam. NCB were forced onto the back foot and <a href="http://www.zawya.com/story/NCB_committed_to_Shariah_principles-ZAWYA20141018032236/">pledged to convert their operations</a> into a fully fledged Islamic bank within about five years. </p>
<p>They also received a boost from a former Imam of the Holy Mosque in Mecca, Sheikh Adel al-Kalbani, who compared NCB to Al Rajhi Bank, a major Islamic lender that has already listed successfully on the stock market. <a href="http://uk.reuters.com/article/2014/10/14/nationl-comml-bk-ipo-islam-idUKL6N0S93PU20141014">He tweeted</a>: “Poor citizens, they don’t know what to do – if they subscribe, they are told they don’t have faith, and if they do not, they are not patriotic.”</p>
<p>The fact is, Saudi clerics have criticised other banks in the past and religious sentiment has not prevented the development of a strong banking sector in Saudi Arabia, including some institutions which pay interest. Plus, as the initial results of the IPO show, the religious controversy did not stop NCB gaining ground and bucking a broader market slowdown.</p>
<p>As Saudi Arabia looks set to open its gates to foreign investment, this IPO marks a significant step in the country’s bid to boost investor confidence in Saudi stock exchange by attracting investment from the super wealthy in the past two weeks of its subscription. And the huge amount of money from excess subscriptions will be returned to investors and funds, meaning the rest of stocks on the Tadawul will probably receive a boost in the coming weeks.</p><img src="https://counter.theconversation.com/content/33382/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis Alam does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Saudi Arabia’s largest lender, National Commercial Bank (NCB) has attracted 215.8 billion riyals (US$58 billion) of bids from about 1.2m investors following its initial public offering. Despite attracting…Nafis Alam, Associate Professor of Finance, Director- Centre for Islamic Business and Finance Research (CIBFR), University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/273472014-09-18T09:32:27Z2014-09-18T09:32:27ZIslamic finance goes global, but Malaysia still leads the way<p>Islamic finance is going global. South Africa has joined the UK and Hong Kong to become the <a href="http://www.ft.com/cms/s/0/0c468e00-3e73-11e4-a620-00144feabdc0.html#axzz3DSnUGOhy">third non-Muslim country</a> to issue an Islamic bond or sukuk. And this follows American investment bank <a href="http://www.bloomberg.com/news/2014-09-16/goldman-sachs-is-selling-500-million-in-first-sukuk-sale.html">Goldman Sachs raising US$500m</a> from its first Islamic bond sale. These moves reflect the desire to effectively tap into the wealth of Muslim investors around the world.</p>
<p>Fuelled by booming industries in the Middle East and South-East Asia, the Islamic finance industry is booming. Forecasts estimate it will double over the next five years to <a href="http://gulfbusiness.com/2014/05/global-islamic-banking-assets-exceed-3-4-trillion-2018/#.VBhHci5dXWo">more than US$3.4 trillion</a>. The two global centres for it are currently Malaysia and the UAE (where Goldman is issuing its sukuk). But London too has staked its claim on standing alongside Dubai and Kuala Lumpur.</p>
<p>Playing host to the 9th World Islamic Economic Forum last year, London appeared to make a deliberate challenge to rival the traditional Islamic financial powers. Opening the forum, David Cameron said:</p>
<blockquote>
<p>London is already the biggest centre for Islamic finance outside the Islamic world … I want London to stand alongside Dubai and Kuala Lumpur as one of the greatest capitals of Islamic finance anywhere in the world.</p>
</blockquote>
<p>London followed this up by launching a £200m sukuk in June 2014 and a groundbreaking new Islamic index on the London Stock Exchange. But can the non-Muslim power really challenge the traditional centres and how do they compare?</p>
<h2>Malaysia’s market share</h2>
<p>In terms of market share, Malaysia leads the pack with 16 fully-fledged Islamic banks including five foreign ones. Its total Islamic bank assets total US$135 billion (£82.7 billion), which accounts for <a href="http://www.thestar.com.my/Business/Business-News/2014/07/01/Moodys-sees-strong-growth-in-Islamic-financing-in-Malaysia/">21% of the country’s total banking assets</a>. By comparison the UAE has seven fully-fledged Islamic banks accounting for US$95 billion of assets and this represents around <a href="http://www.gulfbase.com/news/uae-s-islamic-banking-assets-up-at-95b/265345">19% of its total banking sector</a>. Meanwhile, the UK has just six Shariah-compliant financial institutions, with <a href="http://www.breitbart.com/Breitbart-London/2014/02/24/Six-Sharia-Banks-In-The-Uk">total assets of US$19 billion</a>. </p>
<p>If we focus on Islamic capital market development, Malaysia is once again a long way ahead of its competitors. The country boasts <a href="http://www.theedgemalaysia.com/business-news/290738-moodys-msia-accounts-for-over-60-of-global-sukuk-countrys-policy-supports-islamic-finance-growth.html">more than 60% of the global sukuk market</a> amounting to US$164 billion worth of outstanding sukuk in the first half of 2014. London on the other hand has <a href="http://www.gulf-times.com/Mobile/Eco.-Bus.%20News/256/details/391913/QInvest,-LSE-to-host-Islamic-finance-seminar-in-London">US$38 billion</a> of outstanding sukuk raised through 53 issues on the London Stock Exchange since 2009. Dubai fares the worst with just <a href="http://www.nasdaqdubai.com/press/nasdaq-dubai-welcomes-icd-sukuk-and-bond">US$21.08 billion as of May 2014 in sukuk on its exchanges</a>. In fact state-owned companies in the UAE have gone to London to seek further capital. </p>
<p>But Goldman Sachs’ debut sukuk was, of all the favourite Islamic finance locations, listed on the Luxembourg Stock Exchange. Intent on avoiding the controversy of their failed 2011 sukuk, Goldman this time adjusted the sukuk structure and enlisted several heavyweight Gulf banks including Abu Dhabi Islamic Bank, the National Bank of Abu Dhabi, Dubai’s Emirates NBD Capital and the investment banking arm of Saudi Arabia’s National Commercial Bank to arrange the sale. </p>
<p>This is only the second such deal from a conventional bank outside a predominantly Muslim country and so a significant step in Islamic finance going mainstream. It will also act as a big boost for GCC investment banks and give one more thumbs up for Dubai as the centre for Islamic finance.</p>
<p>Malaysia is also way ahead when it comes to regulating Islamic finance. Malaysia passed an authoritative <a href="http://www.ey.com/MY/en/Industries/Financial-Services/Take-5-Volume-1_Financial-Services-Act-2013-and-Islamic-Financial-Services-Act-2013">Islamic Financial Services Act in 2013</a>, which built on its earlier Islamic Banking Act of 1983 to oversee operations within the country. Dubai, London and other would-be centres meanwhile both rely on their common banking law with some Islamic finance add-ons to govern Islamic finance operations.</p>
<h2>Islamic finance future</h2>
<p>In relation to the Islamic finance education infrastructure, the UK is actually ahead of the game. The UK has been ranked as the <a href="http://www.zawya.com/story/The_ICDThomson_Reuters_Islamic_Finance_Development_Indicator_announces_initial_findings-ZAWYA20131027113746/">global leader in Islamic finance education</a> with more than 60 institutions offering Islamic finance courses and 22 universities offering degree programs specialising in Islamic finance. </p>
<p>Malaysia and the UAE followed. Malaysia has 50 course providers and 18 universities offering degree programs, while the UAE has 31 course providers and nine universities offering degree programs. But when it comes to research output in Islamic finance, Malaysia stood first with more than 100 peer-reviewed research papers released in the past three years. The UK followed with 56 peer-reviewed research papers and there was no data available for the UAE.</p>
<h2>Under threat</h2>
<p>Based on the above observations, it is apparent that Malaysia is still the superpower of Islamic finance. But with the recent developments in the rival centres this position is going to be under continuous threat. </p>
<p>The Islamic Development Bank has <a href="http://www.reuters.com/article/2014/07/22/sukuk-islamic-dev-bank-idUSL6N0PX0SA20140722">set up a US$10 billion sukuk issuance program</a> on the Nasdaq Dubai exchange that will be a big boost to Dubai’s efforts to become a top centre for Islamic finance. And London, which is already a global financial centre, is making its moves to bolster Islamic finance from education to cultivating relationships with Muslim banks and investors. </p>
<p>Malaysia, however, still has the advantage of a vibrant market in sukuk issuance, thanks to the Islamic hinterland of southeast Asia and a good reputation for strong Islamic finance regulation. So, it’s not a surprise that other international banks are going there to do business. And we can expect this to continue for the foreseeable future. But how Malaysia reacts to its competitors and can maintain its position is another matter.</p><img src="https://counter.theconversation.com/content/27347/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Islamic finance is going global. South Africa has joined the UK and Hong Kong to become the third non-Muslim country to issue an Islamic bond or sukuk. And this follows American investment bank Goldman…Nafis Alam, Associate Professor of Finance, University of NottinghamChristine Ennew, Pro-Vice-Chancellor and Provost, Malaysia Campus, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/313202014-09-17T09:58:57Z2014-09-17T09:58:57ZSharia-compliant student loans good news for young Muslims<p>Imagine being a young Muslim in the UK today. You are committed to your religious belief – which tells you that lending money at interest is forbidden in Islam – but you want to further your education and go to university. You need financial support, but you have a dilemma. The only finance available is a government-backed student loan, which bears interest. </p>
<p>After a three-month consultation on Sharia-compliant student finance, the <a href="https://www.gov.uk/government/consultations/sharia-compliant-student-finance">government announced</a> on September 4 that it plans to put forward legislation to create an alternative finance product compliant with Islamic Sharia law, which explicitly forbids usury or the charging of interest. It is good news for young Muslims in Britain. </p>
<p>Nothing can be better for the peace and stability that we all long for in the world than well-educated Muslims, with open minds, who are able to see through and <a href="https://theconversation.com/if-you-could-really-brainwash-young-muslims-isis-would-have-a-lot-more-british-recruits-28423">resist the teachings</a> of those who preach hate.</p>
<p>And that is why prime minister David Cameron was so right at the World Islamic Economic Forum in London last October <a href="https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech">when he said</a> that: “Never again should a Muslim in Britain feel unable to go to university because they cannot get a student loan, simply because of their religion.”</p>
<h2>£9,000 fees posed big problems</h2>
<p>It was never the intention when student loans were introduced that a student should face such a binary choice: either go to university and have a conflict with their religious beliefs, or stand by those beliefs and don’t go to university.</p>
<p>When tuition fees stood at £3,000, Muslim students fell into one of three categories. They applied for a student loan and were not concerned about paying interest; they applied for a student loan, but were uneasy about paying interest and would have preferred finance that was Sharia-compliant; or they borrowed money from family and friends in order to avoid paying interest. </p>
<p>But when tuition fees rose to £9,000 in 2012, the third category became untenable because of the extra costs – a point the government recognised in its response to the consultation.</p>
<h2>Embrace of Islamic finance</h2>
<p>The UK government has already shown it is ready to move fast when it comes to the Islamic finance industry. At the <a href="http://wief.org/">World Islamic Economic Forum</a> – the first to be held outside the Muslim world – Cameron announced that the UK Government would be launching the <a href="http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/10410467/Britain-to-become-first-non-Muslim-country-to-launch-sharia-bond.html">first sovereign sukuk</a>, a bond that is compliant with Islamic Sharia law. This was a major undertaking for a Western government that should not be underestimated – especially since it was launched just eight months later in late <a href="https://www.gov.uk/government/news/government-issues-first-islamic-bond">June 2014</a>.</p>
<p>The efforts of the government now towards finding a solution to domestic needs are no less significant.</p>
<p>At Bolton we were involved with the Department for Business, Innovation and Skills (BIS) in testing some of the first student attitudes to this problem. Much of the original thinking was around a loan backed by <a href="http://www.islamic-banking.com/murabaha_sruling.aspx">Murabaha</a>, which is linked to commodities and is one of the most popular and understood forms of Islamic finance. </p>
<p>From the government’s response to the consultation we’ve learnt that five Islamic finance structures were considered. Each was measured against the traditional student loans to ensure that repayment and debt levels were identical, with no disadvantage or advantage to Muslim students.</p>
<h2>‘Takaful’ a good option</h2>
<p>Working with experts in Islamic finance, Sarah Webb and her team from BIS decided that these criteria could best be met through “<a href="http://www.islamic-banking.com/takaful_insurance.aspx">Takaful</a>”, essentially a co-operative where funds are deposited for the mutual use of those within the group. For student loans, this would mean a student agreeing to pay back the money they borrow into the fund once they start employment. This is seen as a charitable contribution under Sharia law, benefiting all members of the fund. </p>
<p>The government is to be congratulated, not only on an imaginative solution, but because the very essence of Takaful, with its emphasis on not just helping yourself, but helping others, sits very well with education. Given the ethical dimension of mutual help implicit in Takaful, there is every possibility that repayment rates will be high. Maybe this should even be a blue print for the whole of the student loan book?</p>
<h2>Good accreditation</h2>
<p>As always, the success and acceptance of any scheme depends on how well it is understood. The government must make it clear, when the legislation for this scheme is going through parliament, that Muslim students are not receiving favourable treatment – nor are they gaining any advantage over students, whether from other faiths or none. They are paying exactly the same, but just paying for it in a different way. </p>
<p>The scheme’s success will also depend on assuring Muslim students that this is a genuine Islamic financial product. This will be accomplished through the authenticity of those giving it their blessing. The Sharia supervisory committee must be of the highest standing and well-respected internationally, so that no student could have cause to question its authority, or doubt the contract into which they are entering. </p>
<p>Because there are differences in Islamic schools of thought, which sadly have recently deepened, I would recommend seeking the opinion and accreditation of the Fiqh Academy Council which is part of the <a href="http://www.oic-oci.org/oicv2/home/">Organisation of Islamic Co-operation</a> (formerly the Organisation of Islamic Countries) in order to get the fullest support of the wider Muslim community. This would help to ensure that it is accepted by all sects. </p>
<p>This does not take anything away from the respect and appreciation that is due to other Sharia committees who sanctioned this programme in the first place and to whom we should all be most grateful.</p><img src="https://counter.theconversation.com/content/31320/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mohammed Abdel-Haq is chief executive office of Oakstone Merchant Bank and Chairman for the Centre for Opposition Studies.</span></em></p>Imagine being a young Muslim in the UK today. You are committed to your religious belief – which tells you that lending money at interest is forbidden in Islam – but you want to further your education…Mohammed Abdel-Haq, Visiting Professor and Chairman of the Centre for Islamic Finance, University of BoltonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/199222013-11-11T06:08:17Z2013-11-11T06:08:17ZMalaysia plans to be the first Islamic financial superpower<figure><img src="https://images.theconversation.com/files/34699/original/d4qpzkjp-1383849015.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">If you build it, they will come.</span> <span class="attribution"><span class="source">Spreng Ben</span></span></figcaption></figure><p>Could a new upstart be about the join the likes of London, New York and Tokyo as a global financial superpower? The Malaysian government would like to think so, at least. Recently it announced bold plans to transform the country’s capital Kuala Lumpur into a major financial centre in a bid to raise its profile and spark greater international trade and investment. </p>
<p>The <a href="http://www.trx.my/TRX_Brochure.pdf">proposed new financial district</a>, covering 70 acres and featuring 11 new buildings with 25 or more floors, has been dubbed “<a href="http://www.ft.com/cms/s/0/d7f7678e-3f70-11e3-b665-00144feabdc0.html#axzz2jruybC6K">Asia’s Canary Wharf</a>”. Known as the Tun Razak Exchange (TRX), the government believes this project is the foundation on which Malaysia will compete with regional financial superpowers such as Singapore and Hong Kong.</p>
<p>So is this a dream or can it be transformed into a reality? The <a href="http://www.zyen.com/activities/gfci.html">Global Financial Centres Index</a>, a research-informed measure of the competitiveness of a range of cities worldwide highlights the challenge that lies ahead for emerging centres like Kuala Lumpur. </p>
<p>In the <a href="http://www.longfinance.net/images/GFCI14_30Sept2013.pdf">most recent rankings</a> the city dropped one place to 22nd globally but still featured in the Asian top 10. With London and New York ahead of the pack, Singapore and Hong Kong already in strong positions and the dynamism of Shanghai and Shenzhen to contend with, gaining ground on the superpowers will be tough for Malaysia. </p>
<p>And it may be too tough, unless TRX turns to a more niche approach and builds on the country’s established strength in the rapidly growing <a href="https://theconversation.com/explainer-how-does-islamic-finance-work-19670">Islamic financial marketplace</a>.</p>
<h2>Islamic strengths</h2>
<p>Demand for Islamic financial services is growing both regionally and globally, and Malaysia has been well placed to take advantage of this. It is Islamic finance that provides Malaysia with its advantage over neighbouring financial centres, and those mapping out the country’s future business model would be wise to play to their strengths.</p>
<p>According to its central bank, Malaysia’s Islamic banking assets total US$168.4 billion, a quarter of its banking system. This in turn accounts for over 10% of the world’s total Islamic banking assets.</p>
<p>The country’s Islamic financial sector is characterised by a robust and shariah-compliant regulatory system. It has a strong sukuk (Islamic bond) market - over 60% of the global total - making Malaysia one of the world’s leading Islamic capital marketplaces. This attracts institutions from across the globe and an associated pool of liquid cash.</p>
<h2>Banking on finance</h2>
<p>Malaysia is banking on the TRX to be a dedicated international financial hub, promoting Kuala Lumpur as a new nucleus of global economic growth. The project is seen as a crucial to the <a href="http://etp.pemandu.gov.my/About_ETP-@-Overview_of_ETP.aspx">government’s economic plans</a>, creating the critical mass needed to significantly boost productivity and accelerate Malaysia’s growth. The aim is to become a high-income economy by 2020.</p>
<p>But, if Malaysia is to join the top flight of international financial centres, it must leverage its status as an established Islamic finance hub. And it must address the challenges associated with the supply of high quality human capital. </p>
<p>The performance of international financial centres is underpinned by the quality of people, of the business environment, access to international markets, infrastructure and general competitiveness. To outperform Asian rivals on these attributes will be a challenge; there are continued concerns about the quality and employability of graduates, and while the World Bank says the <a href="http://www.doingbusiness.org/data/exploreeconomies/malaysia/">ease of doing business has improved</a>, there are still problems with infrastructure and general competitiveness. And the country’s ability to access international financial markets may depend on attracting major players away from established rivals.</p>
<p>Authorities are confident, however, that they will be able to attract these new players. The central bank estimates that up to 56,000 new finance industry positions will be needed in the next decade, including up to 40,000 jobs in Islamic finance.</p>
<p>However <a href="http://www.mysinchew.com/node/90978">poor scores</a> in international student assessments, <a href="http://www.todayonline.com/world/asia/malaysia-moves-improve-students-standard-english">declining English</a> language capabilities and persistent concerns about the employability of graduates do not augur well. </p>
<p>Malaysia still has a people problem. Yes, the government may be able to build world-class facilities in Kuala Lumpur and offer tax breaks and other incentives to companies looking to operate from the new district. And yes, Islamic finance will still give the country a profitable niche to exploit. </p>
<p>But without a supply of educated, English-speaking workers, hopes of challenging regional neighbours in Hong Kong and Singapore may be little more than a Malaysian pipe dream.</p><img src="https://counter.theconversation.com/content/19922/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Nafis alam does not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article, and has no relevant affiliations</span></em></p><p class="fine-print"><em><span>Christine Ennew does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Could a new upstart be about the join the likes of London, New York and Tokyo as a global financial superpower? The Malaysian government would like to think so, at least. Recently it announced bold plans…Christine Ennew, Pro-Vice-Chancellor and Provost, Malaysia Campus, University of NottinghamNafis Alam, Assistant Professor of Finance, University of NottinghamLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/198662013-11-06T18:24:58Z2013-11-06T18:24:58ZIslamic finance, the Gulf and London’s future as a global hub<figure><img src="https://images.theconversation.com/files/34545/original/kzt9g4m7-1383746117.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Looking east.</span> <span class="attribution"><span class="source">Lewis Whyld/PA</span></span></figcaption></figure><p>David Cameron’s <a href="https://www.gov.uk/government/speeches/world-islamic-economic-forum-prime-ministers-speech">highly symbolic speech</a> at last week’s 9th World Islamic Economic Forum confirmed the government’s commitment to develop London as an important hub for Islamic finance. London Mayor Boris Johnson was also keen to encourage investment, pledging <a href="http://www.dailymail.co.uk/news/article-2480251/Boris-Johnson-Im-London-Mayor-Muslim-extraction.html?ico=home%5Eheadlines">£100m to attract tech start-ups</a> from the Muslim world.</p>
<p>It is not surprising to see both national and local government seek this investment, as London is in many ways ideally placed to benefit from a growth in this <a href="https://theconversation.com/explainer-how-does-islamic-finance-work-19670">special form of finance</a>. In the race to attract the sector, London enjoys various historic and cultural advantages over many of its rival financial centres. </p>
<p>Sharia-compliant banking has been handled in the UK since the early 1980s and London has long been at the centre of business and investment in the Muslim world. In the 90s, London began to provide more sophisticated and structured Islamic services, as local financial services and legal firms acquired enhanced knowledge and experience of the market. </p>
<p>Over the years, London has managed to maintain the industry. Last year it had about US$18.5 billion in sharia-compliant assets, the 9th most of any city in the world.</p>
<p>This experience in Islamic banking gives the city a degree of social capital in the field, unmatched by rival financial centres in the West.</p>
<p>The UK government now recognises Islamic finance as a valuable proposition, one which can bring innovation and diversity in the well-established UK market. Ultimately, it can support London as an international financial centre.</p>
<h2>Why Islamic finance?</h2>
<p>Current economic reality, both in the UK and globally, provides an important rationale for the government’s desire to attract capital from the Gulf. </p>
<p>With most Gulf investors aiming for sharia compliant investment or Islamic financing, moves by UK governments over the years to facilitate them are simply responses to economic conditions. After all, given Islamic finance has already been behind developments like the Shard or the Olympic Village, local and national governments would be foolish to ignore its potential. In addition, financial inclusion in terms of providing financial access to Muslim community according to their religious tenets has played a role as well.</p>
<p>The recent commitment by the UK government again aims to attract further capital to London, accompanied by the political will to provide a more welcoming environment by extending the Islamic finance sphere through sukuk, or Islamic bonds, for example.</p>
<p>There are four ways in which Islamic finance could be developed in the UK:</p>
<p><strong>Engagement:</strong> The relevant authorities must engage with businesses, retail groups, Sharia scholars, regulators and the financial product providers themselves to ensure the right environment for Islamic finance to flourish in London. Coordinating all these various groups will be tough, and that is why the formation of an “<a href="https://www.gov.uk/government/news/government-launches-first-islamic-finance-task-force--2">Islamic finance task force</a>” is essential, as announced earlier this year.</p>
<p><strong>Investment:</strong> Existing UK-based Islamic banks and financial institutions should invest in product design, launch and distribution to be able to maintain a competitive edge.</p>
<p><strong>Competitiveness:</strong> The legal, regulatory and financial environment should work in coordination to ensure London’s competitiveness in terms of providing the right environment for future Islamic finance activity in the capital.</p>
<p><strong>Demonstration:</strong> This will require providing all the necessary conditions for the existence and growth of the market. The Prime Minister’s indication of a sovereign sukuk sends a symbolic signal to other competing markets indicating that London is taking this seriously.</p>
<p>This would all be part of a process of increasing the provision of financial services at all levels in society, something development economists call “financial deepening”, an important boost to economic growth. </p>
<h2>Global rivals</h2>
<p>While London has for some time aimed at becoming an Islamic finance centre, other financial centres including Tokyo, Hong Kong and New York, could perhaps be considered as potential competitors. </p>
<p>However, none of these rivals appear to have London’s political backing. This not only enables appropriate laws to be passed, but it also provides Islamic capital with confidence that it will be well received in the country.</p>
<p>Tokyo remains hesitant, while New York still strategically keeps away from Islamic finance. Hong Kong represent important competition, being open and welcoming to Islamic finance but London still has the competitive edge.</p>
<p>Istanbul promises to become a serious competitor in future, with a growing Islamic finance sector based in the Muslim world’s second largest economy benefiting from close ties to both East and West. </p>
<p>Entirely new rivals may emerge, but Islamic finance’s risk averse attitude generally motivates it to remain in known traditional markets rather than new shores which may have higher returns, but also higher risks.</p>
<p>Recent commitments to develop Islamic finance in the UK represent a positive move. The UK economy will derive further benefits from attracting Islamic capital, and London’s position as a global financial centre will be strengthened. </p>
<hr>
<p><em>For further reading on the subject, see our <a href="https://theconversation.com/explainer-how-does-islamic-finance-work-19670">Explainer: how does Islamic finance work?</a></em></p>
<hr><img src="https://counter.theconversation.com/content/19866/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mehmet Asutay does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>David Cameron’s highly symbolic speech at last week’s 9th World Islamic Economic Forum confirmed the government’s commitment to develop London as an important hub for Islamic finance. London Mayor Boris…Mehmet Asutay, Reader in Political Economy (Middle East and Islamic Political Economy and Finance), Durham UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/196702013-10-29T14:51:02Z2013-10-29T14:51:02ZExplainer: how does Islamic finance work?<figure><img src="https://images.theconversation.com/files/34026/original/cxtf2hqf-1383052878.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A long way from Wall St.</span> <span class="attribution"><span class="source">Jairo Londono</span></span></figcaption></figure><p>At the World Islamic Economic Forum in London, <a href="http://www.bloomberg.com/news/2013-10-29/cameron-to-unveil-u-k-s-plans-for-debut-issue-of-islamic-gilts.html">David Cameron has announced</a> the UK is to become the first non-Muslim country to issue Shariah-compliant bonds and that a special Islamic index will be created on the London Stock Exchange. These moves represent a recognition of Islamic finance’s unique model, and of the important role it has to play in providing stable economic growth. </p>
<p>To understand why the UK is so keen to promote this investment, it is worth understanding exactly what sets Islamic finance apart from western models of banking and finance.</p>
<p>The relatively nascent Islamic finance industry finds itself sitting at the cusp of great opportunities but also confronted with major challenges. In the past few years, it has made great advances. Since 2006, the asset base has grown by 150% and is forecast to <a href="http://www.globalislamicfinancemagazine.com/?com=news_list&nid=2854">reach US$1.8 trillion this year</a>. Given the stability Islamic banks offer, and the strict constraints under which they function, this is a tremendous achievement.</p>
<p>More importantly, this growth is accompanied by a promise of far greater stability than the conventional financial sector provides. This is because of the stringent conditions that Islamic products come with.</p>
<h2>Strings attached</h2>
<p>To begin with, in Islamic finance, one must work for profits, and simply lending money to someone who needs it does not count as work. Under Islamic law, money must not be allowed to create more money. Instead, a bank must provide some service to “earn” its profits. </p>
<p>Thus, instead of traditional accounts with given interest rates, Islamic banks provide accounts which offer profit/loss. The bank in turn purchases assets with your money, which generate returns for the bank. In particular, charging high interest rates to someone in need is considered unscrupulous, leaving no space for business models like Wonga.com’s.</p>
<p>Second, high degrees of uncertainty or <em>gharar</em> are not allowed. All possible risks must be identified to investors, and all relevant information disclosed. Islamic finance prohibits the selling of something one does not own, since that introduces the risk of its unavailability later on. </p>
<p>This rules out investments in conventional derivatives, which require speculation about the future subject to excessive risks. This is also the key reason why Islamic banks survived 2007 unscathed (caveat: while no exposure to derivatives saved them initially, weak risk controls meant that they were left exposed to declines in real asset prices as the real economy went into recession).</p>
<p>Third, Islamic finance requires you only invest in ethical causes or projects. Anything unethical or socially irresponsible, from weapons to gambling or adult entertainment cannot be invested in. This produces a very strong alignment between Islamic investments and socially responsible funds.</p>
<p>With their emphasis on equity and investment in the real economy, the principles of Islamic finance provide a stable and productive banking sector. Rather than providing a lucrative financial alternative to investing in the real economy, Islamic banking complements and strengthens the latter. It ensures that financial capital does not lead to artificially bloated asset prices. Instead, it is made to work in the real economy, on real projects.</p>
<h2>Higher costs</h2>
<p>But Islamic institutions pay for this responsible version of banking through incurring higher costs. For this reason, these banks have been confined to the Middle East and a few other Muslim countries for a long time. At home, they have usually been subsidised by indulgent states committed to Islamic banking.</p>
<p>International growth has also been limited due to the absence of well developed regulatory regimes abroad that are capable of understanding and monitoring Islamic transactions including ordinary accounts, mortgages, bonds and insurance.</p>
<p>However, with its expanding product range, rapid growth, and generally increased maturity, it has been drawing increasing interest from leading financial markets. On top of it is the desire to tap into the massive liquidity these institutions offer. This of course is a key reason for the UK government’s announcement that it will be issuing Shariah-compliant bonds (apart from London’s desire to cement its position as a leading financial market). </p>
<p>This has long been a demand of Islamic banks - to enter a market they need some AAA assets to invest in and such bonds will offer exactly that. </p>
<p>We are now likely to see more steps being taken by other markets to accommodate Islamic banking. These will remove some of the quirks that raise costs for Islamic products (for instance, Islamic mortgages that may be taxed twice because of double buying and selling of houses) and facilitate further expansion.</p>
<h2>Global competition</h2>
<p>Expansion to the world’s major financial markets pits Islamic banks against much bigger and established players, but the greater size also enables them to standardise products and bring costs down to a level where they can compete head on with conventional banks.</p>
<p>But decades of functioning in well cushioned home markets means Islamic banks have become more relaxed and inefficient than their conventional rivals who operate in a more competitive environment. The coming five years will thus be extremely interesting. </p>
<p>Islamic banks will be making their way into new markets where regulators are increasingly open to accommodating this financial model. In doing so, they will attract many customers from conventional banks. But in order to retain them and make the most of this opportunity Islamic banks will need to develop far more robust risk management protocols than what they currently boast. They will also need to invest heavily in reorganisation and raise the level of human resource they depend on right now.</p>
<p>Naturally, some of them will be able to do all this better than others. But regardless of who wins these battles, their arrival on these shores can only be good for existing financial markets.</p><img src="https://counter.theconversation.com/content/19670/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kamal Munir has acted as a consultant or trainer for several organisations, including the World Bank; the Department of Trade and Industry, UK; the Asian Development Bank; and the State Bank of Pakistan.</span></em></p>At the World Islamic Economic Forum in London, David Cameron has announced the UK is to become the first non-Muslim country to issue Shariah-compliant bonds and that a special Islamic index will be created…Kamal A Munir, Associate Professor of Strategy and Policy, Cambridge Judge Business SchoolLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/189172013-10-07T03:33:23Z2013-10-07T03:33:23ZHockey should put Islamic finance on his Inquiry’s agenda<figure><img src="https://images.theconversation.com/files/32524/original/42c37j3g-1381098470.jpg?ixlib=rb-1.1.0&rect=0%2C496%2C5616%2C3245&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Sharia-compliant products are growing in popularity around the world, especially in Malaysia, Iran and Saudi Arabia, with huge potential for growth, according to Standard & Poor's.</span> <span class="attribution"><span class="source">AAP/Lukas Coch</span></span></figcaption></figure><p>A topic which warrants inclusion in Joe Hockey’s planned Financial System Inquiry – but probably won’t make it in – is the regulatory and institutional impediments to Islamic finance.</p>
<p>The 2% of the Australian population who want these Sharia-compliant products face significant problems in accessing them.</p>
<p>Islamic finance is different from regular banking for a number of reasons, one of which is a prohibition on interest. Others include acceptable insurance arrangements and restrictions (which look much like socially responsible investment criteria) on acceptable investments. </p>
<p>I don’t see a point to these religious-based constraints –- but in a free society, governments should not be putting unnecessary impediments in the way of those who want to adhere to them. </p>
<p>And it should be a concern that some regulation, like compulsory superannuation, and institutional indifference, force individuals into financial products not compatible with their beliefs.</p>
<p>Among the various problems which exist, two stand out. The first is the question of designing Islamic financial products enabling families to buy homes. Because interest is prohibited, a conventional mortgage loan is not acceptable.</p>
<p>Islamic finance works around these prohibitions with some simple financial engineering. The financial institution buys the house an individual wishes to own, and leases it to the individual on agreed terms in a long term contract. </p>
<p>At the end of the contract the ownership of the house is transferred to the individual.</p>
<p>The main problem with implementing that in Australia is double stamp duty, once on the initial purchase by the financial institution and second when the house is transferred to the owner at the end of the lease. </p>
<p>Under conventional mortgage finance, stamp duty is only levied once when the house is initially purchased.</p>
<p>The Victorian government has removed this impediment, by allowing house purchase under Islamic financing arrangements to only incur one lot of stamp duty, but other State governments have been unwilling to take that step. </p>
<p>Islamic financing of small business enterprises faces similar problems, a compounded by tax and legal issues.</p>
<p>And the government should turn its attention to superannuation. All employees, regardless of their religious faith (or lack thereof) have compulsory contributions paid by their employers into a super fund of their choice. </p>
<p>And there are significant tax advantages for voluntary contributions as well.</p>
<p>But what does the typical institutional super fund’s portfolio allocation look like? Even allowing for a member’s choice between different investment options, the only portfolios generally available will still have a significant fixed interest component.</p>
<p>This is based on the widely held view of trustees that prudent asset allocation involves a significant share of investments paying interest. That doesn’t sit well for fund member wanting only Sharia-compliant investments.</p>
<p>It is possible – in principle – to construct portfolios which don’t have an interest component but which have some “fixed-interest like” investments. Established infrastructure assets are one example. Lease income is another, such as that which might flow from Islamic financing of home ownership as discussed above. </p>
<p>But more relevant is whether conventional institutional norms about what are acceptable portfolio allocations for super, and institutional inertia, should prevent or inhibit Sharia-compliant super options being offered to individuals forced to invest in super.</p>
<p>Self managed super is always an option – but that’s only cost-effective for individuals with substantial super savings. </p>
<p>While it does look as though some institutional super offering of Sharia-compliant super is now emerging, the impediments and lack of interest have apparently been substantial.</p>
<p>Will Islamic finance get an airing in the proposed Financial System Inquiry? Probably yes, but in the context of what is needed to make investment in Australia attractive to wealthy international Islamic investment houses – because that caters to the interests of, and potentially benefits, the financial community. </p>
<p>That may be worthy of attention, but there’s more value in focusing on whether impediments to providing suitable savings and funding vehicles affecting this group of individuals and businesses can be reduced.</p><img src="https://counter.theconversation.com/content/18917/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kevin Davis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A topic which warrants inclusion in Joe Hockey’s planned Financial System Inquiry – but probably won’t make it in – is the regulatory and institutional impediments to Islamic finance. The 2% of the Australian…Kevin Davis, Research Director, Australian Centre for Financial Studies Licensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/95062012-10-08T19:22:59Z2012-10-08T19:22:59ZCan Islamic finance provide salvation for the banking sector?<figure><img src="https://images.theconversation.com/files/15424/original/xybshvzs-1347513551.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is there such thing as an ethical finance system? Proponents of Islamic finance believe so.</span> <span class="attribution"><span class="source">Image from www.shutterstock.com</span></span></figcaption></figure><p>Islamic finance has <a href="http://www.ft.com/intl/cms/s/0/9b9dcc1e-2029-11e1-9878-00144feabdc0.html#axzz26EfmA3VH">grown and expanded rapidly</a> in recent years. It was <a href="http://in.reuters.com/article/2012/09/11/islamic-finance-germany-idINL6E8K591M20120911">recently announced</a> that, following in the footsteps of some of its European neighbours, Germany will soon have its first Islamic bank — which is ironic if you think about the history of the country. Ireland, a country of arguably staunch Catholics, is also <a href="http://www.thenational.ae/featured-content/channel-page/business/middle-article-list/ireland-aims-to-become-hub-for-islamic-finance">making a bid</a> to be a global hub for Islamic finance.</p>
<p>The global growth of Islamic finance in recent years is, in part, a response to the demand for a more ethical financial system. But is Islamic finance just an ethical “spin” on “conventional” finance? Or can it offer more tangible solutions beyond the Muslim community?</p>
<p><strong>What is Islamic finance?</strong></p>
<p>Just like ethical investment in the standard financial sector, Islamic finance prohibits the use of funds for certain purposes. For example, no investment in activities that deal with alcohol, pornography, gambling and so forth. </p>
<p>The basis for Islamic finance’s code of ethics comes from religious texts and is <em>less</em> arbitrary than secular ethical investment. Admittedly, these texts have to be interpreted, and this can lead to vigorous debates and disagreements. But compared to standard ethical investment, the religious texts serve as a relatively more permanent anchor to guide behaviour.</p>
<p>Islamic finance goes much further than standard ethical investment. Not only does Islamic finance prohibit funding for “unethical” activities, it also bans transactions where people share risks and uncertainty in a disproportionate manner. This is why the use of interest is prohibited. </p>
<p>As you know, if you borrow money from a “standard” bank to run a business, the bank is guaranteed a return (the interest) while you, the borrower, will bear all the risks of making or losing money from the business operation. Islamic finance prohibits such arrangements. Instead of an interest-based banking system, Islamic finance prefers a system where profits and losses are shared. So, instead of lending money in return for interest payments, Islamic banks would lend money in return for an eventual share of the profits or loss generated from the business.</p>
<p><strong>No speculation</strong></p>
<p>The standard financial system permits speculative activity. In fact, this is encouraged as a way to keep the market “efficient”. Unfortunately, speculative activity can also have unwelcome effects, such as when financial bubbles are created and then burst.</p>
<p>Unlike the standard financial system, Islamic finance prohibits financial transactions that involve speculation. According to Islamic texts, financial transactions must have a clear link to an underlying “real” activity. So, you can buy and sell financial assets if you have a genuine interest in its underlying value, not because you want to gamble on changes in its price. <em>[See <a href="http://www.springerlink.com/content/p14rw4428t278513/">the paper</a> (paywalled) by Shahnaz and Tony Naughton for a clear and detailed discussion on this point.]</em></p>
<p>As such, Islamic finance is about more than just ethical investment. It challenges the increasing “gap” that has emerged since the 1990s between the financial sector and what economists call the “real” economy: the part of the economy that is concerned with producing goods and services, as opposed to the financial sector which is less tangible. It seeks to take us back to the days when the role of the financial sector was to serve the “real” economy. </p>
<p>In emphasising the need for financial transactions to have a link to a “real” activity, Islamic finance limits the amount of debt in the system, creates fewer opportunities for speculation and, as a result, minimises the chances of the financial system becoming unstable. Islamic finance would have prohibited the <a href="http://onlinelibrary.wiley.com/doi/10.1002/tie.20435/abstract">type of products</a> that contributed to instability in the American financial system in 2007.</p>
<p>By prohibiting the use of interest while encouraging the sharing of profit and loss, the approach adopted by Islamic finance will shift some of the risks shouldered by consumers on to financial institutions. Supporters of Islamic finance argue that it offers a safer and more equitable approach to the organisation of finance than the standard system.</p>
<p><strong>A way to a more equitable financial system?</strong></p>
<p>In practice, Islamic finance has so far not been able to perfectly follow what it preaches. Even though interest is prohibited and banks should share in profits and losses, Islamic banks tend to intentionally structure the products they sell so that they achieve outcomes that are very similar to interest-based products. As a result, Islamic financial institutions get more certain outcomes instead of bearing the risks profit and loss-sharing arrangements. </p>
<p>Until now, supporters of Islamic finance have argued that these choices have been necessary in order to compete with the “standard” sector, and that they would be abandoned once Islamic finance becomes more established and sophisticated. But, in <a href="http://www.tandfonline.com/doi/abs/10.1080/09692290902983999">mimicking the “standard” financial sector</a>, Islamic finance risks betraying its roots. Such an approach undermines its claims to offer an important and substantially different system.</p>
<p>Despite these criticisms, Islamic finance can still reframe the debate about the role of the financial sector in modern society. It forces us to question our current relationship with finance: should finance be used for speculation, or should it only be used to fund “real” activities? </p>
<p>Given the global financial crisis and the <a href="https://theconversation.com/crisis-what-crisis-five-years-on-weve-surrendered-to-the-global-financial-sector-9217">debate about reforming financial sectors</a>, the approach of Islamic finance offers us one way to think about how the financial sector might be reformed to better serve society’s needs. </p><img src="https://counter.theconversation.com/content/9506/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jikon Lai does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Islamic finance has grown and expanded rapidly in recent years. It was recently announced that, following in the footsteps of some of its European neighbours, Germany will soon have its first Islamic bank…Jikon Lai, Lecturer in International Relations, The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.