Monday, November 17, 2008

No home run yet for Islamic finance

By Habhajan Singh
Islamic finance is far from hitting a home run with global investors eventhough the conventional financial system is undergoing some tough times. Some may forward the argument that Shariah-based business and finance is one alternative to conventional banking that is steeped in interst-based transactions.
Not so fast. There is much work to be done before Shariah-based banking and finance activities gain a wider acceptance, especially in the Western world, and before it can take root even within countries with a large afinity population. Two recent articles in two international business magazines show how oiling the wheels of Islamic finance is still a "work in progress". One is full of praises, while the other links Islamic finance to fuelling international terrorism.
According to an article in Business Week dated Nov 13, this "might be a good time for investors to pick up a copy of the Quran." It noted that stocks and other investments that adhere to Shariah law, though hardly unscathed, have fared better than the broader market. This is thanks largely to rules that forbid investing in collateralised debt obligations and other toxic assets that have caused the carnage in conventional financial circles, it added. However, it also noted that this did not mean Islamic finance would not suffer in an economic downturn.
"Because they must hold collateral, Islamic financial institutions tend to have more real estate assets than Western banks do. So far, Shariahcompliant banks — mostly in the Gulf region — haven't suffered because housing prices there have held up relatively well," it said. But if those markets were to dive, there could be trouble, the magazine qouted Mohamed Damak, a credit analyst at Standard & Poor's, as saying.
However, there are plenty of detractors ready to pounch on Islamic finance. An item on Fox News posted on its website on Nov 13, highlighted fear mongering in Islamic finance. According to the article entitled "Interest in Shariah finance opens dangerous doors, critics say", "Shariah-compliant banking, sometimes called Islamic banking, is growing in popularity in the Western and Islamic worlds. But critics say American interest in the system at a time of economic crisis is opening the door to increased Islamic influence in the American banking system. Worse yet, some fear the banks may be helping to finance international terrorism."
The article went on to quote Frank Gaffney, fou nde r a nd president of the Center for Security Policy in Washington, as saying that "allowing Shariah-compliant finance in the US is green-lighting a seditious system that supports jihad. "Shariah (Islamic law as dictated by the Quran) governs all aspects of life, from the personal practice of the faith, to how you relate to your family, how you relate to your business partners (and) to your community... all the way up to how the world is run, and it is all one seamless programme." "You can't say 'I'll take the personal pietistic practice... and skip the beheading and the flogging and the stoning and the global theocracy,'" Gaffney said.
In that same article, Nicholas Kaiser, fund manager at Amana Mutual Funds Trust in Bellingham, disagreed with Gaffney's assertion that Islamic funds are a threat to the American way of life. "We simply take people's money, invest it and give it back to them when they want it. We don't try and convert the country. We don't have any religious position. We aren't evangelical. We aren't zealots. We're money managers," Kaiser said. "I happen to be Episcopalian." On the local front, the challenge is slightly different.
While there may be some level of scepticism, by and large the take up for Islamic finance products come from both Muslims and non-Muslims. There is good reason why banks, both local and foreign, are making inroads into Islamic finance. For some five years, the sector has seen a revenue growth of close to 20% per annum, a respectable growth that no banker would want to miss out on.
There is also the determined push by Bank Negara Malaysia, the nation's central bank, and other regulatory bodies to turn the country into an international hub for Islamic finance. However, in the wider world of finance, Malaysia is still a small player.
The success here may set an example, but it will not end the debate on Islamic finance. Hence, there is much work to be done by regulators and promoters who want to see Islamic finance thrive beyond the current stage. (By Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)

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