Islamic Finance: Dominating The Global Banking Industry

Englisc · July 16th, 2014

The Islamic financial industry is flourishing – and not just in the Middle East. Barry Cosgrave, senior associate in the finance group at Shearman & Sterling LLP, tells us why.

Having suffered an inevitable slowdown during the global financial crisis, Islamic finance is once again on the rise, with growth now being seen outside the traditional heartlands of the Middle East and South East Asia and taking on an ever more innovative and global flavour.

The announcement by the United Kingdom government of its inaugural £200m Sukuk issue (Sukuk is the Islamic equivalent of bonds) is perhaps the most high-profile example, but first of a kind issuances by FWU AG in Germany and Tilal Development Company in Oman, as well as innovative structures employed in the Axiata Sukuk in Malaysia and the Sadara Sukuk in Saudi Arabia clearly illustrate that the Islamic finance industry is moving forward.

What has led to this increase in activity? The growth in Islamic finance is down to certain key factors which probably fall into three main categories: the continued strong cash position of Islamic investors; the de-mystifying of Islamic finance products; and the growing familiarity of Islamic finance professionals with the needs of Shari'a scholars which has led to consequential efficiencies in implementing Islamic structures.

Whilst there has been a noticeable improvement in access to liquidity since some of the bleaker days of the recession, it is no secret that capital is still hard to come by for a number of businesses. Islamic investors in the Middle East remain cash rich but lack asset classes in which to invest. Whilst the Islamic finance market in South East Asia has traditionally been domestic, Middle Eastern investors tend to be more outward looking, which drives overseas investment. However, those investors that need to invest in line with Shari'a principles have often found a lack of assets in which to place their funds, resulting in a stockpiling of cash resources.

Traditionally, Shari'a-compliant instruments have been viewed with a great deal of caution by conventional investors. Much of this was down to a simple lack of understanding of what were perceived to be mysterious structures with complicated names. However, as an increasing number of Sukuk have run through the maturity cycle, it has provided an illustration of how Islamic instruments bear many of the characteristics of conventional finance products.

Finally, Islamic finance has become increasingly popular as the cost of structuring and documenting Shari'a-compliant business has decreased. Much of this comes down to Islamic finance professionals having gained an increased understanding of the requirements of scholars, which has led to a corresponding decrease in costs. This increased understanding has also complemented the general de-mystifying of the industry.

Increasingly Islamic instruments are being employed in innovative ways even where the structures themselves are tried and tested. The SAR7.5bn Sadara Sukuk is a good example of this: the financing formed a part of a larger financing package which closed in two phases with the Sukuk forming phase one and a combined conventional and Islamic finance package forming phase two. The use of Sukuk was aimed at tapping into the vast liquidity that Saudi Arabia has but which its institutions have struggled to deploy in an environment where Shari'a-compliant assets are hard to come by.

The debunking of the Islamic finance mystique is well illustrated by the number of conventional institutions that invest in Sukuk. It is estimated that around 60% of Sukuk are subscribed for by conventional institutions who regard Sukuk no differently to other fixed income investments. As a result, Sukuk are as attractive to conventional investors as they are to Islamic ones. The problem has traditionally been the comparatively high costs associated with entering into Shari'a-compliant structures. However, as industry professionals gain an ever-increasing insight into the requirements of Shari'a the burden on scholars has reduced. This has allowed scholars to turn their attention to more innovative asset classes to underpin Sukuk and to look at new structures to address products such as hedging and risk management, feeder funds and structured investments.

Islamic finance continues to be an important part of the global financial industry and the increase in its popularity has tracked a general increase in the growth of ethical investment products. It is worth noting that a number of the asset classes in which Islamic investors are prohibited from investing (for example tobacco manufacture, the gambling industry and arms production) are the same as those which ethical investment funds avoid. There are obviously some Shari'a-specific prohibitions but the majority of those prohibitions are shared. If an investor is looking for an ethical alternative to conventional investments then Shari'a-compliant structures can provide a solution. An increase in the breadth of the Islamic finance offering will only help with this.

The question is often asked as to whether the global financial crisis could have been prevented by a purely Shari'a-compliant investment environment? It is, of course, impossible to say, but it should be remembered that the Islamic finance industry has not been free of problems. There have been a number of high-profile defaults on Islamic instruments and insolvency-type situations for Islamic companies. However, these scenarios may be expected during times of heightened economic stress and tight liquidity. What is important to note is that Islamic finance structures have performed no worse than their conventional counterparts.

What, then, of the challenges facing the Islamic finance industry going forward? The call for standardisation continues although at a more muted level. With the growing prevalence of Islamic finance structures, documentation and approach has undergone an organic standardisation to complement the more manufactured version evidenced by the ISDA/ IIFM Tahawwut Master Agreement (an agreement, published in 2010, designed to govern the legal and credit relationship between two parties embarking on a bilateral trading relationship involving Shari'a-compliant hedging transactions).

The main challenge for the industry will be to drive innovation through the development of a more diverse range of financial products. Islamic finance is still too reliant on Sukuk as its major asset class and there is a particular need for short-term investment instruments similar to the Central Bank of Bahrain Salam programme. Sukuk will always remain the key Islamic investment tool but more variety will be needed in order to maintain growth.

Originally published in the June 2014 issue of Acquisition International.

http://www.mondaq.com/x/327518/islam...nking+Industry

Samuel Toothgold · July 16th, 2014

Islamic finance is absolutely fair, since they don't charge interest on loans whose real payback value is prone to influence from either currencey manipulation or inflation which is also a form of manipulation. A customer is simply charged a fee for a service. That's it.

Joe_Smith · July 19th, 2014

Will Pat Condell make a youtube video warning us of the looming threat of Islamic banking to our precious Jew usurers?

Fico · July 26th, 2014

Quote:

Originally Posted by Samuel Toothgold

Islamic finance is absolutely fair, since they don't charge interest on loans whose real payback value is prone to influence from either currencey manipulation or inflation which is also a form of manipulation. A customer is simply charged a fee for a service. That's it.

Interest in Islam banking are known as "fee for a service"

I think that Islam religion prohibits interests in compare Christianity also prohibits interests and I have read one eccnomist (from my land I wrote about he in croatian section in news who have been forcibly poisoned "treated" because he said to croatian minister police that that he dreaming that minister will be hung by him and ago on main croatian television that he wan death penalty for all big traitors (included current prime minister and perivous who are alive also wort on presidents etc ) who called his idea of ecenomy as "christocentric economy" where he have written that reason for monetary system based on interests is for start writte off all debts to banks,nationalize banks,establish monetary system and when we arrange situation within state,we can return debts probably without interests,then no borrowing money in foreign currency,for all newly value increase circulation money depending about how much such value worth and close circulation of money within state that state have financial monopoly who are interest-free but all must be based on Christ in center in his opinion and theocracy as polity (probably separate of Vatican because he spoke very negative about this state and about Croatian Chatolich Curch that called as pharisees from Captol (Captol is place where are seat of Chatolic Curch in Croatia because he didn't react against EU and don't react at all about this super state), (here is one his speech on english

Marko FranciÅ¡koviÄ‡ Govor Washington, DC - Freedom Plaza 08.10.2011 - YouTube

) this is in fact monetary system who are best for who I ever heard,well I think that he must function for all white states and then white people must organized economic cooperation on interests for white race but prerequisite of this is wake up all white people in own states and tell that that we can built such economic cooperation but we must put race on first place and sto fight with each other. I would be gladly put here his chapter about "christocentric economy" but I am not so good in english that I can translate 100 pages text.

Samuel Toothgold · July 27th, 2014

All excellent ideas. The problem with carrying through the nationalization of institutions which everyone uses (oil companies, utilities in general, insurance, banking and railroads) is that the phrase "nationalizing" scares many people who have such a stigma.

Fico · July 27th, 2014

Quote:

Originally Posted by Samuel Toothgold

All excellent ideas. The problem with carrying through the nationalization of institutions which everyone uses (oil companies, utilities in general, insurance, banking and railroads) is that the phrase "nationalizing" scares many people who have such a stigma.

Institutions must respect laws in one state because state where enabling to them activity in state so institutions isn't above state and state can do all because she is territorial organization people who live in her. Ideas from bachelor of economy from my land fear just anti folk individuals but other people who look interests of their own state can with education comprehend that is substantially the common good with one folk and state in who he live and then haven't fear for this. Key is implementation monetary system for example as this who I mentioned with nationalized banks and inter alia economist who I mentioed said that is impermissibly that banks be in private property because then worth private interest (but also wihtout interests banks wouldn't nothing earned ),just the opposite-banks must be nationalized because then worth state interest and state is all people who lived in her. For example private company (banks can't be private in any option) can work but If worth strict laws for example pricate factory footwear and clothing sign contract that she must produce within 5 or 10 years at least minimum how much state expected and state give to private factory bearing no interest credit and If factory don't implement the agreement from contract,state subtracted factory and private enterpreneur responsible for it and he must catch up losses,must be more private firms that worth mutual competition and all must respect laws of state this is all.

Samuel Toothgold · July 28th, 2014

Quote:

Originally Posted by Fico

is impermissibly that banks be in private property because then worth private interest (but also wihtout interests banks wouldn't nothing earned )

That's why, when a private bank doesn't live from interest/usury, charging a set fee for a money-lending service is the only way to legitimize a private bank's existence and would be no different from a situation where a private person charges a set fee for lending money or another posession (automobile, tools etc...) to another private person.

Fico · July 28th, 2014

Quote:

Originally Posted by Samuel Toothgold

That's why, when a private bank doesn't live from interest/usury, charging a set fee for a money-lending service is the only way to legitimize a private bank's existence and would be no different from a situation where a private person charges a set fee for lending money or another posession (automobile, tools etc...) to another private person.

Private bank who presents interest/usury as fee for a money-lending service works on same princeple as other private banks (on interest principle) and they just try to besmirch eyes people that they are something else then banks who live on usury/interest because he use fee for money-lending->metaphorical interpretation interest.
If you want for example that state be above banks,state must be owner over all banks who are in her in contrary banks are above state as today. I have given one interest answer by on jewish woman where she said me: "of course,banks take interest because they are banks,not charities institutions". So what is opposite of charities institutions?-In my opinion best answer is that today banks are bandit institutions and jewis woman told me in metaphorical terms,so If you don't want bandit institutions state (who have nationalized banks ) must become charities institutions who work on principle of interest-free money because If state have nationalized banks and work on principle of interest,such state is bandit state.

July 16th, 2014	#1
Englisc Amor Patriae Nostra Lex Join Date: Jan 2013 Location: England Posts: 1,382	Islamic Finance: Dominating The Global Banking Industry The Islamic financial industry is flourishing – and not just in the Middle East. Barry Cosgrave, senior associate in the finance group at Shearman & Sterling LLP, tells us why. Having suffered an inevitable slowdown during the global financial crisis, Islamic finance is once again on the rise, with growth now being seen outside the traditional heartlands of the Middle East and South East Asia and taking on an ever more innovative and global flavour. The announcement by the United Kingdom government of its inaugural £200m Sukuk issue (Sukuk is the Islamic equivalent of bonds) is perhaps the most high-profile example, but first of a kind issuances by FWU AG in Germany and Tilal Development Company in Oman, as well as innovative structures employed in the Axiata Sukuk in Malaysia and the Sadara Sukuk in Saudi Arabia clearly illustrate that the Islamic finance industry is moving forward. What has led to this increase in activity? The growth in Islamic finance is down to certain key factors which probably fall into three main categories: the continued strong cash position of Islamic investors; the de-mystifying of Islamic finance products; and the growing familiarity of Islamic finance professionals with the needs of Shari'a scholars which has led to consequential efficiencies in implementing Islamic structures. Whilst there has been a noticeable improvement in access to liquidity since some of the bleaker days of the recession, it is no secret that capital is still hard to come by for a number of businesses. Islamic investors in the Middle East remain cash rich but lack asset classes in which to invest. Whilst the Islamic finance market in South East Asia has traditionally been domestic, Middle Eastern investors tend to be more outward looking, which drives overseas investment. However, those investors that need to invest in line with Shari'a principles have often found a lack of assets in which to place their funds, resulting in a stockpiling of cash resources. Traditionally, Shari'a-compliant instruments have been viewed with a great deal of caution by conventional investors. Much of this was down to a simple lack of understanding of what were perceived to be mysterious structures with complicated names. However, as an increasing number of Sukuk have run through the maturity cycle, it has provided an illustration of how Islamic instruments bear many of the characteristics of conventional finance products. Finally, Islamic finance has become increasingly popular as the cost of structuring and documenting Shari'a-compliant business has decreased. Much of this comes down to Islamic finance professionals having gained an increased understanding of the requirements of scholars, which has led to a corresponding decrease in costs. This increased understanding has also complemented the general de-mystifying of the industry. Increasingly Islamic instruments are being employed in innovative ways even where the structures themselves are tried and tested. The SAR7.5bn Sadara Sukuk is a good example of this: the financing formed a part of a larger financing package which closed in two phases with the Sukuk forming phase one and a combined conventional and Islamic finance package forming phase two. The use of Sukuk was aimed at tapping into the vast liquidity that Saudi Arabia has but which its institutions have struggled to deploy in an environment where Shari'a-compliant assets are hard to come by. The debunking of the Islamic finance mystique is well illustrated by the number of conventional institutions that invest in Sukuk. It is estimated that around 60% of Sukuk are subscribed for by conventional institutions who regard Sukuk no differently to other fixed income investments. As a result, Sukuk are as attractive to conventional investors as they are to Islamic ones. The problem has traditionally been the comparatively high costs associated with entering into Shari'a-compliant structures. However, as industry professionals gain an ever-increasing insight into the requirements of Shari'a the burden on scholars has reduced. This has allowed scholars to turn their attention to more innovative asset classes to underpin Sukuk and to look at new structures to address products such as hedging and risk management, feeder funds and structured investments. Islamic finance continues to be an important part of the global financial industry and the increase in its popularity has tracked a general increase in the growth of ethical investment products. It is worth noting that a number of the asset classes in which Islamic investors are prohibited from investing (for example tobacco manufacture, the gambling industry and arms production) are the same as those which ethical investment funds avoid. There are obviously some Shari'a-specific prohibitions but the majority of those prohibitions are shared. If an investor is looking for an ethical alternative to conventional investments then Shari'a-compliant structures can provide a solution. An increase in the breadth of the Islamic finance offering will only help with this. The question is often asked as to whether the global financial crisis could have been prevented by a purely Shari'a-compliant investment environment? It is, of course, impossible to say, but it should be remembered that the Islamic finance industry has not been free of problems. There have been a number of high-profile defaults on Islamic instruments and insolvency-type situations for Islamic companies. However, these scenarios may be expected during times of heightened economic stress and tight liquidity. What is important to note is that Islamic finance structures have performed no worse than their conventional counterparts. What, then, of the challenges facing the Islamic finance industry going forward? The call for standardisation continues although at a more muted level. With the growing prevalence of Islamic finance structures, documentation and approach has undergone an organic standardisation to complement the more manufactured version evidenced by the ISDA/ IIFM Tahawwut Master Agreement (an agreement, published in 2010, designed to govern the legal and credit relationship between two parties embarking on a bilateral trading relationship involving Shari'a-compliant hedging transactions). The main challenge for the industry will be to drive innovation through the development of a more diverse range of financial products. Islamic finance is still too reliant on Sukuk as its major asset class and there is a particular need for short-term investment instruments similar to the Central Bank of Bahrain Salam programme. Sukuk will always remain the key Islamic investment tool but more variety will be needed in order to maintain growth. Originally published in the June 2014 issue of Acquisition International. http://www.mondaq.com/x/327518/islam...nking+Industry

July 19th, 2014	#3
Joe_Smith Senior Member Join Date: Aug 2012 Posts: 3,778	Will Pat Condell make a youtube video warning us of the looming threat of Islamic banking to our precious Jew usurers? __________________ "The favorite slogan of the reds is: 'No Pasarán!: Yes we have passed! And we tell them...and we tell them, we will pass again!'" ― Benito Mussolini after the Communist capitulation in Barcelona

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July 16th, 2014	#2
Samuel Toothgold Charachature incarnate Join Date: May 2014 Location: Already in accordance with the future Repulsive Tapir Avatar Mandate Posts: 4,068	Islamic finance is absolutely fair, since they don't charge interest on loans whose real payback value is prone to influence from either currencey manipulation or inflation which is also a form of manipulation. A customer is simply charged a fee for a service. That's it.

July 27th, 2014	#5
Samuel Toothgold Charachature incarnate Join Date: May 2014 Location: Already in accordance with the future Repulsive Tapir Avatar Mandate Posts: 4,068	All excellent ideas. The problem with carrying through the nationalization of institutions which everyone uses (oil companies, utilities in general, insurance, banking and railroads) is that the phrase "nationalizing" scares many people who have such a stigma.