Bahrain: Islamic finance only answer to credit woes

Bahrain Tribune-While the global economic system is rattled by credit crisis caused by the US sub-prime mortgage crisis, a distinguished speaker yesterday told the conference participants that 'Islamic finance model' is the only answer to this persistent economic turmoil.

Prof. Dr Mohammed Mahmud Awan, a leading scholar and Dean at Malaysia-based International Centre for Education in Islamic Finance (INCEIF), said that current economic global crisis has opened many windows of opportunities for Islamic finance.

"This crisis is seen as a big opportunity for Islamic finance as it has the capacity and capability to bring stability to the market."

The current global crisis which caused colossal financial loses running in billions of dollars, he said, would have not occurred if the Islamic principles regarding collateral debt obligations (CDOs) were in vogue in the international financial market.

"Islamic bonds, carrying unique structure features, cannot fall foul of a crisis such as sub-prime mortgage crisis. Sub-prime mortgages are backed by dubiously rated collateral debt packages which subsequently precipitated a global credit crunch."

Prof Awan, who was a keynote speaker at the two-day conference on globalisation concluded yesterday and organised by the University of Bahrain said that it was a right time for Islamic banking industry to present solutions to the global economic community in the wake of the crisis.
The conference was attended by over 300 delegates representing various countries who share their expertise with a specific thrust globalisation and opportunities and challenges.

The conference under the theme "International Conference on Business Globalisation in the 21st Century: challenges and opportunities" has brought together globally acclaimed experts together who shed light on the global economic trends. He said: "Sub-prime mortgages are backed by dubiously rated collateralised debt packages which subsequently precipitated a global credit crunch.

He added: "A crisis such as the mortgage one would technically would be unthinkable in the Islamic capital markets sector because it would be against shariah principles to sell a debt against a debt."
There is a very simple rule in Islamic trade, he said, which clearly says that you can't sell unless you possess.

He said: "In the present crisis we have seen trillions of dollars trading without backing of assets. If such transactions followed the Islamic finance model it would have easily prevented the current economic crisis."

Bahrain, being a leader in the Islamic banking and finance with the largest concentration of Islamic banks and financial institutions in the Middle East, can help the developing markets to learn from the experience of the Kingdom in this highly specialised segment of the global economy.

"Bahrain can play a leadership role in adopting new monetary policy tools for macro economy management as the share of Islamic finance grows in size.
The precedents set in Bahrain will be followed by other Muslim countries just as the co-existence model of Islamic and conventional finance perfected in Bahrain has been followed by other countries.

The Kingdom's stature as a hub for Islamic banks and financial institutions has made it an ideal country to be the role model in developing, adopting and disseminating the innovative laws to cater to the needs of the Islamic banking industry."

He said: "For the last seven years the government of Bahrain has been the most proactive issuer of sukuk in terms of number of issuance in the world, starting with the monthly local currency denominated sukuk al salam which has maturity of 90 days, followed by the regular monthly issuance of short-term local currency sukuk al ijara (leasing sukuk) with a matury of 182 days and off course long-term sovereign Sukuk Al-Ajara."

The current size of global sukuk industry is over $150 billion and the growth of 20 per cent a year is projected in the year 2008 and beyond.