Islamic finance now a hot topic

GulfNews:Islamic finance featured heavily in Tuesday's opening session of the 10th annual Hedge Funds World Middle East Conference.

The past 12 months have seen the launches of two Sharia-compliant hedge funds, the first by Dubai-based Shariah Capital Inc and the second by Deutsche Bank...Read More

Crossing over: Islamic banking needs to reach out to new customers

By gtnews.com.

Islamic banks will have to become increasingly innovative if they want to gain a bigger share of the market says Nicholas Brewer

As the Gulf nations reap returns from oil prices, and economies in Asia continue to grow on the back of economic liberalisation, demand for Islamic banking is surging across the Muslim world and beyond.

Islamic banking may have its strongest roots in the Muslim countries of the Middle East, but the industry's innovation is focused on Pakistan, Bangladesh and South East Asia, where countries with both Muslim and non-Muslim populations present an interesting cross-over market.

In Malaysia, for example, non-Muslims are major users of Islamic finance products. Banks such as the Hong Leong Islamic Bank, and the Malaysian cooperative bank, Bank Rakyat, report a 70 per cent uptake of Islamic financial products by Chinese customers. So, why are non-Muslim customers attracted to Islamic banks?

Customers of any religion will be attracted by a financial return that competes favourably with the interest rate at another bank. Like any other financial institution, Islamic banks work to deliver the same marketing, customer service and, crucially, competitive products.

Shari’ah prohibits usury and trade in forbidden goods such as alcohol and pork. In line with this, Islamic banks offer a fixed profit rate resulting from investment in Shari’ah compliant trading activities. Additionally, in Islamic mortgages, the bank can share some liability. This presents a more cost-effective and appealing product for some customers.

Within the commercial sphere, Ijarah is a leasing concept that offers financing options for commercial assets at a fixed price for a fixed period. In addition, many Islamic business ventures use trade finance which can be arranged without interest.

Islamic banking has no central detailed rule book for the modern application of Shari’ah . It comes down to a Shari’ah committee composed of Islamic scholars to determine acceptable banking practice at either bank or national level. Some theorists suggest that if a bank sells both Islamic and non-Islamic products and books both instrument types in the same legal entity, this creates an unacceptable mix of different profit streams. But other scholars maintain that as long as money is segregated internally, the products and the bank can still be Shari’ah compliant.

Banks such as HSBC and Citi have established their own Shari’ah committees. Large banks have a global brand and can establish operations running at some loss with considerable investment. But in contrast, regional, specialised Islamic banks like Bank Islam and Gulf Finance House are more focussed, have local knowledge, a deep understanding of the community and can connect more directly with their client base.

HSBC, which offers Islamic banking services across the Arab world, has a strong customer base in Malaysia. HSBC's widespread branch distribution and competitive products may explain why over half of its Islamic banking customers in Malaysia are non-Muslim.

Islamic banks should continue to remember that while they are rooted in Islamic tradition, competitive banking products are vital to sustain growth. Firstly, there are customers who will always choose purely Islamic banks on ethical grounds.

In the middle ground there are those for whom Islamic banking is preferential, but not if the service offers too poor a financial return when compared to non-Islamic alternatives, and there are also non-Muslims who are open to any attractive financial product. The latter two groups present a far greater opportunity than the first and as such, constitute a priority focus for all banks offering Islamic banking services.

Islamic finance and the Square Mile

By Edward Fennell

Here’s a thought. If all the sub-prime deals in the US had been governed by Sharia there would have been no massive defaults and the credit crunch would never have loomed over our shopping expeditions.

Instead, Islamic law’s requirements for prudent lending, the sharing of risk and a ban on the earning of interest would have insulated the borrowers and the world economy at large from the debacle of the past six months. And for that even the Archbishop of Canterbury’s harshest critics might have been a mite grateful.

So how does Islamic finance — now increasingly practised by law firms in London and New York — fit into the heated debate about the relationship between the British legal system and religious codes?

The Prime Minister in particular needs to have an answer to that. Last week he was quoted as saying that: “British laws must be based on British values and religious law should be subservient to British criminal and civil law.” How come then that Gordon Brown, when Chancellor, wanted “to make Britain the gateway to Islamic finance and trade”? And, to support that, government introduced changes to the taxation regime to accommodate Sharia-compliant transactions.

To appreciate the full impact of Sharia on City law and business you have only to go to Clifford Chance where Islamic finance is an important activity.

The firm was named Euromoney Islamic finance firm of the year in 2007 and it has scores of lawyers both in the Middle East and in London practising Sharia. Habib Motani explains: “Doing deals that are Sharia compliant is a standard part of what we do. It’s part of the mainstream.”

But does this mean that there is now a rival jurisdiction operating in London? Has Sharia sneaked into the Square Mile by the back door while the good Archbishop waits befuddled at the front? Well, in the spirit of Canterbury unclarity, the answer is Yes (and a little bit No).

What is clear is that transactions hatched in London by UK lawyers are being reviewed by Sharia scholars in the Middle and Far East who judge whether or not they comply with Islamic law. If they do not, they do not go ahead. So in practice the jurisdiction of Sharia is now well established in Britain.

On the other hand, these transactions must also comply with UK law. Davide Barzilai, of Norton Rose, says that the great strength of English law is its flexibility, constantly evolving and adapting to meet new circumstances and demands from its users.

Hence it would be perfectly permissible under the Arbitration Act 1996 for a Sharia council to be recognised as the body to arbitrate a dispute using Sharia principles and its decisions to be respected in an English court — provided, that is, it abides by English legal principles. “What such a council would not be able to do is to make awards that are in breach of English law,” Barzilai says.

Whether this constitutes a “market” of jurisdictions, in the terms used by the Archbishop, is a moot point. What it does demonstrate is the enormous flexibility of English law based on the pragmatic principle that you can do most of what you want to do provided you are inventive enough about your approach.

For example, Hassan Khan, of The Khan Partnership, has recently chalked up a number of successes for Chinese clients breaking into the Middle East by using Sharia-compliant deals under English law.

The only obstructions to the development of Sharia lie in its own limitations. For example, according to Martin Mankabady, of LG: “There has been little growth in Islamic insurance because insurance companies rely for their stability on broadly based portfolios of investments including sectors such as alcohol, gambling or armaments which are forbidden by Sharia.

” Sharia deals are also likely to be slightly less profitable than the Western norm because — as with ethical investments or organic produce — a premium is attached to complying with a restrictive code.

The other brake on Sharia, its critics say, is that the scholarly experts are often inconsistent with the result that parties in a transaction are never quite sure where they stand. That is where a firm such as King & Spalding comes in useful.

According to Jawad Ali, a partner, it has a reputation as a safe pair of hands in developing original and innovative business structures and transactions that are Sharia compliant as determined by the recognised Sharia scholars. “There is a growing ‘circle of consensus’ among Islamic scholars who will agree in most cases,” Ali says.

“The challenge is that while Western banking goes back hundreds of years, Islamic finance in the West is only about a decade old. This means it is still breaking new ground. There may be occasional uncertainties but these are now settling down fast.” The continued growth of Sharia-based deals it seems is now, in the Archbishop’s phrase, “unavoidable”.

Glass defiantly half full for Islamic finance

By Richard Barley

LONDON - While conventional finance in Western Europe and North America is wracked with turmoil and many market participants filled with gloom, in the world of Islamic finance there is a refreshing burst of optimism.

Speakers at the Reuters Islamic Banking and Finance Summit this week in London sprinkled their comments liberally with words like "positive", "growth", and "opportunity".

Recent conventional finance events, by contrast, have featured muted conversations laden with doom. Some recent credit strategy notes from Societe Generale have referred to "catastrophe" and "the daily dross of bad news that has beset the ... markets since July last year".

Largely shielded from the subprime crisis, although not entirely immune -- credit spreads have widened and issuance has slowed -- Islamic financiers are upbeat.

"As the conventional banking system goes into the credit crunch there will an opportunity for the Islamic financial system to expand and to offset the deduction in credit and liquidity in the Western system," said Nor Mohamed Yakcop, second finance minister of Malaysia.

"Ten years ago during the Asian financial crisis there was a flow of funds from the Western financial system in Asia ... that helped in some way to overcome the crisis. Interestingly this time around this flow is reverse. The flow is now from Asia and the Middle East," he said.

Issuance of sukuk, or Islamic bonds, is still expected to grow this year, albeit not at the breakneck pace of recent years. There is talk of growing use of Islamic securitization, and work on Islamic derivatives markets. Companies spoke of pressing ahead with merger and acquisition plans.

"There is a great opportunity for the Islamic industry generally, not to take advantage, but to play their due role in providing capital where capital is required," said Afaq Khan, head of Islamic banking at Standard Chartered.

He suggested that Islamic principles would help the industry avoid the problems that Western bankers are wrestling with: among them excessive use of leverage and the increased use of derivative instruments for speculation rather than investment in underlying economies. Both would be banned by sharia law.

Islam bans interest and stipulates that deals must be based on tangible assets -- money cannot be made from money alone.

"I'm not saying it can never ever be abused, but to create a bubble in the Islamic industry is much more difficult," Khan said.

TAMWEEL DEAL

If there is a banner deal that shows what Islamic finance can achieve, it is the $300 million convertible bond for Tamweel TAML.DU, the second-largest mortgage lender in the United Arab Emirates, launched in December.

As U.S. mortgage lenders reeled and many Western companies untouched by subprime found that financing markets were shut, Tamweel said its bond, earmarked to fund expansion, was oversubscribed "within hours of launch".

Speaker after speaker at the summit pointed to the issue as evidence of how Islamic finance could power forwards.

"The perfect example is Tamweel," said Rossitza Haritova, European convertibles analyst at Nomura. She noted that the company had been able to raise funding at a rate below LIBOR, the interbank rate, just as planned, despite the turmoil.

"I certainly think it's going to be a strong year," she said.

All of that could lure international investors to the Islamic finance market, seeking stability from the subprime storm and in need of some relief.

"We are getting positive vibes from international investors about Middle Eastern credit, such as Tamweel," said Arul Kandasamy, head of Islamic finance at Barclays Capital.

Holy man joins jet set as Islamic finance booms

By Mohammed Abbas

MANAMA - Studying 1,000 year-old Islamic manuscripts may not be a typical way for a jet-setting financial consultant to unwind, but in his Arab robes and chequered head dress, Sheikh Nizam Yaquby is no ordinary business expert.

Yaquby is one of a select group of Islamic scholars overseeing Islamic finance, the banking industry's fastest growing niche market. When not advising on multi-billion dollar deals he dispenses rulings on everyday issues such as divorce and family disputes.

Yaquby relinquished life as a full-time holy man and academic when he agreed to supervise an Islamic bank at the request of a friend in 1989, a decision that would turn him into a major financial powerbroker.

"I told him I don't know what to do there. He said consider it a learning experience," Yaquby said at the Reuters Islamic Finance Summit.

Between engagements in London, New York, Dubai and Bahrain, Yaquby will sit on the board of scholars next week that will decide the fate of the $80 billion Islamic bond industry, rocked by controversy over questions about compliance with Islamic law.

Demand for Islamic banking has surged as more of the world's 1.3 billion Muslims seek investments that comply with their beliefs. The industry is on course to manage $1 trillion in assets by 2010 from almost nothing 30 years ago, according to consultants Mckinsey.

Yaquby sits on the Islamic law, or sharia, board of the most widely accepted standards body in the Islamic world, the Accounting and Auditing Organization for Islamic Financial Institutions.

He also sits on the sharia advisory boards of banks including the Islamic units of HSBC and BNP Paribas, and advises Dow Jones.

Such is the demand for his expertise and those of his few peers, some media reports have speculated that they command fees of $100,000 per fatwa, or religious edict, and earn annual incomes of more than $1 million a year.

Four bankers contacted by Reuters declined to say on the record how much they paid scholars, saying they feared it would hurt their business.

Yaquby declined to be drawn on fees, but said some scholars were paid retainers while others were paid per consultation. Fees varied wildly depending on the scholar and the length and complexity of the consultation, he said.

"There is no proof that they are millionaires, let alone that they are billionaires," Yaquby said.

"If someone expects scholars should be a philanthropic society, that's a mistake. They are professionals," he said, adding that Islamic scholars working in finance are generally paid about the same as lawyers and financial consultants.

While his working life may resemble that of a financial dealmaker's, Yaquby's leisure time is spent poring over 2,000 ancient religious manuscripts among his private collection of 50,000 volumes. At least one text was 1,000 years old, he said.

"If you are speaking about a competent scholar who has the respect of the general public ... you are speaking about an ethical person whose conduct is reflected in his rulings," he said.

As well as his native Arabic, Yaquby speaks English, Farsi and Urdu, all languages he uses in his work. He started studying religious texts at the age of 10 and was teaching at 16.

"For anybody to be capable of giving sharia ruling on modern banking and finance, especially on a global scale, he must have a multi-disciplinary background," said Yaquby, who holds a degree in economics and comparative religion.

"Although sharia is the cornerstone, a good knowledge of business, finance, economics and legal practices of different backgrounds, plus knowledge of modern languages are very important," he added.

Aston Martin owner to set up UK Islamic bank

By John Irish


DUBAI - Kuwait's Investment Dar (TIDK.KW: Quote, Profile, Research) is setting up a British investment bank this year to offer advisory services for Gulf investors doing business in Britain and tap into growing demand in Europe for products that comply with Muslim law, an executive said.

Investment Dar, which owns 50 percent of carmaker Aston Martin, plans to submit its application to the Financial Services Authority (FSA) this month, Adham Charanoglu, business development manager at Investment Dar, told the Reuters Islamic Finance Summit on Tuesday.

Dar Capital, which is already operating outside the UK until it receives a license, will be headed up by Ahmad Salam, the former global head of Islamic finance at Credit Suisse (CSGN.VX: Quote, Profile, Research).

Salam will initially be assisted by two other bankers from Barclays Plc (BARC.L: Quote, Profile, Research) and Morgan Stanley (MS.N: Quote, Profile, Research), before staffing rises to at least 15 people.

"We see a huge potential ... everybody knows the UK will be the Islamic finance hub of Europe," Charanoglu said.

Britain has taken steps to attract the world's booming Islamic finance industry -- estimated to be worth $1 trillion in assets by 2010 -- including new legislation to make Islamic transactions easier and plans to issue a sovereign Islamic bond.

London's Islamic banks have been positioning themselves to cater to the estimated 15 million Muslims in Europe, where the industry has so far made little impact outside the British capital.

In the "first phase", Dar's British unit would serve the requirements of the company and its affiliates, before becoming a fully fledged Islamic investment bank, Charanoglu said.

Qatar Islamic Bank QISB.QA, the Gulf's fourth-largest lender by market value, said on Monday it had received an investment banking license from the FSA for its UK unit, European Finance House.

UAE's NBAD bank sees Islamic profit in year one

By James Cordahi

DUBAI - National Bank of Abu Dhabi NBAD.AD (NBAD) expects its Islamic finance unit, which will start operations next month, to be profitable in its first year of business as demand for sharia-compliant services surges.

Abu Dhabi National Islamic Finance (ADNIF), a unit of the second-largest lender in the United Arab Emirates, will offer a full range of banking services, with its initial focus on corporate and retail finance, General Manager Aref al-Khouri told the Reuters Islamic Finance Summit in Dubai on Tuesday.

"The market demand is huge," said Khouri, who helped start the emirate's first sharia-compliant lender, Abu Dhabi Islamic Bank ADIB.AD. The unit plans to hire another 30 people before the end of the year, taking the total to 75, Khouri said.

About 14 percent of the UAE banking market -- measured by loans and advances -- complies with Islamic law and is growing by as much as 20 percent a year, compared with growth of between 10 and 12 percent in the conventional market, said Khouri.

Among other restrictions, Islam bans the receipt of interest, equating it with usury, and instead requires banks to invest with its customers, sharing the risk.

For instance, rather than lend money to a customer to buy a car, the bank buys the car and rents it back to the customer until the cost -- and a profit for the bank -- is paid.

Khouri had said in September, the month he joined ADNIF, it would take him two years to be profitable. ID:nL25509914

NBAD, which is controlled by the government of Abu Dhabi, is competing with other conventional lenders in the emirate, such as First Gulf Bank FGB.AD and Union National Bank UNB.AD, which are growing their sharia-compliant businesses.

The government of Abu Dhabi also plans to set up a second dedicated Islamic bank and the UAE's seventh, Al Hilal, in June.

"It's tough out there," Khouri said of the competition, declining to say how much revenue he would contribute to NBAD.

NBAD Chief Executive Officer Michael Tomalin told Reuters in 2006 that the Islamic unit would generate as much as 5 percent of the bank's revenue within five years.

Bright forecast for Islamic institutions

Islamic financial institutions with their Shariah compliant innovative tools were bound to outpace the conventional global banks and financial institutions.

"They will have a pioneering role in the next few years in revitalising global Islamic finance segment due to their effective methods in attracting investments," said the Al Salam Bank Chief Executive Officer, Yousif Taqi.
The bank was the golden sponsor of Euromoney's seventh annual Islamic Finance Summit and Islamic Finance awards to be held in London on February 5 and 6.

He said the innovative tools, which the Islamic financial sector was able to introduce to the market have proved their great potential in matching all conventional financial transactions. The Islamic dealings, which were distinct by their transparency, boost the investors' trust in the capabilities of the Islamic financial institutions.

"Islamic finance has become a preferred option to Muslim and non-Muslim clients as well," he said

Deutsche sees Islamic hedge fund growth in 2008

By John Iris



DUBAI (Reuters) - Deutsche Bank (DBKGn.DE: Quote, Profile, Research) expects demand for hedge funds that comply with Muslim law to take off in the second half of 2008 as structures become more defined and credible fund managers and brokers set up to handle the products.

The move would be the latest attempt to marry huge demand for Islamic investments with the returns on hedge funds.

"There is demand for Islamic hedge funds, mainly from ultra high net worth individuals who already look at conventional hedge funds and would have a preference for Islamic," said Geert Bossuyt, managing director, regional head of Middle East structuring at Deutsche Bank.

International financial institutions, including Deutsche, are working on handling sharia-compliant hedge funds with the second half of the year and 2009 likely to see the industry begin to flourish, Bossuyt told the Reuters Islamic Finance Summit.

"I think we are almost there with some big names, and with reasonably big investment banks including Deutsche," he said, adding that the market was demanding products from established institutions rather than new players.

Barclays Capital (BARC.L: Quote, Profile, Research), with its U.S.-based partner Shariah Capital Inc (SCAP.L: Quote, Profile, Research), said in September it planned to launch Islamic hedge funds offering investors a group of hedge funds that would be managed according to Islamic law, or sharia -- rules that many bankers and investors say forbid common hedge fund strategies such as short-selling.

"You have to sort out the shorting issue," said Bossuyt. "You can't sell what you don't have in Islamic finance ... That's one of the ground rules."

Bossuyt said it could be achieved by creating a synthetic short position through selling derivative options such as in a salam contract.

Salam is a contract in which advance payment is made for goods to be delivered later on.

Bossuyt said some scholars are still at odds over whether a synthetic short completed in an Islamic way is acceptable.

"Where is the reasoning that you can say I can benchmark (sukuk) against London Interbank Offered rate (LIBOR), but I cannot benchmark against a short ... Why is one allowed and one not allowed?" he said.

While parameters are becoming more defined, finding the right people to deal with the complexities of such contracts is still difficult.

"In my opinion, people are getting more used to Islamic finance and are making their prime brokerage ready ... and some actively promoting, and 2008 could be the new birth of Islamic hedge funds."

Sharia-based institutions on strong footing

MANAMA: Sharia-compliant financial institutions have been able to compete effectively with conventional world-wide institutions, says Al Salam Bank Bahrain chief executive officer Yousif Taqi.

Islamic institutions will have a pioneering role in the next few years in revitalising world Islamic finance due to their effective methods in attracting investments and will outmatch their conventional peers.

He said the innovative tools which the Islamic financial sector was able to introduce to the market and have proved their great potentials in matching all conventional financial transactions.

"Islamic finance has become a preferred option to Muslim and no-Muslim clients," Taqi said.

Marking the bank's golden sponsorship of Euromoney's Seventh Annual Islamic Finance Summit and Islamic Finance Awards to be held in London on February 5 and 6.

He said that Islamic dealings, which are distinct by their transparency boost the investor's trust in the capabilities of the Islamic financial institutions and their abilities in creating innovative solutions that cope with today's financing needs.

Qatar Islamic unit wins UK banking licence

European Finance House, a unit of Qatar Islamic Bank, has been awarded a UK banking licence that will help it capitalise on growing demand for Islamic finance among the European Union's 14m Muslims.

The licence underscores the ambitions of Doha-listed QIB in the UK and Europe. The bank is among the leading shareholders in the Shard, a new commercial property development on the south bank of the Thames near London Bridge. EFH, of which QIB owns 66 per cent, is acting as corporate fin-ance adviser to QIB on the project.

Michael Clark, chief executive of EFH, said: "Demand is on the rise for Sharia-compliant investments and finance. We think that with QIB's distribution in the Middle East and our knowledge of European and Middle Eastern markets, we can build a real bank and deliver double-digit returns on capital in our first three years."

He said his credentials in building banks for Japanese and Middle Eastern institutions in the UK had helped EFH obtain its banking licence in nine months, rather than the 12 months or more that could be required for vetting before the Financial Services Authority granted a UK licence.

Mr Clark was recently head of the London-based corporate and institutional banking team at Arab Bank of Jordan. He was previously the general manager of the London operations of Japan's Yamaichi, and has held senior roles at the London arms of Arab Bank of Jordan and Saudi International Bank.

To comply with Sharia law, an investment cannot produce returns by charging interest and cannot support industries condemned by Islam, such as alcohol, pornography and firearms.

Analysts said Middle Eastern investors interested in Sharia-compliant products had for several years been allocating more money abroad, which had provided an opportunity for mainstream banks with Islamic operations.

Citigroup and HSBC have had such capabilities for some time, while others, including Morgan Stanley and WestLB, have moved to harness the trend more recently.

Islamic products can be highly profitable, even though they cater to a relatively small niche, because the market is fragmented outside the Middle East and that allows achieving better margins than in more commoditised areas of finance.

Mr Clark said EFH would begin by distributing products such as an Islamic equities fund in the Middle East. It hoped to use the performance of these instruments to attract investment from Europeans interested in Sharia-compliant products, including private equity, sukuks and structured notes.

EFH's other investors include Sheikh Hamad Bin Jassem Al-Thani, the Qatari prime minister, with a 10 per cent stake, and Groupe Financiere Centuria, the French asset manager, with ties to the sheikhs of Dubai.

Islamic Finance From Faith To A Global Industry

By Tham Choy Lin

HONG KONG - Six years ago, Malaysia launched a US$600 million bond and sold it to the world.

It was more than two times oversubscribed, and attention would have passed if not for a difference -- it was the world's first sovereign sukuk or bond issued according to the tenets of Islam.

Bank Negara Malaysia's governor Tan Sri Dr Zeti Akhtar Aziz remembers the overwhelming response at the first roadshow in Hong Kong and ultimately, a third of the investors came from this region.

"Six years on, the Islamic financial landscape has been dramatically transformed into a vibrant, dynamic and competitive global intermediation mechanism that is supported by more than 300 Islamic financial institutions in more than 75 countries," she said at an Islamic finance seminar in Hong Kong this week.

These days, "tremendous" is the word to describe the demand for sukuk, evidenced by oversubscriptions of between two and 13 times by both Islamic and conventional investors.

Islamic finance has become the fastest growing sector in the financial services industry. It has been dubbed the new "Silk Road", the new link between Asia and the rest of the world.

It is not difficult to fathom why. Take a look at the numbers and see why international financial centres like Hong Kong, Singapore and London are getting into the queue.

The global Islamic financial empire is estimated at US$700 billion and expected to double in the next two years to US$1.4 trillion by 2010.

Total value of Islamic assets has surpassed US$250 billion, more than 40 times over since 1982 and growing at 15 percent a year. Islamic equity funds have expanded by than 25 percent over the past seven years.

"Obviously, Islamic finance has become part of the global financial system and it offers huge potential for development and growth," said Hong Kong Financial Secretary John Tsang.

The rapid growth of Syariah-compliant products and services is speeded by the huge pool of petrodollars in the Middle East of about US$1 trillion in annual revenue.

And Asia has overtaken Europe as the second most popular region for investment from the GCC after the United States.

GCC is the acronym for Gulf Cooperation Council comprising Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Salman Younis, managing director of Kuwait Finance House (Malaysia), said about US$1.5 trillion of GCC funds are held in assets worldwide vested in treasuries, corporate bonds, equities and funds.

"Recent trends in investment activities have been equally significant, investment projects amounting to more than US$160 billion to be financed by GCC countries in Asia have been announced since 2005," Younis said.

Islamic finance is managed according to the tenets of Islam which forbid interest or investments such as in gambling or alcohol counters.

Inevitably, the new "Silk Road" leads to Malaysia which ventured into the relatively unchartered territory of Islamic banking way back in 1983 and now distinguishes with an Islamic financial system in parallel with convention banking.

Malaysia boasts of having the most comprehensive range of Islamic products and services from everyday banking and family needs such as deposits, credit cards, pawnbroking and insurance to sukuk and other wholesale capital.

Malaysia is also the global top sukuk issuer with over US$52 billion or 62 percent of world's total, boosting its position by opening its bond market to allow outsiders to raise ringgit or foreign denominated funds.

Increasingly sophisticated Islamic financial products are coming into the market with the development of comprehensive regulatory and supervisory regime under the Malaysia-based Islamic Financial Services Board (IFSB) that was established in 2002.

Islamic hedge funds and Islamic benchmark indices have made their debut.

"There has also been increased listing of Islamic financial instrument in international exchanges. This has enhanced the depth of the Islamic financial markets and increased its attractiveness of an asset class for investments," Zeti said.

By 2020, the global Muslim population is estimated to grow to 2.5 billion from the current 1.5 billion, to underline the huge potential ahead of the industry, and not forgetting the growing number of non-Muslims, for instance in Malaysia, who are turning to Islamic finance.

Having only a tiny Muslim population is no obstacle for Hong Kong which is keen on developing a wholesale Islamic finance market, said Tsang.

The island city recently launched its first Islamic retail fund for sale and retail investors. Hong Kong has also decided to upgrade its observer status to become an IFSB associate member.

South Sudan to close down 15 Islamic banks, BOSS governor Malok Aleng reveals

The governor of the Bank of South Sudan (BOSS) and deputy commissioner of the Central Bank of Sudan (CBS), Elijah Malok Aleng, has announced South Sudan is due to close down 15 Islamic banks from Southern Sudan, in favour of home-grown banks and East Africa.

"Southern Sudan will be served by banks from neighboring countries and indigenous ones," said the governor of the Bank of South Sudan, Elijah Malok.

Southern Sudan has been devastated by wars for much of its history, and its economy has always been dominated by Khartoum.

The coming of peace to South Sudan has created optimism, and has made the semi-autonomous region an economic hub, attracting thousands from neighbouring countries, thanks to the Wealth Sharing Protocol in the CPA, which gives South Sudan its own budget.

The Bank of Southern Sudan favours a conventional banking while northern Sudan, Central Bank of Sudan, maintains an Islamic banking system capitals, underscoring the historical divide in the two‘s approaches.

Islamic banks that operated in Renk, Malakal, Wau, Aweil, Raja, and Bentiu rejected to turn into liberal banking system as they take orders from Khartoum.

Some of the banks previously operating in southern Sudan include the Bank of Khartoum, Nileen Industrial Cooperative Bank, Tadamon Islamic Bank, Omdurman Islamic Bank, Agricultural Bank, Agricultural Commercial Bank and the Islamic Cooperative Bank.

The departure of Islamic banks from southern Sudan will present a stiff challenge to the Nile commercial Bank and Ivory Bank, the leading banks in South Sudan. Recently, licenses were awarded to some south Sudanese nationals who promised to open another indigenous bank.

The Nile Commercial Bank operates in Rumbek, Renk, Torit, Yei, Juba, Yambio and few other towns in southern Sudan. However, the citizens of southern Sudan are yet to receive capacity building to value banking purposes in their communities.

The IFIs and Islamic finance

There are more than 300 Islamic financial institutions operating in 51 countries. Their combined assets exceed $250 billion, with an annual growth rate between 10 and 15 per cent.

The activities of these institutions affect more than 20 per cent of the world's population, and in certain countries, they handle more than 20 per cent of financial flows. This provides financial services access to certain groups that would otherwise be excluded.

Besides the prohibition of riba (interest), gharar (contractual uncertainty), maisir (gambling), and haram industries (such as those related to alcohol), financial institutions must observe other often complex principles to comply with Islamic jurisprudence, known as shariah.

The World Bank Group's support for Islamic finance cuts across its institutions. The Bank does not have a specialised unit but individuals across the Bank work in partnership with Islamic financial institutions on specific deals and issues as they arise. To build staff capacity on the issue, there have been a series of lectures on the topic held in the Bank's Washington headquarters over the last three years. In December, the Bank published the first book on risk management for Islamic financial institutions.

The International Finance Corporation (IFC), the Bank's private sector arm, offers equity and debt financing to institutions interested in Islamic finance. In 2007, the IFC provided its first partial credit guarantee that complies with Islamic finance rules. In April 2007, Yemen's Saba Islamic Bank was the first Islamic bank to join the IFC’s global trade finance programme as an issuing bank.

The Multilateral Investment Guarantee Agency (MIGA), the arm of the Bank that issues investment guarantees against political risk, co-organised in 2007 a conference with the Islamic Corporation for the Insurance of Investments and Export Credit, a member of the Islamic Development Bank Group.

The groundwork was laid to enable the agency to begin guaranteeing projects backed by an Islamic financing structure. In January, MIGA announced its first-ever guarantee for shariah-compliant project financing. The $427 million guarantee will support investments into a new container terminal in Djibouti.

In terms of its own financing, the World Bank Group has dabbled in shariah-compliant bond issues known as 'sukuk'. Both IFC and IBRD have issued 'sukuks' but so far the Bank has not been able to issue in the 'sukuk' market at a rate which is competitive with the major banks.

While IMF staff have conducted research in the area of Islamic finance as far back as the mid-1980s, the institution did not commence much work in this area until about ten years ago. The start of this work, both technical assistance and surveillance, coincided with the Fund's recognition that it needed to be more aware of what was happening in the financial sector in light of crises that were hitting many emerging markets.

Fund staff have not yet consulted the board for endorsement of a particular strategy or policy. Instead work on Islamic finance is guided by the same policy that guides all financial sector oversight.

Like the Bank, the Fund does not have a separate division that handles Islamic finance, but instead incorporates work in this field into existing functional activities.

Within the monetary and capital markets (MCM) department, about 25 people are familiar with the topic and experienced in applying standard analysis to Islamic institutions. Naturally much of this is concentrated in MCM's Middle East and Central Asia division.

In terms of country level engagement, the IMF is involved in assisting governments to set up appropriate regulatory frameworks for handling Islamic banks. Standard oversight mechanisms, such as required capital adequacy ratios, are hard to apply directly to shariah-compliant banks.

The IMF indicates that its work in this area is fast expanding as more countries are interested in improving their surveillance of these banks as they grow in prevalence and size. There are at least eight IMF technical assistance projects in this field at the current time In mid-2007, it issued a working paper called Introducing Islamic banks into conventional banking systems.

The Fund has also worked at the global level to facilitate the development of standards. In 2002 it helped establish the Malaysia-based Islamic Financial Standards Board (IFSB), which issues global prudential standards and guiding principles for the Islamic financial industry.

The IFSB standards are designed to complement the standards issued by the Basel Committee of the Bank for International Settlements which is also an IFSB member. The World Bank has developed tools to assess country compliance with the standards. The IMF also works with the Accounting and Auditing Organisation for Islamic Financial Institutions.

Islmic finance nearing 'critical mass'

By Faisal Masudi, Staff Writer

Islamic finance is approaching “critical mass” in Dubai, the birthplace of banking with a Muslim twist, an international seminar here forecasting the industry for this year heard Wednesday.

Addressing a business delegation that included FTSE Group, the yardstick for British stock markets – the Group was here to announce its launch of an Islamic index – Dubai International Financial Authority’s CEO, Nasser Al Shaali, said it took the emirate only three years to become the world’s “only exportable model for regulating Islamic Finance”.

“It started right here with Dubai Islamic Bank. Today, we have an advisory council, international rating agency, the Cass Business School – the only executive MBA program for Islamic Finance – and an Islamic Waqf (endowment trust)”, said Al Shaali.

Islamic Finance is a Dh3-trillion global industry that grows about 20 per cent yearly, according to various estimates cited by Majid Dawood, CEO of Yasaar Research Inc., the company co-launching FTSE’s Islamic index.

“It is the fastest growing sector in banking, expanding into non-Muslim regions like Europe and South Africa. By 2025, it will make up an estimated 12 per cent of all equity versus debt-based products and transactions”, said Dawood.

The boom is tempting Asian economic powerhouses like Japan and Hong Kong – the gateway to China – who have started tweaking commercial norms there to win Muslim favor and money, said Dawood.

“That’s a good sign. Islamic investments are moving beyond Malaysia and the GCC which have traditionally been driving demand”, Dawood added.

Even the Reserve Bank of India is eyeing investments in line with Shariah, or Islamic law, Dawood told the audience at The Gate, Dubai’s iconic landmark for all things financial.

He also expects London to extend its longtime role as a nerve center for ‘conventional’ business to Islamic finance as well.

“That city has beaten Pakistan, an Islamic republic, as an active role player. We (Muslims) ought to contribute too”, Dawood said.

Although Dubai received a better report – “it’s got a great track record and infrastructure and the government is supportive”, according to Dawood – there is always room for improvement.

Imogen Hatcher, managing director for FTSE Europe Middle East and Africa, who is poised to “take on this part of the world”, wants more “credibility and legitimacy.”

“The ‘feverish innovation’ (in Islamic financial products) has led to very ‘clever’ stuff, if you like”, she said. The cautious sentiment was echoed by Al Shaali who also admitted the “need to be lawful and transparent.”

“There can be no black-boxes, no surprises in this story”, Hatcher said.
Another sticky point in the path of Islamic finance – it forbids investing in businesses dealing in pork, alcohol, cigarettes, and usury, among other taboos in the Muslim faith – is the lack of a united front that determines what is acceptable to trade, the speakers stressed.

While Dawood suggested having on corporate board at least three Muslim scholars – “we all make mistakes” – for a balanced view, Dr. Mohamed Laldin, a religious advisor, said the problem was rooted in the way the industry was evolving.

“The focus seems to be on imitation rather than innovation, where existing conventional products are simply ‘Islamisized’. It is true that we (scholars) sometimes have our own understanding, and practitioners have their own understanding. I think we can all move forward if we work together”, said Dr. Laldin, who was also there for a “blessing ceremony” for FTSE Shariah Global Equity Index Series.

The Series is made up of 96 indices, 12 of which are calculated in real-time.
In 1995, FTSE Group gained independence from its creators, the Financial Times and London Stock Exchange.

Hong Kong woos Gulf investors

KUWAIT: China's Special Administrative Region, known to the world simply as Hong Kong, is eying the Gulf's Islamic financial market and regional investors.

Donald Tsang, Hong Kong's Chief Executive, is leading a high-level business delegation on a three-day visit to Kuwait courting local investors to enter Hong Kong's financial market which is seeking to expand into the Islamic finance market. "Kuwaiti investors can use Hong Kong as a platform (to entering mainland China and the entire Asian regional market)," said Tsang yesterday in an exclusive interview with Kuwait Times.

Hong Kong is poised to develop an Islamic finance platform in order to get a piece of the more than $1 trillion in petrol revenues generated by the Middle East each year. "Our job is to act as a catalyst and spur them into understanding what we offer and what we are as a global financial center," he added, and noted, "I am very happy with today's work.

On Friday, the European Union announced its disappointment over Hong Kong's delay in implementing universal suffrage which it had expected would occur by 2012. Tsang said of the issue, "This is a sovereign matter between the people of Hong Kong and a matter which will be decided from the Central Offices from China.

It is not something that is imposed from overseas the same way in which in any Gulf states you do not want your constitutional changes to be imposed on you from foreign affairs. It is important
to realize that the situation is largely resolved in that we have a firm line in which we will hold universal suffrage elections for CE in 2017 and the Legislative Council will follow in 2020.

I think it's a very good timetable and the Hong Kong people are generally happy about it. The latest survey shows that 70 percent of our people are content with this position.

" Continuing with the topic of democratic reform, Tsang stated, "It is important for people to realize that universal suffrage is not a fixed model that you can impose or clone on Hong Kong, it must be a self-grown one and we must decide for ourselves and we have to be careful in doing so, to ensure that we have the right model for ourselves.

Expanding on the lengthy timeframe for universal suffrage and outside Western influences, Tsang stated, "It is important not to gauge or decide or put pressure on people on other people's constitutional changes...you must see things through your own eyeglass...

We are not starting with a clean slate, everyone has his own tradition or history, we have a colonial history where democracy came in rather late in the day and this has to be grown and we have to be patient to get it right," he said further, and added, "If it is so easy, then the world should have one model and you can see we have different models and different varieties...

we must make sure that whatever we have is universally recognized to be universal suffrage on the one hand and it must be workable, pragmatic, and compatible with Hong Kong's situation on the other.

Hang Seng Bank launched Hong Kong's first Islamic fund in late October 2007, which invests mostly in stocks offered by the Dow Jones Islamic Market China/Hong Kong Titans Index, which itself only opened in early October of 2007. "It has been quite successful," he said.

The Dow's Islamic (new Islamic) index, tracks Sharia-compliant companies whose major base of operations are in mainland China and Hong Kong but trade in Hong Kong. Hong Kong's foray into the Islamic financial market will enable Hong Kong tocompete with Singapore and Malaysia for Muslim investments.

Tsang said of the Islamic financial market, "The future depends on how successful we are...this is the reason why we are here, to understand the requirements of Sharia compliance...we must learn the essentials." He said, adding, "We want to learn on the ground on how it is exactly conducted..." He stated, "We had a very interesting discussion with the head of the Central Bank here and I am sure this will be followed up - We have learned from him w
hat we might need to do.

" He added, "I believe our law is capable of doing that but we may have to change laws to suit this but that would be a minor amendment on our part." The Hong Kong government recently set up a committee to examine the introduction of Islamic financing to the region's established financial market.

"We had a good and successful seminar in Hong Kong bringing together the world's greatest Islamic financial experts." said Tsang.

Along with private investors, Hong Kong is seeking to woo Kuwaiti businesses to list on the Hong Kong exchange which is Asia's third largest by market capital and ranks seventh in the world. $789 billion worth of assets were managed by Hong Kong based funds in 2006, more than 60 percent of which came from overseas investors. $27 billion in venture capital funds were managed by Hong Kong based firms in 2006.

Looking positively to the future, Tsang stated, "I am sure the market is likely to see new products into 2008 and even more in the coming years." He noted, "I am trying to bring the key figures together, the head of our stock exchange, the head of our securities and futures commission and the head of the managing authority of Hong Kong.

" Tsang minimized his role in setting up the discussions which took place yesterday at Kuwait's Chamber of Commerce between the Hong Kong business delegation (half of whom are representatives of Hong Kong's Real Estate market and half of whom are from the financial market) and the Kuwaiti members of the Chamber of Commerce, "I merely opened the doors for the people to meet.

They spoke about the vantage point which Kuwaiti businessmen would wish to consider in establishing a base in our part of the world and radiate it to the Asian region, particularly in the mainland of China.

To get a business into mainland China from Hong Kong you must either be an established business for two to three years prior to the move, or form a partnership with a Hong Kong company," said Tsang, who furthered, "You don't just go to the mainland, you need someone to write down the legal instruments for you, you need a financier, you need insurance and we in Hong Kong can do this - We have something unique to offer.

" He continued, "It is very easy to set up a company in Hong Kong and it is also quite easy to find a joint venture.

Of Hong Kong's relationship with mainland China, Tsang said, "We are part of China and we have a close economic partnership agreement, essentially a free-trade agreement between Hong Kong and the mainland.

" He noted that the free-trade laws extend to all goods manufactured in Hong Kong, irrespective of the nationality of the owner, which is a key point in wooing foreign businesses to Hong Kong.

Tsang pointed to another key factor for foreign businesses doing business in Hong Kong - they are only taxed on in come derived in Hong Kong, therefore businesses which set up regional headquarters in Hong Kong but are controlling offices in other countries, are not, however, taxed on any of the income derived from those foreign based businesses.

He pointed out the uniqueness of Hong Kong saying, "Unlike most cities we are capable of dealing with the renminbi...the only city able to do this outside of mainland China.

" He noted, "We have come to the point where we have seen the beginning of Islamic financial products being created and we have seen particularly the investment opportunities that are on offer in the mainland of China...It will be very interesting to the investors in the ME who have a huge investment portfolio to consider what they can do, I believe that the opportunity is there in mainland China with very attractive returns in terms of global reach." He furthered, "What we are interested in is a long-term partnership with Gulf countries to start up a new range of products to make sure that the breadth and the depth of the Hong Kong market will include Islamic financial products.

I believe the money will flow from there." Tsang said of Hong Kong's thriving economy, "A free market means free access to any aspect of commercial activities here - We have to ensure the market is accessible to people - a free market is a competitive market.

Hong Kong's GDP in 2006 was $188.8 billion with a growth rate of 6.8 percent. Its economic success can be attributed to vigorous exports, its position as a leading tourist destination, and strong consumer spending. Notably, Hong Kong attracted more than 25.25 million visitors in 2006 alone.

The international financial hub has long maintained a stable business market attracting over 6,300 overseas and mainland China businesses to set up shop within its 1,104 square kilometers. "World financial management these days is augmented into different time zones really, Hong Kong fills a very important gap.

For trading in the day and separated from New York on the one hand, we've done reasonably well." He said. "Our market is one of the most active, fluid, very free, very reliable and more importantly we are capable of handling US dollar instruments of all kinds when New York Wall Street is sleeping.

We are also capable of dealing with Euro dominated instruments when London and Frankfurt are sleeping," he added. Of his visit to Kuwait, Tsang said, "My visit is quite beyond my expectations." Yesterday Tsang met with HH the Amir. "The Amir was very friendly...we talked about all sorts of things.

His experiences in Hong Kong...it was a very valuable meeting. It bodes well for what we wish to do here and what we can do together on the financial development side and the fiscal infrastructure side." Adding,I have seen the enthusiasm of the people here, particularly the leadership, the Amir himself, about doing things together with Hong Kong in a different time zone for the betterment of your people and my people.

Islamic investors Focus on India,China

MUMBAI: Shifting political sands in America and Europe, especially after the 9/11 terror attack and concerns of a probable slowdown in developed economies are encouraging Islamic investors to turn their focus into growth economies like India and China.

Although there has always been a talk of Islamic investors shifting their investment focus to emerging economies, the real trend of investing in India caught up in 2007.

If one goes by numbers, the first real ‘all-Islamic’ finance deal materialised in October 2006 when Bahrain-based Gulf Finance House and the Maharashtra government joined hands to take up the Energy City India project.

Gulf Finance House promised to invest close to $2,000 million for the project. Since then, there has been four major Islamic private equity investments in India, all in 2007.

According to Islamic Finance Information Service (IFIS), National Bank of Dubai along with Velcan Energy Holdings (Dubai) are investing close to $140 million for the Velcan Hydro Power Plant in Arunachal Pradesh.

Saudi Economic and Development Company (Sedco) and Bearys Group have come together to invest $20 million for the Bearys Global Research Triangle in Bangalore. HSBC Amanah will invest $50 million in Srei Projects while Gulf Finance House will invest $10,000 million for the Indian Economic Zone in Mumbai.

“Robust growth, requirement for huge investment in areas like infrastructure and strong legal framework (which protects foreign investors) are some of the reasons why Islamic investors are flocking into India. This number is expected to jump by 100% in 2008. We are expecting investments in the range of 10 to 15% this year,” said Bearys Amanah Investment CEO, Shariq Nisar, who is also an expert in Islamic finance.

Qatar Islamic Bank (QIB) successfully increases the number of shareholders in Al Jazeera Islamic Company

QIB offered 6 million shares to potential investors at QR65 per share including a premium of QR55 per share which delivered QR330m profit. Qatar Central bank has approved the list of the shareholders and has also granted its consent for the restructuring of AJIC as a regulated finance company.

Salah Jaidah, CEO, QIB stated: 'Our aim is to unlock the productive potential of AJIC and streamline the enterprise to promote quality of service, efficiency, revenue generation, economic development, employment as well as competition in the market place'.

QIB in the past few months announced its plan to open up the share holding of Al Jazeera Islamic Company. The objective was to sell to potential investors and increase the number of shareholders from 2 to 10 as per Qatar Central bank requirements.

This was successfully completed and QIB has kept a leading position with 30% of Al Jazeera company shares with Al Awkaf (previous partner) keeping 20% and the balance was sold to strategic partners.

Salah Jaidah, CEO, QIB stated on this occasion: 'We are proud of the high level of interest that strategic partners had in Al Jazeera Islamic Company and the faith they had put in our future plans. In fact we had proposal from more than the 8 partners required. We have in a short period of time completed this project and we are delighted with the high level of partners that we now have on board.''

In fact, the new shareholders on top of QIB and Al Awkaf are prominent institutions from both the local and the regional market; to name but a few of them are: Qatar National Bank, Qatar Insurance Company, the department of minors and Global Investment House of Kuwait.

Salah Jaidah mentioned: 'The new set up with 10 shareholders is as per the QCB requirements and we will now be able to operate Al Jazeera Company as a regulated financing Company'.

With the number of expatriates increasing and the current economy boom, the financing companies' volume of business is significantly growing and this change in AJIC was made to address the market needs. Al Jazeera Islamic Company will be targeting Consumers and Small and medium enterprise financing, two sectors showing exponential growth.

Salah Jaidah CEO QIB added: 'On top of the changes in the shareholding we are also planning an expansion in terms of branches and in terms of employees. A new CEO for Al Jazeera Islamic Company has been appointed and will assume office shortly.'

Shari'a Banking and the Financial Mainstream: An Outlook on Compatibility

Within the Western banking system, there has been a rise in the use of Islamic banking. The industry of banking and finance in the Arab and Muslim world has been doing it for years, but now there are shifts towards Shari´a-compliant banking from within North America and Europe. Some major banks like Citigroup, HSBC, Lloyds TSB and Deutsche Bank have already established departments devoted to this system. With all of the criticism that has surrounded this new trend, it is important to ask what is to gain and what is to lose with a full integration of Shari´a banking in the mainstream financial industry.

While there are several complexities to the system of Islamic banking, or Shari´a compliant banking, it would probably be easiest to describe it by the prohibition of riba (interest) as it is considered usury. Instead of the standardized system of banking known to the West where interest is used as a way for money to make money onto itself, Islamic banking was established in a way to entirely avoid that method. The use of interest is seen as unethical and predatory.

The Koran makes several references to the effect that the engagement in usury is something that only Satan has facilitated and should one engage in usury in order to gain from one´s wealth that they shall not gain anything from God. In a historical perspective, as stated through Koranic commentary, the practice of usury was one in which the pagan Meccans did so that they could acquire wealth in order to defeat the Muslims at the Battle of Uhud in 625.

As a replacement to interest, it then becomes a system of reinvestment of assets—granted that the assets to be reinvested in are not haram (prohibited by Shari´a law). This would include businesses that engage in alcohol, pork, pornography or gambling. As the banking industry across the West jumps into this growing market, there is no doubt a great deal of concern as the executives and shareholders of these haram industries watch the gradual transition into Islamic banking.

The principal reasoning for the Western banking industry´s desire to expand in Shari´a banking is not by means of appeasing ideological or moral appeals by the Muslim community, as some have claimed, but rather by the recognition of an undeniable and quickly growing financial market that until recently has been limited to countries within the Muslim world. At the start of it, Malaysia, for example, began to see their economic interests being diverted to China so in 2001, the government decided to build upon its Islamic financial sector in order to draw in trade and investment from the Middle East.

After seeing the estimated $1.6 trillion in oil wealth floating around the Gulf, Malaysia, and soon after Britain, Japan, Europe, and the United States, found that by providing sukuk (Islamic bonds), they could break into the market and draw in the petrodollar investments. In order to draw in further investment, additional banking serviced were employed.

As it was recognized that with over 1.5 billion Muslims in the world—granted not all strictly adhere to Shari´a finance laws—that it was time to open up the banking industry to those that did before the Gulf states cornered the market.

Many Muslims were banking in conventional banking methods and when given the option to convert their savings and investments into a Shari´a-compliant system, they did. The system in itself has been found to be attractive to non-Muslims as well who in some Islamic banks make up as much as 50 percent of the depositors and borrowers.

In the British perspective, it was soon found by many in the mainstream banking establishment that there are approximately 2 million Muslims and 100,000 Muslim businesses in the country and based on research conducted by Lloyds TSB, that three-quarters of them wanted to engage in banking according to their faith.

So instead of watching this community send its money overseas to Islamic banks in the Gulf or engage in less than conventional forms of money management, these banks found that there was a service to provide. That, among the services conducted, there are personal savings accounts, home loans, and business loans that are all in compliance with Shari´a law. Every bank who has gone into Islamic banking employs an advisory board of Shari´a scholars. This board will supervise every step of the process of a transaction in order to ensure that it is within Shari´a compliance.

For personal savings accounts, the depositor will not receive interest but rather shall receive returns from the bank´s investment. This runs along the principles of mudaraba, which is an equity partnership financing instead of a debt financing scheme. The contract between the bank and the depositor works by the risks and rewards being shared. Profits will be shared as agreed upon but in the case of loss, the investor will bear the loss of any capital. This scenario allows for the bank to take the deposit and redirect it into a halal (permissible by Shari´a) investment. The bank will then provide the depositor an agreed upon percentage of returns from that investment.

Unlike with the payment of interest, which generally is a fixed percentage, the profit share can increase in Shari´a banking should the investment pay off at a greater rate. Typically, the percentage of profit sharing is lower than the standard interest rate and—in the United Kingdom—the payout of shared profit to the depositor is taxed as if it were a return on a standardized loan.

Islamic home finance is of course dealt with in a different fashion as well. Instead of a mortgage loan paid over time with interest, the bank will purchase the property for the borrower and then rent it to them at an agreed upon payment scheme. The bank typically requires a minimum of 10 percent on the down payment and then allows the borrower to pay off the rest through rental payments.

Over a period of up to 25 years, each rental payment acts as a purchase of shares over the property. In order for this to work to the lender´s advantage, the bank will typically buy and resell the property after a price increase. Many have advocated for this system over the conventional interest-based mortgage loaning system by stating that it provides security from fluctuating interest rates that could cause problems in repayment.

The banks that offer this loan all state that the house will be repossessed should payments not be made. Within the interest-based mortgage system, there is a relative level of flexibility. Borrowers are able to refinance their mortgage or even take out second mortgages before they are forced into foreclosure.

It has been argued that a more expansive Islamic banking system would have provided for an environment where crises like the sub-prime mortgage problem that afflicted the United States might not have happened. This crisis, which has been an ongoing financial problem, has caused a sharp rise in home foreclosures. It started in the Fall of 2006 and became a global financial crisis by July 2007.

Many factors created the crisis, but the most immediate cause was a rising interest rate which caused people with adjustable rate mortgages to see significant increases in their mortgage payments. This left many home owners unable or unwilling to meet their financial commitments and lenders without a means to recover their losses.

It has been stated that had the banking system been one under Shari´a compliance, this crisis would have never occurred. There would have been no system of interest, thus there would be nothing to raise the mortgage payment rates. At least in this aspect, Islamic banking would have been advantageous. The entire problem, however, would not be under control. In the United States, the Federal Reserve is the primary tool to manage inflation rates. Interest rates are raised to slow the level of economic growth so that inflation rates can decrease.

Interest rates were raised which caused the sub-prime mortgage crisis but inflation rates were mitigated. Iran, for example, claims to have a 100 percent Islamic banking system. There is no interest based system to curb inflation that is as broad as the Federal Reserve. For this reason Iran holds a 16 percent inflation rate versus the 4.5 percent of the United States or the 2.3 percent of the United Kingdom.

The area of entrepreneurship thus becomes an issue when looking at the principles of business investment loans by way of Shari´a banking. This process also goes along with the risk and profit sharing principle of mudaraba. As a means of avoiding the use of interest in loans, financiers will share with the borrowers risks as well as the profits. Instead of the borrower being the sole owner of whatever business they seek to start with a business loan, the financier then becomes a de facto co-owner, earning a share of the profits. Should the business fail, it is the investor that loses everything.

If the business succeeds, the investors will gain far more than if they were collecting simple interest-based repayment. In principle, the process is the same as venture capitalism. The financier will engage in what is known to them as being high risk venture but only when the reward is worth it.

A venture capitalist who is successful in staying in business, however, will not invest in every idea that comes to them; they will wait for a scenario where the risk is at a manageable level considering the level of profit. For many venture capitalists, they will likely hear hundreds, if not thousands, of proposals for investment every year and pick only but a handful.

Experienced business owners with a proven track record of success are typically considered a safe investment whereas borrowers inexperienced in business administration aiming at a small-business ventures, will be considered higher-risk, lower-profit and will likely not be considered. In the interest-based banking system, the bank is not required to take such risks and these higher risk, small business ventures will have a greater chance of receiving the capital they need to start their business.

When placed on the individual level, the small business owner still has the option to choose the loan available to them, Shari´a compliant or not. When placed on the macro scale, in a society like Iran where business loans that are interest based are largely unavailable, it worsens the plight of the entrepreneur. Starting a food shop in a high traffic area might be considered a safe investment and would likely have no problem. Riskier businesses proposals that are attempting to break into, or create a new market, might not be given a chance. This would then have an adverse affect on the entirety of the economic system of that country.

It is through this concept that most directly impacts the small business start ups. While the conventional financial markets operate in the simple process of lending money after a credit history search and ensuring the borrower is able to repay the loan, the Islamic banking process requires a great deal more engagement with the borrowers intentions for investment on the part of the lender. Reliability and security are issues of significant concern when the bank considered who to provide their loan to.

Lloyds TSB has provided the first Islamic Business and Corporate account at all of its 2,000 branches designed to cater to the 100,000 existing Muslim businesses in Britain and for new entrepreneurs. Out of all of these businesses, the bank recognized that there was a substantial market waiting to be tapped. This is the first Shari´a business banking account in mainstream banking today. Prior to its existence, Muslim business owners went to the regular accounts. Now that it exists it has become widely popular. It is a process in which the mainstream bank itself made Islamic banking popular—and seen as necessary—rather than the Muslim community.

The question is, has the West benefited by expanding its commercial banking industry into the Muslim world to share in the wealth of oil profits or is the Muslim world benefiting more by introducing Islamic banking to the financial mainstream of the West? Is it a win-win scenario or are there serious drawbacks to come as this process evolves? Perhaps one result of Western interest in Islamic banking is that it provides a greater sense of legitimacy to the practice and then gives Middle Eastern banking systems the incentive to go ahead and provide full implementation.

Only up until 2006, for example, the National Commercial Bank of Saudi Arabia, overhauled its entire retail business to make it Shari´a-compliant and only until this year did Tunisia and Morocco have Islamic banks. By the West making the decision to move into Islamic banking, it has given the Middle East the option to develop its Islamic banking system as well; an option that may not have been viable before the banking giants made the transition.

It has been estimated that over $800 billion has been transferred out of the United States and Europe into other regions where Islamic banking is more prevalent—specifically within the Muslim world. As Islam has grown increasingly conservative over the past few years, matched with a greater wealth being invested into the Muslim world, there has been a reinforcing effect on both religion and economics within the region.

It is in this economic revival—due to religious reasoning for halal banking—that an Islamic revival has been made possible. Now that the Western banking sector has become interested in getting involved in Islamic banking, it has given this revival a greater sense of legitimacy.

The concluding question is with regard to how—if at all—Islamic banking can be a detrimental to economic development in the long run. The simple answer would be to state that the larger banks like HSBC and Citigroup, who are actively engaged in Shari´a banking, have done their cost/benefit analysis and found that the untapped market of Muslim investors who wish to adhere by their religious code of finance is worth the risks that go along with the system.

There has been a great deal of debate on this matter and some have advocated that the introduction of Islamic banking is part of a larger ploy to Islamicize the West. Providing ammunition to these types of arguments are groups like Hizb ut-Tahrir, an organization in Britain that has publicly advocated for the totality of the West to be run by Shari´a law, that have in fact advocated on their website that events like the financial crisis in America under would have never happened under an Islamic system and that capitalism is the seed of the devil.

In a brief analysis, however, it is not necessarily the society that is entirely at risk. Investors engaged in Shari´a banking are no longer protected and can incur greater loss but stand to gain a great deal more. Borrowers, in effect, may very well find it more challenging to acquire the capital they need if their investment plan is less than solid. It is a trade-off for both sides, as directed by the original principles of the Quran. For Muslims who wish to conduct their finance adhering to Islam with a less than attractive investment proposal, they will likely find it hard to launch their business whereas a conventional loan might be their saving grace.

From the bank´s point of view, on the other hand, an attractive investment plan, one which looks to be of low-risk and high profit, could provide a far better rate of return than if it were the standard interest based loan. Investors in this case recognize a profitable opportunity and the fact that interest is not involved makes it no less capitalistic.

The concern is not as much with the processes of Islamic banking but rather by the surge of interest by Western banks. It is highly unlikely that Shari´a banking will replace mainstream banking due to the requirement for a total economic reformation, but with every action brings a reaction within the financial industry.

When the largest banks begin to implement Islamic banking practices at the international level, country based banking systems in the Muslim world will alter their systems to a greater degree towards Shari´a banking. In time, the problem this could present is a conflict in commercial trade and banking when mainstream banking cannot complete transactions with countries in the Middle East because they are not Shari´a compliant.

As stated, the West will not and cannot make a full transition into the Islamic banking system due to the nature of change needed, but as their smaller scale integration provides legitimacy to the practice, thus bringing a revival in Islamic finance, it could provide for complicated trade and commercial dealings down the road.