ISLAMIC FINANCE RISES ON RUINS OF CONVENTIONAL BANKS

The Islamic finance industry, which refers to the banking activity conducted in accordance with the principles of Shariah (Islamic law), gained the limelight over the past two months during the global financial turmoil as one of the relatively safe havens for investments.

There are currently over 800 billion dollars' worth of deposits and investments lodged in Islamic banks, mutual funds and insurance schemes known as 'takaful,' more than five times the volume compared with 150 billion dollars in the mid-1990s.

Islamic financial institutions are reportedly expanding their balance sheets as demand continues to grow in Europe for financial products that avoid paying interest, in line with strict religious rules. These products instead pay profits from an underlying business or rent from a building used as collateral to raise money. The expansion of Islamic finances rests on a lack of exposure to toxic assets and derivatives, often related to mortgages that prompted the collapses in the United States and elsewhere in October 2008.

Besides its wide geographical scope, the expansion of the Islamic finance has been also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market instruments.

The most striking phase could be the growth of Sukuk, the most popular form of securitized credit finance within Islamic finance. Sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in shariah-oriented finance contracts into marketable securities without interest rate charges. The rise of the Sukuk market as an alternative investment activity, is attracting the attention of an increasing number of private sector and official circles across the globe including the British government which is reportedly mulling to become the first Western government to buy this kind of Islamic bond.

According to a new study by the International Financial Services London (IFSL), an independent organization representing Britain's financial services industry, Islamic finance will emerge largely 'unscathed' from the current world crisis. It attributed its findings mainly to the fact that Islamic financial institutions make little use of many of the complicated instruments blamed for the current problems in conventional banks such derivatives and short-selling.

FINANCIAL CRISIS WIDENS THE APPEAL OF ISLAMIC FINANCE

The financial crisis has widened the global appeal of Islamic finance as Western governments and institutions attempt to tap into deposits from the Islamic world, by courting Islamic Financial Institutions (IFI), which remain relatively unscathed by the sub-prime mortgage crisis.

IFIs comply with Shariah, or Islamic law, and one of the fundamental principles is that it is forbidden to sell what you do not own. Unlike other banks around the world, IFIs did not trade bundles of sub-prime mortgages, and therefore have no direct exposure to the sub-prime mortgage crisis.

In fact, finance that complies with Shariah now accounts for around $700 billion of assets and is growing at 10 to 30 percent a year, according to Moody's Investors Services. There has never been a more opportune time to open the doors to Islamic finance, and to drive the growth of the Islamic finance industry as a whole.

The International Quality & Productivity Centre (IQPC) is pleased to announce a perfect platform for conventional and Islamic industry leaders to address key issues in today's economic climate, and carry out business vital to sustain growth.

Leaders in Islamic Finance 2009, a global summit taking place on 19-21 April 2009 in Doha, Qatar, will see prominent figures in the financial world gather to discuss the main challenges currently facing the Islamic finance industry.

Khalid Yousaf, Vice President, Investments and Capital Markets, Siraj Capital, and former attendee and speaker at the 2008 summit in Istanbul, describes Leaders in Islamic Finance 2009 as 'the ultimate meeting place for Sharia scholars, Islamic financial institution principals, ministers, governors and regulators.'

Chris Corander, Senior Conference Director at IQPC, explains 'Islamic finance is an increasingly attractive prospect because it demonstrates good banking behaviour that has perhaps been lost in the last decade or so. Despite this, the industry still has problems of its own which need to be addressed in order to drive the Islamic finance industry forward.'

Two large problems that remain are the global standardisation of Islamic finance and the desperate need for innovation in terms of products and structures. Neither challenge can be addressed without the input of revered Shariah scholars, who sit on a vast number of advisory boards for IFIs and determine what is and what is not Shariah-compliant.

Chris adds 'This is why we have acquired the services of seven world-renowned scholars at Leaders in Islamic Finance 2009, who will take part in forums, roundtables and panel sessions throughout the main two-day summit. There will also be a full-day workshop led by Dar Al Sharia, a subsidiary of Dubai Islamic Bank, which is guided by the distinguished Shariah scholar Dr. Hussain Hamed Hassan.'

In addition, the summit is also supported by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which is leading the way in standardising many aspects of the global industry, and the Qatar Financial Centre.

Qatar is emerging as one of the most dynamic economies in the Middle East. It has the highest per capita income in the world and enjoys one of the fastest growing GDPs, reaching 13.3% real GDP, and valued in 2008 at over US$80 billion. The economy is rapidly expanding in practically every sector and industry. A combination of government investment and the participation of multi-national companies is creating a culture of opportunity. In terms of Islamic finance, Qatar is home to some of the largest Islamic Financial Institutions in the world and is fast becoming another pivotal centre for this sector within the GCC.

DOW JONES ISLAMIC MARKET WORLD INDEX

The Dow Jones Islamic Market World Index was launched in February 1999 as the first benchmark to measure the performance of a global universe of Shariah-compliant investable equities. Over the past decade, the Dow Jones Islamic Market Index series has expanded to more than 100 indexes for all major established and emerging financial markets, regions and sectors. Amongst these are Islamic indexes for the ASEAN, BRIC and GCC regions as well as for global and Malaysian blue-chips.

Dr. Nasser H. Saidi, chief economist, Dubai International Financial Centre Authority (DIFCA), said “The sub-prime crisis has led to the extensive collapse of the conventional banking and financial systems leading to a questioning of underlying market mechanisms, corporate governance, regulatory failure and the effectiveness of boards and risk management. Clearly the Basel II framework and self-regulation have failed. We need a new paradigm. Islamic finance, based on partnership, risk sharing and management, embodies the sound principles of corporate governance and ethics and enforces greater transparency and accountability. The global Islamic finance industry is expected to grow to some $3.5 trillion in the next 5 years."

“Islamic Finance has proved, to date, resilient to financial contagion and crisis. The timing is right for governments responding to crisis to develop and use Islamic finance instruments, primarily Sukuk, as an integral part of public finance, deficit financing and for financing public works and infrastructure. Governments and regulators should seize this historical opportunity to integrate Islamic Finance into the mainstream of banking of finance.”

Stating that Islamic finance is a more robust and reliable option especially with the economic crisis threatening to usher in widespread global recession, Mr. Ali Afshar, senior vice president, Head - Institutional & Investment Banking, Al Hilal Bank said “With the financial crisis further deepening and with its impact being felt in all developed, developing and transitional economies, the relative success and sustenance shown by the Islamic finance industry has been quite noteworthy. Conventional financial institutions and capital markets have been severely affected but the Islamic finance industry has relatively come through unscathed.”

Mr. Afshar further added “The basic principles of Islamic finance that necessitate transactions being backed by tangible assets, prevent it from investing in loans, options, derivatives and hedge funds, prohibit speculation, hence make Shariah compliant products less exposed to the potential risks resulting from over exposure and speculation as compared to conventional products.”

The strict industry and financial ratio screenings for Shariah compliance defined by the unique and sophisticated methodology of the Dow Jones Islamic Market Indexes have made the Dow Jones indexes the most widely used Islamic indexes by market participants across the globe as a benchmark to measure Shariah-compliant investable equities.

Besides launching the first Dow Jones Islamic Market World Index, Dow Jones Indexes were also the first movers in sukuk indexing and combining Islamic with sustainability criteria in the Dow Jones Islamic Market Sustainability Index. Dow Jones Indexes was the first index provider to license its indexes as the basis for the first ever Islamic exchange-traded fund worldwide.