ISLAMIC FINANCE: WEST'S OPTION OR COMPULSION?

SHAMSUL GHANI (shams_ghani@hotmail.com)
Dec 22 - 28, 2008

The Islamic finance industry estimated to have a size of dollar one trillion or so vies to occupy a center place in the global financial market- courtesy the financial meltdown that has compelled the West to bid for the excessive liquidity sitting in the kitties of Gulf and other Asian countries.

West's interest in Shariah compliant financial system reminds one of the similar interest shown in the "Islamic spirit of Jehad" during the late seventies when USSR's presence in Afghanistan was being perceived by US as a potential threat to the security of the then bi-polar world. With the heightening of Jehad frenzy, US dollars and sophisticated military weapons got their way into the project "Destroy USSR'. Once the job was dutifully accomplished by Pakistan, the expression 'Jehad' was added to the list of synonyms for 'terrorism'. Are we headed for yet another historic abuse? Is the Western interest in Islamic finance meant to be opportunistic and short-lived - intended just to mop up the excess Asian liquidity to ward off the impending financial crisis? Are we once again bidding to pull the US and European chestnuts out of the fire?

Sounds a bit cynical? But the Islamic world will do well to erect protective firewalls to prevent Western exploitation of the situation. Surely we will not like to see 'Islamic Finance' added to the list of synonyms for 'Financial Terrorism', once the non-Islamic economies are bailed out with the help of Islamic liquidity.

The shift in US policy perception that serves US interest is often made with surprising - and sometimes graceless - ease. The intermingling and then the end-switching of the definitions of Jehadist and Terrorist ideologies, after the end of Afghanistan War, have already caused much tantrum in the Muslim world. This time it is financial and economic contexts that have made US and its cronies to review stance on Islamic finance and sovereign funds. Till recent, sovereign funds were being looked down upon as toxic money chasing high-profile global assets. But now these funds, assuming the role of trouble shooters, have become the most sought-after commodity. Following the historic oil price hike, oil exporting countries became flush with excessive liquidity. This time, instead of consigning the huge dollar earnings to the coffers of European banks and then sitting back in peace, these countries scripted a dynamic role for their excessive liquidity by using it for the purchase of strategic global assets. Gulf countries being the seat of sovereign funds, US has started to evince interest in Islamic finance just to attract these funds to the bailout front. Islamic Finance news reports:

But these sovereign funds are being extra cautious, especially after they were derided when they attempted to move in a few months ago. It appears that US officials now realize what is needed to lure the sovereign funds from the Gulf: Islamic finance. Hence the statement by the US Treasury Department that it is looking into the important features of Islamic banking that could help in tackling the current financial crisis."

GROWTH WITH THE CHANGE IN THE GLOBAL OUTLOOK

At the fag end of the last millennium, Islamic finance was struggling to grow with only a few Islamic products in its repertoire. Modaraba, Murabaha, Musharaka and Ijara (leasing) was all that the nascent financial system had to offer. With the gradual broadening of operational base, new concepts like Islamic Equity Funds, Islamic Sovereign Funds, Islamic Stock Market Indices, Islamic Hedge Funds, Islamic Sukuk (bonds) and Islamic Insurance have emerged on the global financial horizons. Islamic Equity Fund, IEF is fast gaining popularity as an innovative Islamic finance product with an active market presence worth US$ 20 billion. According to the Financial Times Stock Exchange FTSE, the size of IEF is expected to grow up to $53 billion by 2010. Saudi Arab's Amanah GCC Equity Fund is rated to be the best IEF. With the increasing global interest in Islamic Finance, the renowned world stock markets have introduced Islamic Market Indices. In 1999, Dow Jones introduced Dow Jones Islamic Market Index (DJIM) followed by FTSE that came up with its FTSE Global Islamic Index in 2000. Standard & Poor introduced in 2006 S&P Shariah Indices, followed by S&P GCC Shariah Indices and S&P Pan Asia Shariah Indices in 2007. While Islamic Insurance sector has developed a number of Takaful based insurance products that have gained wide acceptance both in the Muslim as well as non-Muslim segments of world population, Islamic Hedge Funds concept is struggling to find foothold. Islamic Finance is essentially averse to two basic irritants namely Riba (interest) and Gharar (uncertainty). Conventional Hedge Funds basically rely on speculation through short selling and minimum disclosure to avoid transparency. Since speculation and short selling are unacceptable under Islamic Shariah system, the prospects of any modified form of Hedge Funds winning Shariah acceptance remain a matter of conjecture. Islamic Sukuk (bonds) market having a size of around US$100 billion is a fast expanding market estimated to assume a size of $200 billion in the next two years. According to Islamic Finance news, 295 Sukuk issues worth US$ 26,206 million were launched during the period November 2007 - November 2008, as detailed in the table below:

ISLAMIC BONDS ISSUE BY COUNTRY
(NOV-07 - NOV-08)
  AMOUNT. IN US $ MILLIONS NUMBER OF ISSUES PER CENT OF TOTAL ISSUE
Malaysia 15,759 256 60
UAE 6,783 10 26
Saudi Arabia 1,599 2 6
Indonesia 711 9 3
Pakistan 513 14 2
Bahrain 350 1 1
Others 491 3 2
Total 26,206 295 100