Islamic Finance News Portal – Bringing you the latest updates in global Shariah finance

Watch out for news alert!

Credit crunch sparks interest in Shariah compliant finance

with 2 comments

Points of Essence:

  • The subprime lending bust in US has intensified an interest in Islamic finance amid concerns about the quality and value of the banking assets as well as restricted access to gain borrowings.
  • Furthermore, the Islamic finance is more appealing structurally where they could see financial institutions with limited or zero exposure to the troubled US mortgage market. Apart from being a market with plenty to invest, and borrowers with strong ratings.
  • The emphasis on shared ownership and real assets dealings in Islamic finance appeals to the current climate.
  • Issuers begin to shy away from US dollar backed borrowings.

Article 1

3 July 2008
The nervousness precipitated by the US credit crisis has failed to dissipate on the financial markets. In 2008, concern about the quality and market value of some banking assets has prompted major financial institutions in the US, Europe and the UK to begin capital raising. Now a greater degree of caution within the banking sector is making it more difficult and costly for borrowers to gain access to finance. The mood has intensified interest in Islamic finance. Its appeal was initially defined by religious affiliation, but has now spread beyond the world’s 1.6bn Muslim community. There is a great deal of investor interest in states rooted in Islamic culture, which apply the principles of Islamic law or shariah with varying degrees of stringency.

The Gulf states, for example, earned $1.5 trillion in oil revenue between 2002-2006. They have financial institutions with limited or zero exposure to the troubled US mortgage market, and have organisations that wish to raise capital using debt instruments closely linked to underlying assets. This is a market with plenty to invest, and borrowers with strong ratings – appealing features in the current market.

There are structural differences in the products offered in conventional western-type and shariah-compliant markets. Conventional bonds commit the issuer to pay investors interest on the sums invested on specific dates. Shariah principles require that financing should be used for the trading or construction of identifiable assets, and do not allow the payment of interest. There are now many forms of shariah-compliant Islamic bonds or sukuk in existence, which differ from conventional bonds in that they represent partial ownership of underlying assets. The shared ownership principle, and emphasis on real assets, is of particular interest at a time when there has been concern about the degree of leverage used in some financially-engineered products. Since the credit crunch intensified in August 2007, global issuance of sukuk is estimated at $30.4bn. According to Moody’s Investors Service, issuance could expand by 35% in 2008.

“The growing importance of shariah-compliant finance reflects an important global transfer of liquidity, prompted by the oil boom. It also illustrates how emerging financial markets are increasing their depth and range,” says Andrew Marshall, Head of Emerging Market Research at Gartmore Investment Management. “We also note that issuers are moving away from pricing in US dollars, with more issuers choosing the UAE dirham, Saudi riyal or Malaysian ringgit.”

There is, however, a level of complexity that results from the fact that products must comply with principles on risk-sharing laid down more than a millennium ago. Even so, the UK is keen to benefit from this expanding market. In March 2008, the government introduced tax concessions for sukuk in its annual budget, and UK Treasury Minister Ed Balls has indicated that the UK could issue its first sukuk bond this year.

Gartmore Investment Management has an experienced, award-winning Emerging Markets team headed by Chris Palmer, Head of Global Emerging Markets. Its Global Emerging Markets portfolios contain selected overweights (relative to its benchmark) in banks with experience of shariah-compliant finance, including the Indonesian Bank of Central Asia and Bumiputra-Commerce Holdings of Malaysia.

Source: http://www.easier.com/view/Finance/Investments/Funds/article-188824.html

Article 2

Volatility boosts interested in Islamic finance: Gartmore

by:Tabatha Bergin

Investor interest in Islamic finance has intensified due to the volatile financial markets, Gartmore has claimed.

<!–
OAS_AD(‘Middle’);
//–>

The investment manager said that apprehension about the value and quality of banking assets had lead to several major financial corporations, both European and American, to consider Shariah compliant finance as a viable alternative for raising capital.

Gartmore said that the Shariah principles of shared ownership and the prominence of “real assets” are particularly appealing in the current climate.

As the Islamic market has been relatively segregated from that of the West it has had few dealings with the US mortgage market and so has not been affected by the American “credit crisis”.

Andrew Marshall, head of emerging markets at Gartmore, said: “The growing importance of Shariah-complaint finance reflects an important global transfer of liquidity, prompted by the oil boom. It also illustrates how emerging financial markets are increasing their depth and range.”

“We also note that issuers are moving away from pricing in US dollars, with more issuers choosing the UAE dirham, Saudi riyal or Malaysian ringgit.”

Source: FTAdviser


Advertisements

Written by Suapi Shaffaii

July 4, 2008 at 7:34 am

2 Responses

Subscribe to comments with RSS.

  1. Interesting article. I need to read it again in order to digest all the information correctly!

    be-mine

    July 6, 2008 at 4:33 am

  2. Islamic finance provides a strong ethical framework for financial transactions, he talks itself.Shariah principles require that funding should be used for commercial construction or identifiable assets and not allow the interest payments.

    islamic finance training

    October 2, 2010 at 12:58 pm


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: