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Islamic Finance Looking Attractive in Korea

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Points of Essence:

  • A rather late starter, Seoul has finally found interest in Islamic finance. The hosting of  an Islamic finance event in the country was an opening chapter to a larger activity of Islamic finance.

By Yoon Ja-young
Staff Reporter

Islamic finance could be a new alternative in overcoming the global financial crisis, a top financial regulator said indicated as the country is now making efforts to attract funds from oil-rich Islamic countries.

Kim Jong-chang FSS Governor

”Reckless distribution of complicated derivative products throughout the global market, detached from the real economy, put the global financial market into crisis,” said Financial Supervisory Service (FSS) Governor Kim Jong-chang at a seminar on Islamic finance held in downtown Seoul, Tuesday.

The annual seminar, held in Japan and Hong Kong in the last two years, is now under way in Seoul, jointly hosted by the Islamic Financial Services Board (IFSB), the Financial Services Commission (FSC) and the FSS.

Kim said Islamic finance, which allows only real financial transactions, could be the answer to the trouble caused by complicated and intangible derivative products.

The hosting of the seminar in Seoul reflects the country’s growing interest in attracting the abundant liquidity of the Islamic world and participating in the expanding market.

According to McKinsey, Islamic financial assets are expected to surpass $1 trillion in 2010, which compares with $750 billion estimated for 2006. The issuance of ”sukuk,” or Islamic bonds, grew five-fold over the past four years to reach $120 billion in 2008 and the mutual fund market is estimated to reach more than $11 billion.

”Despite the global financial crisis, the economy of the Islamic world, based on oil money, is continuing to expand,” the governor said. ”Korea is very interested in making use of Islamic finance to overcome the global credit crunch,” he added.

Not only Islamic countries but the United Kingdom and other European countries, as well as Singapore, Japan and China have introduced or are trying to introduce Islamic finance, with borrowing costs lower than those in the United States or Europe. Islamic countries, which had assets snowball on high oil prices, are eyeing the financial industry as a new growth engine after the depletion of oil.

Islamic finance has some unique features, as it has to meet conditions set in Sharia, or Islamic law.

Since Sharia bans levying interest, sukuk was developed to pay dividends or commissions instead of interest. It is usually invested in tangible transactions such as real estate or facilities.

Islamic money cannot be invested in businesses considered contrary to Islamic value, such as those operating in the pork, liquor, and pornography and gambling sectors.

As Islamic finance bans ”gharar,” or excessive risk and uncertainty, speculative products are theoretically banned.

Due to such unique features, Korean banks, for example, had difficulty advancing into Islamic countries, as these unique practices are not in line with Korean law or financial systems based on charging interest.

Kim said the regulator would focus on setting up infrastructure for Islamic finance in the country.

The FSS and the FSC joined the IFSB as observer members last August.

chizpizza@koreatimes.co.kr

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Written by Suapi Shaffaii

January 13, 2009 at 9:56 pm

Posted in General Issue

Tagged with ,

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