Islamic finance is a subject that is gaining increasing attention throughout the world as soaring energy revenues in the Gulf have fueled investment in the region. However, although Islamic finance is not a new concept, it remains a mystery to many financial professionals. To help shed light on this subject, we asked the experts at Jordinvest to provide an overview of the industry and its impact in Jordan.
|Islamic finance is booming in Jordan|
Can you briefly explain what Islamic finance is?
In a nutshell, Islamic finance is an increasingly growing field in global financial markets with the principles of Shariah, or Islamic law, as the cornerstone guidelines that lay the foundations for such finance.
In particular, such principles forbid investors from taking or charging interest.
They dictate that money should be lent only on physical assets, bar speculation, and prohibit investing in pork, alcohol, gambling and pornography, or in investments that are associated with them.
In addition, Islamic finance is distinctly characterised by the presence of Islamic scholars, who are always appointed as reference points prior to engaging in any investment or financing vehicle.
What are the differences between Islamic finance and conventional banking?
Apart from the fact that Islamic finance is interest-free, Islamic bonds, otherwise known as Sukuk, derive their investment return from the assets used to back them.
This differs from your typical corporate bond, which pays a fixed rate of interest to investors, meaning that there would be no previously fixed yield on such bonds.
That would in almost all cases mean that the preference is towards real estate and commodities.
Equally important, the relationship in Islamic finance is based on the participation of risks and rewards, while establishing pre-agreed ratios.
In addition, the benefits derived from a transaction must be accompanied by the liability arising from potential losses. Islamic finance is also usually synonymous with a strict interpretation of its mechanics and the channels of finance, leaving little room for the most innovative financial products, although this trend has been changing in very recent times.
What are the advantages of Islamic finance for customers?
In addition to giving the Muslim customer the peace of mind he aims for by investing in a field that is based on Islamic principles, Islamic finance offers customers investment opportunities that have been establishing returns in the area of 15% to 17% annually since their recent surge.
The advantages can also be seen from an industry that already has assets exceeding $300bn, with products available in 76 countries.
Customers, with an investment appetite, can benefit from Shariah-compliant funds, equity and Sukuk, all of which are increasingly becoming common in global markets. The equity-based funds, in particular, have been performing well over the past five years, with growth rates in hefty double digits.
What do you think is the common misconception about Islamic finance, if any?
The common misconception is the limitation of Islamic finance in scope and magnitude. Specifically, customers believe that Islamic finance’s role is only related to the issue of interest, which is an important principle, but only a starting point.
Accordingly, many customers think of Islamic finance as a means to secure interest free lending. Nonetheless, the features and channels that Islamic finance brings about are much bigger in scope and magnitude, with the crucial, definitive role of assets in finance.
Islamic finance starts with Murabaha and Mudaraba as traditional financial instruments, and goes on to define Sukuk, Islamic leasing functions, as well as offering investment vehicles, including Shariah-compliant, open-ended mutual funds.
Is the industry growing fast in Jordan? If so, what is causing the growth?
Islamic banks have been around in Jordan for the past twenty years or so, but they are yet to provide Islamic investment vehicle funds, or Islamic funds for that matter.
The perception in Jordan is that Islamic banks are equipped to handle financing, but investment is still a virgin field, so to speak.
Murabaha, Mudaraba, and Islamic leasing are all financing options that merit a good deal of attention. Also, a number of Islamic insurance (Takaful) companies have been on the rise recently. The growth in both cases is clearly attributed to customers with Islamic orientation, who would solely seek financing from Islamic institutions.
Having said that, we have been able to identify a growing interest in Shariah-compliant funds, hence the decision to create a Shariah compliant mutual fund, registered in Bahrain, a vibrant off-shore centre for Islamic investments.
More importantly, the fund targets the widest base of clients in Jordan, including retail, and experienced investors, in line with the CBB’s terminology. In other words, it is offered to both individuals and businesses alike, and we strongly believe that other players in the market should follow suit.
Do you have any dollar estimates of the size of the industry in Jordan and the Middle East?
As regards the size of the local market, Jordan has been taking serious steps towards integrating itself with other regional markets, be it the stock market, the banking sector, or the financial sector .
Islamic investments are no exception. Among other Middle Eastern markets, Jordan has been a major pioneer in Islamic finance, and it still remains as the principal provider of these products in the Middle East.
It is difficult to attach a number to the size of the industry locally, but I would like to mention some figures to illustrate the growing importance of the Islamic banking sector in Jordan since the endorsement of Law 13 to provide for the establishment of Islamic banking institutions in 1978.
The sector currently comprises the Jordan Islamic Bank (founded in 1978) and the Islamic International Arab Bank (founded in 1998), while the Industrial Development Bank has completed all necessary procedures to convert into an Islamic bank in 2008.
The former two banks collectively accounted for JD208m ($293m) in 2007 in shareholder equity, while their combined assets stood at JD2.2bn ($3.1bn). The Jordan Islamic bank, in particular, has witnessed almost 10% growth in its customer base (as gauged from the change in its deposits), compared to 12% for the whole banking sector.
The growth of the industry, from the investment vehicles’ side, especially funds, remains to be seen, given the very recent arrival of Islamic funds, whose sizes are estimated to be in the area of $150m – $200m in the near future.