The Laws of Shariah that are not discussed when talking about finance. This is why Shariah Finance is so dangerous. The true laws of Shariah are not given full disclosure and this blog is why we need to expose the pitfalls of making money fast in the Middle East, as we hand nooses around the necks of women, children, Infidels, and all who do not adhere to Shariah Laws.
(Comments by Allyson Rowen Taylor)
The Islamic inter-bank market needs to be re-examined, according to Nicholas Brewer who says it also seems likely that there will be ongoing controversies about how instruments do or do not comply with Shari’ah principles.
It is often noted that whilst Islamic banking services are based on Shari’ah law, their detailed implementation varies from bank to bank. This is because many banks use their own Shari’ah committees to advise on the application of Shari’ah law to their products and services. Despite initiatives to create national or regional Shari’ah committees advising banks, much is still decided at the bank level. Therefore, there is a wide spectrum of opinion about the details of product operation and servicing.
There is, however, a further aspect to the subject. Banks not only do business with non-bank customers, they also trade with each other. In fact, there are many banks which derive large amounts of their revenues from offering specialised services to other banks. Banks do this sometimes to speculatively trade in the hope of boosting profits, but the main reasons are related to the management of liquidity, funding and currency risks, which their normal commercial operations create as a natural by-product.
Unless a bank precisely matches transactions and positions so that all deposits are automatically and swiftly placed out again with other customers with identical fixed terms, these mismatches will always be the case. This is as true for Islamic banks as for other kinds of banks.
The inter-bank market operates efficiently by having a commonly understood set of trading terms and product definitions, which enables banks to quickly and unambiguously quote trading terms to each other and then execute trades. Given the nature of Islamic banking, where the detailed product definition is often examined at a bank level by a bank Shari’ah committee, it is little wonder that the inter-bank Islamic market is fairly small. It could be argued that the lack of operational capital flexibility will act as a brake on the growth of individual Islamic banks and will thus restrict the overall growth rate of the sector and result in an industry which will be relatively fragmented amongst many smaller players.
There is a similar lack of standardisation in the Islamic commercial finance sector. Commercial companies which do not operate on Islamic lines use the bond markets to raise long-term investment and operating capital to finance growth. As with the inter-bank markets, bond markets operate on standard and well-understood terms. Islamic commercial companies and banks cannot raise finance from the standard bond markets since they cannot pay pre-agreed coupons and remain true to their Islamic principles. Their ability to raise capital and long-term funds is therefore restricted.
There are, however, some reasons to believe that this situation has begun to change. The topic of Sukuk issuance and trading has become a fairly fashionable one. The first major issue of the instrument was performed by Bank Negara in Malaysia in 2001. This was driven partly by a desire to raise funds, but more importantly by a desire to establish a Sukuk market. Since then, the market has grown sharply both in terms of the institutional market and, more surprisingly in the retail market; it is now possible to find advertisements for Shari’ah compliant baby ‘bonds.’
The Sukuk market has it critics. (Shariahfinancewatch being one of them) Much of the criticism centres on the fact that Sukuk operate with some of the financial features of conventional fixed-rate bonds. Many Sukuk provide a fixed rate of financial return and the absolute return enjoyed is dependent on how long the buyer owns them. Despite these criticisms, the market for Sukuk continues to boom, thus demonstrating the strength of the underlying demand for them.
Given the structural need for banks, Islamic and otherwise, to be able to trade with each other and given the popularity of the still-young Sukuk market, it seems likely that capital and treasury market instruments for the sector will continue to evolve and to be manufactured by Islamic banks and companies. It also seems likely that there will be ongoing controversies about how each instrument does or does not comply with Shari’ah principles. As the market matures, a consensus understanding may arise to enable banks to create and trade in instruments which are both Shari’ah compliant and financially appropriate to the institutional market.
Nicholas Brewer, group strategy manager, joined banking software company Temenos in 1997 and is responsible for the company’s strategy across each of the banking sectors, including retail, private, wholesale, universal and Islamic banking.