A year after Dubai’s monster debt problems sent shockwaves though the Islamic bond world, sukuk is thriving again — and with it, Malaysia’s role as the center of gravity of international Islamic finance.
Although Islamic banking, investment and insurance activity are again gaining global ground, it is still relatively small and mainly concentrated in Malaysia and the United Arab Emirates, which are able to use local liquidity and government help to promote it outside their borders.
The Malaysian role is being further enhanced by the establishment of the International Islamic Liquidity Management Corp. being set up by several central banks.
The IILM will be based in Kuala Lumpur and is expected to start operations next year.
Islamic bonds have seen signs of acceptance among sovereign wealth funds and companies outside the Muslim world seeking Muslim funds.
Japanese financial giant Nomura made a $100 million issue, while half of a $500 million issue by the Islamic Development Bank was sold to European and East Asian investors.
Malaysia’s state holding company, Khazanah, created a first for the Singapore sukuk market with a 1.5 billion Singapore dollar ($1.2 billion) issue.
Total outstanding Islamic bond issues are now over $100 billion from almost nothing five years ago.
Proponents of Islamic finance claim that, notwithstanding problems in Dubai and Kuwait in particular, they have proved more resilient than conventional financial products during the crisis.
They point to the fact that they avoid complex derivatives and all issues must be driven by an underlying economic and commercial purpose, not by pure speculation.
Islamic equity funds also outperformed conventional ones over the crisis period, albeit marginally.
However, skeptics suggest that other factors are at work.
Although Islamic finance is supposed to be about sharing risk and reward, the Dubai bailout by its richer emirate, Abu Dhabi, contradicted that principle.
Others point out that in the case of Malaysia, the leader in sukuk issues, almost all were by state entities including the government, Cagamas the mortgage institution, Khazanah and state oil company Petronas, and that most of the buying was by local Islamic banks and the state-managed pension funds.
Islamic banking is still a minority business in Islamic countries other than Iran and Saudi Arabia. Seven of the top 10 Islamic banks are Iranian.
In Malaysia, Islamic banking continues to gain market share, but even with much official support it is still only 20 percent of the system.
It is also growing in Indonesia and Turkey but from a very low base.
Islamic microfinance has recently been quite successful in Indonesia but the Muslim heartland of microfinance, Bangladesh, with its Grameen bank, has stuck with conventional forms.
Nor is there much evidence, aside from the IDB, that Islamic finance has become a way in which rich Islamic countries could help poorer ones by buying their sukuk issues.
Many continue to claim that there is scant practical difference between Islamic and conventional forms.
Be that as it may, there has been a significant narrowing of gaps in the interpretation of Shariah.
This impact on cross-border trade with Shariah scholars in the Gulf who do not accept the legitimacy of some compliance decisions made in other jurisdictions.
Disclosure standards are also often weak.
Convergence and disclosure are, however, increasing. Malaysia is forming a body of codes and practices in English.
The global crisis also showed some problems of dispute settlement and in realizing ownership of security for sukuk issues.
Gaps between civil law and its Shariah counterpart also present potential dangers.
For non-Muslim issuers there is also a problem of showing that funds raised are used in ways compatible with Shariah.
But again, Malaysia has largely avoided such problems with its orderly compliance system and efforts made to align Islamic products both with civil law and with internationally accepted accounting standards.
But not many Islamic countries are as organized as Malaysia where Bank Negara has been successful in developing Islamic finance mechanisms while running a tight ship for all forms of banking and finance.
At least for now, Islamic finance will continue to grow, helped by its acceptance by non-Muslim central banks of its global role.
The IILF stems from the creation of the Islamic Financial Services Board, which plays a role similar to the Basel committee of the Bank for International Settlements.
The liquidity facility coupled with increased issues will gradually enable the development of yield curves and other mechanisms that provide more benchmarks for comparisons with conventional yields.
Philip Bowring is former editor of the Far Eastern Economic Review.
Source : http://www.thejakartaglobe.com/opinion/despite-mideast-debt-woes-shariah-banking-still-rising/405113 - Nov 5, 2010
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