Finance Focus
Third, with the advanced information technology tailor-made solutions for smaller investment amounts can be produced easier. Also, in the Arabic world more wealth has been created recently than ever before. Therefore, the Islamic Financial Market turns into a profitable one for suppliers who are willing to build a new market.
observed. This means that the following three elements must all conform to Sharia code: 1. the underlying asset,
2.the trading mechanism or investment strategy, and
3.the packaging of the structure
As opposed to conventional European and Anglo-Saxon structures, when structuring financial products according to Islamic law, not only must the desired pay-out profiles with their risk/return features be optimised, but strict care must be taken to ensure that the tripartite harmony with Sharia law is observed.
Q
What is the difference between Islamic Finance
and
Conventional Finance? Are equities, bonds and insurance acceptable under Islamic Finance principles?
As opposed to conventional European and Anglo-Saxon structures, when structuring financial products according to Islamic law, not only must the desired pay-out profiles with their risk/return features be optimised, but strict care must be taken to ensure that the tripartite harmony with Sharia law is
Therefore, all the mentioned instruments are acceptable under certain conditions: For equities, companies shall not engage in any of the haram businesses and shall not debt finance their activities by more than a certain percentage.
Bonds are replaced by the Islamic equivalent, the Sukuk.
And an insurance policy can only be issued as Takaful, where the insurance contract is based on a donation contract, the tabarru’, and the intention of the participants is to indemnify the fellow participants, as uncertainty, Gharar, in general is not allowed in contracts.
Q
Are there any notable examples of use of Islamic Finance?
For me, the most staggering example in history of the use of Islamic Finance is one that is not necessarily recognised as such. The Swiss National Museum in Zurich currently runs an exhibition with the title “Capital. Merchants in Venice and Amsterdam”. It is shown that the creation of wealth in Venice and Amsterdam was based on very similar principals like the ones used in the Musharaka. Where one party, usually the older merchants, brings in the capital for an undertaking and the (younger) partners are carrying it out. The profits from such businesses were split evenly.
The beneficial rewards for the junior partners in such structures had driven them to achieve their goals the fastest they could, which lead to healthy growth in the economy.
Interests between the capitalist and the entrepreneur were aligned and prosperity spread. Compared to today’s financial markets, it might be a medicine to cure the lack of growth we are facing in Europe. While investors are chasing yields and companies are seeking for CAPEX financing such structures could overcome the credit crunched most companies are facing, because of the banks still being busy with their balance sheet restructuring.
Q
Are there any risks associated with Islamic Finance?
The market for Islamic Financial Products is currently much smaller than the conventional markets. Also, since the transactions are asset based, there are not often possibilities to issue Islamic products in large issue sizes as with conventional securities. Therefore, liquidity in such issues and their valuation are among the biggest issues that have to be solved when it comes to these products.
Q What are the future challenges?
First and foremost, the principals of Islamic Finance are not yet widely accepted in Europe. But the discussion on ethical investments is in full progress. And with these discussions, there is a fair chance that a unified ethical finance theory may develop.
In the shorter term, the rapid growth for Sharia-conform financial
investment
solutions over the recent years shows that they are increasingly in demand by Islamic investors. However, since it may not be possible to replicate all conventional financial contracts, such as derivatives, in a Sharia-compliant way, solution providers should focus on designing additional Sharia-compliant products that are not comparable with conventional structures in order to broaden the range of financial solutions for the mutual benefit of the society.
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