gif Islamic Finance U.S. Wealth and U.S. Derivatives vs. World Wealth


100 120 140 160 180


60 80


20 40


0


Derivatives in U.S commercial bank portfolios


U.S. net worth Total world wealth (PPP) Total world wealth (exchange rates)


Figure 3: The growing monster of derivatives (U.S.2009)


Total US derivatives and total US wealth 1995-2007 compared to total world


Fugure 4: wealth in the year Source: Courtesy of http://www.istockanalyst.com


been getting the most attention of all Is- lamic instruments. Broadly speaking, su- kuk can be defined as are asset backed, Shari’ah compliant trust certificates. They are generally used in conjunction with two types of contracts: (i) Ijara structure, where the lease rental provides an income (profit) to the holder; or (ii) musharakah structure, where the income of the holder is found in his profit share. The juridical validity of su- kuk has become suspect since Sheik Taqi Usmani cast doubts on their Shari’ah com- patibility in 2008. His reasons for declaring 85% of sukuk as non-compliant with the law were in brief as under.


• There have been cases where the as- sets in the sukuk were shares of com- panies which do not confer true own- ership, but which merely offer sukuk holders a right to returns. • Most sukuk issued today are identical to conventional bonds with regard to the distribution of profits from their en- terprises, at fixed percentages bench- marked on interest rates. The legal presumption regarding sukuk is that no fixed rate of profit or the refund of capi- tal can be guaranteed. This brings us to the third point. • Virtually all sukuk issued today guaran- tee the return of the principal to holders at maturity - just as is the case with con- ventional bonds –either the issuer or the manager makes a binding promise to repurchase the assets at the stated price, regardless of their “true,” or mar- ket value, at maturity.


However, in a recent writings to which I re- ferred earlier, Taqi Usmani does not touch the issue. On the contrary, he approvingly quotes r an AP Business writer who says that: “Sukuk are the equivalent of bonds, but in-


26 Global Islamic Finance February 2011


stead of selling a debt, the issuer sells a por- tion of an asset which the buyer is allowed to rent.” The argument for this position is that sukuk can avoid a mismatch between purely money and real transaction.


As though anticipating such positions, Is- lamic economists have been arguing from the very beginning that the sharing of profit (and loss) is the basic distinguishing feature of interest free finance. Indeed, they claimed participatory finance as the alchemy for nu- merous ills affecting the conventional finan- cial system. Of late, those making this claim have become more vociferous. Increasingly numbers of scholars are claiming that one of the most serious gaps in Islamic finance is the reluctance of market players to pro- mote risk-sharing, equity-styled financing and investment. Thus, the promotion of in- stitutions supporting risk-share partnerships is vital to the realisation of the full potential of an Islamic financial system. On this point, economists, jurists and central bankers are united. However, claims do not win convic- tion; evidence does.


And despite all efforts, participatory funds currently do not constitute more than 10- 15%t of Islamic financing worldwide. Block- ing the way, once more, is the structuring of Islamic banking on a conventional pattern. Mainstream banks are able bring long term investment financing under their umbrella by introducing what is known as “universal banking,” even though they remain short- term credit providers. Because of their rela- tive infancy, small size, and lack of adequate funds - in addition to a dearth of managerial skills - Islamic banks may find it difficult to go universal. In this context, Western banks run- ning Islamic windows or subsidiaries are in a different category. Finally, the mismatch be- tween objectives and structure complicates


Source: Compeled from IMF and World Bank data Wikipedia, the free encyclope- dia (27.1.2010)


factor the process of interpreting the law. Iit has also been a contributory factor in the variation of regulatory regimes for IFIs across countries. These variations are likely to wid- en as Islamic financial centres gain strength in conventional banking environments such as London, Singapore, Hong Kong, and most recently, France. Some differences may be accommodated, but narrowing them down is always advisable. International organisa- tions have been established to set standards expected to strengthen, and eventually har- monise, prudential regulations as they apply to IFIs23. It is hoped that evolving regulatory frameworks will entail convergence of the practice of Islamic financial intermediation, led by its founding concepts rather than by conventional imperatives.


One possible reason behind f divergent inter- pretations of Islamic law could be the dearth of qualified jurists, a factor which gives rise to oligarchic competition among them. A re- cent study – Shariah Scholars from 19 coun- tries hold 467 advisory board positions, with 5 positions per head. This looks reasonable. But the distribution of positions among scholars is far from being uniform, as Table 2 so clearly shows. Some doubt that most Shari’ah scholars work in unison for the pro- motion of mutual interests; this would be intriguing, if true.


Islamic Finance and the Current Crisis Islamic finance has won much praise from bankers, experts, scholars and jurists for re- maining resilient and stable during the cur- rent global crisis. In my view, this praise is largely overdone: the claim ignores the rela- tive position of the two systems. As Islamic finance is risk averse, short-term and liquid- ity oriented, it is arguably not yet developed enough to attract crises. In a storm, it is the oaks that are uprooted, not the reeds. Even


40 2007


30 2007 20 2007 10 2007 40 2006 30 2006 20 2006 10 2006 40 2005 30 2005 20 2005 10 2005 40 2004 30 2004 20 2004 10 2004 40 2003 30 2003 20 2003 10 2003 40 2002 30 2002 20 2002 10 2002 40 2001 30 2001 20 2001 10 2001 40 2000 30 2000 20 2000 10 2000 40 1999 30 1999 20 1999 10 1999 40 1998 30 1998 20 1998 10 1998 40 1997 30 1997 20 1997 10 1997 40 1996 40 1996 30 1996 20 1996 40 1995


Trillions of Dollars


Derivatives $1140Tr.


Stocks & bonds World GDP


Money supply


$120Tr. $60Tr. $16Tr.


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