Posted by Stacy-Marie Ishmael on Dec 08 11:40.
The world of Islamic finance has been roiled by the upheavals in Dubai: questions abound over such matters as the structuring of al-ijarah sukuk like the $3.5bn bond issued by Nakheel, Dubai World’s real estate development subsidiary.
As the FT noted in a special report — The Future of Islamic Finance — on Monday:
For a while it was almost as if the global financial crisis had not happened. Or at least, that is how it looked in some areas of Islamic finance. Then, along came the Dubai debt bombshell, which put the asset class in the spotlight for all the wrong reasons.
Uncertainty over payments to bondholders of the world’s biggest sukuk, or Islamic bond, the $3.5bn deal from Nakheel, the emirate’s property developer, could pose grave problems for the standing of Islamic finance.But even prior to the shakeout in the emirate, certain types of structures — notably tawarruq and tawarruq munazzam — had been criticised by scholars as essentially “un-Islamic”.
So Standard & Poor’s latest report on the prospects for Islamic banking in the Gulf, released on Monday, was timely.
According to the report, which bears the title “Islamic Banking Has Reached Critical Mass In The Gulf After Sustained Growth, And Expansion Is Set To Continue”:
We believe longer-term growth prospects are still good, though, as we expect Islamic banking products to continue replacing plain vanilla conventional products and services.
Overall, the rating agency was cautiously optimistic on the sector:We believe that growing demand, active government backing, easy substitution between Islamic and conventional products, and efforts by conventional players to develop their footprint in this field are all indicators that the market share of Islamic banking will continue to progress. However, we do not expect Islamic banking to grow at the same pace as in the past decade. Several factors are likely to constrain its development in our view:• Not all conventional products have an Islamic equivalent. This is especially true for treasury products and liquidity management tools (see “Risk Management For Islamic Financial Institutions: A Rating Perspective,” published on Jan. 15, 2008).• Limited product standardization constrains the integration of market players into the international financial sphere. It is unclear at that stage if in the medium term banks will be able to distribute standardized Islamic banking products throughout a market continuum from the Middle East to Southeast Asia and beyond, or if the Islamic finance market will remain geographically compartmentalized, limiting economies of scale.
Related links:
The issue of shariah compliance and the Nakheel sukuk - FT Alphaville
Nakheel and the sukuk legal spook - FT Alphaville
Sharia-compliant derivatives - a contradiction in terms? - FT AlphavilleSocGen in move into Sharia funds - FT
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