What really marks Islamic finance products is that they are the result of a combination of various traditional Islamic transactions applied in order to construct a Shariah compliant product which is aimed to substitute a conventional financial product prohibited because it contains one or more elements of prohibition (i.e. riba, gharar). Therefore, any modern Islamic finance product is structured in a way to possess the same economic result – which is also deemed acceptable by the Shariah – as a conventional product, yet excluding all elements of prohibition. In other words, the objective of Islamic finance is to structure a transaction that bridges western and Islamic financial systems and their divergent credit, economic, legal and cultural parameters. For example, the banking system is based on the Mudarabah and Murabahah agreements, securitization is built upon Sukuk, and project finance might combine Ijarah, Salam and Istisnah transactions.
The challenge in 2006 lies in the derivatives market, which is still poorly explored by Shariah scholars, although some attempts have been made by Deutsche Bank and other investment banks to implement derivatives prod-
SAMI MATRAJI LLM
The next year promises to be the most significant year yet for both further innovation in Islamic financial products and wider international adoption of some of the products that have already been developed.
At the retail level, the spread of new deposit facilities seems likely, notably treasury accounts based on Murabahah structures. These have been pioneered by the Islamic Bank of Britain with considerable success, and it is likely that Islamic banks in Malaysia and the Gulf will start to offer similar products in 2006.
On the retail financing side we can expect to see more home financing offered based on a diminishing Musharakah structure, comparable to that already offered by Lloyds TSB. Such partnership structures have a huge potential, especially for lower income Muslim families who in the past could only afford to rent, but who might prefer to participate in co-ownership structures that would provide them with the opportunity to acquire full ownership as their financial circumstances improve. As more countries in the Gulf extend ownership rights to expatriates, this may also help to stimulate the movement to buy rather than rent property.
At the capital markets level, significant developments can be expected in 2006.
At present there are no Shariah compliant repurchase agreements (repos), but Noriba Bank in Bahrain is trying to structure such products. These are highly significant for treasury operations. The way forward for such products is likely to be through a Salam structure, so keep reading Islamic Finance news to learn more about these significant developments in 2006.
2006 could also be the year when Musharakah-based Sukuk become more standardized, and this structure starts to be more widely used. Expect also to see more Shariah compliant venture capital financing as small business financing takes off in the Gulf, particularly in the UAE and Saudi Arabia. Such financing is likely to be based on diminishing Musharakah structures. Indeed, 2006 may well be the year when Musharakah finally comes of age, a welcome development for many as the industry finally starts to use structures long favoured by academic commentators.
PROFESSOR RODNEY WILSON Director Durham University |