Countries that want to diversify their sources of project financing and attract Shariah compliant funds increasingly see Islamic finance as an attractive proposition, not least because of the substantial funds in this category available from the Gulf as a result of high oil prices. Non-Muslim countries may be increasingly attracted, especially those with Muslim world links. Australia, for example, could be a potential user, as could New Zealand, especially given exports of halal lamb and mutton to the Middle East. Latin American countries may also be interested in Islamic finance, as there is already some interest in Brazil, and Argentina has strong links with Lebanon and other countries in the Middle East. Within Europe we may see more interest from the east, with Poland a possibility given the amount of finance needed for new projects which have become more attractive because of European Union accession. In short, interest is likely to come from many mature and emerging economies, especially in Sukuk issuance, Istisnah project financing and Ijarah leasing arrangements, although there will also be continuing scope for extending trade credit through Murabahah.
PROFESSOR RODNEY WILSON
In my view, it would be Turkey and the former countries of the USSR which have predominantly Muslim populations, like Kazakhstan and Uzbekistan. Of course, they would have to regulate their capital market laws first. MOHAMED RIDZA Ridza Law (Mohamed Ridza & Co)
The realization that there is a growing pool of energy dollars on a fairly cosmic scale in the Middle East has not been lost on countries seeking internal investment: to make available Islamically sound channels for such investment is therefore no more than common sense. The use of conventional debt and “equity” finance for Foreign Direct Investment (FDI) is one of the key features of the process we know as “globalization,” whereby the footloose flows of global capital wash in and out of economies, often leaving them – as happened to Thailand – beached and gasping as the tide of capital flows out. The use of genuinely Islamic finance – as opposed to the prevalent “ersatz” variety which is an Islamic veneer on conventional finance – is structured so as to genuinely share risk and reward. That being so, any developing nation, particularly in Africa, would be well advised to follow Zambia’s example in offering Islamic finance. Whether or not they will indeed do so remains to be seen; I hope they will be able to, but I do not necessarily expect it. China and Japan on the other hand are both massive buyers of Middle Eastern oil, and if they are successful in repatriating some of the proceeds through making available Islamic finance, then we may confidently expect other Asian “tiger” economies to follow, if they are not doing so already. CHRIS COOK Principal, Partnership Consultancy LLP
Ithink most countries will consider it at some stage. If one considers that tapping Islamic investors diversifies your investor base and allows access to new liquidity, it is a sensible financing decision separate from any theological considerations as to the (Sukuk) nature of the securities issued. KHALID HOWLADAR Moody’s
The entry of China, Japan and Zambia into the Islamic capital market is a welcome development. Many other countries are flirting with this fast-growing market and the degree of readiness of each is diverse. Countries such as India, Russia and Australia are also expected to see more activity, mostly spearheaded by the private sector.
The state of Victoria in Australia has since early 2000 facilitated Islamic financial transactions by providing exemption on double stamp duty, but other states have not followed suit. India is issuing new Islamic banking licenses and hopefully it does not end there. New regulation and legislation should be instituted to enable the market. Russia has allowed the set-up of an Islamic bank, but activities are limited because of a lack of market infrastructure.
All countries interested in going into the Islamic capital market or the broader Islamic financial market should emulate Malaysia, where the private sector and the government works very closely to develop the right infrastructure for the market. There should be enabling legislation for the set up of Islamic financial institutions, a robust Islamic securities law to facilitate Islamic capital market deals, a defined operational framework for Islamic financial institutions and more importantly a full Islamic financial system which is a stand-alone market that operates in parallel with the conventional riba-based financial market.
Any countries interested in setting up an Islamic finance industry should ensure a transparent or disclosure-based industry. What this means is that no Shariah compliant product which is marketed as an Islamic deposit or akin to a Islamic deposit or Islamic investment fund should be allowed to be sold to consumers if the funds received by the bank or financial institution are used for riba-based transactions. A case in point is the Commodity Murabahah being sold by most of the major conventional banks.
What is required is a proper asset liability management that matches Islamic funds with the appropriate Islamic asset. Synthetic products such as the Commodity Murabahah should not be sold by a conventional bank unless the conventional bank has a fully fledged Islamic window or has a separate fully fledged Islamic banking operation, like those in Malaysia. In Malaysia no person can undertake Islamic banking or financial activities unless licensed under the Islamic Banking Act 1983 or approved under section 124 of the Banking and Financial Institutions Act 1989. Under these laws all institutions providing Islamic financial services and products must have a separate balance sheet, thus clearly prohibiting co-mingling of conventional and Islamic funds. This should be paramount in any regulatory framework to be set up by any country to develop the market. It will protect the integrity of the market and ensure the confidence of consumers.
In conclusion, although it is very exciting to note that many countries are interested in participating in the market, there must be a genuine desire to develop the Islamic financial market on the part of both the government and the private sector. There is real political and economic benefit of instituting a complete Islamic financial market. There should not be a hidden and misguided agenda to take Islamic funds for the purposes of subsidizing the riba-based financial institutions or financial system.
The very foundation of Islamic banking is the prohibition of riba. Therefore, any Islamic product or service, no matter how Shariah compliant it is in structure, if it facilitates or finances riba-based financial transaction, should not be allowed.
BADLISYAH ABDUL GHANI CEO, CIMB Islamic
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