Global Conference 2009

Global Conference 2009

The Evolution of Islamic Finance

Monday, April 27, 2009 / 6:30 am - 7:45 am

The Middle East and the larger Islamic world are fast becoming a focal point for financial developments, in part because of the region's oil wealth.

With "net capital exportation at par with China," the Gulf Cooperation Council (GCC) states have seen strong growth in Shariah-compliant financing, or Islamic financing, according to panel moderator Shawn Baldwin. As structural elements and best practices have begun to formalize, and as the GCC continues to acquire more than $1 trillion of foreign capital over the next decade, the focus on Shariah financing will continue to increase.

Umar Moghul stressed that Shariah financing "is a startup industry, not just a startup venture," and it will take time for the legal, ethical, and financial institutions of the industry to mature.

According to Aamir Rehman, some asset classes, particularly equity and real estate assets, are more easily entered into by Islamic investors than fixed-income equivalents, known as "sukuk," and private equity investments. Part of the difference stems from the specific role of interest, or "riba," in fixed income. Interest is generally impermissible under Shariah. This aspect of Islamic financing creates a need for Shariah review boards composed of Islamic scholars and experts.

Taha Abdul-Basser said these Islamic scholars are essentially counterparts to lawyers, collaborating during the documentation period to ensure that the investment is Shariah-compliant. The review board verifies that what appears to be a conventional transaction (i.e., to be interest bearing) is structured in a compliant way.

Other roles of the review board include looking at the practical limitations on traditionally impermissible activities, like sales of tobacco and alcohol. For instance, a real estate asset with a few tenants engaged in some "impermissible" activities might still be deemed a Shariah-compliant investment by the scholar review board. In other instances, practical solutions may take the form of donating revenue from the impermissible activities to charity.

Another crucial role of the Shariah experts, Moghul said, is to work with lawyers to create specialized investment structures that allow for fixed-income sukuk transactions to take place. Typically, this is accomplished by adding a special purpose vehicle (SPV) to the overall transaction structure that is able to operate on a basis other than an Islamic one. Because a sukuk holder must take an ownership interest in the underlying asset for compliance purposes, the SPV acts to take on loans and set up leases, calls and puts that mirror prepay agreements and other structuring needs for the Islamic investor.

As the structures of Islamic financing have become more formalized, the demand for Shariah-compliant financing has increased. Historically, most sovereign investment funds in the Islamic world have not been Shariah-compliant, but Rehman said these investors, as well as insurance institutions, increasingly are looking at meeting the demand for Islamic financing. "Customers in the Islamic world prefer Shariah-compliant structures if they perform exactly like a conventional product," he said.

There also has been a growing movement among pensioners for Shariah-compliant pensions. Additionally, there is a need for private equity investments to bring capital back into the GCC to support job growth in a region where 40 percent of the population is younger than 15.

The panel closed by noting that Shariah-compliant investing bears similarities to socially responsible investing in that ethical concerns drive Shariah investing.


Shawn Baldwin

Chairman, Capital Management Group


Taha Abdul-Basser

Principal and Co-Founder, StraightWay Ethical Advisory LLC

Umar Moghul

Partner, Murtha Cullina LLP

Aamir Rehman

Head of Strategy, Fajr Capital Limited; Author, Dubai & Co.: Global Strategies for Doing Business in the Gulf States

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