In a keynote address at the IFN 2011 Issuers & Investors Asia Forum held on October 19 Luxembourg’s Minister of Finance Luc Frieden said that Europe can learn and gain from Islamic finance, given that Islamic financial institutions have remained stable against the backdrop of the eurozone debt crisis.
Islamic finance has been gaining ground strongly with London positioning itself as the main leader of such transactions in Europe
He said: “The key elements in Islamic finance that we need in the world today, particularly in Europe, are stability, financial partnership, provision of excessive risk and speculation as well as ethical principles.”
This statement by Mr Frieden clearly portrays the standing Islamic finance has obtained. The term “Islamic finance” has, over the past few years, attracted the attention of many and has been seen as one of the new areas of development in the financial world.
It has been considered as an instrument through which people in oil-rich countries, hailing mainly from North-African, Middle-Eastern and Asian countries could put their money back into the economy by providing Muslims across the globe with methods of finance which did not contradict their religious principles.
In Malta the topic has been discussed, studied and analysed and still continues to attract interest even though the industry is yet to take-off.
Terms like “murabaha”, “ijara”, “mudaraba”, “musharaka” and “sukuk” are still unfamiliar to the many, though their more conventional equivalent of sale, lease, profit-sharing and securitisation are terms which the general public has become accustomed to. Indeed it may come as a surprise for some to know that the said terms are amongst the fundamental concepts which form Islamic finance transactions.
As a general rule all contracts in Islamic finance are permissible unless there is a prohibition to the contrary.
Contracts which are clearly prohibited are those containing elements of: “riba” (interest), “gharar” (uncertainty) and “maisir” (speculation and the taking of risks).
Islamic principles also consider the production and dealing in certain goods and services to be impermissible (referred to as “haram”), such as alcoholic drinks and pornographic material, among others.
With regard to the banking scenario, the prohibition of interest is the element which leads to the main differences between conventional banking systems and Islamic banking.
Thus the main concept is that one should make profits through trade, receiving a return on risks which one would have entered into. Since banks cannot charge interest on loans or give interest upon deposits, the banking system is much more akin to “investment banking” rather than “retail banking”.
Despite the limits imposed on financing structures, finan-cial innovation is also creep-ing into this field, with Sharia compliant derivatives alsobeing mooted. In fact, ISDA, the International Swaps and Derivatives Association has teamed up with the Internatio-nal Islamic Financial Market to publish the ISDA/IIFM Tahawwut (Hedging) Master Agreement.
This development is a breakthrough in Islamic finance and risk management and marks the introduction of the first globally standardised documentation for privately negotiated Islamic hedging products.
Islamic Finance has continued to grow over the past years, and despite the political turmoil in Arab countries it has been estimated that the asset mark of such transactions has exceeded $1,000 billion.
It has been argued that since all transactions require there to be underlying assets, institutions using Sharia compliant financing structures were not hit as badly as those using conventional systems by the global financial crisis.
Nevertheless the effects of the crisis served as a reminder that Islamic Finance does not exist in a bubble and the lack of demand for real estate from foreigners did lead to a slowdown in the development of this sector throughout the past years.
The crisis did not eliminate the existence of this market. Rather the crisis has continued to establish the importance of this alternative system of financing which has continued to progress and is now firmly established and recognised as a system in itself.
The future in this industry continues to look bright, with even a Sharia compliant World Cup already being projected in light of Qatar 2022.
In Europe Islamic finance has been gaining ground strongly, with London positioning itself as the main leader of Islamic finance transactions in Europe while Luxembourg and Ireland have also been performing strongly in Sharia compliant funds.
Malta is still making small steps in this industry and is ideally positioned to make the most out of this opportunity.
As the Mediterranean region draws closer together, with the prospect of democracy in the Middle Eastern and North African regions brought about by the Arab Spring, Malta is already well equipped legally, culturally and strategically to serve as a bridge between Europe and the MENA region.
In the same way that Malta has carried out significant efforts in enacting the necessary legislation and successfully attracting numerous financial players to Malta, a similar effort is required to follow the example of other EU jurisdictions and attract Islamic finance business to Malta with the help of all stakeholders involved.
The authors form part of the banking and insurance department at Ganado & Associates Advocates.