// Bank rout impact on Islamic finance is limited
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« on: Oct 08, 2008 02:58 AM »

Good news, and of course we know the wisdom of non-interest based finance. Yet again we are all still connected. Reminds me of the hadith about the boat. We're all still on the boat together so we shouldn't be gleeful of other's misfortune as it is our own. -- J.


Bank rout impact on sharia finance is limited

Tue Oct 7, 2008 1:24am EDT

KUALA LUMPUR, Oct 7 (Reuters) - Islamic finance has not felt the full brunt of the global credit crisis that has rocked conventional banks, thanks to its profit-sharing requirements and insistence that assets underpin transactions, Malaysia's central bank chief said.

Malaysia, along with the Middle East Gulf, is a leading hub for Islamic finance, which shuns interest-based lending and investments in gaming, alcohol and pornography in favour of profits reaped from partnerships and ethical investments.

"Islamic finance has, thus far, remained positive, despite the current challenging global financial environment," Zeti Akhtar Aziz said in a speech at a sharia banking congress in Boston on Monday. The text was released on Tueday.

"The sharia injunctions require that the financial transactions be accompanied by an underlying productive activity thus giving rise to a close link between financial and productive flows."

Islamic banks are also required to share profits and losses arising from projects, prompting lenders to undertake the necessary checks to ensure that a venture is sound, Zeti said.

The global Islamic finance industry, valued by the Asian Development Bank at $1 trillion, has been regarded by some investors as a safer alternative as the sharia forbids complex, opaque financing structures similar to subprime loans that triggered the U.S. housing collapse.

Still, uncertainties in global markets have had an impact on Islamic transactions, Zeti said.

"While Islamic finance by its very nature only engages in transactions that have underlying tangible productive activities, the slower overall growth and the increased uncertainties have affected pricing and activity in certain market segments," she said.

Some companies, including Kuwait's Abyaar Real Estate Development Co (ABYR.KW: Quote, Profile, Research, Stock Buzz) and Malaysia's Perisai Petroleum (PPTB.KL: Quote, Profile, Research, Stock Buzz), have either put on hold or scrapped plans to sell Islamic bonds, citing tougher market conditions. Last month, the United Arab Emirates central bank launched a $13.62 billion emergency facility to remove liquidity constraints in the interbank market.

Zeti said more than $14 billion of Islamic bonds, or sukuk, were issued globally up until August this year. A record $47 billion of sukuk were issued last year, she said.
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« Reply #1 on: Oct 08, 2008 06:44 AM »


the reason why islamic banks have not been very affected (i'm not sure if that is actually true) is because they don't trade derivative instruments.  they say this is because every transaction must be based on an underlying asset which is visible and well known.  many of the credit derivatives are very opaque and it is hard to see what they are made up of since they are made up of thousands  of mortgages and debt obligations.  and sometimes even these underlying debt obligations are derivatives themselves. 

however,  i feel very uneasy with a lot of current islamic finance stuff because it seems like a lot of repackaging of interest based finance in islamic garb, and is more expensive.  i think the real reason why islamic banks don't trade derivatives is not moral objections, but because the islamicized derivatives haven't yet been invented or become popular. 

another thing is, the real reason why there is a crisis is that tooooo many people who were struggling bought a house.  credit was too easy.  credit is much much harder to obtain from islamic banks, i believe.  that means the current islamic banking system wouldn't have gotten us into the overbought home mess. but it also means that less people would have been able to buy their own home (i think).  which is worse?

i think islamic finance as practiced by the islamic banks really does not abide by the spirit of islam.  there is something wrong when an islamic loan costs more to service than an unislamic loan.  afterall the whole point of an islamic loan is that it should be easier on the borrower -- i.e. not cause hurt or harm (which are the effects of usury).   

and Allah knows best...

a nice expert site on this is: 


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« Reply #2 on: Oct 08, 2008 07:08 AM »

Asalaamu Alaikum  bro

the real reason why there is a crisis is that tooooo many people who were struggling bought a house.

Agreed, but as an aside, we seem to live in an age where people are taught to live beyond their means and adopt the “buy now, pay later” culture.

Inherently, being in debt is a bad thing and something which is to be avoided if at all possible.

Say: "O ye my servants who believe! Fear your Lord, good is (the reward) for those who do good in this world. Spacious is God's earth! those who patiently persevere will truly receive a reward without measure!" [39:10]
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