How Non-Muslim Countries Are Seeing Value In Islamic Finance

Post by: David Vicary

Islamic Finance and the Public Good

Twenty years ago, when I first started getting involved in Islamic Finance, the most frequently asked question I got was always do I have to be a Muslim to participate in Islamic Finance?”

Usually the question was asked by a non-Muslim who did not have much idea about Islamic Finance and who was probably expecting an answer of “Yes you do” which would then let him or her off the hook!  Many were genuinely surprised when I answered that “Islamic Finance is for everyone”

Fast forward to the present day and while I still do get asked the same question as above, it is not very often.  Something has happened over the intervening 20 years and Islamic Finance is now starting to look like it is “good for business”.

So what is going on and why the change?

Well there is no doubt that through the efforts of the pioneers of Islamic Finance in recent years, we have built an industry that is on the threshold of being entitled to be called “Global”.  The effort put in to the development of standards, products, communicating the value proposition and educating the whole community should not be underestimated or taken for-granted.  Those very same pioneers would also be the first to admit that there is still a very long way to go.  There are, however, a couple of things that have come from the blind-side and helped the industry along.

  1. Firstly, the tragic events of 9/11 and the US’s reaction to them with regard to Homeland security did mean that many GCC investors became very nervous about leaving their investments in the US and started to look elsewhere.  In turn this put pressure on the Islamic Finance community to come up with more shariah products and investible assets that could be invested in outside of the US.
  2.   The second tipping point came with the Global Financial Crisis caused by sub-prime mortgage business in the US.  Savvy investors and regulators started to take a look at why Islamic Finance was not so badly impacted and started to understand a few concepts underpinning Islamic Finance.  Namely, Real Assets and the Real Economy, as well as a reluctance to speculate.  This started to give the industry some credibility in the eyes of the rest of the world and has led to numerous government and regulatory level investigations as to the applicability of Islamic Finance and an investor appetite for a more diverse and balanced portfolio that delivers returns….which, of course, shariah assets can do.

There is no doubt that some of the major capital markets have been early adopters.

  • London recognized very early on that there was a business there that was going to grow and that they could not afford NOT TO BE PART OF IT.  Indeed, even Tokyo recognizes the same, but the Japanese have tended to do their Islamic Finance business offshore and have quietly, over the last decade built up considerable expertise and appetite for Islamic Finance to support their businesses in S.E.Asia the Gulf and now in India.
  • Luxembourg, where the IFSB summit will be held in mid-May, has not been shy in coming forward and recognizing that its Asset management, Funds management and private Banking business could benefit from an increased alignment with Islamic Finance.  I mentioned in my last article how Brazil was taking a serious look at Islamic Finance alignment through the potential issuance of Sukuk to finance Halal food production.
  • In North America numerous pension funds are investors in Shariah products and some are even looking at making acquisitions or partial-acquisitions of Islamic Financial Institutions.
  • In Australia, the legislative playing field has been leveled to facilitate Islamic Finance and in China, the first Islamic window has been established and the Government there is starting to realize that Islamic Finance is indeed, good for business.
  • In fact the major targets for investment from the GCC are India, China and the Asia Pacific region, with an increasing desire for the investment to be shariah based.

The growth of Islamic Finance is now going to be strategic.  To get to the next level we need to have the EPL in place (Education, Perception and Liquidity).

There is also a burning need to develop further global standards for accounting, documentation, product development and the Shariah approval process.  Product development to meet hedging and risk management needs from an Islamic perspective, also needs a great deal of work.

The message is, however, becoming increasingly clear “Islamic Finance is good for Business”.

There is much to do and not a moment to lose.