SPECIAL COMMENT: Islamic Finance 2.0 - From Oil, Revolutions to Fundamentals

The price of oil is not the only ‘greaser’ for expansion of Islamic finance. Lately, a number of countries seem to be pre-empting social-movement-cum-change of regime as today’s ‘oil price’ facilitator for welcoming Islamic finance.

But what happens to Islamic finance when alternative energy, solar, bio-mass, wind, ocean, etc., becomes a viable replacement for oil or oil has simply ‘run dry,’ or ‘Arab street democracy’ arrives in the Muslim OPEC countries, or even the anti-Shariah movements in selected western countries finds another ‘boogeyman?”

Its a well known secret Islamic finance, generally, and Sukuk, specifically, rose and became a global phenomenon on the back of the petro-liquidity spike combined with an accommodating government environment in GCC countries ex Oman. Chart 1 shows price oil from December 2000 to June 9, 2011, and majority of the Islamic financial institutions, banks, takaful, leasing, etc., were born during the 2003 to 2008 time period, including part financing of the 8th wonder of world, The Palm Jumeriah.

The Malaysian Islamic finance story can be said to be part of inward commitment, since1983, to address the Muslim majority population, and, in the last 10 years, to attract the GCC oil surplus investments to the country and the country ‘act’ as a springboard into the 10 ASEAN countries and China.

Chart 1.

What is the common-theme running in China, Thailand, Oman, Egypt, and other places where a restive Muslim population may be demanding Islamic finance without articulating it? The cause and effect may not be air-tight to convince a jury of readers to meet the higher threshold of ‘beyond a reasonable doubt,’ but appears to satisfy the lower threshold of ‘preponderance of the evidence.’

It can be hypothesized the first Islamic bank to address local popular unrest for Islamic finance in a country was the Philippines. The Al Amanah Islamic Bank was established in 1973, a similar time frame Dubai Islamic Bank.

The arrival of Islamic finance in ‘communist capitalism’ China may well be linked to the political unrest/uprising with the Uighur Muslims in 2009. For example, the Bank of Ningxia, China’s first Islamic friendly bank, got global media coverage at announcement, but now has called a ‘time out … requiring … breathing period of up to 18 months to allow the project to bed down.’ The lesson for the Islamic finance industry, outside of China, is the follow through with investments, financing, infrastructure or trade finance, to sustain the momentum in large markets like China.

The arrival of Islamic bank in the ‘Land of a Thousand Smiles,’ Thailand, can be said to address the needs of the southern Thai-Muslims, who have been exposed to and influenced by growing success of Islamic Finance in Malaysia. Islam is the second largest religion in this mutli-religious country, and the devout want to be financially devout, hence, Islamic Bank of Thailand was formally established in 2003.

The Tunisian fruit vendor, Mohamed Bouazizi, who provided the spark for the Arab Revolution also (not knowingly) provided sparked for a change in the financial systems of Egypt, Oman, and other financially incomplete Muslim countries. The years of lobbying of the Islamic finance industry for greater governmental recognition in the largest populated country in the Middle-East (Egypt) and the only GCC country without Islamic finance (Oman) proved to be ineffective.

In the ‘new’ Egypt, we are hearing increasing calls for Islamic finance, but not form the expected Muslim Brotherhood. Its from the opposition parties seeking the ‘Islamic friendly’ vote that appears to be demanding Islamic finance.

In the ‘reconditioned’ Oman, the Central Bank of Oman (CBO) stated that it would allow conventional banks to open Islamic windows and license for the first full Islamic financial institution, Bank Nizwa. The irony of the situation is the Central Bank of Qatar issued a circular earlier in the year for conventional banks to close their Islamic windows, issues of ‘leakage,’ by the end of the year and the CBO is now encouraging Islamic windows.

Additionally, there have been Islamic banks recently established in Bosnia, Gambia, Kenya, Azerbaijan, Kazakhstan, Sri Lanka, Mauritius, and so on.

For Islamic finance to be a legitimate and credible option for all capital market stakeholders in the post oil and revolution period, lets ‘discount the eventual future back to the present.’ Now, we need to tackle, instead of continually raising, the issues associated with inefficiencies, marketing, and branding associated with Islamic finance.

Lets start with the questions on the mind of western/conventional financial institutions and governments. What is their number one issue for the acceptance and participation of Islamic finance: is it harmonization, lack of enough scholars and qualified people, risk management, short term liquidity, or Islamic equity capital market?

If one looks at major Islamic finance events where there are presentations from regulators, from securities commission to central bankers, like the recent Mega-Event in Singapore, the common denominator is need for harmonization in Islamic finance.

QUERY: Most people involved in Islamic finance have read the Funds-at-Work study, where a handful of Shariah scholars serve on multiple boards, from 40 to 80! The question then becomes, when a small number of established scholars is on so many boards of major Islamic financial institutions, then why don’t we have the ‘advanced beginning’ of standardizations of various contract modalities, starting with Ijara Sukuk? The marketplace is looking for ‘off-the-shelf’ efficiency, but that pre-supposes a level regulatory field, hence, back to the harmonization issue.

Harmonization implies close levels of coordination of Islamic finance stakeholders between and among countries and regions, and it establishes the path to the much sought after standardization. But, this will only happen over time as structures, contracts, screening, and so on become commonly used.

Finally, one country cannot expected to carry the mantle of Islamic finance forward, there must be coordinated and cooperative efforts. So, lets leave the ‘ego’ at the door and work together for foundational Islamic finance based on merits as Fortune 500 companies are constantly looking for financing options and investors are looking alpha strategies (Islamic screening).