Attracting global interest

The well-developed and integrated Islamic money, capital and foreign exchange markets have worldwide appeal.

Islamic finance is based on the sharing of profits and losses, and prohibits any source of unjustified enrichment like Riba or usury. Mufti Taqi Usmani, an eminent Pakistani Islamic scholar and pioneer in Islamic banking, explains, "The conceptual difference actually lies in the distinction between money and commodity. The conventional system does not differentiate between them. Money is as tradable as any commodity. Therefore, in the conventional system, you can buy money for money. Islam, on the other hand, treats money differently from commodity. Money is not a commodity; it has no intrinsic utility. If you have money, you cannot eat it, nor drink it, nor wear it. It has been created by Allah as a medium of exchange."

Islamic banking is as sophisticated as other banking institutions. All product offerings are Sharia-compliant and all transactions are backed by assets with no fixed rate of return guaranteed on the investment. Profit and losses are shared as agreed at the time of signing a contract. "It seems that Islamic finance evolves in a completely independent way from Islam," adds Imane Karich, a Belgian economist of Muslim descent, who promotes the implementation of Islamic banking in Belgium. "Money has neither a smell nor a religion. Once an alternative is proven profitable, people get interested. Even in France, where the climate is very secular, doors are opening for Islamic finance."

The Central Bank of Pakistan recently raised the statutory liquidity requirement for Islamic banks by 200 basis points to seven per cent. "It has been decided to raise the limit on total sukuk holdings, for statutory liquidity requirement purposes, from 5 per cent to 7 per cent of total time and demand liabilities," the State Bank of Pakistan said in a statement. Statutory liquidity requirement is the amount of time and demand deposits that banks have to set aside in government securities, cash and gold. According to Dr. Shamshad Akhtar, governor of the State Bank of Pakistan, "The State Bank of Pakistan is starting to address its role as an Islamic finance hub seriously."

Delivering the keynote address as the Chairperson of the Islamic Financial Services Board (IFSB) for 2008 on 'Financial Globalisation and Islamic Financial Services Industry' at the 5th Annual Summit of the IFSB held in Amman, Jordan, Dr. Akhtar said the Islamic Financial (IF) services industry has been transformed from being a peripheral activity to a sizeable industry attracting global interest. "Well-developed and integrated Islamic money, capital, and foreign exchange markets will not only be beneficial for borrowers and institutional investors but can also further enhance the stability of IF institutions, providing them with improved portfolio, liquidity and risk management tools," she said.

Referring to sukuks, Dr. Akhtar said that the internationalisation of the sukuk structure and its flotation, which is expected to hit the $100 billion mark soon, is helping to better integrate IF with the world of global finance. This, she added, would not only meet the region's massive infrastructure project financing requirement but will also help diversify financial markets.

Pakistan is due to get a windfall of Islamic funds thanks to Bahrain's Albaraka Banking Group, which plans to raise around $90 million from an existing $37 million in an IPO planned this year end. Pakistan has 20 branches of the bank. The group plans to spend around $200 million to consolidate its presence in the Middle East and Asia. According to its chief executive Adnan Yousuf, IPOs would mainly finance expansion of Albaraka's operations in 12 countries where it has over 250 branches.

Dubai, though facing stiff competition from London, Singapore and Bahrain, remains the Islamic banking hub. Like several of its Gulf neighbours, Dubai has benefited from government support for Islamic finance, a favourable regulatory environment and strong domestic ties to Islam and Sharia. It has more listed sukuk (an Islamic financial certificate, similar to a bond in Western finance, that complies with sharia) than anywhere else. "Lawyers and banks are moving to Dubai," says Darshan Bijur, director of auditor KPMG's Islamic finance division. "They have established a very high-quality regulatory system in the Dubai Financial Centre."

With every passing day, Islamic banking is fast spreading its wings. The UK Trade and Investment (UKTI) has highlighted Britain's commitment to sharia-compliant banking. Speaking at the recent World Islamic Banking Conference in London, UKTI chief executive officer Andrew Cahn highlighted the resilience of Islamic finance through the current economic slowdown. In the first half of 2008 the UK's fifth Islamic bank, Gatehouse Bank, opened its door to business and a Sharia-compliant insurance company, Principle Insurance, began trading. The Islamic finance industry will be worth $1 trillion by 2010 added Kuwait Finance House-Bahrain (KFH-Bahrain) managing director, Abdulhakeem Alkhayyat, whose bank was the Platinum Strategic Partner of the conference.