A case for Islamic finance

Illustration: BT/Ray de Jesus

Sunday, November 21, 2010

IN THE aftermath of the global financial crisis, Islamic finance experts touted that the Islamic finance sector was less affected and that Syariah-compliant investment products are safer than their conventional counterparts.

But are Islamic finance investment products really better?

Shahin Shayan Arani, president and board member of the Barakat Foundation Institute, an organisation that aims to increase the economic ability and improving entrepreneurship among the less developed and deprived regions of Iran, says switching to an Islamic bank or financial system could help you with your money.

TOP THREE

The main difference between a conventional banking system and an Islamic system, is that Islamic finance bans three elements accepted in conventional banking: Riba (charging of interest, which is considered a form of usury in Syariah laws), Gharar (or uncertainty as it is seen as a form of deception in trade or trading of risk in a contract) and Maysir (gambling in the case of highly speculative features of trade such as stocks).

Shahin says the Islamic financial system emphasises transparency and mutual trust and excludes "the risks of inefficiencies created by Gharar and extra volatilities created by Maysir".

This system, he adds, eliminates highly speculative and insider trading related risks and shares, distributes and more evenly spreads other operational related risks between the parties of interest and therefore throughout the economy.

"It incorporates strong stabilising and shock-reducing structural features and distributes and mitigates the positive effects of expansionary and negative effects of recessionary economic and financial shocks (or risks) more evenly throughout the economy which creates more stability for the consumers," he explains.

Shahin says in the case of Gharar, it eliminates the "injustice" of this element of trading seen in conventional banking systems.

FINDING STABLE GROUND

Asked about the financial instrument sukuk or Islamic bonds, Shahin says that for investors who are concerned about Syariah compatibility and stability, sukuk is actually better savings tool in this respect.

"The main difference between sukuk and bonds issued by any institution including conventional banks is that sukuk holders take direct ownership of an underlying asset or pool of assets, whereas a bond is purely the financial debt of the issuer or the bank," he says.

The main differences of sukuk issues compared to traditional bond issuances, he adds, is that the rights and obligations of the buyer and seller have to be transparent and clear, the income from securities must be related to the purpose for which the funding is used and securities must be asset-based as opposed to paper and legal agreements.

The "attractiveness" of investing in sukuk (whether you are Islamic or not), he says, includes Syariah compatibility, competitive pricing and rated instruments.

They can also be listed on an exchange thereby enhancing the liquidity and secondary market trading aspects, as well as varying in the available maturities as well as being able to be structured into various risk/return profiles, based on the underlying assets for specific consumer or investor needs, he says.

TOUGH COMPETITION

Profit sharing investment deposits (PSID), says Shahin, is a competitive financial product available from Islamic banks, compared to other financial products and packages from banks following a traditional financing system.

These are "specific Islamic banking deposits on the liability side of the bank's balance sheet that is directly tied into the risks and returns of the corresponding profit sharing investments accounts sitting on the asset side of the balance sheet of the bank", he says.

Through this product, he adds, consumers can participate in the risk and returns of a portfolio of investments made on their behalf by the bank and the risk-return profiles can be "engineered" to suit the PSID holder's interests.

"This is a special product specific to Islamic banks that in addition to being Syariah compatible is very unique and competitive," compared to many products available from a conventional bank, he says. The Brunei Times


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