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12.11.2007 Homepage
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Business National
Experts discuss the future of Islamic finance in Zurich
Two important locations in Europe are not forgotten by the Islamic market players: London for the stock exchange and Switzerland for their notorious banking system as the interest-free Islamic banking and finance instruments continue their rapid growth.
Critics often only focus on the fact that the relatively young Islamic finance industry borrows techniques and instruments from the traditional finance markets and adapts them to Islamic standards.

The International Islamic Finance Forum (IIFF) therefore organized a Forum for Europe from Oct. 29 till Nov. 1 in Zurich. European investors are slowly getting interested in Islamic finance products. This can, for instance, be measured at the present readiness to subscribe to “sukuk” offerings — best described as Islamic bonds — during these last few months.Of course, good investment managers always want to diversify their risks and spread them over various investment products, but more is needed. Besides expected return and the rating, product knowledge must also be at hand.

As usual, the IIFF lined up important keynote speakers to start off every forum day. The first day was opened by Dr. Abbas Mirakhor, an executive director of the International Monetary Fund (IMF). Dr. Mirakhor argued that finance aims to put financial means at the disposal of the producers/manufacturers. “Whatever the nature of the finance contract is, the first objective of finance is to make business happen.” On this primary goal, both conventional and Islamic finance are identical.

His position at the IMF allowed him to see convergence grow. Both finance industries are slowly growing toward each other. And this is not a one-sided movement from Islamic finance to the conventional world. Critics often only focus on the fact that the relative young Islamic finance industry borrows techniques and instruments from the traditional finance markets and adapts them to Islamic standards. He argued that this also happens the other way around.

The conventional financial markets indeed mostly stick to the pure lending of money. For one, this is due to a lack of information and transparency of the market. Bankers therefore only used to make a fast credit search, combine this with guarantees for repayment and linked a relative low, predetermined profit in the form of interest to the loan agreement.

For the last 15 years however, much effort has been exerted worldwide on market reporting and transparency, corporate governance, disclosure rules, supervision and regulation standards and so on. The investors have more and better information at their disposal that allows them to have a better insight regarding the companies to whom they want to make funds available.

Educated investors who want to optimize their earnings are therefore more prepared for the profit and loss sharing model of Islamic finance. They not only tend to use those instruments, but they also adapt the principles and knowledge within their own conventional frameworks. More fairness will be the result.

Iran has offered a 100 percent Islamic banking environment for some years now. The experience there learns that the industry is more than only sustainable and a considerable banking industry with sizeable Islamic finance institutions and a variety of products has developed.

The keynote speaker of the second day of the forum — Dr. Seyed Mohammad Hossein Adeli, former governor of the Central Bank of Iran — therefore had no problem whatsoever in keeping the attention of his audience.

Dr. Adeli also emphasized that Islamic finance in the first place is a facilitator of transactions. The market participants therefore really should concentrate primarily on doing business. We see a lot of transactions slowed down while waiting for the necessary approvals by the scholars. This time-consuming process costs business opportunities. Whilst staying within the accepted framework, the financial industry should try not to become a passive hostage of the theoretical framework and the “nitty gritty.” Tradition is very important but should be combined with a well balanced innovative approach.

The Iranian experience may help in the assessment of certain topics likely to create problems in the longer run. Dr. Adeli informed us that Iranian scholars are at the moment amongst others evaluating the role of “riba” (interest).

In general from an Islamic finance perspective interest is regarded as an “excess” and “predetermined profit.” The question has been raised in Iran whether or not staying in line with inflation really can be considered as an excess or predetermined profit. Is it rather not just staying at the same level? When the addition or charging of such amount — not predetermined but afterwards against an accepted benchmark — only aims to keep the same value of money, to safeguard the same purchasing power and therefore is not a before agreed upon fixed “profit,” can this be considered excessive and something that should be shunned? When money does not keep up with inflation, its value goes down over time. People will lose the incentive to save money. This may lead to devaluation and impoverishment. No position has yet been taken, but the issue is the subject of much debate.

The sale of debt at a discount is also a sensitive issue. Dr. Adeli reminded us that this has been practiced since traditional times. Both debtors and creditors have traded in claims and debts. Iranian scholars are evaluating this practice to see if it is acceptable today. It became clear that the Iranian model will be based upon strict adherence to existing principles, but re-evaluated upon their true timeless merits and linked to real contemporary needs and situations. Dr. Adeli invited the audience to better the education of sufficient numbers scholars and bankers and to set up think tanks to stimulate innovation and progress.

The forum saw the active participation of some big conventional market players that already offer Islamic finance products, such as Deutsche Bank and ABN Amro. The Swiss financial industry appeared to largely be staying out of the picture for the moment. The Swiss government does not appear to be eager to promote this kind of banking and Swiss bankers probably prefer to offer discrete services tailor-made to the needs and wishes of their wealthy clients. Looking at the present interest of the London financial markets, one might expect changes in that position soon if Switzerland does not want to miss out on the market.

12.11.2007

PAUL WOUTERS  İSTANBUL
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