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Shariah Finance Must-Reads

HSBC Slips Into Iran's Warm Bed

Money Jihad
January 5, 2011

HSBC finds Iran rather more egalitarian than crusty old America. In a new advertisement, HSBC praises Iran for the number of women directing films and backhands the U.S. for a lack of progress on that front.

But maybe HSBC isn’t just growing tired of Hollywood chauvinism, but bored of conventional loans. They’ve embraced sharia financial products with growing fervor.

Pro-Iranian statements and an Islamized division within HSBC would raise the eyebrows of almost any reasonable person. The Wall Street Journal offered this additional perspective on the HSBC ad on Dec. 31 (hat tip to Israel Matzav):


Wide Saudi 'Loopholes' Let Charity Funds Slip to Terrorists

A Saudi assessment was made that illustrated “the scale of the challenge Saudi authorities face in trying to interdict funds provided by wealthy individuals for extremists, when the money flows through a huge network of largely legitimate charities and other organizations...” The assessment states that "...increased diligence and efforts are warranted" to prevent further "misuse [of] the Saudi charitable infrastructure," calling the web of organizations "an example of the extent to which the Muslim Brotherhood is using moderate-seeming politicians to further its extremist agenda...The funding of terrorism is only the most pressing aspect of this... The Muslim Brotherhood is working on a much bigger project than terrorism - a grass-roots political Islamist movement worldwide."

The Washington Times
December 23, 2010
By Shaun Waterman

Despite some success in disrupting funding for al Qaeda, Saudi authorities face major challenges in regulating the sprawling charitable sector in their desert kingdom, according to officials there and documents.

“There are still loopholes,” said a Saudi official, who spoke on the condition of anonymity because he is not authorized to speak with the media. “It is still possible for - [extremist] groups to use the system for their own advantage with impunity.”

A charities commission that Saudi officials promised to establish as long ago as 2002 “hasn’t started functioning yet,” the official said, adding that the proposal had “met with resistance” from some quarters of the government who feared they would have to cede authorities to the new body. “It’s a turf issue,” the official concluded.

Earlier this month, U.S. diplomatic cables posted by the anti-secrecy website WikiLeaks painted U.S. officials as generally pleased with counterterrorism cooperation with the Saudis but less so with the kingdom’s actions on the terror-financing front, especially against groups other than al Qaeda.


Colleges Add Shariah Courses to Plug Shortage

Bloomberg Businessweek
December 14, 2010
By Soraya Permatasari and Suryani Omar

Universities are expanding Islamic finance courses as demand for professionals qualified in Shariah law outstrips supply in the $1 trillion industry.

The International Islamic University of Malaysia plans to start postgraduate courses specializing in Shariah-compliant capital markets, banking and insurance after enrollment for its general program in finance complying with Muslim tenets tripled in the past year, said Professor Mohd Azmi Omar, the dean of the institute. La Trobe University in Melbourne, which started classes this year, is working with officials in Malaysia to offer industry-recognized qualifications.

A lack of skills is among the biggest challenges for the expansion of global Islamic banking, said Washington-based Patrick Imam, an economist at the International Monetary Fund. About 50,000 professionals will be needed over the next five to seven years to meet demand, according to Ishaq Bhatti, the director of La Trobe’s Islamic banking and finance program.

“There are very few people who are really good at both finance and the interpretation of Shariah law,” Imam said in an e-mailed reply to questions on Dec. 10. “To do Islamic banking you must be fluent in finance and Islamic principles, and typically they are either one or the other.”


Top Islamic Finance Scholars Oppose Reform Effort

The Islamic Finance market is tightly controlled by 1 -2 dozen paid Shariah Imams and Sheiks ( called "scholars") who sit on national and international Bank Advisory boards AND sit on national and international Shariah Finance Regulatory boards. Critics say this web of Shariah Board members controlling the entire market violates anti-trust U.S. securities laws and enables collusion and price fixing. Control of information and competition also enables manipulation of financial markets for political and economic gains which is exactly what Shariah Finance critics, both Muslim and non-Muslim say is the goal of Shariah Finance. Shariah Finance Imams , "Scholars" and Sheiks are first and foremost adherents and promoters of Shariah Law in all its' forms, and second have a bit of knowledge about investments. Opposing reform and holding on tight to control by Shariah Islamic Finance Imams is a clear red flag.

December 1, 2010
By: Frederik Richter

Two of the Gulf's top Islamic finance scholars spoke out against efforts to reduce the number of boards they and their peers are allowed to sit on, challenging industry attempts to improve corporate governance. Bankers in the emerging $1 trillion Islamic finance industry say the concentration of hundreds of board positions in the hands of a few sharia scholars leads to conflicts of interest and hampers appropriate supervision.

Bahrain-based industry body AAOIFI is drafting rules to regulate scholars' shareholdings and the number of sharia supervisory boards a single scholar can sit on. "There is no need to limit the number of boards," Sheikh Nizam Yaquby, one of the most revered Islamic finance scholars in the Gulf Arab region, told a conference in Manama. He sits on several dozen sharia supervisory boards.


Top 500 Islamic Financial Institutions

According to critics of Islamic Finance, blaming the fall in price of Islamic investments on “indirect consequences” is a false claim. Islamic Finance promoters say that Islamic finance is less risky because there are underlying assets. The fact is that Islamic Finance has NOT outperformed Conventional markets and in fact has greatly underperformed. The Islamic Finance market is in a slump in small part because it is part of the global market and in large part because:
1. Islamic Finance is new illiquid market. 2. There are concerns that Shariah Finance is NOT compatible with Capitalism, and that it is a closed controlled financial system, created to give economic and political control of world markets over time to the leaders of the Shariah Islamic political movement (Iran, Al-Qaeda, Saudi Arabia). 3. For a young market there have been a fair amount of large sukuk defaults (at least 10 by Dubai World and more). 4. Underlying assets are only valuable if they are correctly priced, and that an investor effectively must have “title” to these in the case of default, in order to sell the assets to subsidize their losses. All the contracts with Islamic Finance are a huge unknown. If the assets are oil fields in Saudi Arabia...the investor has NO “title” to these oil fields…they are gov’t owned. And even if he did, you can’t sell oil fields in Saudi Arabia to ANYONE. This is what creditors of sukuk are figuring out, and there are lawsuits. In U.S. markets, we have had a collapse in price of asset-backed securities, too, for the same reason: that assets are only good if they are worth the price put on them when the structure was created AND you can actually sell them in case of default. And these structures are so complicated that not even Bear Stearns, Lehman Brothers, Goldman knew how to figure out what they were worth in a falling market, and so when there’s a problem with asset backed securities there are few buyers. If you buy a plain old bond from Apple inc. bought on the “good faith and credit” (financial term), that Apples will pay back principle and interest and they default, there are PLENTY of assets to sell and under U.S. securities law , bondholders are a priority creditor. Equity holders only get what is left after ALL the creditors have been “made whole”. This is why Islamic Finance is in a slump, the underlying assets have lost value. And the other risk is that Islamic Finance is off balance sheet ...this is another place.
The paragraph in this article subtitled "off balance sheet activity" is very accurate, and a huge risk factor for investors of Islamic Finance. Islamic Finance investments are "off balance sheet", which effectively means there is a bare minimum of reporting on these Islamic Investments. Islamic investments like all derivatives are "off balance-sheet". This is a huge reason why the sub-prime mortgage collapse and credit default swap (derivative) collapse became a global collapse. These liabilities were NOT reported on the Balance Sheet of companies like AIG, Citi, Lehman Brothers, Bear Stearns. And this was, at the time, totally legal. One of the mandates of the new Dodd-Frank bill supposedly (who can read 2000 pages?) is to mandate that derivatives can no longer be “off balance sheet”. The problem is of course that the new Dodd-Frank finance regulation bill does NOT label Islamic Finance structures as "derivatives," so all kinds of complicated Islamic investments like the 14+ different kind of Sukuk and the new products being developed daily (i.e. Islamic options) continue to be OFF BALANCE SHEET. Minimum reporting. Minimum disclosure. Minimum transparency.

The Banker
November 19, 2010

Since the publication of the first Top 500 Islamic Financial Institutions by The Banker in 2007, Islamic finance has continued to demonstrate upward growth despite growing pains and a loss of confidence in global financial systems. The 2010 survey of financial institutions practising Islamic finance reveals that sharia-compliant assets rose by 8.85% from $822bn in 2009 to $895bn in 2010.

Islamic finance has held a compound annual growth rate (CAGR) of 23.46% from 2006 to 2010. Many sharia-compliant institutions remain unscathed from the direct impact of the financial crisis.

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