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Shariah Finance

Derivatives and Shariah Islamic Finance


Path Opens for Islamic Finance Hedging

The principles of Shariah Finance state that passive interest income is forbidden and investments must have real assets to sell and buy. In fact, Shariah "scholars" say that if Shariah Finance had completely replaced free market capitalism in 2008, there would have never been a collapse because there would be no derivatives, no excessive risk taking and less correlation with fluctuation interest rates since interest is forbidden. So why are Islamic scholars creating derivatives to hedge positions? And why are Islamic financial derivatives any less risky than western derivatives? How can these investments be "interest free" when fixed income Islamic investments are priced off the yield curve or various libor rates? How more opaque can this market get?

Financial Times
March 1, 2010
Manama, Bahrain

The first worldwide standardised documentation for privately negotiated Islamic derivatives was launched on Monday, paving the way for much greater use of hedging in Islamic finance

The move by the International Swaps and Derivatives Association and the International Islamic Financial Market follows the growth of the Islamic finance market, which has increased the need for financial institutions and corporate borrowers to hedge interest rate and currency exposures. Islamic finance bans investors from earning money through interest payments.

Khalid Hamad, chairman of IIFM and executive director of banking supervision at central bank of Bahrain, said: “Given the growing nature of the Islamic finance industry, the institutions operating on Sharia principles can no longer afford to leave their positions unhedged. Hence, some key hedging products are now becoming common across jurisdictions to mitigate risk.”


Doing God's Work

This WSJ article points out the pitfalls of Shariah Finance: the varied intentions and interpretations of its participants, the sukuk defaults in Dubai, and the man who wants to create and develop an “Islamic Goldman Sachs.” However, it does not talk about Shariah as a powerful political movement and its direct connection with Islamic, or Shariah Finance. The finer points, such as the unknowns in zakat and purification, are also avoided. However, the article does quote Dr. Nasser Saidi, chief economist of the Dubai International Finance Centre and former Minister of the Economy and Trade in Lebanon, who said, "When you give zakat, it is not recorded. In Islam, charity is not meant to be advertised." Perhaps the Wall Street Journal should have mentioned the 27 implicated terror charities funded, in part, through zakat.

Wall Street Journal
March 1, 2010
By Maha Khan Phillips

At a party in Karachi a young man cradles a glass of whiskey and laughs when asked why he is in the Islamic banking industry. "It is the fastest-growing sector in Pakistan," he says. "I want to make money, so this is where I need to be. Who cares about religion?" A corporate-finance lawyer, who is a devout Muslim, gives a very different answer: "If you do not believe that Islam and its teachings can bring about positive change to the world, then you should not be in the business."

The two men illustrate the competing, often contradictory, forces that are encapsulated in the very phrase "Islamic banking."

The global market for Shariah-compliant assets, which conform to a body of Islamic religious laws, is estimated to have grown by 35% to $951 billion between 2007 and 2008, according to International Financial Services London. But the U.K.-based organization says the industry, facing a number of challenges, "paused for breath" in 2009.


ABC Islamic Posts $10m Net Profit for '09

Bahrain-based ABC Islamic Bank has posted a net profit of $10.1 million for 2009 compared to $25.6 million for 2008. ABC Islamic Bank’s total assets as at December 2009 stood at $1.32 billion, compared with $1.46 billion at the end of December 2008. This is Arab Banking Corporation’s vision statement: “To become a leading Universal Bank in MENA that delivers superior shareholder returns, provides distinctive service and products to its customers and is able to attract, develop and retain top talent.” Perhaps Shariah-Compliant Investments are not as “superior” as banks such as ABC claim.

Trade Arabia
February 25, 2010
Manama, Bahrain

Bahrain-based ABC Islamic Bank has posted a net profit of $10.1 million for 2009 compared to $25.6 million for 2008.

Net profit for the fourth quarter was $3.7 million, compared to a nominal third quarter loss of $175,000 as there were no impairment provisions required for the fourth quarter compared to $3 million taken in the third quarter.

Income for the fourth quarter was $7.4 million versus $9.2 million for the previous quarter, due to customer repayments, lower participation fees and lower rates.

There was also the positive impact of lower rates as profit payable declined to $3.2 million versus $4.6 million in the previous quarter which allowed the net profit margin to stay at $4.2 million, slightly lower than the previous quarter of $4.5 million.


National Bank for Development Launches Two New Products 'Yosr Murabha' and 'Islamic Sukuk'

Egypt’s National Bank for Development (NBD), once a conventional bank, continues to move in the direction of full Shariah-compliance.
February 25, 2010
Cairo, Egypt

In fulfillment of its promise to launch new products to the Egyptian market, and in full compliance with Shari'a regulations, NBD is launching for the first time in Egyptian Islamic banking the "Yosr Murabha" personal finance program and "Islamic Sukuk" using Wekala contracts, both of which were fully authorized and approved by the bank's shari'a board.

In celebration of this occasion, the bank organized a press conference at NBD's headquarters in Cairo, attended by the bank's top executives and headed by Nevine Loutfy, Managing Director and CEO of the National Bank for Development.

"Yosr Murabha" personal finance is a product that targets a wide range of customers who can use it for their personal needs. The financing amount varies between LE10,000 and LE200,000, and the length of repayment can be from 12 months up until five years (60 months), split into equal installments.

As part of NBD working completely within the constraints of Shari'a law, which focuses on cooperation and partnership, "Yosr Murabha" is unique in possessing "Takaful Insurance", which adds a small amount to the installment cost and in return provides the client with a life insurance scheme, whereby shari'a-compliant insurance companies that the bank deals with take on the burden of meeting installments in the case of the client passing away.

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