Islamic finance not immune to financial meltdown

Shahriman Shariff from Citi Islamic Malaysia talks about the impact of the credit crunch and the creation of Islamic best practices.
The worldÆs money markets may be down but financial activity is not totally out. In Malaysia, an emerging Islamic finance hub in Asia, the issuance of Islamic bonds, or sukuks, has continued in 2008, although at a much slower pace than last year.

In the first nine months of the year, the total issuance volumes of sukuks in Malaysia totalled M$8 billion ($2.2 billion), according to a report by Malaysian rating agency RAM in November. The agency predicts total issuance for the year will reach M$30 billion, down from M$213 billion in 2007.

Against this backdrop, Shahriman Shariff, Citi Islamic MalaysiaÆs regional head of Islamic structuring, sat down with FinanceAsia to discuss CitiÆs Islamic activities and the impact of the credit crunch on Islamic finance overall.

How has the credit crunch affected Islamic finance?
The economics, whether itÆs Islamic or conventional finance, are still the same. If people have an aversion to counterparty credit risk, it does not matter whether they invest in Islamic or conventional products, the effects are still the same. People are refusing to take credit risks with other parties and the impact on Islamic finance is the same as on conventional products.

Have Shar'iah (Islamic law) compliance issues impacted Islamic finance?
There has been some confusion in the market over the issue of Shar'iah compliance, due to issues raised by certain prominent ShariÆah scholars in the Middle East. A lot of issuers, investors, banks and practitioners have said, ôLook, letÆs get clear about whatÆs OK and whatÆs not OK.ö But I still think Islamic finance will continue to grow despite of this. All it means is that the issuers, banks and practitioners will find new ways to comply with the Shar'iah scholarsÆ rulings once they have been clarified.

How important is Shar'iah compliance to Islamic finance?
For us it is quite simple û if the scholars say no, then it's no. Scholars' opinions are pretty much binding, they can put the brakes on any Islamic activity we do.

The main proposition of Islamic products is their Shar'iah compliance. The moment you take away that proposition, what is the value of the product? ItÆs no longer an Islamic product. To most of the people who subscribe to them, an Islamic productÆs value is gone without Shar'iah compliance.

What is Citi Islamic's role when it comes to the issuance of Shar'iah-compliant products?
We try to act as the bridge between scholars in Malaysia and the Gulf on matters of Shar'iah compliance, but increasingly this role has become less important. Today, MalaysiaÆs scholars and the GulfÆs scholars are speaking directly to each other. Early on, for example, we made it a point to annually bring together our local Shar'iah board and our Middle East Shar'iah boards to create an exchange between the scholars in the two regions.

Going forward, what we try to do is enact best practices for the industry as a whole. To that end, we have a global Shar'iah compliance control unit that supervises CitiÆs Islamic activities both in Malaysia and the Gulf. This unit acts as an independent internal control function to guarantee that the bank continuously maintains its Shar'iah compliance. This unit was created to close what we realised was the biggest gap in Shar'iah compliance û the continuous Shar'iah oversight after the products have been approved by SharÆiah scholars. What we are doing is creating best practices in the industry and giving it needed confidence.

What developments in Islamic finance to you expect in the near future?
In Malaysia, the interesting bits will come from the asset management side û basically the retail and high-net-worth markets. WeÆve seen a number of interesting investment products coming out in the past couple of years and this will be something to watch.

The other thing is the use of technology. People might sell Islamic products simply because they are Shar'iah-compliant, but as the products become commoditised and Shar'iah compliance is gained by most of the banks and products, then competition will come in terms of service, how they are delivered and the use of technology. It will be interesting to see the service levels of Islamic banks trying to catch up to the service levels of conventional banks which already use technology and leveraging on products that are not Shar'iah-compliant.

On the whole, the fortunes of Islamic finance will be similar to conventional markets for the next few years. With reduced real economic activity, there will less demand for Islamic finance.
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