Financial Times Special Report on Islamic Finance

Today's Financial Times has an interesting Special Report on Islamic Finance here . Some of the more interesting tidbits worth taking not of are the following:
-the sukuk, or Islamic bond, market hasn't fared as well as the rest of the sector since the subprime crisis began last summer and the primary reason is driven by Sheikh Muhammad Taqi Usmani, one of the leading Islamic finance scholars who is head of the Accounting and Auditing Organization for Islamic Financial Institutions, ruled that most existing sukuk instruments were not in compliance with sharia due to the fact that most are structured to pay a guaranteed return. This violates the proscription on risk and sharing of profits and losses in Islamic law. The cooling effect it has had on the market has been tempered by the recognition that working through the issues and developing more rigorously compliant instruments in the future that are informed by this ruling will help fuel the market in the future.

-this brings up the issue of regulation that has been raging across the Islamic Finance blogosphere and publications in recent months that the lack of common regulatory frameworks may be impeding the market. The other factor that may hold the market back is the lack of qualified professionals who have the understanding of both finance and Islamic law. It now takes up to 15 years to train people in both and demand greatly exceeds supply and is driving up salaries.

-in the wake of Sheikh Muhammad Taqi Usmani's ruling there have been a few sukuk bonds issued but they've been structured through ijara (Islamic lease-to-own contract, for a glossary of Islamic financial terms look (here) ). This was in response to his ruling that mudaraba and musharaka "offered investors a repurchase undertaking where the issuer promises to pay back the face value of the bond when it matures or in the event of a default", thus violating the prohibition against guaranteed returns. Ijara contracts involve a sale and leaseback arrangement because an asset such as a building is used to raise money.

-the other interesting piece was on the UAE's Noor Islamic Bank (here) . This is one of the most ambitious ventures to date in Islamic banking and looks like they're working on some innovative approaches to banking in general by targeting lower income customers through the use of post offices to target the 50% of the population that doesn't have bank accounts and to expand to Africa and Asia. They also plan to include credit cards, microfinancing, salary payments and remittances/currency exchange. Do I hear mobile banking potential as well??

-hedging for rising prices in Islamic finance. Since derivatives are rather questionable in Islamic finance the issue of hedging against growing inflation rates is coming to the forefront. Real estate investment trusts are rapidly becoming one of the favored approaches particularly given the rise in real estate prices. One of the hurdles will be the lack of clear property laws.

What's clear is that the growing assertion of Islamic identities in the marketplace combined with the growing oil prices and growing global financial crisis are all coming together in interesting ways to drive innovation and the future of Islamic banking.