Asia's Islamic finance sector weathering storm well
Updated
As Wall Street gets to grips with its biggest one-day point drop in history, after US legislators voted down a massive bailout plan, new figures show one global finance sector might be in strong enough shape to weather the storm. Dow Jones has just put out the August results of its Islamic markets financial index. While the Dow's Global Titans 50 lost more than two-and-a-half percent of their value in august, the 100 leading Shariah-compliant stocks suffered only half that loss. During Asia's financial crisis eleven years ago, the region's Islamic stock markets outperformed their conventional counterparts.
Presenter: Nasya Bahfen
Speakers: Dubai-based financial journalist Gerard Al-Fil; Islamic finance law expert and Kuala Lumpur based lawyer Mohamed Ridza
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BAHFEN: Blood may have spilt on Wall Street in recent weeks, but in Islamic finance it was more of a graze. The Dow Jones Islamic Market Financials Index measures assets that comply with Shariah, which excludes conventional banks and insurance companies. It also excludes Islamically forbidden investments - for example, anything that makes money from alcohol, tobacco, weapons, porn and gambling. Finally, a company with debt that exceeds more than a third of its market value is automatically dropped. With such stringent conditions, is it possible for any investment on the Dow Jones Islamic Market Index to make a postive return? Well, the Index lost just 2.74 percent in September - a month where conventional stock markets saw a fifth of their value chopped off, as Wall Street went into meltdown. Gerard Al Fil is a financial journalist based in Dubai.
AL - FIL: Islamic banks are more close to the economy because they have to share the entrepreneur's risk by providing some capital and sharing the profit after. They don't give conventional loans with interest but they become shareholders and they share the risk of the entrepreneurs' success.
BAHFEN: But Mr Al-Fil warns that it's not all rosy for Islamic stock markets. While the religious avoidance of debt financing might put them in a stronger position to avoid the credit squeeze, other asset-based investments might still drag down the Islamic indices.
AL-FIL: The Islamic markets are also very heavy on basic materials and raw materials and these prices dropped as well. So these stocks went down further, so you cannot say in particular that Islamic markets in general are better off than the conventional indices.
BAHFEN: Kuala Lumpur based lawyer Mohamed Ridza specialises in Islamic finance law. He says the lack of debt in the Islamic finance sector shields it from many of the problems caused by bad credit. But he agrees that Shariah finance isn't immune to the crisis on Wall Street.
RIDZA: Possibly the same thing could befall Islamic finance, except that in Islamic finance transactions undertaken…it's more asset based rather than debt based. So the kind of transactions where the mortgage bonds were packaged and sold would not be applicable in Islamic finance, because that would not be Shariah compliant.
BAHFEN: Whatever happens on Wall Street, Mr Ridza says the future appears good for Islamic finance in the southeast Asian region. For example, Malaysia is the regional headquarters of choice for a lot of Middle Eastern banks, while Indonesia has passed its first law allowing sukuk, or Islamic bonds.
RIDZA: Looking at developments, if you notice Singapore has also started undertaking Islamic finance, Thailand is following suit, Brunei has also been looking at it for quite some time. And Indonesia has even passed their first sukuk law, that would give them an avenue to actually provide rupiah financing and also US dollar based financing especially for the infrastructure projects.
BAHFEN: With US politicians scrambling to fixup the mess, and leaders on both sides of the American political divide call for changes to financial regulatory frameworks, it might not sound so far fetched to suggest Wall Street might learn from Islamic financing. Gerard Al-fil refers to the decision by the US Securities Exchange Commission to ban short-selling - that is, selling a stock you don't actually own, to profit from falling prices. He describes this decision as in line with Shariah.
AL - FIL: Banning short selling is one of the decisive elements in Islamic finance so it seems almost that the conventional markets are looking at the Islamic techniques which so far did not play any role in conventional markets.
