Want to Buy a Sukuk? Islamic Financing Is Growing Rapidly and the West Wants in. with a Huge Influx of Oil Dollars and Expanding U.S. Trade and Budget Deficits, Are the Dollar's Days as the World's Reserve Currency Numbered?

By Berg, Ann | Futures (Cedar Falls, IA), July 2006 | Go to article overview

Want to Buy a Sukuk? Islamic Financing Is Growing Rapidly and the West Wants in. with a Huge Influx of Oil Dollars and Expanding U.S. Trade and Budget Deficits, Are the Dollar's Days as the World's Reserve Currency Numbered?


Berg, Ann, Futures (Cedar Falls, IA)


Imagine living in a parallel financial world where bankbooks earn rents, leases procure homes and scholars vet stocks. A world where merchants divulge profit margins in advance to buyers and commodities stream as dividends from capital investments. A world whirling around an orbit of gold. You don't have to imagine--this is the world of Islamic finance.

Islamic finance is one of the fastest growing segments of global finance. Evolving gradually from 1970, when the first Islamic banks started in Dubai, it has lately swelled on the wave of globalization and the petroleum boom. Operating in 70 countries with about $500 billion in assets, it is poised to expand geometrically. Western institutions have jumped right in; Citigroup and other Western banking giants recently opened Islamic divisions and are elbowing out much of the indigenous competition. The Islamic Bank of Britain, the United Kingdom's first bank catering to a Muslim client base, listed its shares on the London Stock Exchange in 2004.

In a dash to embrace modern technology and product innovation, Islamic finance is not without detractors. Some economists and Muslim scholars consider it medieval and many find its repackaging of Western products an apostasy.

According to many economists, Islamic finance, in its objectives and operations, is based on Koranic principles (also called Shariah Law). Going beyond the tautology that Islamic finance equals "interest free" banking, it embodies three religious tenets: the avoidance of speculation (gharar), the avoidance of excessive profits (riba) and the focus on permissible activities (halal).

[ILLUSTRATION OMITTED]

Underlying the system is the philosophy of risk sharing: the lender must share the borrower's risk, making the two in effect partners, injecting a strong social component into the financial system. That viewpoint separates it decisively from Western finance, which seeks to maximize profits and minimize loss through diversification and risk transfer.

At the core of Islamic finance is the sukuk. Much like a western-styled revenue bond, the sukuk returns capital from rents, royalties or user fees. According to Citi Islamic Bank, which unveiled a Citi-Dow Jones Sukuk Index at the International Islamic Finance Forum in Dubai this March, sukuk issuance for 2006 could equal about $14 billion, the combined notional value of the past four years' issuance. Revealing its sophistication level, a recent sukuk offering in the shipping sector named Venus Glory describes its structure as combining "an Islamic mezzanine tranche ... with conventional senior debt and conventional equity."

Retail products in Islamic finance run the gamut from microfinance to mortgages. Because interest-based loans are prohibited, mortgages, like other consumer products, are structured as installment or "lease to buy" arrangements, apportioning monthly payments between rent and ownership. Not amortized the conventional way, they replace the front-loaded interest payment schedule with a linear one, allowing homebuyers to acquire homes in equal parts throughout time. Mortgages are viewed as partnerships between custodian (lender) and occupier (borrower) until the home transfers to the latter. Although controversial, the Western practice of bundling and selling mortgages as asset-backed securities into the secondary market began in Dubai this past April with a $300 million offering.

As for equities, most Westerners' are shocked to see the list of industries forbidden by the Shariah Board, which include businesses engaged in entertainment, gambling, tobacco, alcohol, financial services, defense/weapons and pork production. Yet Islamic equity indexes first started in 1999 are blooming. According to Dow Jones, exchange traded funds (ETFs) also have gained acceptance. Last year, the Istanbul Stock Exchange launched two ETFs: the Turkey Titans, which comprises the top 20 blue chip Turkish firms, and the other is made up of 17 Shariah compliant companies.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Want to Buy a Sukuk? Islamic Financing Is Growing Rapidly and the West Wants in. with a Huge Influx of Oil Dollars and Expanding U.S. Trade and Budget Deficits, Are the Dollar's Days as the World's Reserve Currency Numbered?
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.