June 22, 2008
Islamic Finance Bubble
A quick note, prompted by a very decent set of audio-visual summaries at FT on Islamic Finance, and a note within the presentation that the Islamic Finance industry has not been effected to date by the global credit crunch (although noting exposure to Gulf Real Estate).
It strikes me that as impressive as the growth has been in the past seven years, it corresponds rather precisely with the big Gulf boom driven by hydrocarbon prices. There is much loose talk of huge new Muslim markets, counting up the global number of Muslims - African, Asian, etc. - as potential market numbers (see the articles here). This, like your average "MENA" but really Gulf Fund, playing with regional numbers to inflate potential is utter bollocks. Much boosterism comes from the Gulf, and more from City bankers with a thin understanding of the variations in the Islamic world and the extent to which poorer markets with more liberal approaches to Islam are going to be genuinely willing to pay a premium for services (or be exposed to more risk - although that is more likely to be disguised). Perhaps worth a further discussion, but it strikes me that Islamic finance growth right now is intimiately and almost uniquely driven by asset inflation in the Gulf, that makes everything look attractive.
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And according to the CEO of one Islamic bank I spoke to, a lot of growth is from trend/bandwagon. He even described it as a temporary "fad". And he was a gulf muslim and not seemingly a particularly anarchic type. This was a couple of years ago, before the oil price went volcanic.
Posted by: secretdubai at June 22, 2008 06:24 PM
Salam... good questioning. The flourishing of Islamic Finance has been intimately linked to real estate mega projects in the Gulf - due mainly to the lack of other viable business opportunities. Meanwhile most of the Islamic sovereign funds invested in the west are directed toward other sectors as well, including the finance and industry sectors. The retail Islamic Finance targeting the average Muslim citizen might, by the numbers involved, become the next growth driving force for Islamic Finance.
Posted by: Hal Ben at June 23, 2008 07:49 PM
Retail is not going to be a driving force mate, because "Islamic" finance, which merely adds on some legal maneuvering onto the transaction, is more expensive, and it a luxury product (unless the provider violates prudential norms and plays high risk investment with simple depositor accounts).
That is the economics. One can play wishful thinking all one wants, but the economics are the truth. I personally don't mind it if some folks feel they need a hyper conservative bit of legal mumbo jumbo, and are willing to pay above the market rate for it, but don't bloody fool yourself, the product is less efficient and higher cost for the same basic economics.
Personally, I am with my liberal brethren who view reasonable interest as utterly halal.
Posted by: The Lounsbury at July 6, 2008 04:06 PM