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Islamic finance’s reputation as “safe” is a myth: Qatar regulator

By Reuters Staff
January 28, 2010

saudi-bankers

Traders at the Saudi Investment Bank in Riyadh, 8 Oct 2008/Fahad Shadeed

It’s a myth to assume Islamic finance products are safer than conventional products and underlying risks should be studied more carefully, Qatar’s top regulator said at the Davos World Economic Forum meeting on Wednesday. Despite being billed as a safer alternative to traditional banking because assets must underpin deals, Islamic bondholders have found they may not have any more legal safeguards than conventional counterparts in the event of default.

Such issues were highlighted after sukuk — or Islamic bonds — had the first ever defaults last year.  Sukuk, one of the flagship products in the $1 trillion Islamic finance industry, are structured as profit-sharing or rental agreements and returns are derived from underlying assets because Islamic laws prohibits paying or earning interest.

“There is some assumption that some of it is cosmetically more comforting, but when so many Islamic instruments are now trying to mimic the effect of conventional products, you need to examine if they carry the same risk profile,” Philip Thorpe, chief executive of Qatar Financial Center Regulatory Authority, told Reuters.

“It’s a myth for anyone to assume anything about financial products, including Islamic finance,” he said.

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