Global Investing

If the pure pursuit of greed is no longer good in the post-crisis world, what defines the new “good”?

That’s when you start to consider “Impact Investing”, a type of investment that pursues measurable social and environmental impacts alongside a financial return.  According to a report prepared for the Rockefeller Foundation, approximately 2,200 impact investments worth $4.4 billion were made in 2011.

But those who may be ideally placed to pursue Impact Investing are still largely absent from the exercise — sovereign wealth funds from the Persian Gulf, according to a recent paper published by academics at the Fletcher School at Tufts University.

Authors Asim Ali and Shatha Al-Aswad at Tufts’ Sovereign Wealth Fund Initiative argue that Persian Gulf states can deploy their SWFs in impact investing, via Islamic finance, to help develop their economies.

Islamic finance, with its focus on moral and social objectives, and specifically Sovereign Wealth Funds, as long-term investors, are ideally positioned to pursue impact investing… to foster social impact and economic development in the broader economy.

The Islamic finance industry waited in vain for a sukuk issue from a Western sovereign in 2009. Will 2010 be any different?

Gilles Saint Marc, a member of the Islamic Committee at trade body Paris Europlace, said on Wednesday at the Reuters Islamic Banking and Finance Summit that there had to be some sukuk issuance in France in 2010 if it was to retain its reputation as being at the forefront of Islamic finance.

However, David Testa, former CEO of Gatehouse Bank, a sharia wholesale bank in the City of London, was sceptical any Western sovereign issuance would be forthcoming.

The technicalities of Islamic finance may seem arcane to outsiders but participants of the Reuters Summit on Islamic Banking and Finance have been keen to take it to a broader audience.

On Tuesday Mahesh Jayanarayan, CEO of Halal Industries, unveiled his ambitious plans for a halal park in Wales, whilst stressing the industrial site could also house Welsh cottage industries. Halal is simply an Arabic term that means “permissible” but in the West it is largely associated with the preparation of meat and poultry.

Jayanarayan acknowledged that battling preconceived notions is part of the struggle, but pointed out that sharia investing had an ethical dimension that could appeal to a broader audience.

The Dubai World crisis has forced sukuk bond investors to wake up to the reality that sukuk isn’t completely straightforward, said Farmida Bi, a partner at Norton Rose, speaking at the Reuters Islamic Banking and Finance Summit in London on Monday.

“There seems to have been a lot of wishful thinking around implied (sovereign) guarantees and enforcement, which isn’t straightforward in this region,” she said.

In Dubai, for example, there are several distinct secular legal systems to grapple with, as well as Sharia law. “No one has worked out how these interact – it remains an untested legal system,” Bi said.

Islamic finance may have shunned the reckless behaviour that nearly brought down the mainstream financial system last year, but it is not able to step in to the old regime's shoes.

Some expect the industry to grow by double digits in the next three years -- the secretary general of a top standard setting organisation for Islamic finance agrees and with humour:

 "We Muslim breed and breed well", he said laying down his expectations for future demand of Islamic products. 

Jokes aside, Mohamad Alchaar , secretary general of AAOIFI, delivered a message today in London. There is "absolutely no way" that Islamic finance could replace conventional banking in spite of growth potential. Given that a financial product depends on scholars' approval and scholars tend to disagree about what complies with Islamic law,  Dr. Alchaar may have a point.

Eager to attract Middle East investment but uneasy about linking faith and finance, the French parliament has opted for some legislative sleight-of-hand to pass a law allowing the issuance of interest-free Islamic "sukuk" bonds. The move is part of France's two-year drive to create a new European hub for Islamic finance, whose value globally is estimated at $1 trillion. But instead of introducing a separate bill, which would attract attention to it, the governing UMP party tucked the proposed change of French trust law into a larger bill on financing reform for small and medium-sized companies. And it chose to do this by introducing it as an amendment in the second reading of the bill -- the one that usually gets fewer headlines. (Photo: French National Assembly, 15 Sept 2009/Charles Platiau)

Sounds confusing? That seems to be exactly what the legislators wanted. As my colleague Tamora Vidaillet wrote here in an earlier post entitled "France courts Islamic finance, as long as it’s not too obvious," bankers, politicians and goverment officials are clearly uneasy about promoting Islamic finance in France. "There is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité – the strict separation of church and state — tries to keep anything religious out of the public sphere as much as possible," she wrote. "Many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides."

The opposition Socialist Party opposed and attacked the change. "We are introducing Islamic law into the French legal framework. This deeply shocks us, it is unacceptable." said Socialist MP Henri Emmanuelli. "When Muslims are rich, we try to attract them. When they're poor, we expel them."

In researching an article on what lay behind government plans to develop France as a European hub for Islamic finance, I was struck by the uneasy atmosphere surrounding the subject. On the one hand, the government sees it as a way to attract Middle Eastern money and wants to push the idea. But on the other, there is a clear sense of apprehension over how Islamic finance would fit into French society, where the policy of laïcité -- the strict separation of church and state -- tries to keep anything religious out of the public sphere as much as possible. (Photo: Eiffel Tower in Paris, 20 Nov 2007/Mal Langsdon)

The bankers, lawyers, government officials and Islamic finance specialists trying to get Islamic finance off the ground in France speak publicly about the bright prospects they see for the market. France has the biggest Muslim population in Europe at over five million. The government is pushing the idea hard. There is a huge need for financing of future projects.

But privately, many admit that French companies and banks may hesitate to do anything that uses the label Islamic as this could highlight sensitivities over social and cultural divides. Ever since the French Revolution, France has upheld the idea that its people are all individual and equal citizens and not members of regional, ethnic or religious minorities. Stressing membership in a sub-group is considered divisive. The French frequently point to the multicultural approach taken in Britain and the United States as the source of political and social problems -- such as ethnic or religious "ghettoisation" and "identity politics" -- that they want to avoid.

By Jason Benham

It’s the property face of the Gulf’s business and tourist hub and the developer of palm-shaped islands visible from space – so Dubai will simply not allow property firm Nakheel to default on its huge $3.5 billion Islamic bonds which mature in December.

Just think of the bad publicity it would bring to the region, and there’s already been plenty of that. Another kick in the teeth is certainly not what Dubai needs. Plenty of critics have joined the ‘bash Dubai” bandwagon and several more are set to join the ranks at some stage. 

But any default would mark a failure for Dubai World, the state-owned conglomerate, and a castrophe for Dubai’s government, which has ploughed billions of dollars over recent years into making Dubai what it is today.

Is diversity of opinion boon or bane for Islamic finance?

Market participants gathered for a conference at Thomson Reuters’ London headquarters earlier this week discussed the need for more convergence in the industry estimated to be worth $1 trillion.

Of particular focus was the role of sharia scholars who rule on whether investment products are in line with Islamic teachings.

“Sharia scholars who sit as advisers have a crucial role to play in retaining public confidence,” Rifaat Ahmed Abdel Karim, secretary general of the Islamic Financial Services Board, an international standards-setting body for the industry, told the forum.

Combined Shariah and ethical/SRI products could be the way forwards for Islamic finance investing, according to Dr Humayon Dar, CEO at BMB Islamic, the Shariah consultancy at BMG Group.

Speaking at the Reuters Islamic Finance Summit today, Dar highlighted the development of an upcoming F&C fund that will meet both ethical and Shariah investing criteria, and can be sold to both Muslims and non-Muslims. “I see this as the way forward in markets such as Malaysia, where a significant proportion of the population is non-Muslim,” he said, adding that once such products have established a track record, it should appeal to a broader audience, and encourage other launches.

Marrying the Western and Islamic traditions of investing could help Shariah surmount a number of hurdles that have so far limited its appeal. A recent Oliver Wyman survey found that only half of the 1.4 billion Muslims worldwide would opt for Islamic finance if given a competitive alternative to conventional products. Dar said he had conducted his own survey which found that no more than 25 percent of UK Muslims was interested in Islamic banking and finance. “The vast majority prefer competitive quotes from non-Shariah providers,” he said – this is particularly the case in the mortgage sector.