A growing market of Sharia compliant financing instruments is developing. These are meeting the requirements of a niche market catering to investors seeking to invest in financings that are in compliance with Islamic law. Muslim majority countries were the original source of such financial options. But acceptability has now spread to countries with Muslim residents. Of course, the desire to attract wealthy oil rich investors has also led been a source of this acceptance. As a result non Muslim nations are changing their laws and rules to accommodate these customers.
A still limited industry primarily catering to retail customers has developed in the United States. However, it is deepening slowly. Regulatory bodies have given recognition to some products. The OCC has issued two guidelines. It provided a guideline about leasing or ijara in 1997. Two years later, it addressed the cost plus financing mechanism known as murabaha. In the murabaha, an intermediary buys an asset that will later repurchased by a customer at a higher price.
Regulatory bodies have made efforts to standardize regulations with increasing interest in the industry. Presently related laws and regulations vary. This is also because Sharia is open to interpretation. Hence, religious scholars differ in opinion regarding what is acceptable. Absence of concurrence made it difficult to standardize such financial products.
There is concern in the absence of standardization, issues of validity will arise more often to restrict expansion of the industry. This problem was highlighted by a disagreement between a bank in Lebanon and an investment firm from Kuwait. Their dispute was over whether a mutual contract was enforceable if the issue of compliance was disputed.
Many observers believe standardizing of regulations is key to increasing marketability and wider acceptance of these products. There have been a number of initiatives over the years to improve regulatory practices. An example is the IFSB publishing of guidelines in 2009 on issues related to governance and capital adequacy requirements of different financial mechanisms. AAOIFI is working on developing risk management and corporate governance standards.
With rising oil prices, Middle East is flush with money available for investment. Western countries bogged down in recessionary conditions are in need of investments to boost their economies. Islamic laws prohibit interest and discourage uncertainty in contractual arrangements, profit and risk sharing is favored. This niche market has been doubling in recent times. As a survey of 500 leading institutions has revealed assets under control to have risen to 895 billion dollars in 2010 from 822 billion in 2009. Eighteen new financial institutions joined the market in 2010 and six regular banks started providing SCF options.
Some have estimated, total global assets reached over a trillion US Dollars in 2010. Islamic banks generally have done better than conventional banks during the global financial crisis due to risk avoidance. However, this industry has not been totally immune to decline in demand and investor uncertainty. Hence, Islamic capital market securities, sukuk, peaked at 35 billion USD in 2007, then declined in 2008 to 15 billion and rose to 20 billion in 2009.
In the past two decades there have been some development of innovative product offerings. For instance in 1999, Dow Jones presented its first market index for SC stocks internationally. Today it maintains over 100 indices and is advised by an independent SC supervisory board with scholars from a number of countries. However, Sharia compliant financing in the United States is still primarily retail financing linked to housing with room to expand in other sectors.
A still limited industry primarily catering to retail customers has developed in the United States. However, it is deepening slowly. Regulatory bodies have given recognition to some products. The OCC has issued two guidelines. It provided a guideline about leasing or ijara in 1997. Two years later, it addressed the cost plus financing mechanism known as murabaha. In the murabaha, an intermediary buys an asset that will later repurchased by a customer at a higher price.
Regulatory bodies have made efforts to standardize regulations with increasing interest in the industry. Presently related laws and regulations vary. This is also because Sharia is open to interpretation. Hence, religious scholars differ in opinion regarding what is acceptable. Absence of concurrence made it difficult to standardize such financial products.
There is concern in the absence of standardization, issues of validity will arise more often to restrict expansion of the industry. This problem was highlighted by a disagreement between a bank in Lebanon and an investment firm from Kuwait. Their dispute was over whether a mutual contract was enforceable if the issue of compliance was disputed.
Many observers believe standardizing of regulations is key to increasing marketability and wider acceptance of these products. There have been a number of initiatives over the years to improve regulatory practices. An example is the IFSB publishing of guidelines in 2009 on issues related to governance and capital adequacy requirements of different financial mechanisms. AAOIFI is working on developing risk management and corporate governance standards.
With rising oil prices, Middle East is flush with money available for investment. Western countries bogged down in recessionary conditions are in need of investments to boost their economies. Islamic laws prohibit interest and discourage uncertainty in contractual arrangements, profit and risk sharing is favored. This niche market has been doubling in recent times. As a survey of 500 leading institutions has revealed assets under control to have risen to 895 billion dollars in 2010 from 822 billion in 2009. Eighteen new financial institutions joined the market in 2010 and six regular banks started providing SCF options.
Some have estimated, total global assets reached over a trillion US Dollars in 2010. Islamic banks generally have done better than conventional banks during the global financial crisis due to risk avoidance. However, this industry has not been totally immune to decline in demand and investor uncertainty. Hence, Islamic capital market securities, sukuk, peaked at 35 billion USD in 2007, then declined in 2008 to 15 billion and rose to 20 billion in 2009.
In the past two decades there have been some development of innovative product offerings. For instance in 1999, Dow Jones presented its first market index for SC stocks internationally. Today it maintains over 100 indices and is advised by an independent SC supervisory board with scholars from a number of countries. However, Sharia compliant financing in the United States is still primarily retail financing linked to housing with room to expand in other sectors.
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