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Islamic finance must go back to basics

June 11, 2012

Islamic institutions, if run according to syariah regulations, should be able to avoid the problems afflicting conventional banks hit by economic woes in the US and Europe.

KUALA LUMPUR: Islamic institutions around the world should move past sukuk and build a unified platform that promotes the essence of Islamic finance – trading, said the head of Kuwait Finance House (KFH) in Malaysia.

CEO of KFH Malaysia Jamelah Jamaluddin said trading was the purest form of any business transaction and was what traditional syariah-compliant financial regulations were built upon.

In an interview with media and business events company Inside Investor, Jamelah said sukuk, the Islamic equivalent of bonds, is already an established and proven financial instrument that has helped to raise the profile of Islamic banking and finance.

However, she said little has been done to develop trading.

“Maybe we should start talking about the basic fundamentals of Islamic banking,” said Jamelah. “Some people have forgotten and talk about sukuk, sukuk, sukuk.

“What about the fundamentals? Trading is a fundamental aspect of Islamic banking. Interest-free banking was done long before the advent of the western banking system.

“There has been no trade finance brainstorming among practitioners of Islamic banking. How do we do trade finance with Islamic countries?

“There are no products. We talk about one thing, and that is sukuk. Malaysia has been an excellent example of how to develop sukuk. But that has now been done. Let’s move on.”

The issue of trading on a syariah-compliant platform will be among the key discussions to be raised at the Inside Investor Forum Asia 2012 event in Doha, Qatar in October, when leading experts on asset management and Islamic finance, among others, will explore inter-regional investment opportunities in the Middle East and East and Southeast Asia.

According to HSBC, Malaysia will account for 60 per cent of the US$44 billion worth of sukuk expected to be issued in 2012. While Malaysia retains global domination, institutions in the Middle East and Indonesia are also expected to be strongly represented.

Jamelah praised the establishment in 2010 of the International Islamic Liquidity Management Corporation (IILM), a collaboration of 11 central banks and two multilateral organisations aimed at assisting Islamic finance institutions in liquidity management and facilitating greater investment flows for the Islamic financial services industry.

The IILM issues short-term papers in international reserve currencies, such as the US dollar and the euro.

KFH in Kuwait has already set up its own Liquidity Management House, aimed at being a principal player in the international sukuk market and syariah compliant structured finance arena. LMH also enables Islamic financial institutions to manage their liquidity mismatch through short and medium term liquid investments structured in accordance with the syariah principles.

Jamelah added that Islamic institutions, if run according to syariah regulations, should be able to avoid the problems afflicting conventional banks hit by economic woes in the US and Europe.

“The things that happen to conventional banks shouldn’t really happen to Islamic banks,” she said.

“The reason for that is the very essence of Islamic banking. There must be an asset to deal with. Therefore, we take away speculation and derivatives.”


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