My RCW colleague Kevin Sullivan sent along this interesting China Post article concerning the rise of Islamic finance:
Will Islamic finance be a serious challenge to traditional Wall Street finance? That is a question that deserves a good answer.First of all, thanks to the good work of Bank Negara Malaysia and the Gulf central banks, the infrastructure for Islamic finance has been laid, with the establishment of the Accounting and Auditing Organization for Islamic Financial Institutions (AOFFI), the Islamic accounting standards authority, the Islamic Financial Services Board (IFSB), the international Islamic financial regulatory standard-setting organisation and the Institute for Education in Islamic Finance (INCEIF). The International Shari'ah Research Academy for Islamic Finance (ISRA) also provides an invaluable website that is increasingly the transparent source for shari'ah interpretations on what is considered acceptable under Islamic law.
For people unfamiliar with Islamic finance, the basic principle of Islamic banking is the sharing of profit and loss and the prohibition of usury. Simply put, interest is prohibited, but profit sharing is not. A cynic can say that with zero interest rate policies adopted by advanced country central banks today, they are also practicing Islamic banking.
I am a bit skeptical about these conclusions. As a general principle, Islamic finance is illiquid and overpriced, primarily because it's not a large market. The people who make use of this financial source tend to be those who have no alternate choice, for sociocultural reasons, and anybody who does have a choice doesn't bother with it. And while some European banks have gotten into Islamic finance on the sell side, they're only doing so because there's a profit opportunity.
This does, however, raise another finance item for consideration.
