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Sharia Compliant Financing Is A Growing Niche Market

by on Oct.10, 2012, under Vacations

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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.

There has been some effort towards standardization by regulating agencies, but it has been tentative. Hence, variation is the rule in such matters. In part this is because religious scholars do not have a consensus concerning what meets the standard. Since Sharia is interpreted differently, a lack of consensus has not aided standardizing efforts.

If there is no standardization, some worry conformity risks will only rise with further growth in this niche area. The issue of validity variance has been underscored by a dispute between a Lebanese bank and a Kuwaiti investment firm. The question whether a contract was compliant and thus sufficiently enforceable to require it be honored thereunder.

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 the rise in oil prices, Middle East investors have money to invest. While western countries mired in a continuing financial crisis need greater investments to bolster their markets. Islamic principles ban interest and contractual uncertainty, allow profit sharing and risk. This specialized market has grown at a doubling rate in recent years. A survey of 500 of the top institutions shows assets rose from USD 822 billion 895 billion between in 2009 and 2010. Eighteen new financial firms offering such options entered the market in 2010 and six traditional banks started providing SCF offerings.

By 2010 it was estimated over a trillion dollars were globally invested in these financial instruments. One reason may be that they have avoided speculative activities that have gotten mainstream financial organizations into trouble. Yet the Islamic securities market has revealed that it is not completely immune to the negative effects of insecurity and a reduction in demand. Hence it dipped to 15 billion in 2008 from a peak in 2007 of 35 billion. But the rise to 20 billion by 2009 revealed it was still considered to be a refuge.

Innovations have been introduced in the last twenty years to broaden the industry. One example is the market index developed for securities by Dow Jones. Sharia compliant financing in the United States is, however, still dominated by retail investments.

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    My name is Harry Delgado and I am a full time Internet and Small Business developer and marketer. Over 30 years in the Computer systems development, programming, hardware installations and support. Currently making a living from blogs like HJDS Computer Services , HJDS Investment Group and HJDS BlogBiz. You can connect with me via social media sites at Facebook - LinkedIn - Twitter - YouTube.