continued... - Islamic Finance News

Islamic Finance news Guide 2008
Page 16
Developments in Global Islamic Financial Markets in 2007 and
Prospects for 2008 (continued...)
Egyptian equity prices fared badly in 2006 but the recovery
was much faster than in GCC markets, with the share prices
of Orascom Construction and the Orascom Hotels Company
doubling in value in 2007, although the rebound in Orascom
Telecom and Mobinil was more modest.
“Shariah compliant capital market
products are more successful, as
virtually all of the debt issuance
in the GCC and Malaysia is in the
form of Sukuk, and most managed
funds are Shariah compliant”
Price-to-earnings ratios for some of the Orascom companies
are starting to look stretched, but overall, there is still much
value stock for fund managers to pick in 2008, virtually all of
which is Shariah compliant.
Challenges for Takaful operators and Shariah
compliant investment companies
Islamic banks in markets where conventional and Islamic
banks co-exist appear to be unable to achieve more than
a share of 10% to 20% of total bank deposits. In sharp
contrast, Shariah compliant capital market products are
more successful, as virtually all of the debt issuance in
the GCC and Malaysia is in the form of Sukuk, and most
managed funds are Shariah compliant. There are good
reasons for being optimistic about Sukuk, not least as
Takaful becomes more popular in the largely under-insured
Islamic world.
Conventional insurance companies are the largest holders
of corporate bonds and as Takaful operations extend, a
major part of their assets are likely to be held in Sukuk given
the risks in excessive equity exposure. Providers of general
Takaful can cover their claims liabilities by holding Salam
Sukuk, while for family Takaful operators whose clients have
long time horizons, Ijarah, Murabahah and Istisna Sukuk are
more appropriate given their maturities.
In June 2007, Bank AlJazira reached agreement with
Prudential to establish a joint Takaful venture to serve
the potentially vast market in Saudi Arabia, for insurance.
An application for regulatory approval has already been
submitted to the Capital Markets Authority, and it is hoped
operations can begin by June 2008. The new venture,
Tadawul Takaful, will be a listed company on the Saudi
www.islamicfi nancenews.com
Arabian stock market, with Prudential as its largest single
shareholder.
Given the success of the IPO by the National Company for
Co-operative Insurance three years ago in Saudi Arabia,
prospects for Tadawul Takaful are encouraging. Other
international insurance companies interested in Takaful
include Allianz, which distributes its products from Bahrain,
and reinsurance companies such as Hanover Re and Munich
Re, both of which are increasingly active in the Gulf.
Shariah compliant investment companies such as Investment
Dar and the International Investor of Kuwait are likely to be
more in the news in 2008 as they spread their activities.
Investment Dar profi ts rose to KWD91 million (US$350
million) for the fi rst half of 2007, and are likely to jump to
KWD200 million (US$730 million) for the whole year, almost
double the 2006 level.
Investment Dar has established a banking subsidiary in
Bahrain. Its real ambitions are qualitative, however, rather
than merely quantitative, and have real signifi cance for the
future of Islamic fi nance. It is seeking to defi ne more clearly
what is meant by Islamic “values” in fi nance and communicate
this to investors and potential clients. Specifi cally, Islamic
fi nance is often perceived as an industry that revolves
around prohibitions, most crucially the prohibitions of riba
and gharar.
Although these prohibitions are fundamental to the industry,
expect to see more emphasis on positive values, not least
the concepts of partnership and participation long stressed
by Shariah scholars including members of the Investment Dar
Shariah Board. It is chaired by Sheikh Ahmed Bazie Al-Yassen,
with Dr Issam Khalaf Al-Inzi as their youngest scholar.
One area in which these values can be applied is private equity
and venture capital fi nance, where Musharakah provides
an ideal structure with considerable potential for further
innovation. Such innovations are already being explored by
academics, including the writer of this review. It may be too
soon to see their widespread application in 2008, but in the
longer term, their signifi cance will undoubtedly grow, with
the potential to transform much of the corporate sector in
Muslim countries into a truly Islamic economic system and
Shariah compliant fi nance as the means, rather than simply
an end in itself.
Professor Rodney Wilson is the
director of Islamic fi nance studies at
Durham University, UK