VoxEU: Quo Vadis Islamic Finance?

A good article on Islamic finance (if you're interested in the subject) at VoxEU, the European economics blog. The three authors, all of whom work for the International Monetary Fund (IMF), give a brief analysis of the state of the Islamic finance market, a listing of significant challenges facing the industry, and some concluding remarks. Below are some excerpts, primarily from the introduction and the conclusion; the section on challenges is significant and noteworthy, but I'll let my readers go to the original post to read it if they're interested.

BTW, in case you're unfamiliar with the Latin phrase, "Quo Vadis?", it means, "Where are you going?"

Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years (Economist, 2008; Financial Times, 2008). This rapid growth has been fueled not only by surging demand for Sharia’ah compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as takaful), and Islamic branches of conventional banks.

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...[P]erhaps the most striking has been the growth of sukuk, the most popular form of securitized credit finance within Islamic finance. sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in shari’ah-compliant finance contracts into marketable securities without interest rate charges.

The sukuk market has held its own amid groundswell concern about the credit crunch and dysfunctional money markets. Although the current level of issuance remains a fraction of the global volumes of conventional bonds and ABS, the sukuk market had soared in response to growing demand for alternative investments before the first episode of severe market disruptions in 2007 showed first effects (Jobst et al, 2008). Gross issuance of sukuk has quadrupled over the past few years, rising from $7.2 billion in 2004 to close to $39 billion by the end of 2007, owing in large part to enabling capital market regulations, a favorable macroeconomic environment, and large infrastructure development plans in some Middle Eastern economies (see Figure 1).

By 2008, however, sukuk volumes dropped to $15.2 billion (about 50%) while the structured finance market dried up with just $387 billion issued (down by about 80%) during the same time. Factors contributing to this decline include the presentation of new rules on sukuk, the global financial crisis, and Gulf states’ currency risk. The slowdown in issuance was most pronounced in Malaysia, where fewer domestic transactions at smaller volume have balanced the market shares of Gulf Cooperation Council and Southeast Asian countries.

The rapid evolution of Islamic finance activities points to the available profit opportunities that beckon. This in turn has prompted a vetting process among a number of jurisdictions around the world to establish themselves as leading Islamic financial centres. In this regard, the case of London is perhaps the most remarkable insofar as it has managed to extend its leading position in world financial markets to become a center for Islamic finance. Similarly, Hong Kong, New York, and Singapore are also making important advances to accommodate Islamic finance within their jurisdictions and aspire to join the ranks of the more established Islamic centers such as Bahrain, Dubai, and Kuala Lumpur.

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Islamic finance faces many challenges, including recent regulatory changes, illiquidity issues, liquidity risk management concerns, need for harmonized regulation, regulatory disparity amongst national supervisors, and a potentially unlevel playing field.

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Despite the number of challenges outlined above, the long-term prospects look promising for Islamic finance. Financial institutions in countries such as Bahrain, the United Arab Emirates, and Malaysia have realized considerable demand for shari’ah-compliant assets and are gearing up for more shari’ah-compliant financial instruments and structured finance. In addition, financial innovation, driven by both domestic and foreign banks, will promote alternatives modes of intermediation and contribute to further development and refinement of shari’ah compliant derivative contracts.

As Islamic finance comes into its own, greater regulatory harmonization will be inevitable. Recent efforts have addressed legal uncertainty imposed by Islamic jurisprudence, discrepancies of national guidelines, and poorly developed uniformity of market practices. The Islamic Financial Services Board has moved ahead with its standardization efforts of the Islamic financial services industry that will foster the soundness and stability of the system. Globally accepted prudential standards have been adopted by the Islamic Financial Services Board that smoothly integrate Islamic finance with the conventional financial system.

Finally, despite the declining global sukuk issuance in 2008, emanating from both the Accounting and Auditing Organization of Islamic Financial Institutions decision and the impact of the financial crisis, the sukuk market will regain momentum, driven by demand from financial institutions, insurance companies, and pension funds across Islamic and non-Islamic countries. Many challenges still lie ahead, but the banks’ search for profitable opportunities and the ensuing financial innovation process in tandem with favorable regulatory developments at domestic and international levels will ensure that the Islamic finance industry will continue to develop at a steady pace in the long-run. The jury is still out how Islamic finance will be affected in the short-run by the repercussions of the global financial crisis.

HT: Economist's View

On Global Cities

The following appeared in ShanghaiDaily.com. Read the article first; I have some comments down below.

Is there anything negative about a global city?

Sassen: Global cities are two-edged swords. They bring economic dynamics - and that means jobs, life on the streets at night, vibrant restaurants, and so on.

But they do create 20 percent of the population which is extremely prosperous and a risk that they will take over key areas of the city with luxury office buildings, luxury housing and consumption spaces. This displaces smaller shopkeepers, the old modest middle classes. They lose.

My research suggests that ultimately cities are better off being dynamic (and hence global cities) but they do need political and civic leadership to balance out the extreme outcomes that markets left to themselves can produce.

European cities are much better than US cities. New York, the ultimate market town, has the highest share of very rich people and very powerful firms in the US and the highest share (over 20 percent) of officially counted poor ... and, according to the most recent count, over 100,000 homeless. That shows something about matters left to markets.


Will a global city lose its historic identity?

Chen: There is a tendency for cities to lose their historical identities and cultural traditions as economic forces push them to become more important centers in the global arena.

Cities like Mumbai and Dubai are doing what Shanghai is doing. They are all in the same race, running in the same direction, and trying to get to the same destination.

In doing so, these cities tend to lose their distinctive features and identities as they tear down traditional neighborhoods to build modern skyscrapers.

Shanghai has already gone far down this road. But global cities don't have to lose their historical and cultural identities.

In fact, some of Shanghai's traditional features are resilient enough to survive and even thrive in the face of penetrating global economic and cultural forces.

Some of the research I and a Fudan University collaborator have done has demonstrated a mixed local consumer lifestyle that reflects an interesting blend of being conscious of global brands and traditional motives. This will be shown in my work ''Shanghai Rising'' which will be published in Spring 2009.

Saskia Sassen is the Lynd Professor of Sociology and member of The Committee on Global Thought, Columbia University. Chen Xiangming is director of the Center for Urban and Global Studies and professor of Sociology and International Studies at Trinity College, Connecticut.

For most of my life I've lived in large cities (Phoenix, Arizona; Busan, South Korea, and Singapore) although, of the three, I think only Singapore classifies as a "global city." Both Phoenix and Busan try hard to be global cities, but neither succeeds, IMO, especially when compared to their larger neighbors, Los Angeles and Seoul, respectively.

Given the trade-off between vibrancy vs. pollution, I'd go with vibrancy any day. A town or city that cannot provide for its inhabitants economically is not worth living in. Pollution can be a problem, although, ironically, the cities I've lived in didn't have pollution problems so much of their own making, but due to either natural causes or from someone else's making (the winter temperature inversion in Phoenix and the "yellow dust" in Busan, blown in from the Gobi desert; the "haze" in Singapore that blows in from the Sumatran forest fires, where the Indonesians continue to practice slash-and-burn farming; likewise, in Hong Kong, the air pollution that blows in from the Chinese factories in the Pearl River delta).

The problem of the homeless seems to be more of a problem due to high costs of living. Granted, I haven't been to a whole lot of countries, but those countries that I've been to with the worst homeless problems were Japan and the US, both of which have very high costs of living. In Korea, Malaysia and Singapore, where the costs of living are lower, homelessness isn't much of a problem. When Dr. Sassen said, "That shows something about matters left to markets," from my own observations, the problem of homelessness is primarily due to the markets. The markets have priced people out of homes. People aren't able to cope with the high demands made on them by the markets, and they fall by the wayside. Those who think that the markets are the end all and be all, the panacea for every economic problem a society faces, are naive.

As for losing historic identities, I don't think this is much of a problem if local governments keep on top of the issue. Archaeology magazine had a recent article about how people in Beijing have been working to save the residential neighborhoods known as hutongs ("alleyways" flanked by courtyard houses). However, in my three cities, maintaining historic identities hasn't been a problem. The business districts weren't expanding to the point where they threatened older neighborhoods (as in the case of Beijing). However, I do think communities need to balance between creating the best business, industrial and residential facilities available, preserving one's past as best one can, and maintaining the heartlands (as we call the residential neighborhoods here in S'pore) so that all can live affordably.

HT: Economist's View

Incredible, Uniquely, Sparkling, Bloody Asia

Over the past few weeks, Milady and I have been discussing some of the regional tourism campaigns. The problem, IMO, is that several of these campaigns have rather simple and, thus, boring slogans. The three primary offenders are Incredible India, Korea Sparkling (which is normally said as if there’s a comma between "Korea" and "Sparkling"), and the local slogan, Uniquely Singapore. It’s not that the advertising campaigns are done badly; in fact, all three campaigns are quite professional with decent television commercials. It’s just that the slogans are not terribly interesting.

Two slogans that I find a little better are Malaysia, Truly Asia and Australia’s So Where the Bloody Hell Are You?, which, apparently, had generated some controversy in the UK and Canada; in the UK because of the word "bloody," and in Canada due to the "unbranded alcohol consumption" at the beginning of one of the commercials (and also for the use of the word "hell"). Singapore avoided the problem by having the slogan advertised here as "So where are you?"

There are a couple of countries that don’t advertise regionally, which is a little surprising, namely Indonesia, the Philippines, and Hong Kong. The most recent entrant in the tourism sweepstakes is Vietnam, the Hidden Charm, which, unfortunately, seems to have followed the lead of India, Korea and Singapore with a simplistic slogan.