Shariah finance and the credit crunch

[quigleydoor]

I've seen a few blurbs in the past weeks about Wall Street banks like Lehman Brothers issuing bonds denominated in Malaysian ringgit. I spent a few minutes looking into this. Information on this is not easy to google. There appear to be a number of factors here:

1) Malaysian ringgit appears to be undervalued (all the banks see this at once, of course)
2) Commodity price increases working in favor of ringgit

The most interesting and enduring factor is Malaysia's apparent leadership in sharia finance, i.e. financial services approved for use by Muslims. Sharia rules have insulated Islamic countries from the "global" credit crisis. Malaysia is thus in relatively good shape, as a financially sophisticated but Islamic economy. I found out that CIMB Private Bank in Malaysia is offering new types of sharia-compliant structured products. They are clearing a new path, away from the "rules-based" sharia products offered by London private banks, toward a "prinicples-based" sharia compliance regime (whatever that means). Apparently some Islamic private assets are gravitating toward Malaysian asset managers.

I don't know diddly about Islamic finance. But I there might be people here who can illuminate the rest of us.

[phirang]

sukkots are asset-backed, and yes, many of those assets are real estate. dubai has the largest islamic bank in the world (DIB).

[quigleydoor]

I found a speech (http://konsultasimuamalat.wordpress.com/2007/07/18/malaysia-the-role-in-the-growing-global-islamic-finance-industry/) by Dr. Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, 23 February 2007:

The Islamic financial system in Malaysia has evolved as a competitive component of the overall financial system, complementing the conventional financial system as a driver of economic growth and development. Malaysia will continue to foster the expansion of the dual banking system where both, the Islamic and conventional systems operate in parallel to deliver innovative and competitive financial products and services. The global experience has however shown that institutional and development financial infrastructure, the broadening and deepening of the financial markets, and a rigorous legal and regulatory framework is vital for the soundness, stability and resilience of the financial system. Developments in both domestic and international economic and financial conditions have from time to time tested the resilience of financial systems. Thus, Islamic financial institutions will not only be assessed by their Shariah aspects, but also by other factors including their effectiveness and efficiency, their resilience and their ability to evolve and reinvent to meet the challenges of the continuously changing demands as we advance forward.

After more than two decades of experience in the development of Islamic finance, we are now seeing the international dimension of our Islamic financial system gain significance. This has followed the increased foreign presence and participation in our domestic Islamic financial system. Malaysia has also ventured to participate in international financial markets and in term of presence beyond our domestic borders. More specifically, three new foreign Islamic banks are now participating in our domestic financial system. Following further liberalisation measures, there is also increased foreign participation in our domestic Islamic financial institutions. Our takaful industry has also become one of the success stories in Islamic finance. In the four new licences issued recently, it has comprised of joint ventures with foreign participation. The Malaysian bond market has also been liberalised to enable foreign entities to raise funds in our domestic market. Our experience in launching the first Sukuk has drawn significant interest by corporates and sovereigns for raising long-term financing based on Islamic structure instruments.

Also I see that shariah and the Western financial system were discussed here a few months ago (http://www.itulip.com/forums/showthread.php?t=3479). The sukuk markets seem to have been growing very rapidly since about 2003. Here (http://www.sbp.org.pk/departments/ibd/sukuk-risks.pdf) is an academic paper form 2004 on risk management of sukuk investments. I think this could be an important new area of global finance. (The recent ruling by the Accounting & Auditing Organization for Islamic Financial Institutions did not perturb Islamic financial engineers too much.)

It looks to me like Malaysia is a good diversification theme. How can a small fry American buy into this?

[c1ue]

QD,

I'd verify first that the 'hot money' laws passed from the Asia crisis have been changed.

Otherwise you may find getting in easy, getting out impossible.

[quigleydoor]

I'd verify first that the 'hot money' laws passed from the Asia crisis have been changed.

Otherwise you may find getting in easy, getting out impossible.

Good point, c1ue.

I was wondering if anyone knew about ADRs of Malaysian financial companies (Pink Sheet OTC securities okay with me), any closed-end mutual funds that seem relevant, or any western or Japanese banks embarking on joint enterprises in this area.

Another idea is to invest in the borrowers, i.e. infrastructure holding companies who are issuing sukuks. Or infrastructure construction companies.