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| Dubai Ports and the future of International Finance |
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In addition to the issues brought out by the controversy over the Dubai Ports World, a key factor affecting the shift in funds has been the growth of the Islamic finance market over the past few years. This specialised market has developed due to the Islamic prohibition on dealing in interest, which leads to difficulties with conventional banking products, whether home mortgages, business loans or private investment management. As Islamic awareness has increased over the past few decades, observant Muslims have been looking for alternatives to the conventional banking system, which of course is still prevalent in the Islamic world.
In order to satisfy this demand, banks in the Islamic world have provided products that they claim conform to the principles of Islamic law, while at the same time providing terms comparable to the conventional products. The demand for such products has grown steadily over the past 15-20 years and now the Islamic banking market is worth over $260bn and is serviced by over 250 different banks globally.
The latest Islamic finance product to witness growing popularity, the sukuk, is tailored as an investment product similar to conventional interest-bearing bonds. The term sukuk is the plural of sakk, which means a promissory note and is the origin of the English term cheque. In the Abbasid era, such promissory notes were issued by the central bank in Baghdad and accepted as far away as China.
Conventional bonds are offered by businesses and government agencies as a way to garner loans, but since they offer a guaranteed interest rate, or coupon, this method of debt financing would not be suitable for Islamic finance. These modern sukuks however claim to offer investors an Islamic alternative, where the return comes from guaranteed rent of assets (usually property), rather than interest. The sukuk market, currently estimated at around $7bn, is still small but experts expect sustained growth in the next decade.
The development of a credible Islamic banking sector, building upon the huge resources at the disposal of the oil-rich Gulf states, could lead to the emergence of a new global centre of finance with the ability to rival New York, London or Tokyo. This may be buoyed by the fact that increasing doubts about the performance of the American economy are prompting foreign investors to look for alternatives further afield. The performance of American financial markets and products has consistently generated a huge demand for the dollar over past few decades, which has in turn enabled America’s consumption of foreign goods – and the attendant trade deficit – to reach epic proportions. This is in addition to the withdrawals prompted by stricter regulations in the US stock markets, which have led many European firms to delist from Wall Street in favour of London’s Stock Exchange. However, this process has now reached a level where fund managers and foreign treasuries are considering the wisdom of continuing to invest in dollar-denominated securities. These concerns have led to recent falls in the value of the dollar, especially against Asian currencies. An ambitious approach to Islamic finance and new products like the sukuk could offer a new alternative model of investment of global significance. For different reasons, Islamic banking is unlikely to offer such options while utilising the existing models.
However, while there are huge funds available in the Islamic market, currently much of these are actually being invested in existing markets, whether the United States or Europe. It would appear therefore that the immediate prospects of a new, global financial centre of this nature emerging are small.
Many of the Islamic investment funds buy shares from the Dow Jones Islamic Index, which excludes so-called ‘sin stocks’ such as shares in alcohol, tobacco and gaming companies. The introduction of the index is a shrewd move from the New York-based exchange, which has been able to take advantage of the developing area of Islamic finance. While many of the companies listed in the index are from Muslim countries, a large number are from Europe and America.
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