Islamic Finance Must Overcome Significant Obstacles
by Phillip Morton, Investors Offshore.com
29 June 2004

Despite strong demand for Sharia’h-compliant finance products, a major Middle Eastern investment conference heard that the Islamic finance industry still has to overcome some significant challenges before meaningful growth can be achieved.

This was a point alluded to in a speech by Mr. Esam Janahi, chief executive of the leading Bahrain-based Islamic investment bank, Gulf Finance House BSC, to the tenth Arab Investment and Capital Markets Forum in Lebanon, who observed:

“The reality is that our industry is very small and is largely made up of very small players. Yes, the larger conventional banks have opened Islamic windows or subsidiaries but the fact remains that their operations today are small.”

At the present time, one of the major hindrances to the development of Islamic finance according to Mr Janahi is the absence of an Islamic orientated interbank money market and a paucity of specialist Islamic brokers, compounded by a lack of medium to long term investment opportunities.

“There are no real capital markets for medium and long-term products, risk management products are still in their infancy and Islamic banks are still small and have insufficient capital,” he remarked, adding:

“Yes, today there are asset-backed Sukuk issues available that offer good yields but these suffer from relatively poor liquidity, unpredictable spreads between bid and offer prices, unreliable or non-existent market makers and so the list goes on,” lamented Mr. Janahi.

The industry has in the past struggled to find ways with which to effectively manage risk; and a lack of consensus between Islamic scholars as to what is acceptable under Sharia’h law has not helped matters, Janahi believes.

“Until very recently it was presumed that foreign exchange hedging was not allowed according to Islamic Sharia'h. However, we are pleased that recently banks have introduced new products, compliant to Sharia'h, that allow the purchase of long-term forwards and foreign exchange options,” he noted.

However, despite the challenges, Mr Janahi foresees demand driven growth in the Islamic finance industry.

“Our experience is that at this time we are actually seeing exponential growth in demand and we are working hard to find the opportunities to invest,” he commented.

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