Economy, Business And Markets

Islamic Finance Key to Market Expansion

Islamic Finance Key to Market Expansion
Islamic Finance Key to Market Expansion

A  report released by the International Monetary Fund (IMF) this week showed a growing interest in Islamic banking among the lenders, which is expanding in much of the world. Last October, the IMF launched consultations with an external advisory group on Islamic finance, The Economic Times reported.

Islamic finance is expanding day by day in the international financial markets. The Malaysian financial market has flourished greatly, enticing customers from across the world into the biggest Islamic finance market. In Iran, however, Islamic finance has not yet received due attention. Given that Iran is in effect cut off from the rest of the financial services industry due to international sanctions [imposed against the country by the West over its nuclear program] and considering the popularity of Islamic finance due to the risk sharing incentives, Iran’s equity market needs new contracts in accordance with Islamic finance.

In an interview with Financial Tribune, Amir Abbas Zinatbakhsh, a PhD candidate at the Global University of Islamic Finance (INCEIF) explained the advantages of Islamic finance and how it can help boost Iran’s equity market, as well as the the required infrastructures to attract fund managers.

Stability is a key factor in financial systems, noted Zinatbakhsh, elaborating that while the cash flows in the developed countries tend to get absorbed mainly in securities, parallel markets such as currency, land, etc. are lucrative options for investors in Iran as speculations may help them gain irregular profits, which however leads to squeezing the equity market.

Elaborating on various types of risks, he said people often have three choices to dampen the risks, which are transferring, shifting or sharing the risk. “For instance in the US, the Federal Reserve or the government shift the losses inflicted by insolvencies to the third party, which has been rejected by the Islamic finance.”

“Islamic finance emphasizes risk-sharing, the main instruments for which are Mudarabah (profit sharing) and Musharakah (joint venture) contracts, which are even observed in Europe, however labeled differently,” said Zinatbakhsh

Musharakah or Musharaka literally means sharing. In the context of business and trade it means a joint enterprise in which all the partners share the profit or loss of the joint venture. Mudarabah is a special kind of partnership where one partner gives money to another for investing it in a commercial enterprise.

Capital market, money market and insurance are three crucial elements of financial markets that should be addressed clearly in order to assure the emerging market investors.

“An integrated legal framework, consolidated with reference to other internationally well-known frameworks, and a regulatory system are essential for every financial market to enable it to address concerns regarding corporate law, bankruptcy, and consumer protection,” said Zinatbakhsh on the preparations to be made for inflow of capital following a possible lifting of sanctions against Iran, adding: “A solid and effective framework can help prevent corruption.”

“The Securities and Exchange Organization (SEO) should come up with a clearly drafted plan to smoothen the path,” suggested Zinatbakhsh.

Speaking on financial instruments, he mentioned Sukuk —the Islamic equivalent of bonds— as a practical and fair financial instrument, noting that more than 70 percent of International sukuks, worth more than $2800 billion, are currently issued in Malaysia.

“Sukuk is an instrument that can simultaneously assume the role of bonds and stocks. In sukuk, the real ownership of the underlying asset must be transferred to investors, whereas this is not the case in bonds,” he explained.

Considering that the global Islamic finance asset size currently exceeds $2 trillion, creating a solid legal and regulatory system can dramatically increase cash inflow to one of the most attractive emerging markets in the world.