Islamic finance: first steps towards new opportunities

2012-06-finance-islamique

The Islamic Finance sector has grown by 15% per year over the last ten years and the sums involved in 2010 are estimated to amount to 1,000 billion dollars. Standard and Poor’s estimates that the potential market in this sector could be 2,900 billion dollars. The French legal and tax framework offers an opportunity worth consideration by Monaco’s financial markets.

Islamic finance, which came into being in the 1970s, complies with Muslim law and jurisprudence (Chari’a). It is based on the following principles: interest is prohibited (Riba), speculation is forbidden (Gharar), as is uncertainty (Maysir), no investment is allowed in so-called “illicit” assets – arms, gambling, alcoholic drinks, etc. (Haram), profits and losses are shared, and all financial operations must be based on an underlying asset.

Expectations of the Muslim clientele

Muslim HNWIs are increasingly anxious to structure the wealth in compliance with Coranic law. The main types of investment products requested are Islamic bonds (Sukuk), shares listed on the Dow Jones Islamic Market Index (DJIM), pooling of risks (Takaful), Chari’a-compliant structured products, and Islamic funds.

Chari’a Compliant financing

Islamic financing techniques differ from the traditional loan model (creditor / borrower), since they are based on partnership (sharing of risks and profits). The most frequently-used financing contracts for individuals are rental or leasing contracts (Ijara) and purchase-resale or instalment purchase contracts (Mourabaha).
Islamic financing is a young, dynamic industry that has created something of a craze on account of its novel financial model. The UK has already modified its regulatory framework to encourage this type of investment. From a tax angle France too has begun to adapt its regulations to this demand; development in this sector involves high stakes, encouraging competition between financial centres.