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Saturday, 25 October 2008

European takes closer look at Islamic financing

PARIS: With commercial bank financing tight, Europeans have been taking a closer look at Islamic banking.
"The potential is there," Ahmad Jachi, the first deputy governor of the Central Bank of Lebanon, said at a conference this past week in Paris. "It's a matter of really enabling and creating the market."
Islamic banking has already been integrated into the British and German banking systems, and banking executives at the conference said efforts were under way to allow Muslims in France to bank and invest under regulations that conform to Shariah, the legal code of Islam.
Estimates of the Islamic banking market's current size vary from $500 billion to $1 trillion. It has only about 5 percent of the overall banking market, but attendees at the conference, which was sponsored by The Economist, said Islamic banking has a huge potential for growth, since one-sixth of the world's population is Muslim.
The International Monetary Fund estimates that the Islamic banking sector has grown 10 percent to 15 percent a year over the past decade.
There is no specific code to govern Islamic financing. Businesses that are trying to be compliant usually set up a board of Islamic scholars who study the investment structures and products and reassure investors or customers that their money is being held under Shariah guidelines. Mufti Abdul Kadir Barkatullah, an imam in Britain and a Shariah scholar who is regularly consulted by corporations, said Islamic banking regulations generally require investors to be "very prudent and careful with your money, and you only put your money to very good uses."
One general principle that has proved useful of late is that banks are not allowed to be heavily leveraged or to take too many risks.
The lender and the borrower share the risks and the rewards of a loan - which means loans can have no interest rates attached. Investments are also not allowed to profit from an enterprise involved with conventional finance, weapons, tobacco, gambling, pornography or alcohol.
One company to benefit from Islamic banking is Velcan Energy, which has 200 employees, is based in Paris and develops hydropower plants in Brazil and India. Antoine Decitre, managing director at Velcan, said he was contacted by an Islamic bank, which he was not authorized to identify, that said it was interested in the company because it was environmentally friendly and its projects helped poor people in developing countries.
Velcan was able to get capital to execute its projects without having to wait for credit markets in the West to unfreeze, Decitre said. But the process has taken some time because the practices were new to Velcan. "There are many conflicting views about what you and cannot do," he said. "So take your time well in advance."
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