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Monday, 20 October 2008

Transparency key to syariah finance growth

by Salman Younis

Wednesday, October 15, 2008

IN RECENT years, a genuine interest in Islamic banking products and services among Muslim and non-Muslim communities alike has caused market forces to take over and steer growth.

Access to the Islamic banking sector has opened up for individuals and companies an alternative source of investment and funding, particularly at this juncture where the conventional banking sector is facing a serious credit crunch following investments in sub-prime US housing mortgages.

There is likely to be a bigger migration to Islamic financial services in certain markets due to the loss of faith in the conventional system.

In general, sukuk still offers a more secure and resilient investment opportunity, given that sukuk investors are paid a profit rate stemming from revenue streams of tangible assets and are therefore inherently safer than securitised bonds or structured products.

Innovation in terms of products and structures thus far has been driven by the need to ensure syariah compliance across different jurisdictions.

However, as the sukuk market matures, we expect a broadening of product development and innovation more towards meeting the requirements of the issuers and the investors whilst still keeping within the confines of the syariah requirement.

The speed and degree of success with which Islamic banking is integrated into conventional systems will, to a large extent, depend on whether the sector is perceived to be transparent and well regulated.

As such, it is in the best interest of governments and industry regulators in each country to communicate to the public what types of Islamic institutions and products are supervised and encourage Islamic financial institutions to carry out their own awareness campaigns.

Salman Younis is Asian chief executive of Kuwait Finance House , the Gulf state's biggest bank by market value.


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