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Islamic finance: the academic’s view

Tan: Is the current worldwide economic turmoil a
vindication of Islamic finance philosophy?
Wilson: Yes and no. The present problems are not due to interest rate developments, which obviously Islamic finance doesn't like, but they are a function of the securitisation of markets and of debt. The issue is therefore not the prohibition of interest being vindicated because interest rates have been very low and there are many other problems.

Islamic finance is a small part of the global finance system. How big could the volume of Islamic capital become?
Growth has slowed down a lot this year because the credit crunch is also having an adverse effect on Islamic finance.

Are there any figures currently available that measure the size of the market?
The figures from The Banker are probably more accurate than most and they have it at $500 billion. Obviously we don't know exactly how much it could grow, but it's not going to increase dramatically next year as oil prices are very low.

In a market where banks are extremely cautious and reluctant to lend, can business owners turn to Islamic finance as an alternative source of funds?
Yes, but Islamic banks aren't going to put big money into say, the UK or the US. However, they are an alternative source of funds to a limited extent. After they've recapitalised themselves there is also a crisis in the Gulf countries because of the declining property market and the decline in oil prices so their resources are limited.

Are Islamic banks in a stronger position to lend now relative to conventional banks?
They are in a stronger position than some conventional banks, because they are [considered] a classic banking model – they haven't securitised debt and they're not dependent on the wholesale markets. But they're not going to recapitalise Western banks. They're not big enough to do that and they are very cautious at the moment.

There are several challenges facing the industry, including a lack of scholars and issues with Shariah interpretation. Has there been much progress in the past year?
These are all short-term problems. In the long term I don't think they are problems, as there'll be more Shariah scholars as many young people are currently studying in this area. I think the interpretation of Sukuk (Islamic bonds) has led to healthy debate and that's not a bad thing.

The Islamic finance industry's growth in recent years has been driven, in part, by strong oil prices. It has been argued that this brought a great deal of money and wealth that needed Shariah-compliant investments …
The high oil prices were beneficial last year but now it's dropped. It will rise again but obviously the price of oil is very unstable and that's a problem.

Is there concern that the liquidity brought on by high oil prices is not sustainable now that oil prices are so low?
That's correct. It's not sustainable at the moment but it will come back as we will have higher oil prices in the longer term. This will have a strong, direct effect on Islamic finance.

How are Islamic hedge funds different from common hedge funds? Do they use short-selling strategies and derivatives instruments?
I don't think hedge funds are compatible with Shariah. There is an Islamic hedge fund but I don't think it's really viable because hedge funds short-sell and that's not permitted. Effectively, Islamic hedge funds do short-sell. I am very doubtful about hedge funds. It's not a very good time for them anyway.

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