Egypt, Elsewedy review progress on Ain Sokhna phosphate complex    US employment cost index 3.6% up in year to June 2025    Egypt welcomes Canada, Malta's decision to recognise Palestinian state    Pakistan says successfully concluded 'landmark trade deal' with US    Sterling set for sharpest monthly drop since 2022    Egypt, Brazil sign deal to boost pharmaceutical cooperation    Modon Holding posts AED 2.1bn net profit in H1 2025    Egypt's Electricity Ministry says new power cable for Giza area operational    Egypt's Al-Sisi, Italian defence minister discuss Gaza, security cooperation    Egypt's FM discusses Gaza, Nile dam with US senators    Aid airdrops intensify as famine deepens in Gaza amid mounting international criticism    Egypt exports first high-tech potato seeds to Uzbekistan after opening market    Health minister showcases AI's impact on healthcare at Huawei Cloud Summit    On anti-trafficking day, Egypt's PM calls fight a 'moral and humanitarian duty'    Egypt strengthens healthcare partnerships to enhance maternity, multiple sclerosis, and stroke care    Egypt keeps Gaza aid flowing, total tops 533,000 tons: minister    Indian Embassy to launch cultural festival in Assiut, film fest in Cairo    Egyptian aid convoy heads toward Gaza as humanitarian crisis deepens    Culture minister launches national plan to revive film industry, modernise cinematic assets    I won't trade my identity to please market: Douzi    Sisi sends letter to Nigerian president affirming strategic ties    Two militants killed in foiled plot to revive 'Hasm' operations: Interior ministry    Egypt, Somalia discuss closer environmental cooperation    Egypt's EHA, Huawei discuss enhanced digital health    Foreign, housing ministers discuss Egypt's role in African development push    Egypt reveals heritage e-training portal    Three ancient rock-cut tombs discovered in Aswan    Sisi launches new support initiative for families of war, terrorism victims    Egypt expands e-ticketing to 110 heritage sites, adds self-service kiosks at Saqqara    Egypt's Irrigation Minister urges scientific cooperation to tackle water scarcity    Palm Hills Squash Open debuts with 48 international stars, $250,000 prize pool    On Sport to broadcast Pan Arab Golf Championship for Juniors and Ladies in Egypt    Golf Festival in Cairo to mark Arab Golf Federation's 50th anniversary    Germany among EU's priciest labour markets – official data    Paris Olympic gold '24 medals hit record value    A minute of silence for Egyptian sports    Russia says it's in sync with US, China, Pakistan on Taliban    It's a bit frustrating to draw at home: Real Madrid keeper after Villarreal game    Shoukry reviews with Guterres Egypt's efforts to achieve SDGs, promote human rights    Sudan says countries must cooperate on vaccines    Johnson & Johnson: Second shot boosts antibodies and protection against COVID-19    Egypt to tax bloggers, YouTubers    Egypt's FM asserts importance of stability in Libya, holding elections as scheduled    We mustn't lose touch: Muller after Bayern win in Bundesliga    Egypt records 36 new deaths from Covid-19, highest since mid June    Egypt sells $3 bln US-dollar dominated eurobonds    Gamal Hanafy's ceramic exhibition at Gezira Arts Centre is a must go    Italian Institute Director Davide Scalmani presents activities of the Cairo Institute for ITALIANA.IT platform    







Thank you for reporting!
This image will be automatically disabled when it gets reported by several people.



Islamic finance resists equity shift, may stunt growth
Published in Daily News Egypt on 27 - 04 - 2010

KUALA LUMPUR: When Kuwait Finance House Malaysia helped develop a $1.3 billion real estate project in the country in 2005 as a partner in the deal, Islamic equity property ventures were a rarity.
Five years on, the bank is embarking on its fourth building project using a similar equity concept but few others in the industry want to follow the same path, reflecting Islamic finance's slow and difficult shift away from debt instruments.
Debt funding's dominance of sharia finance has earned the $1 trillion industry the tag of "copycat" and limited its growth as critics question its ability to offer a fairer way of sharing risks and rewards that truly distinguishes it from conventional banking.
"Profit-sharing or equity structures are the true way of doing Islamic financing," said Siti Mariam Mohd Desa, Kuwait Finance Malaysia's real estate advisory director.
"It is a different concept because if you were to give out straight loans, you may as well go to a conventional bank."
As the global financial system emerges from the debt crisis and banks shy away from assuming added risks, practitioners want Islamic finance to rely more on partnership structures and less on straight financing which they say has created a brand of finance which is sharia compliant in form, but not in spirit.
They say equity financing such as musharaka and mudaraba are closer to the sharia's aim of ensuring gains and losses are shared equitably and a shift back to it would help banks win new business beyond its traditional markets.
While Islamic finance has flourished in Muslim markets such as the Middle East and Malaysia, many non-Muslims are unconvinced, saying the industry differs from conventional banking only in name.
"We cannot add value in markets which are mimics of conventional markets. At the moment, it's difficult to see the value-added," said Safdar Alam, head of Islamic structuring at JP Morgan in Bahrain.
"It's a real opportunity, with the increased awareness globally of Islamic finance, to demonstrate this value and the difference and benefits. This is a chance that we might miss if we don't do this well quite quickly."
But banks' reluctance to bear the risk of projects funded, companies' unwillingness to share profits and scarcity of banking capital make equity financing an unappealing proposition.
The recent property slump in the Gulf, where equity financing is more common, badly hit Islamic firms such as Bahrain's Gulf Finance House and could compound banks' fears of becoming project partners.
Kuwait Finance Malaysia, which uses the musharaka equity structure to develop real estate, had a non-performing financing level of 6.73 percent in September, more than thrice the industry average.
Its parent Kuwait Finance House, the Gulf state's top Islamic bank, posted a 24 percent drop in net profit in 2009 to 118.74 million dinars.
Equity financing models were born out of a belief in Islam that the financier must share the risks if he wants the rewards and that profits should be earned through enterprise.
While equity funding is commonly associated with higher returns, bankers say it may not necessarily be more profitable than debt as the latter allows for higher leverage.
Traditionally, popular Islamic debt-based instruments such as istisna and murabaha have been likened to interest-based loans where banks take limited risks and are guaranteed a return.
But as Islamic finance grew beyond traditional roles such as agriculture financing to funding government budgets and billion dollar real estate projects, some banks began leaning more towards debt instruments to limit their risks.
As banks' capital grows scarce, they will be wary of parting with large sums to back equity ventures, said Mohammad Faiz Azmi, PriceWaterhouseCoopers's global Islamic finance leader.
"On the demand side, the issue is that there are enough corporates who are essentially willing to give up the upside?" Faiz said, referring to profit-sharing structures.
"The reality is that the people that would want to have equity forms of financing are usually the ones that you want to avoid lending money to anyway."
Some practitioners say the push for more Islamic equity financing is ill-conceived.
"From the sharia's perspective, there is no such evidence to support (the view) that Islamic banks or whoever wants to do business should do profit-sharing more than debt-based," said sharia scholar Aznan Hasan, who advises Barclays Capital London and Malaysia's stock exchange operator Bursa Malaysia.
"Whether it is debt or equity that suits you better, it depends on commercial and business decisions, not sharia matters.


Clic here to read the story from its source.