Wednesday, September 14, 2005

"Islamic Project Finance" and Cheapening the name of Islam

I had an interesting email exchange with a reporter earlier today. I will post the reporter's questions in red, and indented, and my responses thereof in the default color and paragraph style.


Some of the recent large project financings have carried Islamic tranches, but many of the participants seem to be the Islamic divisions of conventional banks. Some banking sources have suggested that the Shari'a boards of some of the Islamic banks, particularly in Saudi, regard these deals as not sufficiently shari'a compliant to permit their participation. I was wondering if you had looked into this matter at all or had any opinions on it?

My reply:

Conventional investment banks in particular have an obvious comparative advantage.
First of all, while every financial procedure can be "Islamized", project finance is an area where Islamization is particularly easy (e.g. BOT structures can easily be called istisna`, ijara and sale, with trivial modifications required, depending on your particular Shari`a board). The ease of Islamization in this area means that the more conservative Islamic banks are at the same disadvantage competing with the larger and more experienced conventional banks.

With regards to whether something is "sufficiently Shari`a compliant", that is a red herring. You can always hire the appropriate scholars, and add degrees of separation to make any structure "Shari`a compliant"... That is a given. The question is one of cost. In this particular area, as I have argued above, the main cost components are the ones for conventional project finance, where the smaller and less experienced Islamic banks are at a distinct disadvantage... (I am repeating myself, am I not :-)


Also, would you like to make any general comments about the growth of Islamic participation in the project finance sector? I'm happy to take on- or off-the-record information depending on your preference.

My reply:

It was a natural: banks know how to do this anyway, and -- as a London lawyer told me recently -- everything "Islamic" is currently the flavor of the month for investment bankers. Every project is now "the first ever" something (e.g. the first ever Islamic BOT to break the $1.5 billion barrier in the Emirate of Sharjah :-). This way, you get a bunch of free publicity (mainly from you guys), and perhaps if some gullible customers think that your product is in fact different from what they could get from conventional providers, you may charge them a little extra.


It seems that you're a bit skeptical (!) about the growth of Islamic finance, but isn't it useful in providing a little bit of extra liquidity?

My reply:

Not a bit skeptical: *very* skeptical and disappointed. What is marketed as "Islamic" is completely void of substance. Name one case where Islamic finance served a function that could not be served by conventional finance! In the meantime, "Islamic finance" experts deride Grameen and others active in micro-finance (which actually do serve a purpose that the HSBCs in the world would only support as part of their public relations, or community banking act type regulations) for not being "Islamic".

I am not sure about increasing liquidity: Islamic finance serves only to bring about market segmentation, which reduces overall liquidity.


...So if Islamic banks are serving a function which could easily be served by convetional banks in project finance and are not offering anything new....What could they do to change this? Do you think they should simply abandon the world of project finance for other initiaves or can they come up with something new that would compete pricewise with conventional banks but also be fully shari'a compliant (and not just massaged to look compliant)?

I guess that's the million dollar question!

My reply:

Allow me to answer in metaphor:

I am not saying that "Islamic restaurants" should not serve vegetarian salads, neither am I saying that their lettuce is not truly Shari`a compliant. I am merely saying that celebrating the launch of XYZ Islamic salad ("the first ever with three types of dark greens and tomatoes") can only be useful for cheap publicity. Its cheapness cheapens the name of my religion, too, but few seem to care.


Blogger heraish said...


Oh Brother El-Gamal,

Muslims love rent.

11:14 PM  
Blogger heraish said...


Sheikh Muhammed Salih Al-Munajjid discussed the issue of instalment sales as practiced by "Islamic Banks" in a audio lecture. He is an approved preacher by Sheikh Bin Baz and additionally has a Business related degree from the King Fahd University of Petroleum and Minerals.

In this lecture he implies that the difference between traditional finance and Islamic Finance is that in the Islamic version the financing party in a transaction must bear some tangible risk with regards to the item being financed.

If traditional finance is a salad then the Islamic Finance should be a bowl of fruit.

God knows best

8:36 PM  
Anonymous Mohammad Fadel said...

All credit providers, whether "traditional" or "Islamic" bear "tangible risk," i.e., the risk of default by the debtor. The creditor in an installment sale governed by Islamic law does not bear the "risk of loss" of the sold item, since the sold item passes by contract, not by discharge of the debt. It is hard to understand what additional risks an installment sale seller is supposed to bear for the transaction to be "sufficiently" Islamic.

9:17 AM  
Blogger heraish said...


The current efforts in Islamic Finance have produced products whose function is very similar to the conventional financial products.

Could we consider these efforts as setting the foundations upon which functionally distinct products can be developed at a later time.

God Knows Best

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