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Credit crunch may spur Shariah products

01 May 2008

By Hannah Smith,

Trustnet Correspondent

Until quite recently Shariah-compliant financial products have catered mainly to the Middle Eastern market. But in the aftermath of the credit crunch, UK and European investors are increasingly looking towards Islamic finance, which its proponents say is more transparent and lower risk than some mainstream investments.

A raft of products have come to the retail market to meet this demand, and there are more in the pipeline.

Saftar Sarwar, an investment manager at Barclays Wealth, says he expects to see further innovation in the area of Islamic structured products and bonds, adding Barclays Wealth is in the process of developing a Shariah-compliant hedge fund.

“There is more demand from the Middle East, but these solutions could be just as valuable to Muslim investors in the UK."

Some of the more established products in this arena are offshore vehicles, although they are accessible to UK retail investors. They include SWIP’s Global Islamic Equity fund, a Luxembourg-domiciled SICAV launched in 2005, and HSBC’s four year old Amanah Global Equity Index, also a SICAV.

New Star and Emirates Investment Services recently launched an Islamic Global Property fund aimed at high net worth investors, with a $25,000 minimum on the retail share class. It is only available to investors in the Middle East, but it is conceivable products like this could open up to the onshore retail market, especially as bearish investors move their money out of risky asset classes.

Junaid Bhatti, an independent consultant on Islamic finance, said it is difficult to know exactly how many Islamic products are available in the UK market because many institutions create bespoke offering for their clients.

“What we can say for sure is that the pace of development has significantly increased in the last 12 months. In the past year we have witnessed the authorisation of two more stand-alone Islamic banks and at least a dozen new Islamic global depositary receipts (GDRs) and Sukuks (Islamic bonds) have been admitted onto the London Stock Exchange."

It has been reported that it would be next to impossible for Islamic banks to suffer the kind of losses we have seen from the major UK banks in the wake of the credit crunch. Bhatti said this is due to greater transparency in their dealings, and their generally cautious stance.

"It would be very difficult for Islamic finance to reach a credit-crunch style crisis. The principles underlying Islamic finance shift ensure risk is more evenly distributed between banks and customers than conventional finance. The banks offering Shariah-compliant finance are therefore forced to adopt a more cautious position."

As a result, Islamic institutions have healthier balance sheets and greater liquidity, which is likely to attract increasingly risk-averse investors.

Bhatti adds: “I believe Shariah-compliant investments have a great opportunity to capitalise on the woes of the finance market. With many conventional financiers currently running on empty, they could well be forced to switch more of their activity to Halaal investments in order to take advantage of the excess liquidity sitting within Islamic financial institutions.”

1 May 2008

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