Subprime: 'No market discipline'

Johannesburg - An Islamic finance scholar has blamed a lack of market discipline for the US' subprime crisis, suggesting conventional markets could learn from Islamic finance structures.

"We need to find a way to reintroduce discipline into financial systems," said leading Islamic finance scholar Aly Korshed of UK-based Elite Horizon Economic Consultancy.

Korshed was speaking at the opening of the Islamic Finance & Investment World Africa 2008 conference in Sandton, north of Johannesburg, on Tuesday morning.

Industry professionals have gathered to discuss some of the prospects and challenges facing global financial markets to investigate potential investment structures for both Muslim and non-Muslim communities.

The US' subprime crisis has directly or indirectly affected financial systems across most stock markets around the world.

During his opening remarks, Korshed implied that conventional markets could perhaps take a leaf out of Islamic finance structures in terms of re-instilling this discipline to build a sounder offering.

Islamic finance places a number of restrictions on community members entering into debt-type financing transactions, investments and general banking activities.

In demand

Ahmed Moola, the managing director of Absa Islamic Banking in South Africa, says the bank is seeing increasing demand for ethically based financial businesses from both the Muslim and non-Muslim communities.

While Islamic financial structures were relatively new - having evolved over the last 30 years - participants still needed to identify ways in both Islamic and conventional financial systems could interact., said Korshed.

Looking at the existing Islamic financial structures in South Africa, Moola said "Islamic business is no longer an 'exotic nice-to-have', but a basic business requirement."

Growing market

It is estimated that only 10% of the global Muslim market is catered for in terms of financial products. This infrastructure however has not kept pace with the increasing wealth of the Muslim-based community as oil-rich countries have seen their economies boosted significantly.

With debt instruments prohibited by traditional Islamic finance models, Moola says that the industry seeing an increased interest in traditional equity type investments such as exchange-traded funds (ETFs) which have increased in popularity in both South Africa and abroad.

However investment managers operating in the Islamic finance market are often faced with many restrictions on where they may invest.

Investments in banking, gambling and alcohol companies are prohibited. for instance.

One of the key issues that the conference will be addressing is whether or not Islamic structured investments can compete with more conventional investment managers who do not share the same restrictions.

- Fin24.com