118 Islamic Finance in Practice
events such as the sub-prime crisis being experienced. The regulators tend
to be reactive rather than proactive. These derivative products and their
like should be scrutinized now rather than later.
On the other hand, mortgage market defaults in the US have urged
conventional banks and institutions to seek access to the booming Arabian
Gulf economies, and they have become the largest investors ofsukuk,
prefering to be able to trade. Geert Bossuyt, the head of Middle East
structuring at Deutsche Bank, stated the following:Now we have more Western investors, notnecessarily Islamic
investors. They tend to have a more active view in terms of
trading in the market and are more driven by arbitrage
opportunities than interest environments.Although a number ofsukukare listed on exchanges in the Middle East,
Europe (London) and Asia (Bursa Malaysia), they are not liquid, due to
factors such as a lack of availability of stock with most of the issue being
bought and held by investors to maturity due to high cash liquidity and
shortage of investable issues, a lack of a diverse pool of investors, and
standardization and regulatory issues.
London has made an effort to develop asukuksecondary market to take
the lead among the established financial centers to become the world’s
leading financial center and also the main Islamic finance hub away from
the Middle East and South East Asia. Malaysia has a roster of more than 40
sukukslisted and averaging around 100 trades weekly, though the typical
transactions are aroundthe $5 million mark.Critical mass
For the success of any initiative of the nature of Islamic finance, it needs to
have a secondary market otherwise growth will be constrained. We have a
“catch-22” situation in that the secondary market is essential, but requires
a critical mass. However, as the sector is relatively young, we have excess
liquidity and not enough product thereby creating a mismatch that needs to
be addressed to ensure smooth development of the sector.
A Shari’a board’s involvement maintains fairness in the products and the
elements of Shari’a are very risk averse; therefore you have a stable and
robust initiative that as it grows will become more and more attractive to
non-Muslims as well, thus prompting growth of the sector. The Ethical and
Social Responsible Investment markets are also likely to participate in the
Islamic finance sector. As the sector develops, it will be a bigger market, as
it is open to all whereas the conventional market excludes Muslim investors
and financial market participants.
Lately, it seems that the appetites of non-Middle Eastern investors has
been targeted towards the booming emerging markets of the Middle East