Islamic finance industry charts high-tech future

A trader walks underneath stock display board at the Dubai Stock exchange. Islamic finance has become a $2 trillion business over the past two decades, covering everything from bonds to buying a car. (AFP)
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Updated 13 April 2020

Islamic finance industry charts high-tech future

  • Based on the concept of shared profit and loss, the sector has in its relatively short existence grown to be worth $2.1tn

DUBAI: “Is it halal to buy shares in Tesla?” a young Muslim would-be investor asks on Twitter.

Islamic finance — an amalgamation of Shariah law and modern banking — has become a $2 trillion business over the past two decades, covering everything from bonds to buying cars.

But it’s not easy for observant Muslims to decide whether or not an investment is halal (religiously permissible). Yet new technology is helping.

Zoya app logo

Tesla, the American electric car pioneer, for example, is considered 96 percent Shariah compliant, according to the Zoya mobile application.

The app screens US-listed stocks based on criteria issued by the Accounting and Auditing Organization for Islamic Financial Institutions, one of several bodies that set Islamic finance standards.

Islamic funds are banned from investing in companies associated with tobacco, alcohol, pork or gambling. Earning interest is also banned as “usury.”

Wahed Invest logo

US-based Wahed Invest, an online halal platform, uses those criteria to help tens of thousands of people invest “ethically.”

Islamic bankers are hoping that modern platforms will open the industry up to young investors, and that its innately ethical credentials will prove to be another draw.

Mehdi Benslimane, Global Expansion Strategist at Wahed Invest, said the guidelines in religious texts boil down to two conditions.

“A business must have a real economic impact, not just a speculative one. And it must have a positive contribution to the world,” he told AFP.

According to the ratings agency Standard & Poor’s, the Islamic finance industry has in its relatively short existence grown to be worth $2.1 trillion.

In projections made before the coronavirus outbreak, it predicted the sector would “continue to expand slowly” in 2020.

Financial technology, or fintech, could help the industry grow by “facilitating easier and faster transactions,” it said in its Islamic Finance Outlook 2020 Edition.

The meltdown the coronavirus pandemic has caused in other parts of the economy has prompted fears of a collapse in the sector. Dubai Islamic Bank has already delayed a planned issue of Shariah-compatible bonds, according to Emirati media reports.

Yet Islamic finance — based on the concept of shared profit and loss, thus minimizing risk for banks — has fans well beyond the Muslim world.

For example, the Jeddah-based Islamic Development Bank in November signed an agreement with Japan’s mammoth pension fund to support the development of sustainable Shariah-compliant products.

And the Responsible Finance & Investment (RFI) Foundation, a think tank, has talked up their ability to respond to the latest crash, due to the fact they are anchored in the real economy.

It also suggests that profits on investments in industries such as protective medical equipment could be donated to charities, helping tackle the coronavirus crisis without breaking the Islamic ban on interest payments.

But the sector’s current slow-moving nature may hobble its ability to respond to crises.

The emphasis has been on growing the market rather than making it more efficient, said Mohammed Al-Sehli, CEO of Wethaq Capital, a Dubai-based fintech firm.

The sector must focus more on innovation after “suffering from lack of innovation, standardization and automation of processes,” he told AFP.


‘Lower for longer’: Fed’s warning on interest rates

Updated 24 September 2020

‘Lower for longer’: Fed’s warning on interest rates

  • The Fed cut rates to near zero in March and took other steps to combat a recession

WASHINGTON: Federal Reserve Vice Chair Richard Clarida said on Wednesday that policymakers “are not even going to begin thinking” about raising interest rates until inflation hits 2 percent, comments aimed at cementing the public’s understanding of the US central bank’s new approach to monetary policy.

“Rates will be at the current level, which is basically zero, until actual observed PCE inflation has reached 2 percent,” Clarida told Bloomberg Television, referring to the Fed’s preferred measure of prices. PCE inflation tends to be somewhat lower than the better-known consumer price index.

“We could actually keep rates at this level beyond that. But we are not even going to begin thinking about lifting off, we expect, until we actually get observed inflation equal to 2 percent. Also we want our labor market indicators to be consistent with maximum employment.”

The Fed cut rates to near zero in March and took other steps to combat a recession that took hold as businesses shut down and consumers stayed home to fight the spread of the coronavirus.

Clarida said that with further government aid from Congress and the steps the Fed has already taken, the US economy could return from the current “deep hole” of joblessness and weak demand in perhaps three years.

To aid that process, the Fed in late August revised its approach to monetary policy to commit to lower rates for longer periods of time, allowing the risk of higher inflation to try to encourage a stronger economic recovery and more job gains for workers. A follow-up policy statement last week gave more specific guidance about future decisions, but questions remain about what the new approach will mean in practice.

Clarida said there should not be any confusion: Rates will not increase until labor markets recover and prices hit the Fed’s target.

“So lower for longer, and we have given some observable metrics,” for judging when a rate hike debate might begin, he said.

Decisions about any possible overshoot of inflation are “academic” at this point, he added, and can be made once the economy rebounds.