Posted on 09/09/2004 2:28:57 PM PDT by shaggy eel
Accounting firm Deloitte is trying to position itself to play a part in the potentially lucrative Islamic finance market with the unusual selling point that "sharia-compliant" banking is not just for Muslims.
There might seem to be a contradiction in a profit-driven western company such as big-four firm Deloitte embracing the devout Islamic ideology which prohibits "making money from money," since that sounds a lot like an accountant's job description.
But the professional services firm's move is in line with international trends which have seen a growth in finance companies which comply with sharia or Islamic law.
The boom has been driven by non-Muslim financiers such as the US' Citigroup which set up subsidiary Citi Islamic Bank and UK-listed HSBC, with its Islamic subsidiary Amanah. Swiss-based UBS has Noriba, while the UK last month granted a licence to its first Islamic bank.
Deloitte already has a thriving Islamic finance practice based in Malaysia headed by a Briton who converted to Islam, David Vickery, but it is now setting up New Zealand Islamic finance services overseen by financial sector head Ian Perry, a non-Muslim.
Deloitte is not alone is realising the Islamic approach to finance has quite a bit to recommend it, even for mainstream customers.
"It's basically just venture capitalism it's about sharing risk" University of Otago management school lecturer Malcolm Cone, a specialist in Muslim business practices, explained.
Islamic finance offers products that are compatible with the Koran, which teaches that paying or charging interest is "riba" usurious or immoral.
Instead of charging interest, the risk and the profits are shared between the bank and the borrower.
Conventional European banks will vary interest rates over time in a financial instrument such as a mortgage, but in the sharia-compliant type of mortgage the amount to be paid over the entire life of the loan, 20 years or whatever, will be agreed upfront.
The agreement of how the profit gets divvied up between lender and borrower is clearly stated from the outset of the transaction.
Essentially the financier has to take a position at the beginning, rather than using interest rates to reflect the changing perception of risk over time.
"It is completely transparent there is risk sharing and sharing of profit," Deloitte's Mr Perry said.
Consumers who fume at what feels like conventional banks' price-gouging interest rates might also warm to this approach in Malaysia 70% of Islamic finance customers' are non-Muslims.
Although there are only about 30,000 people in the Muslim community in New Zealand, Islamic finance considered to be a potentially profitable point of difference for local banks struggling to hold market share.
Mr Perry said banks that knew a bit about Islamic finance, and realised how much money was involved, had expressed interest.
Deloitte is also interested in attracting to this country some of the $US1.3 trillion of Islamic funds (according to a 2003 JP Morgan Chase report), mostly believed to be of Middle East origin, looking for a "home" after the Iraq wars and September 11.
Mr Perry said one of the reasons this capital was on the move was fear that it would be "locked up" if left in the US.
"Following those events there were large tranches of money coming out of those areas looking for new homes," Mr Perry said.
As well as banning interest, the Koran prohibits investments in sectors considered to be immoral, such as gaming, pornography or alcohol.
But Mr Perry said these needs of Muslim customers in New Zealand were not yet catered to by the financial sector.
"What is a Muslim person supposed to do when they want to get a mortgage?"
The professional services firm denies it is being opportunistic, or that consultants who promote Muslim finance products ought to be devout and subscribe to the religious ideology upon which it based.
University of Otago's Dr Cone confirmed some non-Muslims find the Islamic model a useful investment vehicle.
"If you put money in an enterprise you become a shareholder in that enterprise and a participant in the profits. The objective is to avoid as much as possible an exploitative relationship where one party is disadvantaged by a commercial venture."
Dr Cone said the Lloyd's insurance syndicates were an example of a Western business venture which operated in a similar way.
Ernst Gellner, a philosopher and London School of Economics lecturer, was one famous thinker who claimed the structure of Islamic commercial enterprise was the best business model.
There are tax implications for Islamic finance in some countries, with different treatment of capital gains, but in New Zealand this is not an issue.
However, Inland Revenue was said to be interested in any large scale movement of funds particularly from an anti money-laundering perspective, Mr Perry said.
Good post, I posted one on the US$ yesterday and the changes that are going on.
,,, thanx. Link your post here if you want to.
I wonder whether this "philosopher" knows what risk-sharing and value of capital are.
,,, yep, that sums it up. They've yet to come up with their own Bill Boeing, Howard Hughes or even (heaven forbid), Donald Trump. Fractional reserve banking keeps a downstream serf like me in my place, but I'll stay in it if there's a choice.
Thanks to Freema for sending me the link to this report.
If I take out a 20 year fixed rate mortgage I know exactly how much I'll be paying over the 20 years. I know at my closing the total amount, principle plus interest, was disclosed by the bank. How is this different?
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