Pakistan News

Islamic financial products risk losing uniqueness

Islamic financial products risk losing uniqueness

DUBAI: Islamic finance continues to expand globally but the industry risks losing its differentiation from conventional financial products and lacks official data to ensure better supervision, an oversight body said.

Islamic finance weathered the global financial crisis better than conventional banking and is recovering in areas such as profitability and asset quality, the Islamic Financial Services Board (IFSB) said in its third financial stability report.

Islamic finance, which has its core markets in the Middle East and Southeast Asia, follows religious principles that ban interest and shun outright speculation, and as such is seen as an alternative to interest-based banking. But the industry’s fastest-growing Islamic bonds segment (sukuk) is moving away from profit-sharing structures, which risk weakening the industry’s value proposition.

Less than 7pc of all new sukuk issued in the first three quarters of 2014 were based on risk-sharing contracts and instead favoured sales-based contracts, the report found. This could lead sukuk to be valued using similar pricing and risk management approaches used for bonds.

“As a result, any adversity in the global financial system, even if it originates in the conventional sector, has an impact on the financial stability of the sukuk market.”

This was observed in the volatility stemming from the US Federal Reserve’s monetary policy meetings, which had identical effects on both the sukuk and bond markets, the report said.

Published in Dawn, May 22nd, 2015

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