TRADING

Futures exchange warrants

Although conventional futures commodity exchanges do not usually comply with Shariah principles in relation to murabaha or similar structures, the ancillary delivery system they have created based on warehouse receipts, or warrants, can still play an important part. It is well known in Islamic banking circles that on-exchange futures trading is not generally suitable for Islamic finance structures. The uncertainty related to futures trading, which involves speculating on the price of commodities going up or down in the future, the interests embedded in the forward curves and the selling of material not owned by the seller at the point of sale (short positions: not holding the physical material to satisfy the delivery obligation) put exchanges off-limits under Shariah principles.
     Even so, part of the physical delivery—based on warrant or receipt creation and transfer of ownership—still plays a key role. Although commodity exchanges are not a natural source of physical material, they still need a mechanism of delivery of last resort (last possible option for delivery) for a number of reasons.
     First, commodity futures trading is based on contracts in the present to buy or sell specified quantities of assets on dates in the future.These contracts are mainly closed out financially, which means the parties are generally happy either to settle their obligations or to receive their rights by cash instead of transferring or receiving the real commodity. Nevertheless, delivery could still be a possibility and exchanges need to provide a system for such an eventuality.
     That delivery can take place in a futures market produces two further effects. It helps the so-called futures/physical price convergence, or to put it simply, it keeps financial and industrial market prices in line.

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INVESTMENT

Opportunities in emerging markets

The global financial events of the last two years have demonstrated to investors that emerging markets can prevail when confronted with the ultimate stress test—a widespread crisis caused by dislocations in the developed world as opposed to their own solvency issues. Despite the subsequent withdrawal of capital that ultimately put pressure on emerging market asset prices, many emerging market economies entered this downturn in a position of financial strength born of conservative leverage and sound policies.
With lower leverage, transparency and no speculation similar to the tenets of Islamic finance, risk-averse emerging market companies should appeal to the increasingly global Islamic investment community.
     In recent times emerging markets have re-emerged to regain, from their perspective, their rightful place in the economic world. Today, they account for more than 50% of global gdp, up from 38% in 1950, and are rapidly expanding their share. Numerous factors have contributed to the revival of these countries, including their ability to outsource to lower-cost economies in Asia, acceptance into the World Trade Organisation, strong commodity cycles, favourable demographics, implementation of conservative fiscal and independent monetary policies, and price stability and falling interest rates supporting domestic investments and consumption.
     Also important are the numbers joining the working population—a key driver of long-term growth potential. It is six times higher in emerging economies than in developed markets. Emerging markets are catching up at breakneck speed. Try typing “China overtakes” into Google and you will find headlines such as “China overtakes the us as largest auto market” and “China overtakes Germany in gdp, becomes third largest economy.”

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EDUCATION

Interest-free student loans

The most popular loan programme in the US, Stafford Loan, raised its borrowing limit from $23,000 to $31,000 last year. The us government essentially gave a green light to the colleges to increase their tuition up to 35% in the coming years. The University of Phoenix, the largest private university in North America, boasts that it “sets its tuition with the loan limits in mind”.
     Families in America typically save for their kids’ college through “529 plans.” There are two basic types: prepaid tuition plans and savings plans. Prepaid tuition plans enable families to pay for future tuition now in current dollars and prices and are an effective hedge against ever-increasing college tuition.
     The savings plans are nothing more than brokerage accounts where Wall Street-related entities “manage” the money. Calling them savings plans is a misnomer. They are investment vehicles where up to 100% of the savings could be at risk. I know of a family whose savings dwindled down to 30% of the amount actually deposited by the family in a 529 plan savings account.
     Middle and lower-middle class citizens in the us are the prime targets for consumer loans, including student loans. Riba, or interest, extends the duration of such loans and devours a significant portion of their hard-earned income for years, if not decades.

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FRANCE

Moral dilemma

The disposition of France towards Islamic finance has always been an anathema in a country that prides itself on laïcité, a legacy of the French revolutionaries who revolted against the Catholic Church. In a republican system of government, the dogma says there is no place for religion in anything related to government and, therefore, government-regulated finance. The dogma has been overlooked in special circumstances, such as in the early 20th Century when legislation was passed to accommodate Catholic worker associations, allowing them to set up their own financial institutions, better know as credit mutuels (credit unions), which benefited from government funds.
     So why has the French government shown sudden interest in Islamic finance? It is certainly not because—as government mouthpieces have declared—Paris will not cede the place to London as the centre of Islamic finance in Europe. Islamic finance conferences have been organised in Paris by very British entities such as Euromoney, and the plethora of Islamic finance conferences in Paris continues unabated. The real motive rests with the people who, as in the classic movie Casablanca, Captain Renault called “the usual suspects”.
     The French government has announced it intends to raise 152 billion euros to cover its budget deficit and other obligations, and it is keen on capturing some of the petrodollars destined for “recycling” in the Western economies. It has called on gcc sovereign funds to invest in French infrastructure under public/private partnerships, together with cash-strapped local governments. The format for this Islamic financing is, of course, sukuk. This has prompted the French authorities to rush enabling legislation through the Assembly in a coordinated action by the ministry of finance, the tax department and the central bank with unusually impressive haste and efficiency.


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