The neglected essence of Islamic Finance

Perspectives

ME PoV Summer 2010 issue

The neglected essence of Islamic Finance

This issue tackles timely issues such as the challenges of thought leadership in Islamic Finance in the Middle East, new trends in government services in the GCC region, company data protection challenges, Human Resource service delivery across the region, government’s role in advancing talented women, and many more.

About this issue

'Islamic Finance' seems to be the new buzzword in business circles these days. And with good reason. With an estimated 1.8 billion potential consumers, the Islamic world presents a huge potential for businesses worldwide. Banking is one industry that has taken advantage of this potential. Since the opening of the first commercial Islamic bank in 1975, Islamic finance assets have grown to an estimated USD 950 billion in 2009, defying a recessive market.

But not all is well in the land of Takaful and Shari'a. The pressure now is on these financial institutions to maintain authenticity and integrate fully into the mainstream global financial market. In this issue of Middle East Point of View ( ME PoV) we take an in-depth look at Islamic Finance and examine its need to invest in an asset it has sometimes
been missing: thought leadership.

Click the link on the left to access the Summer 2010 issue. Alternatively, you can read each article separately by clicking below.

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The neglected essence of Islamic Finance

Have Islamic Financial Institutions (IFIs) around the world, including the Gulf region, been so busy structuring products and services that they have overlooked the importance of communicating the essence of Islamic Finance? This brief analysis suggests that investing in thought leadership programs, a hitherto neglected asset class, is an essential tool for the continuity, practice synergy and improved business performance of IFIs. However, past experience of IFI practice differences, regulatory discrepancies and market divergences show that practice harmonisation has a challenging path ahead.

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The long unwinding road

In the decade prior to the current economic crisis, there was strong consumer spending growth in the United States as well as in smaller economies such as the United Kingdom, Spain and Ireland. To simplify what happened, such growth was funded, in part, by borrowing against the increased value of homes, itself the result of a flood of liquidity from surplus countries such as China. This excessive consumer spending growth was not only the principal source of economic growth in these countries, it also fueled export driven growth in surplus countries such as China, Japan and Germany. In fact, the symbiosis between these “consuming” and “producing” groups of countries was the hallmark of the global economy in the first decade of the twenty first century. All that will now change.

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Tourism, Hospitality & Leisure in the Middle East

With world-class infrastructure and facilities and an excellent geographic location on the world stage, the Middle East is expected to emerge as one of the world’s most competitive landscapes offering value tourism and conference experiences to a worldwide customer base.

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IFRS

With its recent issuance of a controversial ‘exposure draft’ – a proposed standard – on ‘Financial Instruments,’ the U.S. Financial Accounting Standards Board (FASB) has taken a vastly different approach to financial reporting to that taken by the International Accounting Standards Board (IASB).

At the end of 2009, the IASB had promulgated their own version of the revised standard on ‘Financial Instruments’ – a new standard entitled ‘IFRS 9’ – in response to a call by the finance ministers and governors of central banks of the G20, representing the 20 most powerful economies of the world. Some believe this latest move by the U.S. FASB does not fit well with the global ‘convergence’ initiative and the various standard setters around the globe.

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Market efficiency in the Gulf

How do the GCC markets compare with more developed economies in terms of market efficiency? Not too well, according to this author, though recent developments have been encouraging.

Perhaps one of the most discussed topics in corporate finance is Efficient Market Hypothesis. In a developed market such as the United States, that discussion centers on the strength of market efficiency. But in emerging markets such as the Middle East, and the Gulf Cooperation Council (GCC) countries in particular, where the securities markets have not kept pace with the spectacular growth witnessed in the last few years, the question is more whether Efficient Market Hypothesis holds at all in the region.

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Have governments been quicker than corporations to advance talented women?

Debates on the value of diversity and the empowerment and advancement of women have raged for centuries, but when it comes to gender equality, few achievements can compare with the rising role of women in government worldwide.

Paths To Power, a March 2010 report by Deloitte and Forbes Insights, reveals that women worldwide are rapidly advancing in the public sector, making government a leading example for businesses. The study reported that women hold chief executive and presidential positions in only 3% of the world's top 1,000 companies, yet almost 10% of United Nations countries now have women heads of state, a huge increase from the three female heads of state in 1975. Women also hold about 20% of parliamentary seats worldwide, nearly double that of 1995's 11.3%.

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Trends in government services in the GCC countries

In recent years, governments in the Gulf Cooperation Council embarked on a large number of initiatives to enhance government services to citizens, residents and businesses both at the national level and at the GCC level. One key trend is the participation of the private sector in enhancing government services through the formation of Public Private Partnerships (PPPs).

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An introduction to VAT

Since the early 1990s VAT has been adopted by various countries as an efficient alternative revenue source. But there are those who are still holding out.

The world seems to have capitulated to the rise of indirect taxes and king of them all is Value Added Tax (VAT). Since the early 1990s VAT has been adopted by various countries as an efficient alternative revenue source. But there are those who are still holding out, the GCC is one of them, along with a number of Middle Eastern economies. The US also remains a stronghold of sales tax rather than VAT. However, there are constant suggestions that VAT may be introduced in both the US and the Middle East. But with President Obama denying any VAT agenda, it is probably safer to assume that countries in the Middle East will adopt it first.

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The time to change is now

Human Resource functions in companies across the Middle East have reached a point of no return. The pressure to change has become too great for HR and business leaders to neglect.

Enhancing HR service delivery is a hot topic across the region. However, despite attempts by some HR functions to transform, many functions across the region are still administrative “dumping grounds,” where people who are not good enough for other parts of the business are employed, or where services no one knows where to put are placed.

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Protecting what matters

The world contains a vast amount of digital information which is diverse, complex and most importantly, continuing to grow at an exponential rate. Although this new information superhighway allows us to make gains in all sectors, it also creates a host of problems, not least of which is data protection.

According to market research company IDC, last year, despite the global recession, the Digital Universe set a record. It grew by 62% to nearly 800,000 petabytes.

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