Quote Originally Posted by vinod View Post
Dubai and Islamic Finance

http://www.globalissues.org/news/2010/01/12/4174
Shaar, however, underscores that the main issue is that Islamic finance investors tend to think in conventional banking terms and are mostly performance driven, while actual Islamic finance is based on the principle of profit and risk sharing.

'Nakheel's sukuk were secured by existing real estate developments and land that incurred about 50 percent decline, which left investors with largely depreciated securities. Investors can’t expect to mimic the performance of conventional banking tools,' emphasises Shaar.
True. As for the performance, it can out-perform or under-perform -- depends on the situation since it is more similar to equity in structure.

Khaled, a young Lebanese working in Saudi Arabia, owns sukuk issued by a Saudi group facing financial difficulties. 'I started hearing about the sukuk when I moved to the Gulf and decided to invest in this type of venture, which seemed safer than other conventional products. Now I am not so sure,' he points out.
I'm not sure what he means by the underlined part. If he means there is no risk than that is wrong. But understanding of to be safer means that they must be backed by real assets unlike conventional bonds. For example if DW went bust like Lehman Bros. than sukuk bond holders of Nahkheel still would have the ownership in real assets (in this case, land of water-front properties) vs nothing in case for Lehman Bros. bonds.

I had a big discussion over this, I don't know why people in finance get into arguments with me on the forums... oh gee, I was disrespecting peoples' professional knowledge and underestimating my ignorance on the matter:
http://www.islamicboard.com/world-af...ml#post1253939


Anyhow, I'm enjoying my 75% return on investment :
http://www.islamicboard.com/world-af...ml#post1259196

Follow the discussion, it will bring important issues to light that I mentioned there. One important thing, I'll quote here:
Quote Originally Posted by Chuck
Risk sharing is not proportional in all Islamic financial instruments. Nakheel sukuks were based on ijara structure which is lease-to-own model. Difference with conventional bond is that it is backed by asset. It is not like what happened on wall street in which debt was repacked again and again in the form of derivatives and you end up with 1 trillion of sales with only assets of $100 billion. Islamic finance principles will not do away with economic cycles of expansion and recession, neither they are meant to do away these cycles. However, they do give good practice to better coup with them. DW is not in the same situation as what happened to the companies in US and UK -- it is not over-leveraged and it has assets more than its debts.

http://www.islamicboard.com/world-af...ml#post1253822
Important issues never mentioned regarding Islamic finance:
Quote Originally Posted by Chuck
I think it has a potential to improve standards. Here some have tried to come up with the solution by pooling of funds. A bank has funds/share in set of businesses that they know well, and then they give share to depositor in the savings account. It works similar to mutual fund, and fund manager in the bank tries to make a well balanced portfolio. But the concerns people have shown are that they don't know much about the business prospects, operations/practices, and management that their money is invested in. This is a valid concern, and trying resolving it would mean better sharing of knowledge and rating about revenue/risk models of the businesses, screening process, and transparency regarding the management and their operations/practices. This would be very beneficial for the industries across the board (but most importantly for banking and finance industry).

Another issue facing Islamic finance is the fiat inflation which was not there at the time of Prophet (pbuh) due to the use of gold and silver as currency. I'll try to find a chart, but in early 1900s when there was gold standard, I saw a chart that showed the value of money didn't dilute like it does today with fiat for 20 years. chart was about 20 years. So basically, it showed that money value moved up and down slightly, but on average even for 20 years it was almost same. So somebody lending 10 million would get back approx 10 million in real value even after 20 years. But with fiat lets say losing 2.5% each year on average for 20 years, means it would lose about 50% of the value.

Here is more accurate figure from http://www.westegg.com/inflation/

10 million initial money in 1988. Returned in 2008 which makes it 20 years. After 20 years, its purchasing power comes down to $5,547,348.18. That is about 45% loss in 20 years and these figures are real. So person lending $10million in fiat will get back only $5.5million in real value if borrower only gives back $10 million back in fiat after 20 years.

These two are very important issues in modern finance and how Islamic finance will impact these two issues rarely comes up in discussions.

http://www.islamicboard.com/world-af...ml#post1259737