Up to now, I have mostly scoffed at sharia finance as an unseemly attempt to reconcile dated and hopelessly moralistic edicts with modern finance. This article from the London Review of Books has forced to to realize that there is, of course, more nuance to the issue to the issue than I had presumed.
Particularly interesting was the fact that not only does the Dow Jones Islamic Market (DJIM) not allow for the listing of organizations that deal in pornography, tobacco and alcohol (including hotels with minibars), it also does not allow participation to "any company whose debt is higher than one third of its market capitalisation (a valuation based on the total number of shares issued times the prevailing share price)." I am not sure if they are right about porn, cigarettes and booze, but they seem to have the right idea on leverage.
3 comments:
Somehow I have always thought of Islamic finance as a very advanced idea -- using equity like (revenue share, profit share) instruments with customers so that you allow them to take loans and benefit from the growth that they enable but to limit their downside by giving up a part of their upside -- in the options world there are "Zero Premium" options that have this character as well.
However, the beauty does not end there. If one does use these products (and I am hoping that IFMR Trust does launch them soon)then on a portfolio basis you will actually end up with a loan asset base which has a pretty standard loan like character, if the product has been designed well. So as a lender, you are back to the risk-return profile you are used to.
This has an amazing charcter of win-win that I find fascinating. Of'course there are serious moral hazard issues that need to be dealt with but even there solutions do exist.
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