Understanding Shariah Compliance and Islamic Banking—A New Revenue Stream for RIA’s?

Sharia compliance refers to the strict observance of the principles of Islamic law. Additionally, Islamic banking itself has own basic “rules” which must be adhered to in order for transactions to be considered Sharia-compliant. The strictness and transparency of Islamic banking has allowed this sector to remain virtually unscathed during the recent financial crisis.

Simply put, Sharia banking prohibits interest to be charged for loans and further, prohibits the financing or investing in businesses which are contrary to the Sharia principles. An example of this might be investing in a company which produced pork products. Muslims are expressly forbidden from eating pork. Same idea applies to gambling, liquor and other violations of Sharia.

Also, Sharia principles encourage profit/loss on a “shared basis” so that a banker and depositor, for example, share risk. This helps to ensure that deals are sound. Islamic finance also requires that transactions must be backed by real assets like real estate rather than derivatives like sub-prime mortgages.

Islamic banking obviously isn’t new and has been, heretofore, only a small slice of global banking. It is estimated to represent around 1 percent of the world’s global banking assets, according to Tan Jeh Wan, Managing Director of the Islamic Bank of Asia, who was cited in a June 14 article in the Daily News and Economic Review. However, more and more banks and other financial services professionals are familiarizing themselves with Sharia principles to create their own visibility within the expanding affluent Muslim community. Several global banks have adopted Sharia-compliant products and services to accommodate this growing population, including Deutche Bank Ag, Credit Suisse and UBS. It is estimated that Islamic banking is growing 10-15 percent per year and is one of the fastest growing segments of the global financial system, CIMB Group Holdings wrote in an October 2010 Global Brief, entitled "Toronto as a Centre of Global Finance."

Christians, Jews and Muslims have a history of “protecting” their own from the unsavory actions of potentially usurious lenders. Usury (from Latin usura, "interest") originally was the charging of interest on loans. When charging interest first became acceptable, usury was usually any interest above the rate allowed by law. The word usury itself is largely derived from Christian religious principles, according to the Wikipedia entry on the word; Riba is the corresponding Arabic term and ribbit is the Hebrew word, that same entry says.

Now that you know some of the basics of Islamic financing, here is the new business opportunity: financial services for observant Muslims and eventually, crossover “conventional” clients who will be attracted to the security of a Sharia-compliant transaction. Although associated costs may be higher to assure rules are adhered to, the risk is generally greatly reduced. This is a new and interesting potential new revenue stream to evaluate in your market for your practice.

I am not an expert on Sharia compliance but here is a partial list of available Sharia compliant products lines:

--insurance/reinsurance products

--lending including mortgages

--equity funds

--derivative products



Its worth your consideration and investigation into Sharia as the wealth market becomes more and more of a crowded playing field. Points of differentiation are important today. Clients demand increased transparency for financial transactions. Sharia compliance brings bona-fide buyers/sellers together. What could be better than that?

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