World’s largest sharia lender to boost investments in the real economy

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The world’s largest sharia lender will be launched by June, an industry body said on January 23, 2009 as the sector tries to address a shortage of large lenders it needs to become a global alternative to conventional banking.

The Bahrain-based bank would have a paid-up capital of $11 billion, with the Islamic Development Bank (IDB) as its largest shareholder, said Sheikh Saleh Abdullah Kamel, chairman of the General Council of Islamic Banks and Financial Institutions.

Sheikh Saleh said the Organisation of Islamic Conference (OIC) countries would also invest in the bank, adding that it was the right time to set up the bank despite tough financial market conditions worldwide. « I think it is the best time to push and to encourage people to invest in the real economy … industry, agriculture, but not to invest in markets and derivatives and these blow-up things, » Sheikh Saleh told Reuters on the sidelines of briefing in the Malaysian capital.

Islamic finance is based on the sharia, or Islamic law. It avoids the interest-based formula of conventional banking and argues that gains must be derived from ethical investing and for profits and losses to be shared between venture partners.

Once a niche market serving devout Muslims, Islamic finance has gained in popularity as the global financial crisis has prompted some investors to rethink the merits of conventional banking.

The bank, which has yet to be formally named, has been in the pipeline for several years and is currently undergoing final review by IDB on its capital input. « I hope minimum they will contribute $300 million, » Sheikh Saleh said. While a total of $1 billion will be raised by private investors, including IDB, the other $10 billion is expected to come from an IPO on the Bahrain stock exchange, he said.

Sheik Saleh said the bank aims to fund economic development in Muslim countries and increase liquidity in the Islamic financial sector, a weakness in the Islamic financial system.

« The third, and very important, goal is to create an Islamic financial paper market. Now there is no real Islamic market. As a secondary market, there is none because there is no good financial Islamic paper market, » he said.

This is a role that has been undertaken by other development banks in emerging economies such as the European Bank for Reconstruction and Development, a body set up to finance the reconstruction of ex-communist eastern Europe. It undertakes issuance in debt markets in domestic currencies so as to set benchmarks and boost trading.

Arabian Business – Reuters, by Liau Y-Sing 23 January 2009

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