The Economist’s article about Shariah banking system
Looks like -as you can imagine- that they are very happy with the system:
As the buzz around the industry grows, so do expectations. The amount of Islamic assets under management stands at around $700 billion, according to the Islamic Financial Services Board, an industry body. Standard & Poors, a rating agency, thinks that the industry could control $4 trillion of assets. Others go further, pointing out that Muslims account for 20% of the worlds population, but Islamic finance for less than 1% of its financial instruments that gap, they say, represents a big opportunity. With tongue partly in cheek, some say that Islamic finance should by rights displace conventional finance altogether. Western finance cannot service capital that wants to find a sharia-compliant home; but Islamic finance can satisfy everyone.
Confidence is one thing, hyperbole another. The industry remains minute on many measures: its total assets roughly match those of Lloyds TSB, Britains fifth-largest bank (though some firms that meet sharia-compliant criteria may attract Islamic investors without realising it). The assets managed by Islamic rules are growing at 10-15% annuallynot to be sniffed at, but underwhelming for an industry that attracts so much attention. Most of all, the industrys expansion is tempered by its need to address the tensions between its two purposes: to serve God and to make as much money as it can.
That is a stiff test. A few devout Muslims, many of them in Saudi Arabia, will pay what Paul Homsy of Crescent Asset Management calls a piety premium to satisfy sharia. But research into the investment preferences of Muslims shows that most of them want products that benefit their savings, as well as their soulsrather as ethical investors in the West want funds that do no harm, but are also at least as profitable as other investments.
A combination of ingenuity and persistence has enabled Islamic finance to conquer some of the main obstacles. Take transaction costs which tend to be higher in complex Islamic instruments than in more straightforward conventional ones. Sharia-compliant mortgages are typically structured so that the lender itself buys the property and then leases it out to the borrower at a price that combines a rental charge and a capital payment. At the end of the mortgage term, when the price of the property has been fully repaid, the house is transferred to the borrower. That additional complexity does not just add to the direct costs of the transaction, but can also fall foul of legal hurdles. Since the property changes hands twice in the transaction, an Islamic mortgage is theoretically liable to double stamp duty. Britain ironed out this kink in 2003 but it remains one of the few countries to have done so.
Read the rest: it is a very interesting article. Even if they are not opposed to the system, the explanation is accurate and not very difficult to understand.