Keith Lieberthal
Second, Islamic banks are handicapped in risk and capital management. Islamic bankers tend to have less experience and sophistication in risk management because they are forbidden from utilizing hedging tools such as derivatives and swaps.
Third, the haram prohibitions against investment in un-Islamic businesses can hamper risk diversification and preclude attractive investments. Read broadly, these restrictions could forbid investment in any media company producing content deemed "pornographic" (a category into which many PG-rated films and prime-time television shows would fall in conservative clerics' eyes) or any conglomerate with a food division that produced ham.Necessity Has Bred Invention
Much as medieval Christian merchants employed the contractum trinius (a series of three contracts, each permissible individually, that collectively created a loan with interest) to avoid the Church's prohibition on usury, Islamic lenders have developed ingenious transactions to finance risk within Sharia. For example, banks use Murabaha (a "cost-plus" transaction) to finance mortgages. In a Murabaha deal, the bank purchases a property for market price and then immediately resells it to the buyer for an agreed-upon higher price. However, the buyer pays the higher price to the bank over a period of time, throughout which the bank retains ownership of the underlying asset as collateral. As a result, while the bank never formally charges interest, it receives imputed interest in the form of the contractually guaranteed higher resale price.| Want more? Check out TheStreet.com TV video. Keith Lieberthal says Islamic banks need international capital regulation. |  |
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