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Mon 28 Nov 2011 08:25 AM

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Islamic finance ‘would have prevented credit crunch’

Sharia rules would have seen banks avoid toxic assets, says entrepreneur James Caan

Islamic finance ‘would have prevented credit crunch’
James Caan hopes to attract Gulf investors to a Sharia-compliant property fund

The
global financial crisis could have been avoided if banks had abided by Islamic
rules that forbid investment in collateralised debt obligations and other toxic
assets, UK entrepreneur James Caan said.

“One
of the questions we always ask is if the global economy operated under Sharia-compliant
finance would we have had a credit crisis,” said Caan, the former star of the
BBC series ‘Dragon’s Den, during an interview in Dubai. “I think the answer is
no actually.”

Sharia-compliant
banks fared better than conventional lenders during the downturn, thanks to
rules that forbid speculation and insist loans must be backed by collateral.

Banks
are also deterred from repackaging debts, as financial instruments generally
have to sold for face value.

Caan,
who recently purchased an apartment in Dubai’s Burj Khalifa, is touring the Gulf
in a bid to drum up interest in a £45m ($69m) student housing product, offered
through the Islamic investment firm 90 North, in which he holds a stake.

“When
you think today that half the world’s population today is Muslim, as a
businessman I see this as one of the biggest growth market opportunities that
is under-exploited,” Caan said.

“Potentially
over the next five or ten years I can see this as being a very attractive
position. I think there is an incredible increase in demand for
Sharia-compliant opportunities and products.”

Independent
advisory firm 90 North was co-founded by Philip Churchill, formerly of
Kuwait-backed Gatehouse Bank. The company has placed nearly £1.1bn ($1.7bn) on
behalf of Gulf investors in Islamic-compliant real estate assets to date.

Sharia
law forbids gambling, investments in alcohol and receipt of interest, so fund
managers have to select investments deemed halal, or permissible.

“Most
of the product that we have sourced is UK-based,” Caan said. “The UK is a
natural place that I think Middle East investors find very comfortable, because
of the governance, the laws and the transparency.”

Islamic banking assets with commercial lenders will
reach $1.1trn in 2012, a jump of 33 percent from their 2010 level of $826bn,
Ernst & Young said last week.

Islamic banking assets in the Middle East and North
Africa (MENA) region increased to $416bn in 2010, representing a five-year
annual growth of 20 percent compared to less than 9 percent for conventional
banks, the consultancy said.

90
North hopes to tap into the Gulf’s wealthy residents by offering
Islamic-compliant property assets with secure long-term returns, Caan said.

“We
have identified an investment opportunity in the student housing market. Well
respected universities are still getting more applications than they can cater
for so the demand side is very high but most universities are not able to meet
the demand in terms of accommodation,” he said. “You have predictability of
income.”

In
‘Dragons’ Den’, Caan was one of panel of entrepreneurs courted by start-up
firms in a bid to secure their investment in return for an equity share.

Caan,
who invested $1.5m in 14 companies while on the show, said Dubai remained the
leading destination for investment among the six Gulf states.

“If
I was being pitched in Dragon’s Den by Abu Dhabi, by Qatar, by Dubai – which
one would I back? [Dubai] has the least and has made the most out of it,” he
said.

“Look
at the region, Dubai probably has the least natural resources so it doesn’t
have an option. Its drive and determination is much greater than somewhere like
Qatar.”

For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
Ra.One 7 years ago

Though I want Islamic finance it must be understood it is not a holy grail to profit. In fact the main core of Islamic finance is that every participant needs to share the risk of loss and not dump the loss through exotic schemes to third-party.

Thus it might not have promoted CDO, it could possibly cause investors loss in uncertain times and economic downturn.

Islamic finance does not provide guarantee to all out profit or even safety of principal investments.

Ardash K. 7 years ago

I agree in general with the comment above. There is no single solution and there shouldn't be. If one system becomes dominant, it runs the danger of creating its own risks, most of the time unforeseen ones. Having collateral does not mean much when that collateral is in a bubble. Dubai is a good example of that. The problem is not in the system itself, but rather in the people using it. Greed and lack of prudence from all involved (borrowers, lenders and regulators) are a more direct cause of the crisis than the financial instruments involved. Generally there is less dependence on debt both on the individual and corporate levels in our region. If that level were more comparable to developed countries, chances of crises would be higher, regardless of the banking system.

Doubtful Dorothy 7 years ago

It must be remembered that whilst investing in real estate is Shari'a compliant, the underpinning assets (being real estate in this story) of many of the shari'a funds is also taking a huge knock in both vale and returns everywhere in the world. Hence, to make a statement that the Global Crisis could have been avoided by using one model or another is slightly taking the argument a little far as to have a concentration of investment or risk or the like, whether real estate or commodities, may have had its own set of consequences.

Again, another article that misses the mark of any real factual insight. Good sales pitch though the his funds.

Mike Hails 7 years ago

The credit crunch has been brought about by the greed of a small percentage of people in both Banking and Public Sectors. The West has been borrowing money to fund its lifestyle for decades and that has now finally caught up with it. Here in the UK we have leaders of Council's (that is a Public/Govt body responsible for a certain County's public services like rubbish collection, local police etc) who are being paid nearly double what the Prime Minister David Cameron is earning. They are not worth it, they just managed to blag their way to that type of excessive pay. Also many other Public Servants have given themselves massive pay and pensions that no one in the private sector would even dare dream of getting. Multiply that by millions of people and you can see why the Public Sector has bankrupted us. It is NOT the private sector that has done this ,it is the Public/Govt sector.

Ripped off 7 years ago

Islamic finance in theory, opposite in reality and uncontrolled method of charging powerless customers.

Forget about preventing credit crunch, banks are creating insolvencies and fallouts. Even after collecting over double the amount of credit card limits over 3 years, they maintain the outstanding amounts same by evaporating the whole paid amount through extorbidant charges.

Even after collecting over twice the card limit, not ready to give any settlement plan.

erik 7 years ago

Mr. Caan’s understanding of numbers and knowledge about the world seems very poor for a business man.

“When you think today that half the world’s population today is Muslim, as a businessman I see this as one of the biggest growth market opportunities that is under-exploited,”

In fact estimates of the Muslim population range from 1.3-1.7 billion, which is a far cry from half the world’s population.

Peter Bench 7 years ago

Oh dear, opinion masquerading as fact. 50% of the world's population is Muslim? presumably no-one has told the Chinese, Indians or South Americans. And Islamic finance? hmmm bet James Cann owns lots of Sukuks issued by Dubai property companies (not to mention those in KSA or Kuwait)? And interestingly he worries about governance - hmm, tried going bankrupt in Indonesia? Please, some challenge to these interviews

Alex James 7 years ago

The global financial crisis' roots are in the fact that banking is the legalized counterfeiting of money, i.e. money created from nothing. Add to this the legalized gambling with derivate bets, and you have a recipe for massive expropriation of wealth compounded with additional expropriation through bailouts and inflation.