Sunday, September 07, 2008

"Follow the money"

When you have almost three-fourth of the world economies reeling under trade deficits and hyper inflation, companies like Nokia issuing profit warnings, it’s time to explore alternative destinations to do business. After all, the dictum is – follow the money :-)

I was recently part of the team that did some early due diligence for a Korean firm interested in issuing Islamic bonds in the Persian Gulf and far east. Yes, Islamic bonds. But why should a Korean major drool over religion tainted security? The question was not for us to ask, they were paying us. But as we delved deep into the task, a few facts got cleared.

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. So how do we structure it?

Confidence is one thing, hyperbole another. Most of all, the industry’s 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. We faced difficulties in design and structuring an instrument that has to comply with Sharia – that needed to be communicated to the client, a non-muslim. Hell, it needs to be certified not by a professional rating agency, but by Islamic scholars that are terribly in short supply! So we struck a deal with some American financiers that recycle documentation rather than drawing it up from scratch. But to our amazement, we found something pretty weird. The contracts they now use for sharia-compliant mortgages in America draw on templates originally drafted at great cost for, hmmm… no, you would never guess it - aircraft leases!

And we thought we have to refine our systems and processes to adapt to a changing financial world order. But there are imperfections and mediocrity galore even in the most credentialistic circles. That knowledge allows us enough headroom for creative neglect and recreation. We could even be setting trends with what we seek to build. Now we are all charged up. Someone is paying us too.

Why do you think I love this business? I am on my way, getting to be a Sharia specialist ;-)

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