Weighted commodities
Largely, Australia’s economic growth has been a result of investments in mining. The country has seen an upswing in the demand for iron ore, gas, and other commodities, due to the bustling economies of other nations. Among these countries, China has had the largest demand for these resources and has received the bulk of Australia’s mining exports.

Commodities have also become popular as a form of investment by traders in other countries. After the market for soft assets such as stocks and bonds tumbled, many investors made the shift to the hard assets that provided steady returns in the past. In response, the price of commodities rose, greatly benefiting Australia’s economy. According to a report by ANZ Bank and Port Jackson Partners, Australia could potentially sustain its economy for the next 20 years and create over 750,000 jobs from its mining operations.

Is the trend sustainable?
Despite the rosy economic forecasts, some industry experts have voiced worries about the sustainability of Australia’s economy. Commodities make up nearly 55 per cent of Australia’s annual revenues. Since the market is so dependent on commodities, a change in the values of these materials could dramatically affect the country’s welfare.

Australia’s biggest commodities client is China, which has been experiencing an economic boom of its own for the past few years. However, some analysts have expressed concern that the welfare of the Australian economy is too heavily reliant on China’s sustained growth. Should the Chinese economy experience a dramatic slowdown, the effect on Australia’s industries would be substantial. Some reports have claimed that even a five per cent slowdown in China’s economic growth could cause commodity prices to fall by as much as 20 percent.

There are other factors that could put a halt to Australia’s boom. China is one of the largest holders of European and American bonds, and the persistent recession in Europe and the US may well cause Chinese growth to decelerate. Since the commodities market relies on both the natural goods and the financing for projects, any interruption in funding due to economic investments in other countries could sharply affect market prices.

Should Australia diversify?
In view of these and other concerns, some market experts have strongly encouraged Australia to diversify its economy further to avoid exposure if commodity values fall. Prominent economist John Hewson echoed these fears, stating: “It doesn’t make good governance at all to be so deeply in debt to China …One day, China will stop paying high prices for commodities, like Japan and Korea did before them.” Australian officials, however, remain optimistic about the country’s economic future. National Treasurer Wayne Swan touted the country’s positive factors, saying: “Australia has very low public debt, low unemployment, a massive pipeline of investment and we expect to bring the budget back to surplus next financial year.”

Ecuador’s economy is almost entirely dependent on the country’s oil supply.  Petroleum production is the largest industry in the nation, followed distantly by exports of various fruits, and automobile manufacturing. Over half of the national export earnings are derived from the export of oil and petroleum products for agriculture, domestic use, and commerce. These exports also account for nearly 20 percent of GDP, and nearly 40 percent of government revenue.

In 2000, the country decided to adopt the US dollar as its main form of currency, which served to help stabilise an economy that had been quite volatile in previous years. The election of President Rafael Correa – a leftist politician who believes strongly in the use of government spending to stimulate the economy – in 2007 was another factor in the country’s economic boom. Upon election, Correa reworked several of Ecuador’s oil contracts to give the government greater control of the profits from the petroleum sector. When oil prices suddenly increased in 2008, shortly after Correa’s election, Ecuador was in a prime position to benefit from the windfall.

Effects of recovery
As Ecuador’s market has rebounded, other economic factors have improved as well. In 2011, the country’s poverty index fell four percentage points, and the country posted an economic growth of eight percent that same year, outpacing government estimates of 6.5 percent growth. Government stimulus spending has also increased the country’s minimum wage, leading to a rise in inflation and the consumer price index. The national unemployment rate dropped a full percentage point in 2011, falling to 5.1 percent.

Forecasting Ecuador’s economy for 2012
In the short term, President Correa’s economic policies have appeared to work, but there is some concern that the increases will not continue for long. The government’s spending has been largely financed by international loans, mostly from China. In fact, Ecuador sends nearly half of its oil exports to China as a form of payment on previous loans. According to Pedro Delgado, President of Ecuador’s Central Bank, a large portion of the country’s 2012 budget deficit is directly covered by Chinese financing. “At least $1bn is covered with financing that was obtained from China at the end of the year,” Delgado stated. Delgado added that the country was also looking to effect another bond sale but that market conditions would dictate the timing. He added: “Everything depends on the market environment.”

Recent declines in oil prices have put Ecuador’s burgeoning economy in an uncertain position. In response, the government has revised its economic forecast to reflect a modest 4.2 percent growth for 2012.

EU leaders voice their opinions about the FTT
Of the opposing countries, the UK has been particularly outspoken about the possible negative effects of the FTT. David Cameron said the tax would cost thousands of jobs, possibly damaging the fragile economy even further. Cameron added: “Even to be considering this (proposal) at a time when we are struggling to get our economies growing is simply madness.” This viewpoint has been echoed by some industry analysts who claim that imposing the tax would cost the UK up to €22bn, even if the UK opted out of the plan. The Dutch Central Bank similarly criticised the plan in a statement, saying: “The negative impact (of the FTT) on the economy is a certainty.” Both Cameron and the Dutch Central Bank have stated that the FTT would only be effective if it was applied to all countries, not just those in the eurozone.

European Commission leaders who support the proposal, though, say that the FTT will serve a twofold purpose by requiring the financial industry to provide economic support, and by serving as a form of regulation for the market. The EU Commissioner for Customs, Taxation, Anti-Fraud, and Audit, Algirdas Semeta, said that the FTT “will deliver what EU citizens expect: a fair contribution from the financial sector”. Supachai Panitchpakdi, United Nations Secretary General of the UN Conference on Trade and Development, likewise voiced support for the plan, saying that the FTT “could help to regulate some of the particularly volatile short-term funds that can help to distort the currency values”.

EU leaders are planning to meet about the proposal in March in an effort to reach some type of agreement about the plan. Despite the calls to adjust the plan to include other countries around the world such as the US, the initial FTT plan has not been adjusted to allow for this change.

The Association of British Insurers (ABI) has said that when the Statement of Principles expires, it will not renew. This is because it forces insurers to cover all properties, even those in extremely high-risk areas, thereby raising rates for all homeowners. In effect, the low-risk homeowners are subsidising the premiums of the high-risk homeowners, to which ABI objects.

The National Audit Office (ABO) has said that because of climate change, urban sprawl, and ageing defences, it will take an average of £20m per year between now and 2035 to maintain the current level of flood protection. However, with the fiscal situation throughout the UK so dire – not to mention the rest of Europe – it is not known if ABI’s request for partnership with the government on this issue will get a hearing.

No one is expecting flood insurance to be free, but ABI wishes to look at some of the pooling arrangements or subsidised coverage that other countries have in place already. ABI’s director general, Otto Thoresen, has said, “We are frustrated with the progress of our talks with the government on this issue and want it to look urgently at a model that would allow flood cover to remain widely available and competitively priced.” He estimates that approximately 200,000 homes in the UK are struggling to afford cover.

Homes in flood-prone areas are, in many cases, redlined, and so unable to obtain insurance through any insurer other than their current provider. On the other hand, those who do choose to provide cover in these high-risk areas typically charge more than insurers who stay safely on the sidelines. This leaves the homeowner with an unpleasant choice: either pay exorbitant charges, or don’t carry cover and hope they beat the odds and experience no damage due to flooding.

Neither one is a good option, but until the government and the insurers come together and talk, there is little the homeowner can do.

Redlining is an illegal practice of denying access to a variety of services within a certain geographic area. The term was first coined in the late 1960s when a red line was marked on a map to outline an area where banks would not invest. It later came to be used to describe a wide variety of discriminatory practices against groups of people. There is also “reverse redlining”, where a company targets a group of people (usually a minority group) and charges them more than other people in that same area.

Revenues according to retailer climbed 16 percent to MEX$116bn from MEX$100bn a year earlier.

In 2011 Walmex opened 364 stores in Mexico and 76 in Central America, and now operates 2,722 shops and restaurants globally.

Business social network site LinkedIn was one of the big winners as it launched on the NYSE, with shares growing in value by around 50 percent from launch to the end of the year. Zynga, the software designer behind successful online games such as Farmville, in contrast, had a far rougher time as share prices dropped below the $10 launch price on first day of trading. The reason for the difference in fortunes is tough to equate; Zynga’s games boasts 227 million users, around 100 million more users than LinkedIn. Investors though failed to see where the value lay in the company, particularly given its dependence on Facebook to operate. Market investment in technology companies, it would appear, is as faddish as the social trends that keep the companies afloat.

Activity on the Hong Kong Stock Exchange reflected the growing prosperity and changing social habits of the People’s Republic. MGM China Holdings, the Macau casino operator, launched on the HKSE with a $1.5bn IPO. Macau is fast gaining a reputation as the Las Vegas of the East and with the number of casino groups licensed to operate by the Chinese state in single figures, investors and hedge funds jumped at the chance to get in with a company with a lion’s share of the estimated $23.5bn annual revenue raised from gambling in Macau. The HKSE is well placed to capitalise on similar trends of China’s rising middle class, while the island’s long standing colonial links lend it a familiarity that exchanges such as Shanghai lack. Needless to say, the Asian markets remain a hot one to watch.

US exchanges also received the benefit from another hot growth region – Latin America. Arcos is the largest operator and franchisee for McDonald’s restaurants in the region and its launch on the NYSE, generating $1.43bn, signified the growth in presence that Latin American shares are having on a good international share portfolios. Much like the growth in popularity of China’s gambling,  Arcos’ success at launch is a reflection on growing levels of disposable income the region has and the changing lifestyles that are embracing fast food culture. For the foreseeable future, the growth in Latin American   companies will continue to feed the US exchange markets until regional exchanges can grow to the size that present contention on the international level.

London calling
In terms of size, it was the London Stock Exchange who stole the crown for the biggest initial public offering of 2011, as Glencore International drew a staggering $10bn, landing it just outside of the list of the ten biggest IPOs of all time and making the first company in 25 years to enter the FTSE100 on launch. Media speculation prior to the commodity producer’s IPO had suggested a sum as much five times this size, the eventual amount reflected a more sober investment approach, particularly given the current dire straits of  the construction industry.

Glencore was nevertheless a boon for the LSE, contributing substantially to its year total of £12.9bn ($19.9bn) raised across its 76 IPOs. This sum equates a year-on-year increase of 27 percent, proving that the London market is far from the has-been that the media like to portray it. Despite the solid IPO results, many exchanges were engaged heavily in 2011 with ways to enhance their position.

Strengthening ties
Faster trading systems, remodelled exchange buildings and improving sustainability and carbon credentials provided some incentive to attract trade, but a more common trend was the attempt at mergers to shore up market strengths.

This was no better evident than in Japan, where the Tokyo Stock Exchange announced plans to merge with rival Osaka Securities Exchange, to create the tentatively-named Japan Exchange Group upon completion of integration in 2013.

The merger will provide a much needed economic boost to the country at a time of great need. Japan’s economy and markets are still reeling from the backlash of the devastating earthquake and subsequent tsunami that occurred in March of 2011. At the same time, both the Hong Kong and Shanghai are continuing to strengthen their positions with new international listings at the expense of their Asian neighbour. The $30bn merger should go a long way to ensuring Japan’s exchange maintains its status as one of the top exchanges in the world but will require the Japanese economy to shape-up.

Other cross-border attempts to bolster position failed to go through, but illustrated the power struggle between exchanges none the less. The LSE’s attempts to tie-up with the Toronto Stock Exchange (TMX) failed to win the required support from shareholders that would have seen a $3.5bn merger take place between the two exchanges. The main reason for this stemmed from TMX receiving a better domestic offer for its shares. The failed merger was understood as an attempt for the LSE to move away from its grounding in traditional stocks and equities. With these markets currently experiencing reduced performance, the LSE could find itself the subject of a takeover bid in the not too distant future if activity   fails to pick up.

A $7.8bn merger between Singapore and the Australian Stock Exchanges also failed to launch. The bid by SGX was rejected by the owners of the ASX on the grounds that such a merger would be counter productive to Australia’s attempts to establish itself as a significant financial hub for the Asian market. For SGX this provided a temporary set-back, with a dip in share price following the event temporarily making its own situation appear precarious. The conviction of SGX’s CEO Magnus Bocker following the event though suggests this may not be the end of the story.

If the joining of exchange companies on opposite sides of oceans proved too great, more hope can be held out for the creation of a Pan-Latin America exchange in the future. The growth of Latin American markets over the past two years has necessitated a stronger position from their stock exchanges. The UN reported economic growth across Latin America and the Carribean across 2011 was a healthy 4.3 percent, with individual nations posting figures double or more to this. This has yet to convert to the formation of significant exchange markets outside of larger nations, such as Brazil or Argentina, which has seen smaller exchanges merge to bolster position.

The first steps to a unified exchange market came in May, with the signing of the Mercado Integrado Lationoamericano (MILA), or Integrated Latin American market by Colombia, Peru and Chile. The MILA agreement will see the three nations integrate their stock exchanges into a unified cross-border exchange. Since MILA was signed, Bolsa Mexicana de Valores SAB – operator of the Mexican stock exchange – has expressed interest in reviewing the opportunities and benefits to be gained from the possible amalgamation of its markets into those of MILA.

Mexico’s agreement to MILA would bring significant prowess to this exchange, not least to double its value. Investors anticipate such a move would trigger a wave of IPOs on the new market. If this were to happen, the appeal for other Latin American nations to join would grow immeasurably – perhaps enough to attract the big boys such as Brazil. Were this to take place, the Latin American exchange would become a dominant economic force.

Much as the balance of power has shifted between exchanges, so too has the balance shifted between brokerages with independent online trading sites, which have continued to gain market traction and user numbers. The speed at which online brokers have become established over the past few years, particularly in relation to currency markets, has been phenomenal. Investors have been impressed by the simplicity of discretionary broking and the quality of the advisory functions offered by their brokers and the manner in which complex markets have been unravelled for them by their broker. Several brokers have been able to attain a strong track record, with some now rising to the status of household names within the finance industry.

Customer satisfaction in execution broking over the past year has been far harder to attain. Turbulent market conditions may have proved exciting for the casual trader, but it has proved a far tougher market to make a long term profit from.

Commodity markets threw up some unwelcome surprises in Q2, as high prices of oil and precious metals plunged suddenly by as much as 25 percent. Given the scale of the loss, many exchanges raised the value of margin requirements held by traders to near double their previous value, flattening the market for much of the rest of the year. Currencies also proved a difficult area to keep a grip on as first the Japan earthquake and then the prolonged crisis in the eurozone saw values of most major currencies decline with each new doom-laden revelation in Q3 and Q4. Keeping profits coming in has been a challenge, yet the flocking masses to brokerages illustrate that they’re doing something right.

Both brokers and exchanges have therefore been working overtime to deliver investor satisfaction over the past year. World Finance’s Exchanges & Brokers Awards 2012 offers recognition of the best performing from these fields and celebrates the hard work and service that lies behind it.

Eastern Europe
NETTRADER

North America
First Manhattan

Latin America
Celfin Capital

Asia
Edelweiss Financial Services

Middle East
Ahli United Bank (Bahrain)

Australasia
Macquaire Bank

Africa
Merrill Lynch South Africa

Best Discretionary Broker:
Western Europe
Credit Suisse

Eastern Europe
PBZInvestor

North America
Citigroup

Latin America
Corredores Asociados

Asia
Credit Suisse Japan

Middle East
Dubai Finance Group

Australasia
First Prudential Markets

Africa
Investec Securities

Best Online Broker:
Western Europe
4XP

Eastern Europe
easy-forex

North America
Infinity Brokerage Services

Latin America
J. Safra CVC

Asia
HotForex

Middle East
Royal Forex Trading

Australasia
Interactive Brokers

Africa
Standard Financial Markets

Best Execution Broker:
Western Europe
Ava FX

Eastern Europe
PKO Bank Polski

North America
TD Waterhouse

Latin America
ICAP do Brazil

Asia
CLSA

Middle East
Oanda

Australasia
UBS

Africa
Auerbach Grayson

Best Sustainable Stock Exchange:
Western Europe
Malta Stock Exchange

Eastern Europe
Warsaw Stock Exchange

North America
One Chicago

Latin America
BM&F Bovespa

Asia
Hong Kong Stock Exchange

Middle East
ADX

Australasia
New Zealand Stock Exchange

Africa
Johannesburg Stock Exchange

Best Trading Technology Company:
Western Europe
Deutsche Bank

Eastern Europe
ProQuote

North America
Tibco

Latin America
Systech

Asia
Hitachi Software

Middle East
Mubasher

Australasia
ASX

Africa
3I Infotech

Best Binary Options Platform:
Western Europe
4XP
Eastern Europe
Option Bit

North America
Banc De Binary

Latin America
Start Options

Asia
Banc De Binary

Middle East
Any Option

Australasia
24 Option

Africa
EZ Trader

Best IPO:
Western Europe
Glencore

Eastern Europe
JSW Coal Group

North America
HCA Holdings

Latin America
Acros Dorados

Asia
Hutchinson Port Holdings

Middle East
National Takaful Company

Australasia
QR National

Africa
Tullow Oil

Best Analyst:
Western Europe
Credit Suisse

Eastern Europe
KBC Securities 

North America
Goldman Sachs

Latin America
BTG Pactual

Asia
Great Wall securities Co

Middle East
Dubai Finance Group

Australasia
First Prudential Markets

Africa
Investec Securities

Best Tangible Asset Broker:
Western Europe
CBRE Richard Ellis

Eastern Europe
Firmus Group

North America
USA Gold

Latin America
Fortaleza

Asia
Tennet Group

Middle East
Gold AE

Australasia
LJ Hooker

Africa
ECPlaza

Best Commodities Broker:
Western Europe
Tullett Brown

Eastern Europe
X-Trade Brokers

North America
Marex Spectron

Latin America
Goldman Sachs

Asia
Selby Jennings

Middle East
Gold.ae

Australasia
Saxo Capital Markets

Africa
Tradition

Best CFD Broker:
Western Europe
Ava FX

Eastern Europe
Ava FX

North America
Saxo Bank

Latin America
Dif Broker

Asia
Dif Broker
Middle East
AM Financials

Australasia
CS Securities Broker

Africa
GCI Financial

Best High Frequency Trading Company:
Western Europe
Corvil

Eastern Europe
Algospan
North America
Solarflare
Latin America
Link Investimentos

Asia
Real Time Systems

Middle East
Mubasher

Australasia
Tibra Capital

Africa
Peregrine Holdings

The country’s pension funds have been purchasing a vast array of investments internationally. These include toll roads in Chile, timberlands in Australia, real estate in Brazil, gas pipelines in the US and even large parts of London’s Heathrow Airport. But there has also been a rise in investments in less conventional areas.

The Canada Pension Plan Investment Board, in a partnership with private equity, more than tripled in less than two years after it invested in internet phone service provider Skype.

There has been a recent trend of Canadian pension funds stepping up their push into the UK through both the hiring of senior private equity figures and direct investments. Within the investment opportunities being considered, infrastructure and real estate remain the two sectors that offer tremendous opportunities, especially in Europe and in emerging markets. The rising power of Canadian pension funds has been noted to challenge even the globe’s largest sovereign wealth fund as they have shown to be savvy dealmakers.

Across the Atlantic, UK pension schemes have been piling into hedge funds at a faster rate than any other asset class, according to the the National Association of Pension Funds (NAPF). Their share climbed to 4.1 percent from the previous 2.6 percent over the past year and total sums administered by all final salary members came to a total £800bn. This meant in monetary terms that pension fund investments in hedge funds rose by £12bn, to £33bn. According to the NAPF this came at the expense of UK equities which dropped nearly five percent, from 17.1 percent to 12.2 percent.

Emerging markets
But in addition to hedge funds, there were other winners. Large gains were also observed in emerging market equities, which rose from 2.5 percent to 3.6 percent. Others included real estate, which went up from 5.4 percent to 7.2 percent and infrastructure with a minor increase of 0.3 percent.

Meanwhile, the government moved forward the date when the state pension age will change to 66. It is scheduled to happen over a transitional period between 2018 and 2020, six years earlier than was set in previous legislation. Authorities are also planning changes that will see workers automatically included into workplace pension schemes unless they choose to opt out – a process due to commence in October.

Of all the regions Latin America has experienced the biggest pension reform shake up. Its pension funds have seen a significant development in recent times as the area continues steady growth. Mexican pension funds have generated strong returns of an estimated $120bn in assets. A study by Credit Suisse showed that Mexico’s private sector pension funds, or AFORES, the administering funds for retirement, had by the end of last year managed the equivalent of $112bn.

Furthermore, assets under management experienced a sustained average annual growth of 23 percent over the past decade, with a return in annual terms of 13 percent as of October last year. Non-government securities investments by SIEFORES, the society of specialised investment funds for retirement, on the other hand, increased to an estimated 42 percent. The portfolio asset classes included domestic and international debt, structured securities, domestic and international equity and forex positions. In addition, investments in foreign securities were equivalent to 12.5 percent of total assets.

Peru is another South American country that is undergoing significant pension reforms. Ollanta Humala’s freshly-elected government has taken much needed steps to replace its outdated pension model swiftly. With an estimated $30bn in deposits, pension funds are Peru’s most important source of investment capital. The pension overhaul in Peru aims to provide a dependable source of retirement income for workers and disadvantaged citizens. The finance ministry has now set up a working group to help study and devise a plan to expand coverage and increase efficiencies in the nation’s private pension fund system. This group is composed of Congress, several economists, the Central Reserve Bank of Peru and the Superintendent of Banking, Insurance and Pension Funds.

Change has also come in the form of regulatory adjustments. Last year, Peru’s Central Bank increased the limit on pension funds’ overseas investments to 30 percent, while a limit of 50 percent has been set by Congress. This gradual boost is mainly intended to stabilise the currency but will also allow pension funds to buy shares of corporations in Columbia and Chile, once the three complete the integration of their stock markets.

It is widely considered a highly positive industry development because it has provided scope to diversify investment portfolios. In the past Peru experienced a shortage of accessible investment prospects within its domestic market. This regulatory change will provide portfolio flexibility via foreign markets as it will be able to freely invest in an increased number of liquid securities within foreign countries. Peruvian as well as other Latin American pension funds will welcome the flexibility and liquidity of the foreign markets because it will benefit consumers immensely.

View the World Finance Global Pension Funds Awards, 2012, here.

Belgium
Amonis

Brazil
Petros Fundacao

Canada
OMERS

Chile
AFP Habitat

Colombia
Skandia Pensiones y Cesantías

Croatia
PBZ Croatia osiguranje

Czech Republic
Penzijní fond Komercní banky

Denmark
Industriens Pensionsforsikring

Finland
Tapiola

Germany
ERGO

Italy
Enpam

Kazakhstan
JSC Accumulating Pension Fund GNPF

Mexico
Profuturo GNP Afore

Netherlands
ABN AMRO

Norway
Oslo Pensjonsforsikring

Peru
Prima AFP

Poland
PKO BP BANKOWY PTE

Portugal
Sociedade Gestora do Fundo de Banco de Portugal

Russia
NPF Gazfond

Slovakia
Allianz – Slovenská poistovna

South Africa
Eskom Pension & Provident Fund

Spain
VidaCaixa Group

Sweden
AP Fonden 3

Switzerland
Aargauische Pensionskasse

Turkey
Groupama Emeklilik

UK
Barclays Bank

US
California State Teachers Retirement System

Uruguay
Integracion AFAP

Instruments that are bound to Islamic finance are currently available in over 70 countries worldwide and the sector has been growing over 15 percent yearly over the last five years. But it is not just restricted to Islamic countries. Besides the Gulf Cooperation Council (GCC) and Malaysia, other key financial centres including Hong Kong, Germany, Denmark, London and Luxembourg have established themselves in the Islamic finance sector. And there are others that are progressively more interested with what Islamic finance truly means and what it has too offer the intelligent investor.

Law in Islamic financing
Islamic jurisprudence, or Shariah, is based on a combination of methods within civil and common law traditions which are solely founded on Islam’s religious law and moral code. Although at first glance restrictive to investors, these rules have actually ensured its solidity and won it growing international popularity.

According to those practicing Shariah, there are five main principals to Islamic finance. Most investors are familiar with the concept that predetermined payment over and above the actual sum of principal is firmly forbidden – charging interest on loans is therefore illegal. The law also states that lenders have to share both the losses and the profits that arise out of the enterprise for which the money was lent in order to thwart the borrower from being unfairly enriched at the cost of the financier.

Securitisation of loans and bundling of securities is also prohibited as the law states that to make money from money is not tolerable. Neither is the taking of risk, speculation and uncertainty, which is commonly known as Gharar in Islamic finance law. Gharar is today seen as one of Shariah laws’ key attributes.

Dual risk-sharing
Islamic finance vehicles base their practices explicitly on laws which encourage meeting the financial requirements of participants through processes that promote fair, trustworthy, and honest wealth distribution. During the recession numerous distinguishing facets ensured Islamic financial institutions suffered only a minimal adverse effect. Many believe the reason for this is the shared risk disposition between investors and institutions. The methods used by Islamic finance institutions encourage asset backing because they ascertain a direct connection between real economic activities and financial transactions. In consequence, investments and savings proceeds become intimately joined as they are determined by the real sector rather than the financial industry.

The benefit of such a system is that it helps to establish a means of flexibility that allows leeway for modification in case of unexpected economic blows. In addition, this structure forbids disproportionate leverage and various types of complex securitisation. This on the other hand ensures that real assets and accountability assessments are at all times equal. By treating clientele like partners, Islamic finance vehicles create an air of parity that reduces action while under duress during difficult economic times. The arrangement within Islamic finance instruments discourages unnecessary short range risk taking, hence creating a more equitable pact between borrowers and lenders, offering a fairer split in risks and rewards.

A brighter future
It is because of this equitable set-up that more western investors have taken a keen interest in the development of Islamic finance vehicles. US investment bank Goldman Sachs last year invested in a $2bn Islamic bond programme through an Islamic law-compliant Cayman Islands-registered special purpose vehicle. Even the Vatican reportedly said in its daily publication that the Islamic banking system may well be the way forward in overcoming the global crisis. According to the report the Vatican believes that banks should look at the ethical guidelines of Islamic finance as they may bring banks closer to their clients, which is a factor the Vatican states sees as the true spirit of all financial transactions.

Meanwhile, Deutsche Bank in its end of year “Global Islamic Banking Report” predicted a 24 percent compounded yearly growth rate in Islamic assets for the next three years. It reported that Islamic finance is a rising phenomenon among conventional multinational financial institutions because the commodity boom in several Muslim nations has created surpluses, which need to be assigned through financial intermediaries and sovereign wealth funds. The lender, moreover, found that the quality of Islamic financial services has progressively improved and now offers investors and savers plausible and realistic substitutes to conventional instruments.

As it stands, the Islamic finance system still needs to resolve certain corporate governance and regulatory issues to suit all western requirements beyond doubt. It may even need to evolve to equal cultural and economic changes. But one thing is certain: Islamic finance has the potential to meet more investors’ banking and finance needs to help add to a wider financial stability internationally. World Finance has selected some of the best Islamic-compliant institutions and recognised its industry leaders.