Islamic Finance in physical commodities trade

Islamic FinanceCommodity traders increasingly turn to Islamic Finance instruments in search of attractive financing terms, while entities adherent to rules of Islamic Fianance are eager to step in considering a relative shortage of Sharia’s compliant instruments that allow for effective liquidity management. Until present Islamic Finance compliant financial institutions have been employing commodities from the London Metal Exchange to structure short-term funding transactions with much success. Nonetheless this activity seem to not fulfill their ambitions any longer.

Furthermore banks from GCC countries appear to be eager to fill the gap left by some of the European players that decided to limit their exposure to commodity business, due to liquidity constraints (particularly in USD currency terms). This is not an issue that raise concerns of GCC based banks at the moment.

Generally speaking, we could argue that much of initial growth of Islamic finance was fueled by the needs of commodity trade. Particularly to satisfy increased financing needs of oil-importing Islamic countries in 70′s. Nowadays Islamic Finance is  forecasted to reach a size of 2 trillion USD over this year. What position it as one of the most prospective areas of financial industry as a whole. For those who did not manage yet to familiarize themselves with its basic tenets, its main characteristic is that no interest rates can be charged whatsoever nonetheless mark-up’s and shares of borrower’s profit are allowed. There exists a number of standardized products to enable the financing of projects and trade. Some instruments employed are quiet complex examples of financial engineering, combining a number of Sharia’s compliant financial instruments to create a product that provides acceptable risk/return ratios.

Interesting project regarding physical commodities trade is developed within JLT Free Zone in Dubai. The Zone was brought into existence  as a strategic project of Dubai’s government in order to provide the physical market (including trade platforms and storage facilities) and financial cluster  for creation of commodities market place in Dubai.  Despite the fact that The Dubai Multi Commodities Centre is focused on trade of  Gold, Diamonds, Pearls and Tea, more typical commodities for Western based commodities traders as Oil or Copper are also exchanged.  DMCC  provides excellent facilities to track ownership of commodities in question to make sure that a factual sale of assets has occurred. It is important from the view of Islamic Finance principles adherance and from the perspective of people involved in physical trade.

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