In one of my previous articles entitled ‘Did Islamic Investment Funds contribute to Development?’ I explained that given the nature of Islamic investment funds, they have not contributed to the development of the countries in which they operate. This is because these [investments] were made either in low-risk murabaha funds, or in speculative investments on the stock market (especially in the Gulf) which encouraged the successive rises [in the stock market] resulting in what is now termed a “stock market bubble”. This stock market bubble [which led to the global economic crisis] caused many to lose their savings or even their future earnings as a result of borrowing to invest.
The [murabaha] investment funds would purchase commodities from the international market at a high price and then sell them onto a wealthy third party at a deferred price [to be paid later]. This price could be deferred for anything up to a year while the [financial] performances of such funds are usually linked to the interest rate. These funds are known by various names in different places. Some financial institutions call them trade funds, while others refer to them as equity funds or murabaha funds.
The Al Ahli Saudi Riyal Trade Fund has assets worth 15.5 billion Saudi Riyals [SR] (US $4.1 billion) and is considered the largest murabaha fund in the world. A quick look at the parties involved in this fund shows that they are all either local or Gulf banks, while no companies, whether local or Gulf, are associated with the fund so as to reduce risks resulting from this type of investment. This [protectionist] behaviour deprives companies of one of the most important credit resources [murabaha investment funds] which are characterized by lenient credit endowment since these funds are considered to be outside the banking system allowing them to be more dynamic.
Moreover, this [protectionist] behaviour also deprives investors from making higher profits than those made by banks, especially considering the desire of many companies to take advantage of the leniency exhibited by such [murabaha] funds in extending credit even at a higher cost and especially that the amount of credit that banks are prepared to offer is shrinking as they prefer to maintain their liquidity in order to strengthen their financial position and achieve the highest degree of protection for their capital in order to safeguard the finances of their depositors.
There can be no doubt that maintaining the publics’ confidence in the financial sector especially at this particular time is considered more important than achieving high profits, especially since any instability in the financial sector will result in serious consequences.
Therefore I believe that it is time for Islamic murabaha funds to assume their responsibility with regards to breaking the stranglehold of this credit crisis by providing direct credit to private sector companies. It is also time for the regulatory authorities to ease the regulations on these funds by legislating laws to govern their operation, while observing the issue to ensure that those participating in this process do so in accordance with professional and sound principles so as to safeguard the money invested in such funds.
The continuing decline of credit and the soaring prices in the Gulf region which is currently experiencing hard times due to the collapse of oil prices (one of the main sources of Gulf income) will strongly affect both the development process directed by the regional governments and their ability to complete their forecast projects. This [global financial crisis] could also cause many companies to fail to meet their obligations and may even result in bankruptcy. This is why the goal of searching for ways to provide additional funds to stabilize the private sector and finance the growth projects is one of the top priorities of regional governments.
These governments must take steps to avoid the possible looming crisis whose seeds can be seen in Kuwait where some investment companies failed to meet their [financial] obligations due to either failing to renew their funding or secure new alternate sources of financing. This resulted in the government being forced to actively intervene and offer these companies sufficient credit for them to be able to meet their financial obligations.
This situation that Kuwaiti companies experienced may be repeated in every Gulf state when the deadline for paying back any large amount of money comes around, unless an initiative is made to find solutions like the one proposed in this article [murabaha funds offering credit to the private sector] to the declining amount of credit that banks are prepared to offer.