Islamic Finance and Structured Commodity Finance Techniques: Where the Twain Can Meet
This study discusses Islamic trade and project financing techniques, and draws parallels with conventional finance. It is hoped that the discussion will inspire conventional bankers to incorporate Islamic financing structures into their credit packages, and Islamic bankers to adopt some of the innovations of structured finance to expand their lending and investment possibilities.
The conclusion is that in Islamic finance, banks need to earn their profit not simply because they make money available, but because they take a production or trade-related risk. In principle, this orients Islamic bankers more towards venture capital, project finance and structured finance than their colleagues in other banks. However, in practice, Islamic banks often have difficulties to build up the skills base necessary to evaluate financing proposals in the necessary detail (and, in many countries, lack the supporting commercial framework, such as national rating services), and therefore tend to concentrate on relatively low-risk transactions which, for most non-Islamic observers, look remarkably like interest-bearing loans under a different name. This may, however, change when more experience is built up.