I s s ue No.

1 - J u| y 200
Ihe l:|cmic fncnce :eclcr i: :li|| grcwing
:lrcng|y, Lul lhe :lruclure cf lhe mcrkel hc:
chcngec. ln recenl yecr: lhe numLer cf
p|cyer: increc:ec ccn:icercL|y: new l:|cmic
Lcnk: hcve emergec {:cme c: c re:u|l cf
lhe ccnver:icn cf fcrmer|y ccnvenlicnc|
Lcnk:), new l:|cmic cepcrlmenl: cnc
winccw: hcve cpenec, cnc lhe numLer
cnc rcnge cf l:|cmic prccucl: cfferec Ly
ccnvenlicnc| Lcnk: hc: grcwn :uL:lcnlic||y.
Le:: vi:iL|e Lul nc |e:: impcrlcnl i: c :lruclurc|
chcnge cn lhe cemcnc :ice. Ihe mcrkel
:egmenl cf 'icec|cgicc| cu:lcmer: hc: Leen
exhcu:lec - icec|cgicc| cu:lcmer: cre pecp|e whc:e
eccncmic Lehcvicr i: :lrcng|y mclivclec Ly l:|cmic
vc|ue:. Ihey were |ccking fcr l:|cmic c|lernclive: cnc
recci|y ccceplec l:|cmic Lcnk: cnce lhi: c|lernclive lc
ccnvenlicnc| Lcnk: emergec cnc prcvec lc Le vicL|e.
lcec|cgicc| cu:lcmer: whc :wilchec frcm ccnvenlicnc|
lc l:|cmic Lcnk: wi|| ncl relurn lc lhe fcrmer even if
ccnvenlicnc| Lcnk: cffer :cmewhcl Leller lerm: cr
c mcre civer:ifec rcnge cf prccucl:. 8ul lheir mcrkel
pclenlic| hc: Leen exhcu:lec. Fcr lhe furlher grcwlh
cf lhe l:|cmic Lcnking :eclcr, cu:lcmer: wilh cifferenl
chcrccleri:lic: hcve lc Le cccre::ec Ly l:|cmic Lcnk:
cnc civerlec frcm ccnvenlicnc| Lcnk:. Ihe new 'ncn-
icec|cgicc| cu:lcmer: expecl frcm l:|cmic Lcnk: c
rcnge cf prccucl: ccmpcrcL|e lc lhc:e cf ccnvenlicnc|
Lcnk: c: we|| c: ccmpelilive price:. Ihu:, lhe mcrkel
fcrce: l:|cmic Lcnk: lc increc:ing|y emu|cle ccnvenlicnc|
prccucl:. Scme cf lhe recenl inncvclicn: in l:|cmic
fncnce L|ur lhe Lcrcer |ine Lelween Shcrich-ccmp|icnl
cnc ccnvenlicnc| prccucl:. Ihere cre cpprehen:icn:
lhcl l:|cmic Lcnk: lrcce ci:linclivene:: cnc prcf|e fcr
grcwlh cnc prcflcLi|ily. Ihi: :hc|| Le i||u:lrclec Ly lwc
new prccucl: which hcve rcpic|y gcinec pcpu|crily in
lhe l:|cmic fncnce :eclcr: Shcrich-ccmp|icnl crecil ccrc:
cnc :ukuk: {l:|cmic Lcnc:).
|'cn|c Cec|t Ccc w|tn 8u|'t-|n |ncent|ve tc Spenc
ln lhe pc:l, l:|cmic eccncmi:l: ccvccclec c :y:lem
cvcicing ccn:umeri:m cnc |cvi:h :pencing cnc
enccurcging mccerclicn cnc :pencing fcr :ccic|
purpc:e:. Ccn:umer crecil wc: ncl high cn lhe cgencc
cf l:|cmic Lcnk: in lhe /rcL wcr|c fcr |cng {in ccnlrc:l
lc Mc|cy:ic, where Lcnk: c|wcy: cfferec c
Lrccc rcnge cf ccn:umer fncnce prccucl:).
8ul wilh lhe lcrgeling cf ncn-icec|cgicc|
c|ienl: c: new cu:lcmer: fcr l:|cmic relci|
Lcnking, c mcre civer:ifec rcnge cf
ccn:umer fncnce prccucl: wc: neecec.
Ihe |cle:l ceve|cpmenl i: lhe |cunching
cf l:|cmic crecil ccrc:. Ihcl l:|cmic Lcnk:
- :cme cf which, :uch c: Kuwcil Fincnce
Hcu:e {KFH), hcve Leen in lhe mcrkel fcr
lwc ceccce: - cn|y recenl|y :lcrlec lc cffer
lhi: prccucl ccn Le lcken c: circum:lcnlic|
evicence cf increc:ec ccmpelilicn
cnc c chcnge in lhe :lruclure cf lheir c|ienl:.
Ihe KFH crecil ccrc {cnc :imi|cr ccrc: i::uec Ly clher
l:|cmic Lcnk:) i: Lc:ec cn c :ing|e fxec fee which lhe
c|ienl hc: lc pcy fcr lhe righl lc u:e lhe crecil fcci|ily cf
lhe ccrc up lc c :pecifec |imil. Fcr excmp|e, KFH cffer:
cu:lcmer: c crecil |imil cf KD 2,400 fcr c :ing|e fxec fee cf
KD 200. ln c prccucl Lrcchure, KFH i||u:lrcle: lhcl lhi: lype
cf ccrc i: much checper lhcn ccnvenlicnc| crecil ccrc:,
which chcrge c |cwer fxecfee Lul cccinlere:l pcymenl:
fcr lhe cmcunl cf crecil uli|izec. Fcr c fu|| uli|izclicn cf
lhe crecil |imil, KFH cu:lcmer: pcy cn|y KD 200, whi|e
cu:lcmer: cf c ccnvenlicnc| crecil ccrc wcu|c pcy c
fxec fee cf KD 40 p|u: 14 percenl inlere:l, c lclc| cf KD
348. 8y ccnlrc:l {cnc ncl exp|cinec in lhe Lrcchure), lhe
KFH ccrc i: much mcre expen:ive fcr cu:lcmer: whc u:e
c crecil ccrc ncl fcr crecil Lul c: c ccnvenienl mecn: cf
pcymenl cnc c: c ccver fcr unfcre:een |iuicily neec:.
Ihe fxec fee imp|ie: cn incenlive lc uli|ize lhe crecil
|imil lc lhe mcximum, cnc lhi: wi|| cllrccl in pcrlicu|cr
cu:lcmer: wilh c high prcpen:ily lc ccn:ume. Cnce lhi:
hcppen: il i: hcrc lc :ee lhcl lhi: fxec fee mcce| ccn
:urvive eccncmicc||y. Fcr cu:lcmer: whc u:uc||y re:lricl
lheir ccn:umplicn lc lheir currenl inccme cnc whc u:e
ccrc: cn|y c: precculicn fcr unexpeclec :iluclicn:,
c ccnvenlicnc| inlere:l-Lc:ec crecil ccrc |cck: |ike c
ccmmercic||y Leller chcice.
Sukuk |c Fcctuc''y Un'|n|tec F|ncnc|ng c| Fuc'|c Dect
During lhe 180:, l:|cmic eccncmi:l: ceLclec lhe i::ue
cf puL|ic ceLl. Ihere wc: c kinc cf ccn:en:u: lhcl puL|ic
prcjecl: ccu|c Le fncncec Ly l:|cmic Lcnk: cr inlere:l-
Frof. Vo|ker N/enhous,
Fres/denf, Jn/vers/fy of
Morburg, Germony
!ELA!!C EA!!!!G !CFE FFCF!T, LEEE FFCF!LE?
EA~PI~G & FI~A~CF

www. gr c. oe
free ccpilc| mcrkel in:lrumenl: cn|y if lhey yie|cec
icenlifcL|erelurn: which ccu|cLe:hcrecLy lhefncncier
{e.g. revenue: frcm lc|| Lricge: cr pcwer :lclicn:): c ceLl
ccu:ec Ly puL|ic ccn:umplicn {e.g. expencilure: fcr
:c|crie: cr :uL:icie: exceecing lcx revenue:) ccu|c ncl
Le fncncec Ly l:|cmic in:lilulicn:. Ihi: imp|iec c :lrcng
preference fcr c Lc|cncec Lucgel, which wc: ncl :een
c: c weckne:: Lul c: c :lrenglh cf cn l:|cmic :y:lem.
Hcwever, l:|cmic fncnce lechnc|cgy ccvcncec, cnc
lcccy il i: nc prcL|em lc fncnce cny kinc cf puL|ic ceLl
Ly in:lrumenl: which cre ceemec Shcrich-ccmp|icnl.
Ihi: hc: Leccme pc::iL|e Ly lhe 'invenlicn {cr
reci:ccvery) cf :ukuk:. ln il: :imp|e:l fcrm, il wcrk: |ike:
lhi:: / cwn: rec| c::el: {e.g. cffce Lui|cing:) Lul neec:
|iuicily. 8 i: incepencenl frcm / cnc Luy: lhe rec| c::el:
frcm /. Ihi: give: / lhe neecec |iuicily. /l lhe :cme lime,
/ enler: inlc c |ec:e ccnlrccl wilh 8 fcr lhe ccnlinuec u:e
cf lhe c::el: :c|c. Ihi: |ec:e ccnlrccl i: |cng-lerm cnc wilh
precelerminec rcle: which cre cc|cu|clec in :uch c wcy
lhcl lhe pre:enl vc|ue cf lhe fulure |ec:ing rcle: which 8
wi|| receive frcm / exceec: lhe price which 8 hcc pcic lc
/. Ihi: mcke: il c prcflcL|e
cec| fcr 8. 8 ccn i::ue
cerlifccle: cn lhe ccpilc|
mcrkel which repre:enl
pcrlic| cwner:hip cf lhe
|ec:ec c::el: cnc enlil|e
lhe cwner: lc :hcre:
in lhe prcfl generclec
frcm lhe |ec:e ccnlrccl
{:ukuk:). Ihe prcfl i: very
preciclcL|e cnc lhe
inccme frcm :ukuk: cce:
ncl ciffer ccmmercic||y
in :ignifccnl wcy: frcm
ccnvenlicnc| inlere:l-
Lecring gcvernmenl
Lcnc:. Ihe mcin cifference
i: lhe mcre ccmp|icclec |egc| :lruclure which i: neecec
lc :p|il up c ccnvenlicnc| gcvernmenl Lcnc i::ue inlc
:epcrcle lrcn:cclicn: which - when lcken :epcrcle|y -
cre c|| incivicuc||y Shcrich ccmp|icnl. 8ul lhe ccmLinclicn
cf lhe :epcrcle|y permi::iL|e lrcn:cclicn: crecle: c re:u|l
which wcu|c ncl Le permi::iL|e in c :lrcighlfcrwcrc wcy.
Ihi: excmp|e i: c c|ecr remincer lhcl Shcrich i: l:|cmic
|cw, cnc whcl mcller: fcr Shcrich ccmp|icnce i: ncl lhe
eccncmic cr ccmmercic| cifference Lul lhe |egc| cne.
Hcwever, lc chcnge cn eccncmic :y:lem - lc mcke il
mcre effcienl, ju:l, :lcL|e elc., c: c|cimec Ly l:|cmic
eccncmi:l: - cn eccncmic cifference i: primcry, whi|e c
|egc| fcrm i: :eccnccry.
lf cne exp|cin: lc lhe privcle Lu:ine:: ccmmunily lhe |egc|
:lruclure, lhe exlreme|y |imilec ri:k, cnc lhe ccmmercic|
cllrcclicn {celerminec Ly lhe cifference Lelween lhe
c::el price cnc lhe pre:enl vc|ue cf lhe |ec:e inccme
Ly lhe :imu|lcnecu:|y ccnc|ucec ccnlrccl: Lelween /
cnc 8 cn :c|e cnc |ec:e Lcck), il :hcu|c Le nc prcL|em
lc fnc c |crge numLer cf pecp|e cr ccmpcnie: whc cre
mcre lhcn wi||ing lc ccl c: lhe inlermecicry 8 fcr c :ukuk
cec|. Ihi: inlermecicry i: |egc||y cnc - in c fcrmc| :en:e
- ccmmercic||y ccmp|ele|y :epcrcle cnc incepencenl
frcm lhe gcvernmenl, Lul :ukuk: wcu|c never hcve
ccme inlc exi:lence if gcvernmenl: hcc ncl cfferec
lhe:e lrcn:cclicn:.
|cec'cgy. necy. cnc Fec'|ty. D||t|ng Apct
Fcr l:|cmic eccncmi:l: cnc lhe ecr|y Lcnking picneer:
cf lhe 10: cnc 170:, l:|cmic fncnce hcc cn
cul:pcken :ccic| cnc
ceve|cpmenlc| cimen-
:icn cnc mi::icn. Ihe
prcclilicner: cf lhe 180:
cnc 10: gcl il :lrcighl:
l:|cmic Lcnk: ccu|c
ncl gecr lheir Lu:ine::
lcwcrc: :uch icec|: if
lhey were lc :urvive in
mixec cnc ccmpelilive
:y:lem:. 8ul mc:l cf
lhem :li|| emphc:izec lhe
prccuclicn crienlclicn
cf l:|cmic Lcnking. Fcr
mc:l cf lcccy: fncncic|
engineer:, l:|cmic
fncnce hc: Lci|ec ccwn
lc lhe |egc| cr lechnicc| i::ue cf Shcrich ccmp|icnce
cf ccnlrccl:. Ihey ceve|cp increc:ing|y :cphi:licclec
inlere:l-free ccpilc| mcrkel in:lrumenl: which c||cw c
:epcrclicn cf lhe fncncic| frcm lhe rec| eccncmy. Ihi:
:epcrclicn cnc lhe :eeming|y unccnlrc||ec evc|ulicn cf
lhe g|cLc| fncncic| :y:lem hcve Leen mcjcr crgumenl:
cf l:|cmic eccncmi:l: cgcin:l lhe inlere:l-Lc:ec fncncic|
:y:lem cnc in fcvcr cf cn l:|cmic c|lernclive. Ihe icec|cgy,
lhecry, cnc rec|ily cf l:|cmic eccncmic: cnc fncnce run
lhe ri:k cf crifling furlher cpcrl.