Almost all contemporary writings in Islamic Law and/or Islamic finance proclaim that Islamic Law (Shar?#a) forbids interest. This statement is paradoxical in light of the actual practices of Islamic financial providers over the past three decades. In fact, the bulk of Islamic financial practices formally base rates of return or costs of capital on a benchmark interest rate such as LIBOR, and would easily be classified by any MBA student as interest-based debt-finance. Nevertheless, jurists on the payrolls of Islamic financial providers continue to proclaim all forms of interest as rib?, which is subject to the severest Qur"anic prohibition. As quotations later in this article will illustrate, this dual role of jurists (condemning conventional interest-based financing, while supporting and personally profiting from its “Islamic” twin) is supported through excessively formalistic interpretation of the letter of the Law.
Minority opinions permitting modern forms of interest have surfaced from time to time, and they were occasionally championed by holders of highly respectable (though, often politically appointed) religious posts. Perhaps the oldest such pronouncement was made by Ebusuud Efendi, the Mufti of Istanbul between 1545 and 1574 C.E., and holder of the title ”eyhülislam towards the end of his tenure. Ebusuud defended the act of interest-taking, especially by awq?f (pious foundations), as a practical matter of necessity.1 As expected, this minority opinion, while sanctioned by the Ottoman Sultan Suleyman, was rejected by the majority of Muslim scholars around the Arab world, who continued to favor interest-free lending and traditional partnership forms of finance. Consequently, European modes of banking only became commonly practiced in the Islamic world in the eighteenth century. Even then, this widespread adoption of “western” banking practices appears to have been driven by external forces.
They were exotic products created by unregulated, renegade stock-pickers and exclusively held by a private club of high-net-worth individuals for financial snobbery motives. They have progressively become the darlings of the investment industry, as evidenced by financial publications, analysts’ reports, boardrooms and even happy hour cocktails. Their success was fuelled by the wealth created by the long bull equity market of the 1990s, and is now supported by the difficult and highly volatile environment that has prevailed since the early 2000s. Indeed, by focusing on absolute performance and abstracting from benchmarks, hedge funds are able to generate superior returns in virtually all types of market environments. Consequently, they offer the much-needed diversification to portfolios invested in traditional asset classes such as equities and bonds. This provides a strong argument for using them in wealth management and contributes to making this new asset class – or new way to manage traditional asset classes – an increasingly popular investment choice.
However, we all know that there is “no such thing as a free lunch” in finance. Thus, private and institutional investors willing to include hedge funds in their portfolios must realize that to deliver their favorable return/risk characteristics, hedge funds must carry additional risks, which are not common to traditional stock and bond investments. These risks are inherent to the strategies pursued, the instruments and markets used, the amount of leverage employed, and last, but not least, the specific skills of the selected hedge fund managers.
This document is based on the discussions that took place at the first session of the Intergovernmental Working Group on the Draft Budget for the first financial period, document A/FCTC/IGWG/1/6, and on identification of next steps. A summary of those discussions is recorded in the Draft report of the first session of the Inter-Governmental Working Group (documents A/FCTC/IGWG/1/8, paragraphs 55 to 64 and paragraph 80 (e)) In the course of the discussions requests were made for financial information that might give some indication of the likely costs of implementing the Framework Convention and the possible level and structure of the budget.
