Islamic finance needs its own efficient price indicators

Sharia compliant assets have emerged as a viable alternative asset class as part of the strategy to diversify portfolios of investors.  The outperformance of a number of global Islamic indexes in the medium-to-long term should encourage investors to consider allocating a portion of their portfolios to Islamic investment vehicles. To conform to sharia requirements, Islamic products will have to avoid elements of riba (usury), gharar (ambiguity/uncertainty/ misinformation or deceit/fraud), maisir (gambling) and zulm (oppression), among others. Although the obligation to eliminate riba may result in complex structures for Islamic financial instruments, I believe the prohibition of other elements as mentioned above in Islamic contracts and in strict adherence to sharia rules and principles, should help assuage many investor concerns.

Whatever it is, a product structuring or innovation exercise should comply with sharia requirements in substance and in spirit.  In the absence of reference price indicators specific for Islamic finance, the Islamic financial services industry still relies heavily on interest rate-based benchmarks such as the London Interbank Offered Rates (LIBORs).  Without a viable sharia compliant alternative, the industry will still have to use these quoted market rates as a basis to price Islamic financial instruments and securities. As such, it's a fallacy to think that movements in global interest rates will not have any implications for Islamic securities although the impact may be limited to those that are pegged to observed interest rates, especially LIBORs.