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Opportunity knocks on the Islamic front

A growing number of companies are realizing that there is a large pool of cash in the Islamic world that they may be able to tap into to diversify their funding sources and lower their financing costs. However, they must be willing to embrace Shariah-compliant structures.

A number of airlines have started to use Islamic finance structures

THE ISLAMIC DEVELOPMENT Bank (IDB) has the lowest ratio of net development-related assets to shareholders' equity and the best liquid assets to gross debt ratio of all the multilateral development banks.

According to credit rating agency Standard & Poor's, which rates it AAA, the IDB could write off all its receivables and investments and remain solvent without a capital call.

Although this strength is impressive it also indicates that the bank is simply not providing enough development assistance - it is sitting on a pile of cash it doesn't know how to mobilize. And in this respect, as well as in its stringent upholding of the Shariah, the IDB is perhaps the defining example of an Islamic bank today.

In 2002, ABN Amro Private Equity estimated that Islamic banks were 40% more liquid than conventional banks. Figuring out productive uses for the money flowing in from religiously motivated customers is still a problem. The Liquidity Management Centre, established in Bahrain last year to provide an active market of short-term liquidity instruments has not yet solved it.

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