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Oil price dynamics and impact on Islamic finance

13/06/2011 05:09:00 PM GMT   Comments ()     Add a comment   Print     E-mail to friend
Rising oil prices are once again pointing towards a petrodollar boom

Oil prices rise and fall over the period of time but there must be a certain impact on various finance markets around the globe. In other words, some financial structures benefit more from rising oil prices than others. Islamic finance is certainly one of the beneficiaries of the oil price increment. Throughout the history of rising oil prices the interested companies invested in Islamic finance as a short term solution to gain maximum profit.

The reasons why people are companies invest in Islamic finance markets when the oil prices soar are various. Firstly the main reason is due to the fact that Islamic finance markets discourage interest. This helps the already affected investors and they do not pay for the interest at all. Historically whenever the price of oil increases a certain level, the investors rush to the global Islamic market. But this trend only lasts till the prices are soaring.

Another reason why people prefer Islamic finance over other investment options in such times is because Islamic finance disallows investment in certain volatile sectors. Industries such as gambling and pornography are strictly forbidden in Islam, so any Islamic finance institution can’t invest in these. This in turn helps the original investors as the risk of loss becomes way too less. This can also be termed as the reason why people prefer Islamic finance over hedge funds. Although hedge funds offer a very lucrative and instant form of profit, but they come with their set of risks too.

If we historically monitor the trend of rising oil prices and Islamic finance markets, 2008 would be termed as an ideal scenario to analyze this phenomenon. Before that let us know what a petrodollar is? Petrodollar is termed as a US Dollar earned from the sale of petroleum products worldwide. Often people confuse petrodollars with petrocurrency. Petrocurrency however means any currency in which petrol or oil is traded. Coming back to petrodollars, in 2008 when the oil prices hit a record level reaching to $150/barrel the big corporations and countries invested their dollars in Islamic finance. In return a global Islamic financial boom was witnessed with UAE harvesting the maximum benefit from this.

Now in 2011, once again the oil price is rising extensively, mainly because of the turmoil in the Middle East. The investors are once again eyeing the Islamic finance as an instant and short term solution to earn maximum profits and minimizing the risk factors involved in losses. It shows that Islamic finance will play a key role in the future finance dynamics of the world, but the question still remains whether it can wholly replace the current structure or not. Most analysts believe Islamic finance would be able to gather a sizable chunk of the market but it will serve parallel along with the current financial tools without having the capability of overcoming all other competitors.
Source: Al Arabiya Digital

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