US financial meltdown gives a boost to Islamic banking
Thursday, 28 January 2010
Md. Touhidul Alam Khan
Malaysia achieved a spectacular success with Islamic finance. At end June last year, it accounted for about 19 per cent of the country's banking assets. At end-August, the Islamic capital market reached 803 billion Malaysian ringgit, representing 54 per cent of market capitalisation of the Malaysian stock market. The total financing estimated at 115 billion ringgit constitutes 15.5 per cent of the total financing portfolio of the banking industry. Net non-performing financing remains low at 2.4 per cent.
Speaking at the sixth annual Kuala Lumpur Islamic Finance Forum (KLIFF) in November Malaysian Prime Minister Najib Tun Razak said his country has entered into agreement for greater collaboration and engagement of mutual benefits in Islamic finance. Malaysia would, he said, continue to expand the outreach of Islamic finance. Najib described Islamic finance as a strategic vital element in the world's recovery from a financial crisis that had shaken the faith in banking institution. "Although Islamic finance has largely escaped the ravages caused by overzealous financial innovation and imprudent lending practices which were at the heart of the global financial crisis, we cannot afford to be complacent," he said. It is imperative for the industry to draw upon the lessons learnt to avoid any such financial instability in the future.
For Islamic finance to withstand the impact of the current or future crisis, he suggested that innovations in Islamic finance ought to be based on the objectives of Syariah, which requires the gains to benefit the people. Innovations must, he said, be supported by good governance practices, the basic principles of Islamic finance. He called for ensuring risk management systems, with appropriate safeguards, which should keep pace with innovations.
He also called for the development of a legal, regulatory and supervisory framework to address problems for the development of Islamic finance industry.
Development of Islamic finance would also require the institution for speedy, effective and cost efficient resolution of troubled financial institutions. Besides, a financial safety net framework could function as a deposit insurance system for the lender.
The recent financial turmoil in advanced economies underscored the importance of better liquidity management. Sharia'h-compliant financial instruments effectively managed cross-border liquidity problems during the recent global financial crisis. The Islamic Financial Services Board (IFSB) and the Islamic Development Bank (IDB) of Malaysia had set up a liquidity management task force early this year for the development of a liquidity management framework.
Supervisory and legal infrastructure remains relevant to the rapidly changing Islamic finance landscape.
Malaysia's Islamic bond market maintained its dominance, accounting for 58 per cent of total bond market.
In Russia, the "Badr Forte Bank," was opened in 1997 as the lone bank to offer Sharia'h-compliant financial services to Russian Muslims.
Russia, with 47 million Muslims, a third of its population, represents one of the major Islamic finance market as its Muslim population is eager to follow the tenets of Islam.
After the US financial meltdown people are sceptical about capitalism. Some of the Islamic financing principles have been adopted by western corporations. General Electric Capital Corporation announced it would issue $500 million sukuk or bond debt compliant with the Shariah. In Islamic finance the question is whether the money lent to a person or business would be used in a productive manner for the society. Conventional finance tends to value profit more. The world's over 600 Islamic financial institutions has about $1 trillion in assets. Islamic banks in theory have a 100 per cent reserve ratio. In conventional banking, depositors are guaranteed to earn a percentage of interest on their money held in banks. Islamic financial products include murabaha, which is comparable to consumer loans in conventional finance, except that getting money from an Islamic bank means paying more than the item is worth, which is similar to interest tacked on to a conventional loan. But paying back an Islamic bank loan ahead of time doesn't save money because many Muslims believe interest is detrimental to society. Before lending, Islamic bankers look at the financial viability of a particular business in society. In conventional banking, a business owner's creditworthiness is considered important and the lending bank does not care if a business fails as long as the loan is repaid. In Islamic finance, business loans are considered partnerships. The lending bank is a silent partner in mudarabah loans. Musharakah loans are more like joint ventures, with the lending bank providing the business advisers.
A handful of Islamic banks have been established in Toronto, Canada. The United States financial regulators recently brought changes to banking rules to allow Islamic financial practices.
Switzerland is the latest western country to adopt a full range of Sharia'h-compliant banking products and services. "We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the Middle East region and on a global scale," Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference at the Museum of Islamic Art in Doha. The bank would offer a full spectrum of Sharia'h-compliant banking products and services for clients, including Murabaha "sale on profit", Wakala "fiduciary agreement between two parties" and Maraya "an Islamic structured product that is based on Murabaha or a series of Murabaha transactions".
"The launch of our Islamic wealth management offering reflects our commitment to serving the diverse needs of our clients," said Goetz.
Islam forbids Muslims from usury, receiving or paying interest on loans. Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages. Sharia'h-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships. Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities. The Swiss Bank, a leading private bank with a broad international footprint, hopes to get a share of the booming Islamic finance market. "We have perceived in the past couple of years that we have been in the region for these services," Goetz said. Islamic finance is one of the fastest growing sectors in the global financial industry. Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world. "We are extremely delighted that the global launch of our Islamic products is taking place in the Middle East," said Rohit Walia, Executive Vice Chairman and CEO, Bank Sarasin-Alpen Group, Middle East and South Asia. Nearly 50 percent of the Islamic finance market is situated in the Gulf region. "Islamic Finance is a fast growing concept in the region," said Walia. "Many of our clients have expressed interest in Islamic Wealth Management and we are very happy to offer the suite of Islamic products to meet their requirements. "I am sure this will also add to our already strengthened position in the region." Many other international banks, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business. Now, nearly 300 Islamic banks and financial institutions operate across the world. "Ultimately our aim is to operate on a global basis," said Fares Mourad, Managing Director, Head of Islamic Finance at Bank Sarasin. "But what we are doing is a step by step approach."
Assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks, rose by 28.6 per cent, to $822bn from $639bn in 2008. This was in striking contrast to the growth of just 6.8 per cent of the conventional banks.
Ireland, like other European countries, is warming up to Islamic finance. Dublin's Islamic investment fund rivals Channel Islands and Luxembourg. Several Shariah-compliant funds, including the Oasis Crescent Global Equity Fund is based in Dublin.
Some of the Islamic banks of Gulf countries cater to Britain's Muslim community. Others look after the investment funds that the government and revenue commissioners like to see coming to Ireland.
Non-Muslims in many countries have also been attracted by Islamic banking after the collapse of many conventional banks over past two years.
In Britain, Steven Amos, the Islamic Bank of Britain's head of marketing, recently told the London-based 'Times' newspaper that his bank is prospering as High Street banks alienating existing customers.
The New York-based International Swaps and Derivatives Association (ISDA), which represents more than 830 organisations active in the $592 trillion derivatives market, started working on its Sharia'h-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006. The first version of their framework will focus on swaps for profit-rate and currency transactions.
Islamic finance is the fastest-growing segment of the global financial system with $919 billion of assets under management, including $114 billion of Sharia'h-compliant bonds, known as sukuk, Prudential Financial Inc. said recently.
The infant Islamic management industry lacks a large enough range of products and distribution channels to challenge its conventional peers, experts said. The nascent US$1 trillion Islamic finance industry is replicating conventional products and establishing its own genuine products that adhere to Islam's prohibition of interest. Asset management is seen as a sector where the industry could easily create products according to its own set of values, but it has not yet established the range of products to compete with conventional asset management.
Experts say that the weakness of Islamic fund is its failure to focus on equities and real estate, for which it is unable to diversify funds and assets.
Islamic asset managers are prohibited from investing in companies that are highly leveraged and in certain sectors, such as financials, alcohol and gambling.
The writer is Executive Vice-president, Corporate Banking Division of Prime Bank Limited. and Associate Fellow Member of Institute of Islamic Banking and Insurance (IIBI), United Kingdom. He can be reached
at: touhid1969@gmail.com
Malaysia achieved a spectacular success with Islamic finance. At end June last year, it accounted for about 19 per cent of the country's banking assets. At end-August, the Islamic capital market reached 803 billion Malaysian ringgit, representing 54 per cent of market capitalisation of the Malaysian stock market. The total financing estimated at 115 billion ringgit constitutes 15.5 per cent of the total financing portfolio of the banking industry. Net non-performing financing remains low at 2.4 per cent.
Speaking at the sixth annual Kuala Lumpur Islamic Finance Forum (KLIFF) in November Malaysian Prime Minister Najib Tun Razak said his country has entered into agreement for greater collaboration and engagement of mutual benefits in Islamic finance. Malaysia would, he said, continue to expand the outreach of Islamic finance. Najib described Islamic finance as a strategic vital element in the world's recovery from a financial crisis that had shaken the faith in banking institution. "Although Islamic finance has largely escaped the ravages caused by overzealous financial innovation and imprudent lending practices which were at the heart of the global financial crisis, we cannot afford to be complacent," he said. It is imperative for the industry to draw upon the lessons learnt to avoid any such financial instability in the future.
For Islamic finance to withstand the impact of the current or future crisis, he suggested that innovations in Islamic finance ought to be based on the objectives of Syariah, which requires the gains to benefit the people. Innovations must, he said, be supported by good governance practices, the basic principles of Islamic finance. He called for ensuring risk management systems, with appropriate safeguards, which should keep pace with innovations.
He also called for the development of a legal, regulatory and supervisory framework to address problems for the development of Islamic finance industry.
Development of Islamic finance would also require the institution for speedy, effective and cost efficient resolution of troubled financial institutions. Besides, a financial safety net framework could function as a deposit insurance system for the lender.
The recent financial turmoil in advanced economies underscored the importance of better liquidity management. Sharia'h-compliant financial instruments effectively managed cross-border liquidity problems during the recent global financial crisis. The Islamic Financial Services Board (IFSB) and the Islamic Development Bank (IDB) of Malaysia had set up a liquidity management task force early this year for the development of a liquidity management framework.
Supervisory and legal infrastructure remains relevant to the rapidly changing Islamic finance landscape.
Malaysia's Islamic bond market maintained its dominance, accounting for 58 per cent of total bond market.
In Russia, the "Badr Forte Bank," was opened in 1997 as the lone bank to offer Sharia'h-compliant financial services to Russian Muslims.
Russia, with 47 million Muslims, a third of its population, represents one of the major Islamic finance market as its Muslim population is eager to follow the tenets of Islam.
After the US financial meltdown people are sceptical about capitalism. Some of the Islamic financing principles have been adopted by western corporations. General Electric Capital Corporation announced it would issue $500 million sukuk or bond debt compliant with the Shariah. In Islamic finance the question is whether the money lent to a person or business would be used in a productive manner for the society. Conventional finance tends to value profit more. The world's over 600 Islamic financial institutions has about $1 trillion in assets. Islamic banks in theory have a 100 per cent reserve ratio. In conventional banking, depositors are guaranteed to earn a percentage of interest on their money held in banks. Islamic financial products include murabaha, which is comparable to consumer loans in conventional finance, except that getting money from an Islamic bank means paying more than the item is worth, which is similar to interest tacked on to a conventional loan. But paying back an Islamic bank loan ahead of time doesn't save money because many Muslims believe interest is detrimental to society. Before lending, Islamic bankers look at the financial viability of a particular business in society. In conventional banking, a business owner's creditworthiness is considered important and the lending bank does not care if a business fails as long as the loan is repaid. In Islamic finance, business loans are considered partnerships. The lending bank is a silent partner in mudarabah loans. Musharakah loans are more like joint ventures, with the lending bank providing the business advisers.
A handful of Islamic banks have been established in Toronto, Canada. The United States financial regulators recently brought changes to banking rules to allow Islamic financial practices.
Switzerland is the latest western country to adopt a full range of Sharia'h-compliant banking products and services. "We are proud to be the first Swiss private bank to offer such a holistic range of opportunities in Islamic finance to the Middle East region and on a global scale," Fidelis M Goetz, Head of Banking Division at Bank Sarasin, told a press conference at the Museum of Islamic Art in Doha. The bank would offer a full spectrum of Sharia'h-compliant banking products and services for clients, including Murabaha "sale on profit", Wakala "fiduciary agreement between two parties" and Maraya "an Islamic structured product that is based on Murabaha or a series of Murabaha transactions".
"The launch of our Islamic wealth management offering reflects our commitment to serving the diverse needs of our clients," said Goetz.
Islam forbids Muslims from usury, receiving or paying interest on loans. Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages. Sharia'h-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships. Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities. The Swiss Bank, a leading private bank with a broad international footprint, hopes to get a share of the booming Islamic finance market. "We have perceived in the past couple of years that we have been in the region for these services," Goetz said. Islamic finance is one of the fastest growing sectors in the global financial industry. Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world. "We are extremely delighted that the global launch of our Islamic products is taking place in the Middle East," said Rohit Walia, Executive Vice Chairman and CEO, Bank Sarasin-Alpen Group, Middle East and South Asia. Nearly 50 percent of the Islamic finance market is situated in the Gulf region. "Islamic Finance is a fast growing concept in the region," said Walia. "Many of our clients have expressed interest in Islamic Wealth Management and we are very happy to offer the suite of Islamic products to meet their requirements. "I am sure this will also add to our already strengthened position in the region." Many other international banks, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business. Now, nearly 300 Islamic banks and financial institutions operate across the world. "Ultimately our aim is to operate on a global basis," said Fares Mourad, Managing Director, Head of Islamic Finance at Bank Sarasin. "But what we are doing is a step by step approach."
Assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks, rose by 28.6 per cent, to $822bn from $639bn in 2008. This was in striking contrast to the growth of just 6.8 per cent of the conventional banks.
Ireland, like other European countries, is warming up to Islamic finance. Dublin's Islamic investment fund rivals Channel Islands and Luxembourg. Several Shariah-compliant funds, including the Oasis Crescent Global Equity Fund is based in Dublin.
Some of the Islamic banks of Gulf countries cater to Britain's Muslim community. Others look after the investment funds that the government and revenue commissioners like to see coming to Ireland.
Non-Muslims in many countries have also been attracted by Islamic banking after the collapse of many conventional banks over past two years.
In Britain, Steven Amos, the Islamic Bank of Britain's head of marketing, recently told the London-based 'Times' newspaper that his bank is prospering as High Street banks alienating existing customers.
The New York-based International Swaps and Derivatives Association (ISDA), which represents more than 830 organisations active in the $592 trillion derivatives market, started working on its Sharia'h-compliant master agreement with the Bahrain-based International Islamic Financial Market in 2006. The first version of their framework will focus on swaps for profit-rate and currency transactions.
Islamic finance is the fastest-growing segment of the global financial system with $919 billion of assets under management, including $114 billion of Sharia'h-compliant bonds, known as sukuk, Prudential Financial Inc. said recently.
The infant Islamic management industry lacks a large enough range of products and distribution channels to challenge its conventional peers, experts said. The nascent US$1 trillion Islamic finance industry is replicating conventional products and establishing its own genuine products that adhere to Islam's prohibition of interest. Asset management is seen as a sector where the industry could easily create products according to its own set of values, but it has not yet established the range of products to compete with conventional asset management.
Experts say that the weakness of Islamic fund is its failure to focus on equities and real estate, for which it is unable to diversify funds and assets.
Islamic asset managers are prohibited from investing in companies that are highly leveraged and in certain sectors, such as financials, alcohol and gambling.
The writer is Executive Vice-president, Corporate Banking Division of Prime Bank Limited. and Associate Fellow Member of Institute of Islamic Banking and Insurance (IIBI), United Kingdom. He can be reached
at: touhid1969@gmail.com