The Islami Bank tower in Bangladesh
Islamic Banking Blooms in Bangladesh
Courtesy of IslamOnline.net
By Ferdous Ahmad, IOL Correspondent
DHAKA — The globally-booming Islamic finance is making strides and gaining popularity in Bangladesh, with experts predicting that the shari`ah-compliant industry will continue in steady steps to become the mainstream banking system in Muslim South Asian nation.
“The future of the Islamic banking systems is so bright,” Mominul Islam Patwary, Chairman of the executive committee of Islami Bank Bangladesh Limited, told IslamOnline.net.
The Islamic banking is seeing impressive growth in Bangladesh
Bangladesh entered the Islamic banking system only in 1983, with the establishment of Islami Bank Bangladesh.
Since then, five more full-fledged private Islamic banks and 20 Islamic banking branches of conventional banks have been established.
Patwary says that his bank is now one of the top performer banks in terms of business and profits among the 48 commercial banks operating in the country.
“Islamic Bank Bangladesh Limited has gained first position in the all private banks in term of deposits, investment, export & import and remittance collection.”
According to the Bangladesh Bank (BB), the central bank of the country, the deposits of the Islamic banking systems are now 25 percent of all private banks deposits and its investments are 30 percent.
Bahauddin Mohammad Yousuf, vice chairman of Al-Arafah Islamic Bank, has an explanation for Bangladesh’s Islamic finance boom.
He says that for a Muslim, whose religion prohibits earning or paying interests, Islamic banking makes it possible to operate interest-free business.
“People of this country are religious,” Patwary, of the Islami Bank, agrees.
Islam forbids Muslims from usury, receiving or paying interest on loans.
Islamic banks and finance institutions cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
Bangladesh is the world’s third largest Muslim majority country, with Muslims making up more than 80 percent of the nation’s 148 million population.
New Order
Bankers believe that the Islamic banking is set for even more progress, if a law governing Islamic Banking policies is introduced.
“If an Islamic banking Act is introduced, the Islamic banking systems will even further flourish,” Patwary said.
Experts predict that with the rapid rise of Shari`ah-based systems, the industry will ultimately turn to be the financial mainstream in Bangladesh.
“The interest-free Shari`ah-based systems will be mainstream Banking and the conventional banks will be the minority systems in the OIC countries including Bangladesh within 2002,” M Azizul Haque, a leading expert on Islamic banking in Bangladesh, told IOL.
Azizul Haque, who is also chairman of the Shari`ah Council of Dhaka, believes that Bangladesh will follow the rest of the world to the Islamic banking sector.
He explains that the growth rate of Islamic banking in the OIC countries for example is 15 to 20 percent while that of conventional banks is 10 to 15 percent.
Islamic finance is one of the fastest growing sectors in the global financial industry.
In defiance of the credit crunch, the global Islamic finance market has grown about 15 percent in each of the past three years, and is now worth about $700 billion worldwide.
Currently, there are nearly 300 Islamic banks and financial institutions worldwide.
Its assets are predicted to grow to $1 trillion by 2013.
Azizul Haque expects that higher growth rates in the next decade will force the global financial systems to Islamic banking.
“There is not any sort of apprehension regarding the success of Islamic banking,” the renowned economic expert said.
“Capitalization could not solve the global economic problems.
“The world is looking for a new economic order. Islamic economic system will be that new economic order.”
Filed under Islamic Banking News, Islamic Banking in Bangladesh by on Mar 16th, 2010. Comment. 
Development Bank of the Philippines
Ignacio Bunye of Speaking Out wrote a recent article on the increasing interest in Islamic banking in the Philippines.
Until recently, he says, Islamic banking was little known in the Philippines, in spite of the fact that The Philippines actually pioneered in Islamic banking with the creation of the Al-Amanah Islamic Investment Bank of the Philippines in 1973.
Now, however, interest seems to be rekindling. The Development Bank of the Philippines recently obtained full control of Al-Amanah Islamic Investment Bank by acquiring the national government’s 69 percent stake in the bank.
The bank plans to expand their operations in majority-Muslim Mindanao, and they have sent 15 banking executives to Malaysia to be trained in Shari’ah-compliant Islamic banking.
Here is the story in full:
Islamic banking in the Philippines
By Atty. IGNACIO BUNYE
February 28, 2010, 4:02pm
Not many of us are aware that there is such a concept as Islamic banking, and that there is actually a special bank for our Muslim brothers and sisters.
In a country like the Philippines where there is a significant Muslim population, this financial system is indeed very important.
Islamic banking pertains to a system of banking that is consistent with the principles of Sharia (Islamic law). In this type of banking system, the collection and payment of interest, which Muslims refer to as “riba,” is strictly prohibited.
Islam forbids transactions involving interest because of its teachings that all income must be determined by the supply of work associated with the factors of production.
It emphasizes that if money is lent for interest, capital is consequently augmented without any effort. Profit-Loss sharing in Islam encourages Muslims to invest their money and become partners in order to share the profits and risks of the business.
Islamic law prohibits investing in sectors contrary to Islamic values such as gambling, alcohol, tobacco, the arms industry and pornography.
In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller and resell it to the buyer at a profit, while allowing the buyer to pay the bank in installments.
The Philippines actually pioneered in Islamic banking with the creation of the Al-Amanah Islamic Investment Bank of the Philippines in 1973. Al-Amanah even antedated the establishment of the Dubai Islamic Bank in 1975.
However, for a variety of reasons, principally lack of expertise in this new field and lack of general public awareness, Al-Amanah failed to really take off the ground.
In the 1980s, the Government of Malaysia and Bank Negara began actively promoting Islamic banking in Malaysia. The following decade saw the development of a regulatory regime for Islamic Financial Institutions by the Central Bank of Bahrain.
Financial institutions and products designed to comply with the central tenets of Sharia are among the fastest growing segments of the global financial industry. The number of Islamic financial institutions worldwide now exceeds three hundred, with operations in 75 countries and assets in excess of US$400 billion.
Islamic banking has also been estimated to be growing by as much as 20% a year, largely fuelled by wealth from oil.
With these developments, interest in Islamic banking has been rekindled. With Monetary Board approval, the Development Bank of the Philippines recently obtained full control of Al-Amanah Islamic Investment Bank by acquiring the national government’s 69 percent stake in the bank.
Forward-looking DBP President Rey David sees in Al-Amanah a new opportunity for DBP to expand its SME operations in Mindanao as well as other banking services to include remittances especially from the Middle East.
DBP has already sent 15 top executives to Malaysia to hone up their skills in Sharia banking.
Rey David believes that under new management, the refurbished and rebranded Al-Amanah could serve as gateway to Brunei, Indonesia, Malaysia and to the economies of other Muslim countries.
Filed under Islamic Banking in Philippines by on Mar 1st, 2010. Comment.
The Kuwait Real Estate Bank, one of the shareholders in the mega-Islamic bank being formed
According to BruneiNews.net, the creation of a planned Islamic investment megabank is in “fairly advanced stages” and it will likely be launched in the next six to 12 months. Such is the word from an executive at a firm advising on the ambitious project.
The plan has been in the works for years. It will form the world’s largest sharia-compliant lender, and is being promoted by the chairman of Al Baraka Banking Group Sheikh Saleh Abdulla Kamel.
Sheikh Saleh said last April the global financial crisis had delayed the project, but that they hoped to launch it soon.
“The key shareholders I would say are on board and we are looking for an imminent launch, within six months to a year,” Sameer Abdi, head of Islamic finance at Ernst & Young, told the Reuters Islamic Banking and Finance Summit in Bahrain.
Sheikh Saleh said the new institution so far had about 10 shareholders, including the Islamic Development Bank ISDBA.UL, Saudi Investment bank 1030.SE and the Kuwait Real Estate Bank.
Bigger Islamic banks are seen crucial for the industry to realize its growth potential and to compete with Islamic windows or subsidiaries of Western conventional banks that have large market shares in wholesale banking services.
Abdi said the bank’s “capital aspirations” were between $3 billion and $4 billion.
“It’s progressing very, very quickly, even in such tough market conditions,” Abdi said.
Conventional banks, regional as well as international, would likely play a role in the project, but their exact role had yet to be decided.
“Possibly as shareholders, possibly as technical consultants, possibly as operators, all those options are being explored,” Abdi said.
Possible jurisdictions to host the bank include Malaysia and Bahrain, with a third being considered, he said.
(Reporting by Frederik Richter, Dinesh Nair and Raissa Kasolowsky)
Filed under Islamic Banking News by on Feb 21st, 2010. Comment.
Islamic home financing does exist in Australia
In response to articles on this website about the availability of Islamic mortgages in the UK and other places, a reader named Houssam posted the following comment:
“Its good to know that these type of loans exist but what about the Muslim community in other countries like Australia. Are we able to borrow money from a different country? please reply as i am in a desperate situation to borrow for the purchase of a home for my family.”
I did a little research and found an article on the International Business Times titled, “Demystifying Muslim Mortgages”. It indicates that lending organizations offering Islamic home financing do indeed exist in Australia.
One is called the Muslim Community Cooperative of Australia (MCCA). Their website is http://www.mcca.com.au/
Another is Iskan Home Finance, based in Sydney. Their website is http://www.iskan.com.au/home.htm
So, Houssam, take hope! As a Muslim in Australia you have alternatives to buy a home and still adhere to your religious principles.
I am reprinting the article in full here:
Demystifying Muslim Mortgages
27 November 2009 @ 12:00 am AEST
Some Muslims won’t accept the standard loans offered in Australia based on Islamic law forbidding interest payments. They’ve instead taken on a new way of lending aimed to stay within their beliefs. This unique Islamic finance market is growing internationally to the tune of nearly US$1 trillion, and could soon become a force in Australia as well. Kit Kadlec reports.
“Those who charge riba are in the same position as those controlled by the devil’s influence… As for those who persist in riba, they incur Hell, wherein they abide forever” – Qur’an 2:275
This much is clear – the Qur’an has very strong words against “riba,” which loosely translates to interest.
This poses a clear difficulty for Muslims in Australia who would want to take out a mortgage while still following Islamic law. There were more than 340,000 Muslims in Australia in 2006, and the population is growing. Many of these residents want to live the Australian dream and own their own home. But in doing so with a local lender, they must pay back interest and thus violate “Sharia” or Islamic law.
“The difference between Islamic and Western banking is the notion of interest rates,” says Nail Aykan, marketing manager with the Muslim Community Cooperative of Australia (MCCA). “In the Islamic beliefs, the interest rate is forbidden, hence there must be an alternative.”
One way to avoid any interest payments would be to pay entirely in cash for a property, but few could ever afford such a transaction in Australia. Another option would be to borrow from friends, but that also is usually not practical.
In order to get around this challenge, the MCCA has followed the lead of other lenders abroad and offered Islamic finance – essentially a process that avoids interest by entering into a partnership with each homebuyer and sharing the risk of the purchase.
The buyers don’t make interest payments, but instead pay rent to the MCCA until a certain point when they are granted full ownership.
Slow start in Australia
An energy efficient house in Sydney, Australia, with a view of Bondi Beach and the ocean
Founded in 1989, MCCA is the first and one of the leading providers of Islamic finance in Australia, a small but growing market. There’s little competition other than a few others such as Sydney-based Iskan Home Finance. While Islamic finance has taken off in some Western countries such as Britain and the United States, it’s still relatively small here. Aykan says there are about 1,500 MCCA members, which is slightly under 2% of the estimated 80,000 Muslim families across the country.
Part of the problem in drawing in customers is that the MCCA does not offer the multitude of services as larger banks do.
“If we had real banking services, I believe we could easily penetrate 20% of the Muslim market,” says Aykan, going as far as to say 50% of the Muslim market eventually be committed to Islamic finance eventually in Australia. The MCCA also aims to reach non-Muslim customers as well.
While the Muslim community is growing, it is not completely accurate to describe it as one homogenous group. There are more than 60 countries of birthplace and 55 languages spoken, according to the MCCA.
Another major reason Australia has lagged in growth of its Islamic finance sector is that it doesn’t have the connections to the Arab world like the U.S. and U.K., says Bala Shanmugam, a professor and chairman of accounting and finance at Monash University’s Malaysian campus.
“Britain and the United States have always viewed themselves as a major destination for petro dollars – a repository for Arab funds,” says Shanmugam. “Hence they are taking steps to do what is necessary to maintain their stand. Australia on the other hand is not exactly a centre for such funds, so I do not see a rapid take-off in that direction.”
Perhaps the largest issue, however, is the fact many Australian Muslims, while growing in number, see the traditional lending method with banks here to be both easier and cheaper.
“Research shows that Muslims as well as non-Muslims view returns as a more important factor in a financial transaction,” says Shanmugam. “This variable outweighs religion in terms of importance for patronising types of banking. Therefore, unless people see actual benefits in terms of returns, the extent of patronisation will be nominal.”
Case study
There are some Muslims in Australia who place religion first, however. Mohammad Tabiaat, of Lebanese descent, is one who chose to borrow through MCCA for his first family home.
He bought a three bedroom home in Campbellfield, outside of Melbourne, in December for $270,000, paying a 20% deposit. That part is not unlike anything other Australians would do in purchasing such a home.
The difference is that Tabiaat is not paying interest back. Instead, he’s paying about $1,600 per week in rent through “Murabaha.” It can be described as a lease-to-own agreement, where the borrower is offered a fair market rent.
A fascinating dome-shaped house in Hawthorn, suburb of Adelaide, Victoria, Australia. Probably not what most people will be financing with Islamic mortgages, but interesting to look at it any case. You can see more of it at http://www.housedesignnews.com/home-ideas/the-dome-house-by-mcbride-charles-ryan-in-australia/
Murabaha, an Islamic term, is defined as a transaction where the seller (in this case MCCA) discloses the cost of its commodity, then adds some profit thereon, which is either a lump sum or based on a percentage. This payment must be a fixed amount.
In another option, Ijarah Muntahia Bittamleek, the payments can be either fixed or variable, and the end ownership of the property is transferred to the client with the last instalment. There are another three products as well, and other lenders such as Iskan Home Finance have other offers as well, although all aim to be Sharia compliant.
In his own particular case, Tabiaat will be paying back his rent for 180 weeks, which ultimately equates to $288,000, plus the $54,000 deposit. While not everyone can afford such high weekly rents of $1,600, it is common to have borrowers pay off the amount owed quickly with Islamic finance, says Aykan.
The MCCA has also taken on some of the risk in this transaction, as it essentially has made the purchase on behalf of Tabiaat. According to the MCCA, the mortgage can either be seized by the funder or left with the borrower given that it is registered for full mortgage securities entitlement to the funder. It is also permissible to use a third party property as a security mortgage.
Tabiaat says he realises it would have perhaps been easier to use a traditional bank, but he prefers to follow the Islamic law.
“It’s an individual choice,” he says. “Some people are really conscious about what rate they are paying, whereas others don’t mind paying the extra amount to do it in a compliant way.”
How much more is it that one must pay in Islamic finance? Aykan says it often is a very similar bottom line.
“A normal bank and a traditional bank may be offering the same rates, but it’s how it’s processed that is the difference,” he says.
Filed under Islamic Banking in Australia, Islamic Mortgages by on Jan 24th, 2010. 1 Comment.
Though Muslims are a minority in India and are generally less affluent than Hindus, in sheer numbers they make India the second largest Muslim nation in the world. Cumulatively, their investment power is tremendous and represents an untapped resource for Islamic banks.
M D Nalapat reports in the Pakistan Observer that financial entities in the USA and Europe have exerted their influence to prevent the development of Islamic banking in India, fearing the outflow to India of the $1.16 trillion (!) in funds that are parked in Western Islamic banking institution.
Is this true? I don’t know. But the article makes for very interesting reading. He also points out that India has strong ties with the Arabian Gulf, and the development of Islamic banking in India would probably result in tremendous investment in India by Gulf institutions. For that reason, he believes that the growth of Islamic banking in India is inevitable.
I have reprinted the article below, cleaning up some of the many typos. Hey Pakistan Observer (or any of the other international publications that are typically poorly edited in English), if you need an editor, give me a ring.
Here’s the article:
Bringing Islamic Banking to India
M D Nalapat
There are more Muslims in India than there are in Pakistan, which is why it is surprising that successive governments have so far done nothing to bring Islamic banking into India. The consequence of such neglect is that millions of observant Muslims are forced to park their savings in dubious entities, because they have been deprived of financial institutions in India that are Sharia-compliant and avoid the payment of interest, because of its ban in the Quran (3:130).
Indeed, the Quran sets forth some very healthy financial principles,such as the avoiding of the giving of finance to unsavoury businesses (5:2), and the showing of compassion to the financially disadvantaged (2;280). As has been pointed out by several scholars,the prohibition of interest is not unique to Islam, but is also found in Judaism and Christianity ( Psalms 15:5, Nehemiah 5:7). However, throughout the world, the giving and taking of interest has become widespread Financial experts estimate that more than $50 billion of funds from the Gulf can flow to India, should Islamic banking institutions be set up in the country. This will generate 2.7 million jobs in the country,both directly and indirectly. At present, almost all the surplus cash of the Gulf countries is parked in London (which, ironically, is the world’s top “Islamic Banking” centre), New York, Zurich and Frankfurt. Naturally, the financial instititions headquartered in these locations would not like to see India emerge as a competitor in the parking of funds from the Gulf.
They are aware of the strong historical and civilisational ties between India and the Arab world, and are nervous that this may result in funds moving away from them. Indeed, many Arabs are justifiably upset that they have suffered a collective loss of $1.3 trillion because of the numerous malpractices of financial institutions in the US and the EU, and would prefer to place their money in India. However, thus far, because of the immense influence that financial entities in the US and the EU have over the Reserve Bank of India and the Ministry of Finance, thus far, the policy changes needed to attract such funds have not come about So pervasive is the influence of US and EU funds over India’s financial policymakers that the Reserve Bank of India significantly slowed down economic expansion in India during 2007-2008 by raising interest rates to levels not seen in more than a decade.
Although the RBI justified this as an anti-inflation measure,they themselves know that such painful steps have no impact on price rise,caused as this is by speculation and by policies that favour the middleman over the producer and the consumer. All that the policy of high interest rates has done was to make several segments in Indian industry less competitive than they were when interest rates were low. The policies followed by the monetary authorities in India have forced several corporates to borrow money from London and other centres in the developed world,at a profit for these centres of 3%.
Small wonder that there is so much pressure on India to prevent the authorities from taking steps that could attract funds from the Gulf. Had the authorities in India encouraged their domestic companies the way policymakers in the US and the EU unfailingly do, India would not have been in today’s situation,when even tiny Taiwan exports double the volume India does Recently, the government of Kerala, a state that has ties with the Gulf that go back for 1600 years, sought to set up an Islamic Banking division in one of their financial institutions. However, a politician having close links with a section of the Hindu religious leadership has got the Kerala High Court to stay the operationalisation of this move.
India’s courts are famously liberal when it comes to granting stays,with some even lasting for decades. In countries such as the US or the UK, stays are granted only after the court is convinced that there exists a strong prima facie case in favour of the individual making the request. In the case of India, stays by a court are granted far more liberally. The Kerala High Court order means that the attempt by the state’s Communist rulers to set up an Islamic banking system in a state where 20% of the population are Muslims may be indefinitely delayed. Bankers in Europe and in the US can rest easy, knowing that it may be a long time before the estimated $1.16 trillion dollars parked in so-called “Islamic Banking” institutions in these locations faces competition from India
Although it is true that several policymakers allow themselves to be unduly infuenced by interested parties operating overseas, the fact remains that overall, India’s policymakers are a patriotic group. Indeed, with all their faults, India’s administrators have done a commendable job in ensuring a modicum of stability in the face of frequent political upheavals.
Hence, this columnist is optimistic that it will not be long before India copies the Malaysian model, and brings Islamic banking into the country. Closer economic interaction between India and the Gulf is in the interests of both sides. The GCC countries and India are complementary in their skills and congruent in their interests. The setting up of Islamic banking divisions within the existing banking network in India would ensure a substantial flow of investible funds into the country.
Of course, none of this money would get diverted to industries such as gambling and alchohol, that are barred in Islam. A beginning has been made by the Jamaat-i-Islami Hind,which has set up a committee on Islamic banking under a noted scholar, Mr Abdur Raqeeb. Some influential policymakers within the Congress Party are also active in seeking to overcome the block to Islamic banking that has been artificially created by international interests keen to ensure that India does not take money away from them India is a secular country, and therefore Islamic banking needs to be seen not as a “Muslim” issue, but as one that involves the welfare of each citizen,whether Muslim, Christian, Hindu, Jain, Sikh or Buddhist.
After all, the huge volume of remittances from Indians working in the Gulf benefits the entire country and not simply those belonging to a particular religion.
Islamic banking therefore needs to be viewed less as a religious right than as a secular advantage. Allowing India’s observant Muslims to gain access to domestic funds that are Sharia-compliant would ensure that they avoid getting duped by unregulated and often dubious entities that seek to profit from their faith. The Islamic world is India’s natural partner, and one way of strengthening such linkages would be through the introduction of Islamic banking in India Indeed, it can be argued that the healthy financial principles mentioned in the Quran were the earliest enunciation of the “mutual fund” concept. Unless mutual gain comes from mutual effort, and unless moral principles are given primacy in decision-making, the world will witness further man-made catastrophes such as the 2008 financial crash.
This was caused entirely by the greed of some 380 individuals, who were the prime movers in the relentless speculation that artificially drove up the prices of commodities such as food grains, copper, steel and oil. Sadly, apart from a handful,not one of the 380 have suffered any legal consequence of their devastating economic attack on humanity.
Indeed,the Obama administration seems as deferential to them as was George W Bush. Small wonder that speculation in commodities is once again rearing its poisonous head, making the price of oil and other essentials rise despite the weakened state of the international economy. Judging by the way in which Barack Obama, Gordon Brown, Angela Merkel and others are obedient to their whims, it looks as though those guilty of causing the distress of hundreds of millions in their insatiable greed for money will once again plunge the world into chaos, and soon.
In such a context, the need to create financial systems grounded on moral values becomes clear. Should Islamic banking entities finally get sanctioned in India, and should they function in the way that is intended, then not only Muslims but Hindus and others will start putting their savings in them. As the sages say, we need to look for good everywhere, so as to reach it everywhere.
Filed under Islamic Banking in India by on Jan 9th, 2010. Comment.
Salford University in Greater Manchester is now offering degrees in Islamic finance
A university in the UK is going to be offering a degree in Islamic banking. British banks have experienced a surge in demand for Islamic financial products, mostly from local Muslim families but also from non-Muslim families who are attracted to the fair terms that these products offer.
In the comment section on the the Daily Mail Online’s story, Paul Hart wrote:
“This is what Labour have always wanted ,a Muslim state. Congratulations Blair , Brown and all the other buffoons under Labour your wish is finally coming true to eradicate what little is left of the true British culture.”
And Tony M. responded:
“Cue mad ranting islamophobes claiming this will be the end of the world as we know it….”
I think Tony is more on the money here. It’s pretty ridiculous to see the introduction of a University degree as a takeover by the brown masses. If they were offering language degrees in Russian or Hindi (as they probably do) would that imply that peasants from the steppes, or Indians on elephants, would soon be banging down the gates?
Here’s the Daily Mail’s story:
University to launch degree in Islamic banking after demand for ‘ethical’ lending surges
The banking world has already grown used to accommodating the needs of Muslim savers… and now there’s a university degree to match.
A Muslim student at a cash machine
Salford University in Greater Manchester is launching a degree course in Islamic banking next year in which students will learn how to invest and lend according to the religion’s strict financial principles.
The postgraduate course is being introduced after a surge in demand from high street banks offering Islamic services to Muslim families.
Under Islamic rules, charging and paying interest is viewed as immoral and investments must be made according to strict ethical principles.
Islamic banks have opened in a number of British cities and major banks, including HSBC and Lloyds TSB, already offer Islamic products and services.
Although they cannot pay interest, Islamic banks must still offer competitive returns to customers and turn a profit.
Banks make money for investors by taking fees for matching investors and borrowers, buying into businesses, or buying and leasing assets to potential borrowers.
The MSc course – one of the first of its kind – will initially be open to 20 students next year. Lecturer Hussein Abdou said: ‘It’s predicted demand for Islamic services will treble in the next few years. ‘The course is not just for Muslim students. It is open to all people who want to have a unique position in the jobs market.’
Filed under Islamic Banking UK, Islamic Finance Education by on Dec 14th, 2009. 1 Comment.
Manama, Bahrain. The government of Bahrain issues a type of short-term sukuk, or interest-free Islamic financing product, that substitutes for three-month treasury bills.
Oxford Analytica is an international, independent consulting firm drawing on a network of over 1,400 senior faculty members at Oxford and other major universities and research institutions around the world.
In an article titled “Islamic Finance Still Profitable”, published in Forbes.com on 12-19-2009, Oxford Analytica reports that Islamic sukuk financing continues to grow, with the startling news that General Electric plans to raise $500 million through a five-year Islamic sukuk.
The Islamic takaful insurance industry continues to grow as well, with most issuance concentrated in Malaysia and unaffected by Dubai’s financial crisis.
Here’s the full story:
Islamic Finance Still Profitable
Prior to the current financial crisis in Dubai, sukuk issuance had started to revive following two difficult years since the August 2007 peak. New issuance for the year to November 2009 exceeded $17.5 billion with 69 separate offerings. Confidence was demonstrated by the announcement on November 19 by General Electric that it was to raise $500 million through a five-year sukuk–the first Western industrial company to raise such financing.
Liquidity. There are many varieties of sukuk, some–such as the short-term sukuk issued by the Government of Bahrain–being a substitute for treasury bills with a three-month maturity. Such sukuk are attractive for Islamic banks to hold, as they cannot hold conventional treasury bills paying interest, and the alternative of holding cash means they receive no return. Bahrain’s regular sukuk bill issuance continued throughout the credit crisis, but the amounts raised are modest–$40 million on average.
Still profitable. Although Islamic capital market activity was negatively affected by the global financial crisis, the impact on Islamic banks has been limited, largely because most are focused on retail business:
–Dubai Islamic Bank, for example, has reported a decline in third quarter earnings for 2009 of 33% compared to the same quarter of 2008, but this was 8% above market expectations.
–Trade financing through murabaha–in which a bank buys a good on behalf of a buyer, and sells it on to them in installments at a marked-up cost–has remained buoyant, as has personal financing for vehicles and household goods.
Real estate has been the most troublesome, with mortgage lending reduced. In many instances, the value of property has fallen below the amount of credit outstanding. This only becomes an issue in the case of defaults and the bank acquiring the property, which has rarely arisen in the case of Dubai Islamic Bank, or indeed Al Rajhi Bank in Saudi Arabia or Kuwait Finance House. As Islamic banks in the GCC had more conservative housing finance policies than their conventional competitors, they have been less affected by the fall in real estate prices.
Takaful insurance. One sector which has continued to expand throughout the crisis is takaful insurance based on the principle of mutual risk sharing rather than risk transfer:
–Dubai Islamic Bank has developed Al Islami Takaful products, which it has cross-sold to its clients since May.
–Savings plans are offered with either regular or lump sum contributions made to an endowment fund from which family members can receive compensation in the event of the death of the policyholder.
–If the policyholder lives to the maturity of the policy, they receive a substantial lump sum plus a terminal bonus.
Outlook. Most sukuk issuance is concentrated in Malaysia, which is not likely to be directly affected by the Dubai crisis. Moreover, if the Dubai case is tested in the courts, this could clarify the legal position of sukuk investors with regard to their rights to the underlying assets backing the issuance. Although this may be painful for Dubai World subsidiary Nakheel in the short run, a court ruling in favor of investors would increase confidence in sukuk in the longer term. Overall, the global Islamic finance industry seems well positioned for recovery in the longer term with further sukuk issuance, a widening of products to include takaful and the continuing buoyancy of Islamic retail banking.
Filed under Islamic Banking Malaysia, Sukuk Financing, Takaful: Islamic Insurance by on Dec 12th, 2009. 1 Comment.
A visitor takes a photograph at Ski Dubai, an indoor ski slope in a shopping mall in the emirate.
In an article for the New York Times, Andrew Ross Sorkin looks at the lead-up to the financial collapse in Dubai, and argues that Dubai built its banking reputation on Islamic financial instruments that were not in fact Shariah-compliant, were no different from interest-based bonds, and were “mathematically equivalent to conventional debt and mortgage contracts.”
Here’s the story:
A Financial Mirage in the Desert
By ANDREW ROSS SORKIN
Published: November 30, 2009
The investments were supposed to be blessed, and the bankers were desperately looking for more people to bless them.
It was about two years ago, and I was in Dubai to cover an investment conference at a hotel along Jumeirah Beach. Hundreds of Western bankers dressed in Savile Row suits were packed into an enormous room to bone up on the intricacies of the next new thing in financial products: Shariah-compliant investments.
They wanted to sell them to wealthy, oil-rich Muslim investors who needed a way to increase their fortunes but whose options were limited. Any investment vehicle needed to conform to the spirit of the Koran, which forbids any investments that pay interest. No mortgages. No bonds. No clever derivatives. Just tangible assets in the so-called real economy.
It was a big honey pot — worth as much as $1 trillion that could yield billions in fees — and the bankers were determined to find a way in.
Jumeirah Beach, Dubai, site of an investment conference.
One discussion was led by a British banker from Barclays who had moved to the region to create an entire Shariah-compliance team. He shared tips about various ways to create “structured products” that would pass muster with Muslim investors. (To me, the investments looked like bonds, walked like bonds and talked like bonds — but he never called them that.) Some of the bonds that Dubai World is in jeopardy of defaulting on, by the way, are Shariah-compliant sukuk. Just don’t call them bonds.
He was struggling to hire enough Shariah scholars, he said, and he needed them to bless the investments — apparently there was a shortage of properly trained Islamic scholars who did this kind of work.
With the benefit of hindsight — and you didn’t need much — there were plenty of other signs back then that Dubai was building a financial mirage in the desert.
With hours to kill before a late-night flight, I ventured over to the Ski Dubai indoor ski run. It’s a pretty good bet that a city with an average temperature of 90 degrees and an indoor ski slope is probably living a little too large. On one ride up the chairlift, I sat next to a 7-year-old from London who had just moved to town. With a big grin, he proudly told me that his father was in “the real estate business.”
For the last couple of years, the running joke on Wall Street was “Dubai, Mumbai, Shanghai or goodbye.” If you were the C.E.O. of a troubled investment bank desperately looking for cash, you made a pilgrimage to one of those three cities with hat in hand. They were the places most likely to write a quick billion-dollar check; their eagerness should have also been a tip-off. Now you have to wonder about Mumbai and Shanghai, too. Are they next in line to take a fall?
Willem Buiter, a former Bank of England official who was hired as chief economist of Citigroup on Monday, says that Dubai’s credit crisis is just the natural progression of “the massive build-up of sovereign debt as a result of the financial crisis.” He wrote on his blog on The Financial Times’s Web site that the contraction of credit “makes it all but inevitable that the final chapter of the crisis and its aftermath will involve sovereign default, perhaps dressed up as sovereign debt restructuring or even debt deferral.”
With all the money pouring into the region, it would have been hard for any doomsday types to make themselves heard. But there were whispers here and there, pointing out the obvious. David Rubenstein, the co-founder of the private equity giant Carlyle Group who was in Dubai at the conference, remarked to me at the time: “You know, they don’t have any oil here.”
That fact was overlooked by many investors who didn’t want to miss out on a quick buck. What about the risk? The view was, and apparently still is, that if Dubai gets in trouble, its oil-rich neighbors in Abu Dhabi will bail everyone out to avoid damage to their collective reputation and, by extension, the region’s economy. Just as the United States stood behind its banks, in part, to avoid losing the confidence of foreign investors, Abu Dhabi might have to do the same.
That had to be what Citigroup, with its firsthand expertise with bailouts, must have been thinking when it lent $8 billion to Dubai last year. Oh, and here’s an interesting fact: Citigroup made the loan to Dubai on Dec. 14, 2008. Take a look at the calendar — that’s after it received tens of billions in TARP funds. Citigroup’s chairman, Win Bischoff, said at the time, “This is in line with our commitment to the U.A.E. market in general, and reflects our positive outlook on Dubai in particular.” Good call. And what became of all those Shariah-compliant financial instruments that were the hot topic of that panel I attended? It turns out that many of them that were sold prior to the crisis weren’t compliant at all.
The Shariah Committee of the Accounting and Auditing Organization for Islamic Institutions, which is based in Bahrain, ended up changing the rules to make them stricter because of widespread abuse. As Mr. Buiter described them on his blog, “these were window-dressing pseudo-Islamic financial instruments that were mathematically equivalent to conventional debt and mortgage contracts.”
Blessings, alas, can do only so much.
Filed under Financial Crisis, Islamic Banking Dubai by on Dec 9th, 2009. Comment.
Islamic bank in Indonesia
Are you a student, trying to decide what industry will hold the most promise when you graduate? Are you looking for a halal career in a growth industry with good salary potential?
Kompas.com reports in a story titled, “Islamic Banking in Dire Need of Bankers”, published on Wednesday December 9, 2009:
JAKARTA, KOMPAS.com — Islamic banking is impeded with regulations, permits, capital, and the more serious one is the lack of bankers. Deputy Director of Bank Indonesia Syaria Banking, Mulya Effendi Siregar, reminded that the lack of bankers is one reason why the operations of some islamic public banks have been delayed.
Among operational islamic banks, the limited number of bankers has caused a hijacking war. In several months of operations, some bankers have already moved onto other new syaria banks.
According to Mulya, the hijacking war is normal for a growing industry. “According to the data, the human resources needed for islamic banks is up to 22,000 personnel. But so far only 14,000 are available.”
An islamic banker, who wishes to remain anonymous, stated that the lack of human resources in islamic banking is especially on the directional level. “I moved because I want a more lucrative opportunity. It’s like swapping an old shirt that’s too small with a new one that fits.” This senior banker moved to a new islamic bank recently launched a few months ago.
Another banker who plans to swap his banner is Ismi Kushartanto. Unfortunately, the former high official of BNI’s Islamic Business Unit wasn’t willing to reveal which syaria bank he’ll be moving to. He only said that he had passed the fit and proper test of Bank Indonesia, two months ago.
Regarding his new salary and reason of resignation, he was also unwilling to reveal. Banking authorities claim to have endeavored so that this human resource issue doesn’t become a lasting stigma. But so far the efforts have been in vain. (Ruisa Khoiriyah/Kontan/C17-09)
Filed under Islamic Banking Indonesia, Islamic Banking News, Islamic Banking Trends by on Dec 8th, 2009. Comment.
Palm Jumeirah – a palm shaped island off Dubai - cost over $12 billion USD to build, and is still underpopulated
Expensive Real Estate Investments Precipitated Financial Crisis
Hock’s Viewpoint – By Choong Khuat Hock
The Star Online
THE financial turmoil arising from the Dubai debt crisis is merely one of the visible signs that the excesses from the debt fuelled asset bubbles are continuing to surface.
Dubai World, incorporated only in 2006, managed to accumulate debts amounting to US$60bil as it went on a shopping spree. Some of the assets like Emirates Airlines and DP World (which controls over 50 ports worldwide) are quite attractive. Others like the QE2 cruise liner and a stake in MGM Mirage (Las Vegas gaming operation) are more ostentatious but it was the expensive real estate investments that precipitated the financial crunch when demand dried up.
Excessive Real Estate Developments
Dubai World had spent over US$12bil on Palm Jumeirah – a palm shaped island off Dubai. Other than the super luxury Atlantis Hotel and some residential units, the island remains under-populated.
Other developments include The World – a group of artificial islands costing US$14bil to build. As money ran out, some of these islands are facing erosion.
The soon-to-be completed Burg Dubai, towering over 800m or almost twice the height of Petronas Twin Towers, has become an epitome of past excesses. No doubt Dubai has achieved a lot but excesses built on debt often crumble when credit is removed.
Hidden Liabilities
The true liabilities are probably higher as there may be commitments to finish construction of ongoing property projects. When investments banks like Lehman failed, the true liabilities were higher as the bank used many off balance structures to mask the true level of gearing.
Special purpose vehicles (SPVs) were set up to lure investors in and the investment bank would earn fees for structuring the deal and managing the SPVs, which often geared up to buy asset-backed securities.
Other ways to hide liabilities are to get associates to borrow or to guarantee loans taken up by friendly parties as was the case in Enron. Fortunately for Dubai, Abu Dhabi, the richest of the seven emirates forming United Arab Emirates (UAE), has the financial muscle to help Dubai.
Abu Dhabi has the largest sovereign fund in the world estimated at around US$700bil-US$800bil, and the sixth largest proven oil reserves in the world. Failure to resolve the issue would result in loss in confidence not only in Dubai but also in UAE and the Middle East in general.
Nevertheless, Abu Dhabi is likely to demand something in return for its help while Dubai is likely to seek a haircut from the banks for US$26bil of loans to be restructured. Dubai World may also have to sell stakes in some of its crown jewels to Abu Dhabi or other investors.
Default by Dubai Could Impact the Islamic Debt Market
Any default by Dubai would also result in large losses by UAE banks. In an interlinked world, European banks with large exposure like RBS, HSBC and Standard Chartered would also have to make provisions.
Banks had lent assuming implicit state guarantee and were carried away by the over-optimism that Dubai’s property market could only go up. The Dubai debt crisis could also adversely impact the sukuk (Islamic) debt market which has already seen a sharp decline in issuance. Islamic banking often structures interest as a profit-sharing venture but under Islamic principle, there should be a sharing of profits and losses.
Many Islamic scholars and the Bahrain-based Accounting and Auditing Organisation for Islamic Institutions have stated that Islamic bonds with quasi-principal protection are unislamic as it goes against ethos of Islamic finance.
Holders of Islamic bonds might find that they are competing with a general body of creditors rather than being paid first if they are holders of conventional bonds. The possibility of not being ranked above normal creditors could hurt the valuation of Islamic bonds.
The Dubai World bonds are unsecured and have a form of principal protection.
The bonds are governed by English law and should it go to court, the verdict by the British courts would have tremendous ramifications for the Islamic bond market including Malaysia’s substantial Islamic bond market. Is the principal protection legal or Islamic? How would the Islamic bondholders rank?
Other Debt-Fueled Asset Bubbles
Other than Dubai, trouble lurks for countries that had indulged in debt fuelled asset bubbles. The Spanish economy was so geared towards real estate that when the bubble burst, unemployment surged to 24%, a level that is as high as the level in the US at the worst of the Great Depression. Great Depression conditions also exist in the Baltic states where the economies have collapsed.
The gross domestic product (GDP) of Latvia plunged by 18.4% in the third quarter compared with a year ago while unemployment surged to 15%. Swedish banks have the largest exposure to the Baltic states while German and Austrian banks are exposed to some of the ailing Eastern European countries.
When the dust settles, investors are likely to differentiate among countries. Countries with large debts and current account deficits are particularly at risk. It is no wonder that Vietnam, with a current account deficit, has had to devalue twice.
Investors are also getting jittery on highly indebted countries like Japan, Mexico, Ireland, Greece and many Eastern European countries.
Fortunately, Malaysia enjoys a current account surplus and a stable banking system but Malaysian construction companies which were keen on development projects in bubble economies like Vietnam and the Middle East will become more cautious on such projects.
US banks could also be sitting on a potential time bomb in the form of commercial real estate loans, estimated at US$1.7 trillion. US banks may not have fully written down the loans and the day of reckoning will come when around US$500bil of the loans mature over the next few years.
Most exposed are the regional banks. No wonder they are reluctant to lend despite ample liquidity, starving small and medium enterprises of funds and slowing any recovery in employment. Nevertheless, a collapse of the banking system is unlikely as the Fed and other central banks have discovered a new weapon – print money to inject capital or liquidity into troubled banks.
Printing money may become the preferred tool as borrowing becomes more difficult.
Even the cost of Japanese debt is rising. Its savings rate fell from 15% in 1990 to only 2% currently. A series of fiscal stimulus has boosted its debt to GDP from 60% in 1990 to 180% currently. Japan cannot continue to rely on domestic savings to fund its fiscal stimulus.
In the US, money printing is even more tempting especially as the government is expected to post a budget deficit of 12.3% of GDP this fiscal year and high unemployment makes tax hikes difficult.
With so many minefields in the form of hidden debts and crouching defaults, it is no wonder that the Fed and other central banks have decided to flood the financial system with liquidity hoping that it would help the situation through lower debt servicing and higher asset prices.
The sea of liquidity may cover up the minefields to provide an illusion of normality but some of the minefields will continue to explode from time to time. Flooding the system with liquidity would just delay the clearing of these minefields.
Choong Khuat Hock is head of research at Kumpulan Sentiasa Cemerlang Sdn Bhd.
Filed under Financial Crisis, Islamic Banking News by on Dec 7th, 2009. 2 Comments.
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