Expert: It’s tough for Islamic banks too

Expert: It’s tough for Islamic banks too

By Chong Pooi Koon

The industry saw strong growth in 2007 despite the start of the subprime crisis and was still expanding fast until the summer last year, when the credit crunch began to take its toll.

“This year the syariah banks are going to be exposed to the crisis the entire year. Those who survive this year will come out as winners, but others, especially the smaller banks, could merge, be taken over, or simply disappear,” BMB Islamic UK Ltd chief executive officer Dr Humayon Dar said in a media interview in Kuala Lumpur yesterday.

Islamic finance is distinctively different from conventional banking in principles. But it does not operate in isolation from the mainstream financial market and hence is not spared from the credit crunch, Humayon said.

Consolidation is a positive development for the industry since it will help pool the Islamic assets under fewer but stronger institutions, he said.

The Western banks are now more convinced about Islamic banking potential after they saw the sector’s resilience in the face of the subprime crisis.

On the other hand, some big financial institutions from the UK and the US, which entered the market four to five years ago in chase of the huge oil wealth, were disappointed by Islamic finance, he said, because they failed to secure business from syariah investors.

“It is very difficult for non-Islamic institutions to sell syariah banking products. The syariah investors are not going to trust someone who has conventional products in his left hand, Islamic products in his right hand and who sits in the bar drinking,” Humayon observed.

London-based BMB Islamic provides syariah structuring and advisory services to mainly financial institutions. It is part of the Cayman Islands-registered asset management firm BMB Group Ltd, whose parent is in Brunei.

BMB Islamic was recently named the Best Syariah Advisory Firm in Islamic Finance News Poll conducted by Kuala Lumpur-based Redmoney Group, and Humayon was in Kuala Lumpur to attend the award ceremony.


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More non-Muslims trying Islamic banking: OCBC

More non-Muslims trying Islamic banking: OCBC


ISLAMIC banking is gaining ground with non-Muslims worldwide due to its strict lending principles, Singapore’s third-largest lender OCBC said today, reflecting industry efforts to transcend religious beliefs to gain market share.

Syariah finance is a blend of Islamic economics and modern lending principles and its products can be sold to Muslims and non-Muslims.

While it was previously a small market catering to Muslims who wanted to avoid interest-based conventional banking, Islamic finance has become popular in recent years due to cash-rich Gulf Muslim investors and rising demand for ethical investing.

Non-Muslim investors have also been looking for less risky alternatives since the onset of the global credit crisis over a year ago cast doubt on many Western risk management practices.

But the Islamic finance sector is still relatively small and the industry wants to grow its market share to become a global alternative to conventional banking.

Many banks including OCBC have set up Islamic banking businesses to tap opportunities in the US$1 trillion industry. OCBC’s Malaysian unit launched its Islamic banking subsidiary, OCBC Al-Amin, last month.

“Islamic banking is getting a firmer foothold in the market right now and it has attracted not just Muslims but also non-Muslims not just in Malaysia but in the other parts of the world as well,” OCBC Al-Amin Bank chief executive Syed Abdull Aziz Syed Kechik told reporters.

“(In) Islamic banking, there is a lot of other governance to be put in place to enhance the confidence and enhance the risk management through the syariah governance and framework.”

He said non-Muslims now make up half of the bank’s Islamic banking customers.

Islamic banking products such as home loans and insurance have drawn interest from Malaysia’s ethnic Chinese and Indian minorities.

Under Islamic insurance, or takaful, members contribute to a pool of funds which is used to indemnify participants who suffer a loss. Profits made from investing om the funds are distributed among members.

Globally, syariah bonds are among the fastest growing Islamic finance instruments, with recent issuers coming from non-traditional Muslim markets such as Japan.

There are more than 300 Islamic financial institutions worldwide and the sector is valued at about $1 trillion, just a fraction of the the conventional global banking industry.

OCBC Al-Amin will roll out more products to bolster its customer base, including four trade financing murabaha instruments this month, Syed Abdull said.

In a murabaha deal, a financier such as a bank buys a commodity and sells it to the customer at a higher price, complying with Islam’s ban on interest.

OCBC Malaysia’s overall loan growth, including conventional and Islamic, was expected to ease to a low-teen to high single-digit rate next year, OCBC Bank (Malaysia) Bhd chief executive Jeffrey Chew said.

“We’re looking at teens percentage in terms of growth for 2008,” Chew said. “Next year probably (there) will still be growth, possibly moderate a bit because the demand may have come down a bit from purchasing of capital items, large ticket items like houses and cars.” – Reuters


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Derivatives dispute divides Islamic finance market

Derivatives dispute divides Islamic finance market


Strict rules on transparency and simpler deal structures saved syariah lenders from the worst of the current credit crisis, but their ability to survive future shocks is in question because they have few instruments to guard against wild swings in currency and interest rate movements.

“To the extent there are not enough syariah-compliant liquidity and risk management products, then clearly Islamic finance would be disadvantaged compared to conventional banks and would be less able to manage their liquidity risks,” said Hussein Hassan, head of Islamic structuring at Deutsche Bank.

The US$1 trillion (RM3.59 trillion) industry bans banking structures that are vague or ambiguous to avoid exploitation – a rule which some argue shuts out the use of common hedging instruments such as currency and interest rate swaps and futures contracts.

But as more markets embrace Islamic finance and the need for risk protection increases, there are growing attempts to find syariah hedging tools.

More complex derivatives have come under widespread scrutiny by regulators and governments in the West for their role in the credit crisis. Some products have been blamed for spreading risks of bad assets rather than containing them and amplifying the impact of losses in the financial slump.

Derivatives were a prickly issue in Islam even before the US subprime mortage market collapsed. Reflective of the diverse interpretations of Islamic law, the industry is divided over the use of derivatives – and for different reasons.

This has left Islamic institutions with far fewer hedging devices than their conventional peers.

Conservative religious scholars reject derivatives because hedging practices are deemed speculative bets on currency and stock movements which violate the syariah ban on gambling.

These suspicions have deepened with derivatives having evolved from relatively simple contracts such as foreign-exchange forwards to complex tools like credit default swaps, over-the counter-contracts between two parties that bet on whether a company will default on its bonds within a certain time.

The conventional credit derivatives market alone was estimated to be worth some US$55 trillion (RM197.45 trillion) by last October.

With derivatives seen as a key trigger for the financial crisis and ensuring global economic downturn, opinion in Islamic finance may have now swung in favour of the conservative view.

“Just as there are fewer takers for conventional derivatives, fewer Islamic investors are biting at Islamic derivatives,” said Hooman Sabeti, an Islamic finance lawyer with Allen & Overy.

“Similarly, new participants in Islamic derivatives with the fortitude to proceed are steering away from more controversial structures and embracing more conservative ones.”

Some syariah advisers, however, permit derivatives as long as they are used to hedge risks on existing investments and not for speculation.

The difficulties with this argument are clear.

“Islam encourages you to manage your risk,” said Agil Natt, chief executive of INCEIF, an Islamic university based in Kuala Lumpur. “But when does risk management end and gambling begin?”

Derivatives are also avoided as their underlying assets can be uncertain, as many loss-laden Western banks and investors have discovered.

“In Islamic law, there must be something tangible that you are selling,” said Mohammad Akram Laldin, a syariah scholar who sits on various syariah advisory boards including HSBC Amanah. “You cannot be selling something in which you do not know the status of the subject matter.”

Last year, CIMB Islamic, the world’s top arranger of Islamic debt, launched a forex hedging tool where investors enter into an Islamic transaction with the bank.

The net proceeds – which are similar to the premium paid for conventional options – gives investors the right to exercise the option at the agreed rate on the maturity date.

But some bankers say the industry is struggling to find enough Islamic contracts that can be used to create derivatives.

“Most of the contracts that we have today aren’t entirely and immediately transferrable towards structuring derivatives products,” said Deutsche’s Hussein.

“Apart from ‘arbun’, which is the contract that is used mostly to do options, it’s not immediately clear that we’ve got enough other contracts that can be used to do other things.” Under an arbun contract, a purchaser makes a deposit (which forms part of the purchase price) to buy particular assets at a later date. Should the sale not proceed, the seller keeps the deposit.

Another difficulty is that Islamic finance contracts are subject to varying interpretations due to different readings of the syariah.

The International Swaps and Derivatives Association is working on a template to standardise the main terms for over-the-counter syariah derivative contracts.

“In the Islamic market acceptance has to come from a wide range of independent syariah boards, which might be challenging,” said Mahmoud Abushamma, HSBC’s head of syariah division in Jakarta. – Reuters


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How Islamic banks make money

How Islamic banks make money

A young man makes his career choice and decides to become a successful banker, just like his father.

Rudi Prenzlin

Monday, February 23, 2009

A young man makes his career choice and decides to become a successful banker, just like his father.He wants to prepare for the role and asks his father: “What must I do to become a successful banker, just like you?”

“Son,” says the father, “you must follow these three simple rules: first, don’t lend money to those who don’t have any; second, don’t lend money to those who need it badly; and third, the most important, don’t lend your own money.”

Sound advice in these troubled times. It is a shame that many of today’s bankers either never received this sound advice, or ignored it!

In last week’s article, “Credit crunch opens doors for other possibilities” I argued that Islamic banking institutions were weathering the present financial crisis comparatively well as they are insulated from the disasters in the interbank market and the mess in the derivatives markets.

A number of readers raised the logical question of how Islamic banks manage to stay in business without charging interest.

To recap, one of the basic principles of Islamic banking is the prohibition of riba (usury or interest).

Other principles are based on simple morality and common sense, which are by no means unique to Islam. For example, usury was also prohibited by the Old as well as the New Testament.

The Islamic economic system is concerned with social justice to ensure that none of the parties is being exploited without inhibiting individual enterprise.

Extended to the Islamic financial system, this means that the funds individuals and/or companies put at risk share the profits or losses resulting from the enterprise. This concept of sharing the delights or pain of the outcome of business is a progressive one. Islamic banking encourages better resources management, in particular as outright speculation is not permitted by Shariah ie Islamic law.

The participants are keeping pace with sophisticated techniques and have developed products that not only are ethically motivated but also profitable.

At their core, most Islamic financial products are essentially the same as their conventional equivalents. The main difference is the absence of interest and often complicated procedures to ensure compliance with Shariah.

For example, in Islamic housing finance the risks involved are shared between the bank and the borrower, rather than transferring all the risk to the latter.

The most commonly contract used is the diminishing mazurka (partnership) contract.

In this case the bank and the borrower form a partnership, with the bank providing up to 95 percent of the purchase price, and the borrower 5 percent.

The borrower buys out the ownership share of the bank which makes its profit from the rent paid by the client for the share the bank owns. This happens over a period of, usually, 15 to 30 years.

Should the borrower default on a rental or principal repayment, the bank may advance the borrower an interest- free loan to enable him to continue the payments in anticipation that he will pay in full when he is able to.

The good news is that during this period of distress, the borrower retains his home rather than face eviction.

Having said this, Islamic banks still appraise credit risk, and indeed are more cautious about who they finance than conventional banks.

Rudi Prenzlin is the chief financial officer of the Hong Kong Islamic Index


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Malaysia: CIMB Aviva survey shows trend for capital guaranteed products

Malaysia: CIMB Aviva survey shows trend for capital guaranteed products

4 September, 2008

The investment environment might not look too rosy for now but people are still generally receptive towards investment products that offer guaranteed capital protection, investment diversification and insurance protection.

This is evident from the simple survey conducted in August 2008 by CIMB Aviva Malaysia (CIMB Aviva) which showed 67.9% of respondents saying they will invest in a product that offers all the three elements.

Asian markets such as China, India, Philippines, Indonesia, Thailand and Malaysia are still the preferred investment location with 74% choosing Asia as the continent that they think they would be interested to invest in now vs 10.7% for Australia or 5.4% for North America.

“CIMB Aviva decided to get some feedback on investor sentiment that is currently very difficult to predict due to unsettling factors such as global economy slowdown, rising cost of living and local political developments. This survey gives us a better picture of what to expect and supported the strategy of our latest product, CIMB Islamic Market Select,” said Encik Zainudin Ishak, CEO of CIMB Aviva Takaful Berhad.

“CIMB Islamic Market Select is a Shariah-compliant product which provides a 100% capital protected guarantee along with the upside of investing in 17 different countries. This means not only portfolio diversification that mitigates overall portfolio risk but also a higher potential for growth. The fact that most of those surveyed still view Asia optimistically means this is an ideal product for all,” he added

CIMB Islamic Market Select gives investors the opportunity to ride on the existing investment wave of mature markets such as the US, promising Asian markets such as China and India plus the added advantage of investing into new emerging markets such as Brazil and Turkey which are set to take off as the next investment hotspots offering potential for long-term growth potential.

When applied to historical data, Market Select’s dynamic investment allocation strategy gives average annual returns of 16.5% and 23.6% for its three-year and five-year plan which means potentially higher returns than a conventional fixed deposit account.

A CIMB Islamic Market Select investor also benefits from takaful coverage, which pays surviving nominees a maximum of 125% of his single investment if he passes away before the investment matures.

Market Select applies the Best Performing Strategy that refers to the Dynamic investment allocation strategy. With this strategy, the returns at maturity are allocated based on a 60:20:20-allocation rate for the three market categories. This means investors enjoy 60% of the return based on the best performing category and 20% respectively for the remaining two categories. This product offers the option of a three-year and a five-year select terms with the latter having the added flexibility of providing yearly income distribution.

CIMB Islamic Market Select is available at all CIMB Islamic branches, which are co-located at CIMB Bank’s 366 branches nationwide until 19 September 2008. For further information, investors can call 1 300 880 900 or visit


Andi McLennan
Director of Marketing
CIMB Aviva Assurance Berhad
Telephone: 03-03-2612 3724

Tricia Loh
Head of Brand & PR
CIMB Aviva Assurance Berhad
Telephone: 03-2614 3599

Notes to editors:

What questions and answers did we get?

1. Which age range do you fall into?
Above 50 6.25%
Between 41 and 50 15.18%
Between 31 and 40 43.75%
Between 21 and 30 32.14%
Under 21 1.79%
2. Your current annual gross income level is:
Under RM24,000 11.61%
Between RM24,000 and RM50,000 41.07%
Between RM50,000 and RM100,000 33.04%
Above RM100,000 11.61%
3. What is the average savings amount in your deposit account now?
Below RM1000 32.14%
RM1000 – RM5000 25.89%
RM5000 – RM20,000 18.75%
RM20,000 – RM50,000 14.29%
Above RM50,000 8.04%
4. Currently, do you think you have enough savings to cope with rising cost of living?
Yes 10.71%
No 86.61%
5. If you have excess cash in hand, where would you prefer to put it at present?
Keep in the bank 26.79%
Invest in shares 8.93%
Invest in unit trust or insurance 22.32%
Invest in properties 27.68%
Other 13.39%
6. Which of the following continents in the world do you think would be interesting to invest in now?
North America (eg US, Canada) 5.36%
South America (eg Argentina, Brazil) 3.57%
Africa 3.57%
Asia 74.11%
Australia 10.71%
7. Which of these markets would you choose to invest in if given the choice?
Developed markets eg US, Europe & Japan 25.00%
Asian markets eg China, India, Indonesia, Philippines, Malaysia and Thailand 59.82%
New markets eg Russia, Kazakhastan, South Africa, Brazil, Egypt, Turkey, Mexico and Vietnam 14.29%
8. How confident are you now to invest your money vs two months ago?
Very confident 1.79%
More confident 11.61%
Neither confident nor not confident 51.79%
Less confident 27.68%
Not confident at all 8.04%
9. What is your primary investment objective?
Highest potential returns 28.57%
Growth of income 35.71%
Diversification across different asset classes 8.04%
Secure investing 26.79%
10. If you could securely invest your excess money in your deposit account within 17 countries across Asia, Africa, Europe, North and South America whilst benefiting from 100% capital protection and with an element of additional life cover protection, would you do so?
Yes I’d invest 67.86%
No I’d leave my money in my deposit account 8.93%
I don’t know 23.21%

Which countries does CIMB Islamic Market Select invest in?

Developed Markets US, Europe and Japan
Asian Emerging Markets China, India, Indonesia, Philippines, Malaysia and Thailand
Next Emerging Markets Russia, Kazakhastan, South Africa, Brazil, Egypt, Turkey, Mexico and Vietnam

Who is CIMB Aviva?
CIMB Aviva is a joint venture company between CIMB Group and Aviva plc. CIMB Group is Malaysia’s second largest financial services provider and one of Southeast Asia’s leading universal banking groups, and Aviva is the world’s fifth largest insurance group* and the largest insurance services provider in UK.

Through the joint venture, CIMB Aviva offers a comprehensive range of life insurance and takaful products and services via the 366 branches of CIMB Bank and CIMB Islamic, two subsidiaries under CIMB Group.

CIMB Aviva also rides on the global expertise of Aviva, which services 45 million customers in 27 countries around the world. Aviva recorded total sales of £49.2 billion (RM337.5 billion) at 31 December 2007 and funds under management of £359 billion (RM2.28 trillion) at 30 June 2008.

*based on gross worldwide premiums
Average exchange rate 1£ = RM6.86 (2007), RM6.34 (6-month 2008)


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Interest-free Sharia MasterCard launched

Interest-free Sharia MasterCard launched


Knowing you have a Sharia credit card? Priceless

The UK’s first sharia-compliant prepaid MasterCard was launched today.

The Cordoba Gold MasterCard does not charge or receive interest as this is in direct conflict with sharia Law.

The company also donates at least 10% of its profits to registered charities in the UK and abroad.

A company spokesman said: “Because this is a prepaid card, the customer pays no interest on their balance.

“The difference with this card is that Cordoba Financial Group does not earn any interest on the balance either.

“Normally when someone puts money on a prepaid card the company that issues the card will earn interest on the balance until the person spends it.

“This is not the case with Cordoba, as you can neither earn nor pay interest under sharia law.”

The Cordoba Gold card is available to UK residents aged 18 and over, and is being launched in London.

The UK’s Muslim population totals about two million and fully sharia-compliant banks have more than 30,000 customers across the UK.


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Muslims to be offered Sharia-compliant pensions by Government

Muslims to be offered Sharia-compliant pensions by Government

Muslims are to be offered Sharia-compliant pension funds by a new Government body.

The scheme to provide retirement funds for millions who do not already have a company pension is likely to include a special option that would not invest in companies deemed sinful under Islam.

Ministers are keen to get Muslims saving with the Personal Accounts Delivery Authority, as many who have low-paid jobs or who have moved to Britain in recent decades are unlikely to have put away much for their old age.

The decision to provide a Sharia-compliant pension fund is another sign of the growing influence of Islamic law in British public life and in particular the country’s finance industry.

The prospect of some aspects of Sharia law such as divorce proceedings and dispute resolution being enshrined in the English legal system – raised by the Archbishop of Canterbury and Lord Chief Justice this year – remains highly controversial because of fears that the system discriminates against women and that a two-tier approach would be divisive.

But more and more financial products are being tailored to cater for Britain’s population of 2million Muslims.

The religion’s holy book, the Qu’ran, forbids Muslims from making money from money, so they cannot use products that involve the charging of interest nor invest in traditional financial services firms.

Gambling, drinking and pornography are also seen as immoral under Islam, so Muslims cannot put their money into companies that promote these activities.

The Islamic finance market is estimated to be worth £500million already and is growing rapidly.

Families can already get Sharia-compliant baby bonds under the Government’s Child Trust Fund scheme while the UK is likely to become the first Western country to issue Islamic bonds in order to raise money from the Middle East.

This year has also seen the launch of Britain’s first Islamic insurance company and pre-paid MasterCard. There are a handful of wholly Islamic banks in the country and several more that offer alternatives to mortgages which do not involve the charging of interest.

When the Personal Accounts Delivery Authority launches in 2012, as many as 10 million people who do not have a decent occupational pension will become automatically enrolled and made to save a minimum of 4 per cent of their earnings a year, matched by a 3 per cent contribution from their employer and 1 per cent tax relief from the Government.

Savers will be able to choose from a range of funds into which their money will be invested, with one option likely to be Sharia-compliant.

A spokesman for the authority said: “In early 2009 we will be consulting on the potential approach to investment. Issues that we envisage incorporating into the consultation document include the overarching investment objective, the default strategy and lifestyling of funds and fund choices beyond the default strategy.

“This will include the appropriateness of making available religion compliant funds (e.g. Sharia) and funds focussing on social, environmental and ethical issues.”

Its plan was backed this week by a report by the Pensions Policy Institute and the Equality and Human Rights Commission on how to improve the lot of Britain’s “under-pensioned”, such as disabled people, women and ethnic minorities, who in many cases have not worked long enough to be entitled to a full state pension of £90.70 a week when they retire.

The study said: “The inclusion of a Sharia-compliant investment choice might be important to encourage participation among some ethnic minority groups.”

Douglas Murray, director of the Centre for Social Cohesion think tank, said the Government should not be creating parallel financial or legal systems for different groups in Britain.

He said: “It’s a great mistake for the Government to think this is desirable or even necessary.”


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