Archive for March, 2009

Expert: It’s tough for Islamic banks too

Expert: It’s tough for Islamic banks too

By Chong Pooi Koon
pooikoon@nstp.com.my
2009/02/13

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.

Source: http://www.btimes.com.my/Current_News/BTIMES/articles/daro/Article/index_html

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More non-Muslims trying Islamic banking: OCBC

More non-Muslims trying Islamic banking: OCBC

2008/12/01

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

Source: http://www.btimes.com.my/Current_News/BTIMES/articles/20081201152232/Article/

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Derivatives dispute divides Islamic finance market

Derivatives dispute divides Islamic finance market

2009/02/11

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

Source: http://www.btimes.com.my/Current_News/BTIMES/articles/devisf/Article/

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