Archive for Islamic Banking

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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Interest-free Sharia MasterCard launched

Interest-free Sharia MasterCard launched

CreditCards

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.

Source: http://www.metro.co.uk/news/article.html?in_article_id=258913&in_page_id=34

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Product development for Islamic banks discussed at MEFX conferences

Product development for Islamic banks discussed at MEFX conferences
By: Mike Gallagher

Greater visibility needed if Islamic finance is to become internationally acceptable. International listings and uniformity of standards key to spread say delegates.

MEFX, Islamic real estate investment trusts, Sukuk, Qatar, Alpen Capital, Sanjay Vig, Saadiq, Ghazanfar Naqvi, Mobily Sukuk, standardisation

Delegates at the Future Proofing Your Bank MEFX conference in Dubai on Sunday discussed the vexing issue of product development from an Islamic finance perspective. Standardisation was given the most attention, as it always seems to at conferences where Islamic finance is discussed, but how much progress is taking place with regards to the subject is still not certain.

Sanjay Vig, managing director of Alpen Capital, which was behind several high profile Sukuk, such as the Berber Cement Sukuk in Sudan and the Mobily telecoms issuance in Saudi Arabia, pointed out that the issue of standardisation was not just an issue between regions, but also sometimes between countries. He said that while the Mobily Sukuk was accepted in Saudi Arabia, it was not in the UAE.

Vig also said that sorting out the critical issue of uniformity was vital if Islamic finance wanted to become globally acceptable. Uniformity and replication of products would speed up the process because the complex documentation that is part and parcel of the current trend in Islamic finance was slowing down its spread. Any bank that became involved had to run the product past its Shari’ah board, which also added to the time it took to bring it to market. Uniformity would greatly speed up that process, he said.

Ghazanfar Naqvi, director of Islamic products for Saadiq in the UAE added that very few law firms in the region understood Islamic finance and he said they needed “to gear up” to be able to meet demand. One thing that would help product development, said Naqvi, would be if more conventional bankers moved over to Islamic banking. “You cannot teach banking to everyone, but you can teach Islamic [law],” he said.

Delegates were told that not more than 20 to 30 per cent of Islamic banks portfolios from the GCC are invested outside the region and that more diversification of risk was required. This, they were told, would also help to increase the awareness and popularity of Islamic finance.

Vig said that more international listings of Sukuk on exchanges like New York, Hong Kong and London would increase its visibility and he said would assure investors that by listing there, that they were meeting internationally recognised standards.

There was also talk among delegates about the role of Takaful in markets such as the UAE and Qatar where a huge real estate boom was taking place. Many wondered why Takaful had such a small share of the market, compared to conventional insurance, when so much money was being invested in real estate. Others expressed wonderment at why Islamic real estate investment trusts were not more popular, given that India, Pakistan and Malaysia were actively considering them.

Source: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=431&sec=Islamic%20Finance

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The Difference Between Shari’a-compliant and Shari’a-based Islamic Finance Institutions

The Difference Between Shari’a-compliant and Shari’a-based Islamic Finance Institutions
Natalie Schoon, The Bank of London & The Middle East – 22 Jan 2008

This article considers the subtle differences between the two key players within the Islamic finance industry – Shari’a-compliant banks and Shari’a-based banks – and how they could co-operate to achieve the real potential of this market.

On 9 July 2007, the Bank of London and The Middle East (BLME) was launched in London. BLME is the second wholly Shari’a-compliant investment bank authorised and regulated by the UK’s Financial Services Authority (FSA). This brings the number of fully Islamic banks in the UK to three, with the total number of financial institutions offering Islamic financial services in the UK at 24. Another three Islamic financial institutions are in the process of applying for a licence with the FSA, showing the strength of the UK as the largest Islamic finance hub outside Muslim geographies.

Although a young segment of the financial industry, Islamic finance has gone through an exceptional growth period. Over the past 10 years, the industry has grown at a rate of 15-20% per year. This level of growth is expected to continue in the coming years and by far exceeds the rate of growth in conventional finance. The increase in wealth resulting from the rise in oil prices and the subsequent requirements for investment in oil-producing countries is a large contributor to the expansion of the Islamic finance industry. Coupled with relatively high returns, this attracts banks and investors alike.

Islamic financial products are not only offered by fully Shari’a-compliant banks but also by conventional banks employing specific distribution channels, such as Islamic windows and Islamic branches. The issue that arises is whether Islamic financial products offered by a conventional bank are equally acceptable to Muslims as those offered by fully compliant Islamic financial institutions. There is, after all, a difference in the level of Shari’a compliance of conventional and Islamic banks.
Shari’a Supervision

Islamic financial institutions have an additional layer of corporate governance over and above the governance mechanisms in place for conventional financial institutions. In addition to a supervisory board, independent external auditors, adequate policies and procedures and other governance mechanisms, Islamic financial institutions also have to ensure compliance with the Shari’a principles, which are reviewed and monitored by the Shari’a Supervisory Board (SSB). The role of the SSB is to issue fatwa (opinions) setting out how the bank’s operations should be carried out in order to be consistent with Shari’a rules and principles (ex-ante compliance). In addition, because of its role within the corporate governance framework, the SSB is also responsible for the monitoring of the institution’s Shari’a compliance in applying the fatwa in practice (ex-post compliance).
Shari’a Compliance

In order for a financial product to be Shari’a compliant, it needs to satisfy, at a minimum, the criteria of Shari’a law regarding the avoidance of Riba, Maysir and Gharar. Once these are satisfied and the bank obtains Shari’a supervisory board approval, the product or structure can be marketed as Shari’a compliant. As far as conventional banks are concerned, this is where Shari’a compliance stops. It does not constrain the bank from employing non-Islamically raised funds to invest in Islamic structures.
Shari’a Based Banks

A fully Shari’a-compliant or Shari’a-based bank takes the compliance with Shari’a law a step further. Not only do individual products have to meet all requirements but also all operations within the bank are required to be compliant with Shari’a law. This extends to contracts with suppliers, rental contracts and labour contracts. The bank is completely set up to work in line with the ethical framework of Shari’a, which makes it more likely to be able to structure all products to meet the requirements. In addition, there is no co-mingling of conventional and Islamically raised funds, since all funds are raised in line with Shari’a requirements.
Impact on Investment Decisions

The decision any investor, depositor, Sukuk issuer or other client of a bank will have to make is related to the trade-off between the level of Shari’a compliance and the reputation and historic track record of the bank.

A large conventional bank with a proven track record will provide a relatively higher degree of certainty than a newly established Islamic bank. In addition, large conventional banks have the advantage of the backing of a big balance sheet and structuring capabilities that are well beyond the potential of Islamic banks, at least at the moment. This becomes immediately clear when comparing the total assets of the largest Islamic bank with total assets of large conventional banks. At the end of 2006, the largest Islamic bank (Al Rajhi) had total assets of US$28.1bn. The likes of HSBC, Barclays and Citi, on the other hand, each had a total asset base close to US$2 trillion at the end of December 2006.

As a result, it is much easier for conventional banks to underwrite large Sukuk issues and to structure sizeable project finance structures than it is for Islamic banks. Between June 2006 and June 2007, five of the 10 biggest Sukuk arrangers were conventional banks. Issuers choose conventional banks for their proven track record, their ability to raise large sums of money and, most importantly, their competitive pricing.

Conventional banks, however, provide Islamic finance as part of a broader range of financial products and although the individual offerings are Shari’a-compliant and the distribution channel is different from other financial products, a conventional bank is likely to co-mingle funds raised in an Islamic manner with conventionally raised funds. In addition, conventional banks can hedge positions using innovative financial products that are often not allowed in Islamic banks, given the speculative nature of the majority of hedging products.

A small, relatively young Islamic bank does not have a long track record and can hence be seen by investors and depositors as carrying a higher risk. Although some comfort can be found in the fact that the bank is regulated, conventional banks are regulated in the same way. As a result of the smaller balance sheet size, Islamic banks are not currently in a position to underwrite large Islamic finance transactions unless they are part of a syndication effort and, even then, some transactions are out of their scope due to large exposure regulations and size limitations.

On the other hand, a Shari’a-based bank operates completely within the remit of the ethical framework defined by Shari’a law, something that could be of significant interest for Muslims. A fully Islamic financial institution will not only be audited internally and externally, but will also be subject to an annual review by the Shari’a supervisory board as an independent third party to ensure ongoing Shari’a compliance for the whole of the business. An Islamic window or branch of a conventional bank does not necessarily go through this type of ex-post compliance audit, and in any case does not have to report the results in its annual report.
Compete or Co-operate?

There is a strong call in the market to form an Islamic ‘mega’ bank but given the size of the individual Islamic banks, this appears to be quite a way off.

Although the number of Islamic banks is growing exponentially, their balance sheet size on a consolidated basis is not even remotely close to the size of any of the large conventional banks on their own. Thus, the two types of players operate in different market segments, which actually make them very complementary. In the end, there is a place for both Shari’a-compliant and Shari’a-based banks. By working closely together, they can achieve high market penetration and work on reaching the full potential of the market.

Source: http://www.gtnews.com/article/7055.cfm

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First Islamic equity product launched in UK

First Islamic equity product launched in UK

Mushtak Parker | Arab News – 23 June 2008

LONDON: The London-based ABC International Bank’s Islamic Asset Management (IAM) entity, both of which are subsidiaries of the Bahrain-based consortium bank, Arab Banking Corporation (ABC), has launched the first retail Shariah-compliant capital-protected equity product in the UK under its ‘Alburaq’ brand.

The savings product, which has a minimum subscription of just £500 and is a Shariah-compliant alternative to a conventional guaranteed equity bond, adds to an increasing number of retail Islamic financial offerings in the UK market, which now includes mortgages, Takaful (insurance), pensions, current and deposit accounts and even escrow accounts for money transfers. Other Shariah-compliant retail products in the process of being launched include ISAs (investment savings accounts) and child trust accounts.

The product was structured by ABC International Bank and is offered in partnership with the Bank of Ireland, which has a long history of providing guaranteed equity bonds to UK consumers. ABC Group is one of the largest banks in the Arab world with assets totaling around $32.7 billion at the end of December 2007. The group announced net profits of $125 million for the year 2007.

The government of Prime Minister Gordon Brown has been very supportive of developing the Islamic finance sector under the Labor Party’s social and financial inclusion policies. At the same time, it is the stated policy of the UK to develop London into an international hub for Islamic finance, investment and trade. Only yesterday at the Jeddah oil summit, Brown reiterated that oil producers in the GCC states should divert some of their record liquidity surpluses to investment in the developed countries in renewable energy initiatives and other sectors. These funds could be channeled through sovereign wealth funds; through conventional or Islamic capital flows. Bahrain-based Arcapita Bank, for instance, was one of the first Islamic financial institutions to invest in alternative energy in the UK in a wind farm project developed by Innogy.

The UK Treasury and Financial Services Authority (FSA), however, are only too aware that the Islamic finance industry in the UK needs to improve customer access to and awareness of Islamic retail financial products. UK Economic Secretary and City Minister Kitty Ussher, who is effectively in charge of Islamic finance at the treasury, at a meeting of the Islamic Finance Experts Group (IFEG) at the treasury earlier this year, stressed that “the UK is at the forefront of developments in Islamic finance and London continues to seize new opportunities. We have made tremendous inroads in the wholesale markets. But there is also an important domestic market, which we want to be accessible and open.

“There are nearly two million Muslims living in the UK and, thanks in part to legislative changes introduced by this government, the Islamic mortgage market is now worth over £500 million. Going forward, the government and industry want to continue to do all it can to see the retail market flourish and ensure that everyone – regardless of faith – has equal access to competitive financial products,” he said.

ABC International Bank claims that the Alburaq savings plan provides a new way for those wishing to invest in accordance with their faith and provides savers easy exposure to potentially unlimited returns linked to shares in major companies, all with the added comfort of capital protection and Shariah compliance.

According to Keith Leach, head of Alburaq at ABC International Bank, said, “Alburaq is very excited to be the first to bring a Shariah compliant capital protected product to the retail market in the UK. Over the past few years the UK has seen an increase in the availability of Islamic home finance products, but there remains very few options for Muslims wishing to save money in accordance with their religious beliefs. This new account is also an easy way for Muslim savers to gain exposure to the equity markets, in a secure way. While it is considered permissible within Islam for Muslims to own shares, there are restrictions on the type of companies that are considered allowable. The companies must not be over-reliant on debt nor must they be engaged in activities that conflict with the principles of Shariah. Many of these principles will be similar to those required by ethical investors.”

Savers will be able to deposit funds with the Bank of Ireland for five years in an account structured under the Wakala contract. At maturity, savers will receive their initial capital back together with 100 percent of any gain in the performance of a basket of 20 shares in global companies selected from the Dow Jones Islamic Market (DJIM) Titans 100 Index.

Des Crowley, chief executive of the Bank of Ireland UK Financial Services, is confident that “this is a highly innovative product, which is the first of its kind and directly addresses the saving needs of the Muslim community. We have been working with Alburaq for four years providing Islamic Home Finance and (this product) should be seen as the next stage in our development of Shariah compliant products.”

The Alburaq fixed-term savings product offer closes on Sept. 5 2008 and investors will have their funds tied up for five years. The maximum opening deposit is £1 million and the promoters stress that there is no cap on the returns; in other words customer’s enjoy 100 percent of the calculated return.

Capital protected funds are not new in the market. Several institutions – such as HSBC, the National Commercial Bank, Al-Rajhi Bank, Deutsche Bank and others – have launched Shariah-compliant capital protected funds in the Middle East.

While this product is new in the UK, Islamic equity funds per se are not, although they have had a very mixed record. Al-Madina Equity Fund, the Al-Safa Equity Fund and the Parsoli Global Equity Fund, which were launched at different times over the last decade or so, have all dismally failed. The first two were closed soon after they were launched. The latter has failed to make any impact. The reasons are manifold – the wrong promoters, wholly inadequate marketing strategies and resources, and perhaps the wrong timing.

Source: http://www.arabnews.com/?page=6&section=0&article=111139&d=23&m=6&y=2008

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Misused murabaha hurts industry

Misused murabaha hurts industry
by ArabianBusiness.com staff writer on Friday, 01 February 2008

A commonly used Islamic finance product could cause the downfall of the industry because it is being used inappropriately, a senior banking figure has claimed.

Islamic banks often use commodity murabaha agreements to invest their surplus cash in a Shariah compliant way. This involves buying into a basket of commodities, such as metals, held by another bank for a pre-determined amount of time and a pre-determined return.

However, in practice, many of the transactions never see any commodities change hands and sometimes there are no commodities involved, merely cash flows between banks and brokers.
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“The situation is a little bit embarrassing for the industry,” said Ruggiero Lomonaco, head of Middle East and Islamic private investor products, ABN Amro Markets, speaking at the Islamic Finance Forum in Dubai last month.

He pointed out that sometimes there is not even enough of a particular kind of commodity in existence to account for all of the transactions that are taking place.

Lomonaco said: “I believe these very transactions can cause the fall of the industry in a very short period of time.”

He proposed the use of the wa’ad swap, a controversial finance agreement that has been criticised by others in the Islamic finance community recently.

“Through this arrangement it’s possible to invest in a pool of assets and link the performance of these assets to external benchmarks,” he said.

Islamic investors would receive returns which could be linked to LIBOR, equities indices, or even the performance of hedge funds.

The commodity murabaha transaction was also criticised by Dr Aznan Bin Hasan, assistant professor at International Islamic University Malaysia, who said Islamic banks should only use it as a last resort if they could find no other use for their surplus liquidity.

“Otherwise if you have any other way to do it, you should do that first before a commodity murabaha,” he said.

ABN Amro’s Ruggiero said that economic forces could encourage Islamic banks to stop using the financial tool. “There is an incentive,” he said. “You will see very shortly when interest rates go down, back to 2003 [levels], people will find alternatives.”

Source: http://www.arabianbusiness.com/509187-misused-murabaha-hurts-industry

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