“Hong Kong: The Natural Gateway to Islamic Finance in Asia – Current Developments”

images2009 Asia Sukuk Summit

18 February 2009

Keynote Address by Eddie Yue, Deputy Chief Executive Hong Kong Monetary Authority on

“Hong Kong: The Natural Gateway to Islamic Finance in Asia – Current Developments”

Ladies and gentlemen, 1. It is a great honour to be invited to speak at today’s inaugural Asia Sukuk Summit in Hong Kong, and a pleasure to welcome you all, especially those of you who are visiting Hong Kong. 2. This is the first Sukuk Summit to be held in Asia and it takes place at the beginning of the Year of the Ox in the Chinese calendar. The ox symbolises strength, resilience, and – of course – bullishness. For, while it may be true that we are still in the middle of unprecedented financial turbulence, every crisis brings with it new opportunities for renewal and change. The remarkable turnout today clearly reflects a desire to explore new ways of restoring financial market stability and, most important of all, promoting growth. This Summit has assembled an impressive gathering of colleagues from both the public and private sectors from many parts of Asia, Europe and the Middle East. The theme of the Summit – “Towards A New Silk Route for Islamic Finance” – is an apt one: it is a call for partnership in creating new regional bonds and links of the kind that once allowed this ancient trade route to flourish in a diverse yet co-operative world. In the globalised world, such co-operation is more important than ever if our economies are to be able to meet future challenges successfully. 3. I have been asked to give a brief overview of Hong Kong, with particular emphasis on how this city is developing its Islamic finance capabilities. Hong Kong’s strength as a free and open international financial centre has helped nourish its deep and liquid financial markets. Yet maintaining a free and open market in such a turbulent world is not an easy task. It is therefore reassuring that Hong Kong’s monetary and financial systems have continued to be sound and robust, reinforced by a number of recent contingency measures to strengthen financial stability. There are many factors that underline the resilience of Hong Kong’s financial markets: I would like to highlight two. 4. First, even when extreme volatility prevailed in the global foreign exchange markets following the collapse of Lehman Brothers, the exchange value of the Hong Kong dollar remained firmly anchored even as other major currencies suffered wide fluctuations, causing a ripple effect to other currencies in the region. Several reasons accounted for this extreme global volatility: the repatriation of large amounts of capital to the US to rescue the market; repositioning by those outside of the US who came to realise the severity and the contagiousness of the crisis; and deleveraging of large amounts of exchange and interest rate arbitrage activities triggered by the financial crisis. 5. These volatile conditions should, in theory, be destabilising for the Hong Kong dollar. Yet, not only has there been no depreciation pressure on the Hong Kong dollar: it has in fact strengthened following capital inflows into Hong Kong since the outbreak of the crisis in mid-September last year. Consistent with the principles of the Currency Board, the Hong Kong Monetary Authority (HKMA) has bought a total of US$23 billion, injecting HK$179 billion into the local money market. 6. The inflow of funds to the Hong Kong dollar was a welcome development, paving the way for monetary easing, which was fortuitously the appropriate monetary policy stance to support the economy. The reasons put forward for the inflow have not been a cause for concern for they did not seem to relate to exchange-rate speculation. Market consensus about the causes pointed to the unwinding of carry trades and the repatriation of funds by corporates to finance operations in Hong Kong. It is also likely that there have been some inflows to position for investment in Hong Kong, in light of the better economic prospects of the region, and in particular, China. 7. The second factor in the resilience of Hong Kong’s financial markets is our robust banking system. One of the lessons from this experience is that the stability and effectiveness of the banking system becomes even more essential when financial crisis shuts down the two other financial intermediation channels: the bond market and the stock market. In economies across the world, new issuance of corporate debt and listing of new companies came to a halt, posing an enormous challenge for the banking channel to sustain economic activities: as we have seen, in many cases that challenge was insurmountable. 8. At the same time, the financial crisis grew to such exceptional proportions that governments worldwide had to implement a series of rescue measures of a kind never seen before, using public money to bail out the banking system. In a globalised world, it would be complacent to say that Hong Kong will continue to be less affected than their counterparts in Europe and the US: it is likely that the falling prices of financial assets, the economic downturn and other unfavourable factors will inevitably affect banks’ asset quality and drive up the ratio of non-performing loans. Nevertheless, it is also true that Hong Kong has entered this crisis in a position of strength and should be able to weather it relatively well. 9. Despite the complex and stressful financial environment, the fundamentals of the banking sector in Hong Kong has remained strong and sound. The local banking sector here is well capitalised, at 13.8%, with a strong liquidity position averaging 45% in the fourth quarter of last year. The asset quality of retail banks is also high by historical standards, with preliminary figures showing overall non-performing loan ratio edging marginally from below 1% before the global financial crisis to just above 1% at the end of 2008. These very solid foundations will help Hong Kong cope with the challenge of a possible rise in non-performing financial assets and losses in the financial markets. They also supply the conditions for moving beyond crisis towards opportunity, and for exploring what seems set to become one of the strongest and more interesting of growth engines in markets in this region and beyond: Islamic finance. 10. Like most other asset classes, the growth of Islamic finance decelerated last year as a result of the global credit crunch and unfavourable economic conditions. New sukuk issuance retreated to US$14 billion last year, down from a high of US$31 billion in 2007.1 And without a doubt, there will continue to be great challenges in the coming year. Market participants are reportedly expecting a slowdown in annual growth in global Islamic banking assets to 10–15% in 2009, compared with a growth of 20–30% last year.2 Even so, a growth rate of 10–15% is robust by any standard, and especially so when set against the strong shrinkage in other areas of finance. There remains a healthy stock of sukuk issuance in the pipeline for this year, thus providing a good market to tap: one report conservatively estimates planned or announced sukuk for 2009 as being in excess of US$45 billion3. 11. As a new asset class, Islamic finance practices banking and investments in compliance with the principles of Islamic Shariah law, which prohibits excessive leverage, risk-taking and uncertainty, and promotes ethical practices. These are indeed universal principles in all markets – or at least they should be: one of the lessons of the present financial crisis is that too little attention has been paid to them. This is not to suggest that Islamic finance is without risk – indeed many of the risks inherent in Islamic finance are similar to those of conventional finance, and, in fact, Islamic financial institutions may be subject to other unique risks from the liquidity and operational perspectives. But Islamic finance introduces an alternative form of financing, and one that offers many opportunities particularly when financial market conditions start to improve. 12. From the perspective of Hong Kong, we are optimistic that the coming together here of Islamic finance with development opportunities in neighbouring Asian markets and China will provide an exciting growth stimulus for financial market participants. A key part of the Government’s strategy for developing Hong Kong as an international financial centre is a focus on Islamic finance. In support of this initiative, the HKMA, in collaboration with the Treasury Markets Association (TMA), has devoted considerable time and resources into establishing an appropriate infrastructure framework and developing an education and awareness programme both locally and worldwide. Although we are still in the infant stages of development, we have accumulated some experience, which I would like to share with you today. 13. First, since it is now such a hot topic to talk about change, I trust that you will agree with me that Islamic finance, at least for jurisdictions like Hong Kong, means change – a change in perception, a change in skills, a change in structures and techniques, in contracts, standards, and so on. Change, in all its many forms, is happening within the global Islamic finance arena, even as we speak. In the past year or so, we have seen the inception of several standardisation initiatives for Islamic financial documentation, spearheaded by international institutions like the Islamic Financial Services Board (IFSB) and the International Islamic Financial Market (IIFM). This form of change is significant towards facilitating harmonious practices, providing greater clarity for the Islamic financial services industry and thus acting as a boost to the development of global Islamic financial markets. 14. There have also been many exciting developments in the new markets for Islamic finance in Asia, where there is a growing tendency for sukuk issuance, such as the sovereign issues from Indonesia and Singapore to support the development of Islamic finance. At the same time, we have also seen enhanced co-operation and increased linkages, both internally within the region and externally with other Islamic financial centres in the Middle East. Malaysia, for one, has announced its co-operation with Bahrain and Dubai, to jointly cooperate and develop Islamic banking and finance in the region. At the market level, we have also seen a continuing trend of regional expansion by Islamic financial institutions beyond the traditional markets toward newly emerging centres in Asia. Such changes are happening, despite the challenging environment that firms are currently operating in. 15. One of the most daunting of the changes required for policymakers and regulators is the change in regulations and taxation rules to provide an equitable environment for the operation of Islamic finance within the overall financial market framework. Within Hong Kong, with the wealth of expertise drawn from members of the TMA, recommendations were put up and analysed by the Government as a priority in its comprehensive tax review. The Government has concluded that the legal system in Hong Kong is flexible enough to meet the demands of Islamic finance transactions. This is because, with our robust rule of law and our simple tax structure free of capital or interest gains tax, there have only been a minimal number of taxation issues that have to be dealt with. The legislation on tax also gives power to the Government to grant tax exemptions where necessary to those who apply for it. The legal architecture in Hong Kong therefore lends itself well to Islamic finance. There is therefore little time to spare, in the run up to a revival of the sukuk market and the lead time it takes to promulgate tax exemption rules for Islamic finance transactions; financial market players in Hong Kong must gear themselves up to embrace the change coming your way. 16. Secondly, there is in general a greater awareness of Islamic finance within the local financial community, particularly among banks. Banks in Hong Kong are in the position of being both investors in, and suppliers of Islamic finance products. Instruments, ranging from retail Islamic investment funds and Islamic treasury placements at the interbank and corporate level, to Islamic loan syndication, have started to emerge in Hong Kong within the past year. Financial market participants have also set up Islamic banking windows here to signal their readiness to cater for these types of activities. 17. But even with all the significant developments achieved here in such a short period of time, more still needs to be done. While the recognition of Islamic finance as a viable fund-raising and investment alternative is gradually making its way to the corporate sector in Hong Kong, the pace of development is still rather slow. Furthermore, this market awareness should also be promoted beyond banks and other types of financial institutions to all related service industries, such as investment managers, asset managers, securities and brokerage houses, exchanges and commodity firms, pension funds, insurance agencies, solicitors, accountants, and trustees. Not only will this require a much wider network of collaboration among the trade associations in Hong Kong, it will also require the financial institutions themselves to play a role in educating their customers and stimulating the potential supply and demand of Islamic financial products in Hong Kong. 18. Last but not least, although Hong Kong is still a relative newcomer to this industry, it has the strengths and capabilities to make significant contributions to the global Islamic finance market. Hong Kong is in many ways fortunate to have access to the Islamic finance talents and knowhow through an extensive network of international and regional players here. And I believe that there is endless potential for us to innovate in the area of Islamic finance, especially in deploying our special strengths – our close affinity to China, our experience as an international fund raising centre and asset management hub, and our role as a testing ground for the Mainland’s financial liberalisation. There is, for example, no obstacle to Hong Kong’s becoming a centre for Islamic IPOs, given our distinct record as a leading IPO centre in the region. What is needed is maximum preparedness on the part not only of the regulators but also of financial market players, who are the driving force of financial innovation and growth. 19. With great challenges come great opportunities, and Islamic finance is an area that has shown much promise over the past years. I believe that now is the time to lay down the groundwork for future growth and development. With these remarks, ladies and gentlemen, let me wish the inaugural Asia Sukuk Summit a great success and all of you a most productive time here in Hong Kong. 20.

 Thank you.

1 Source: Bloomberg.

2 Source: “Islamic inroads” by AsiaRisk, February 2009.

3 Source: “Sukuk market declined sharply in 2008, but long-term prospects remain strong” by Standard and Poor’s, Islamic Finance News, 6 February 2009.

source: info hk.gov

The growth of Islamic banking

 

442a4b85a5477eb21The National Bank of Commerce (NBC) head office in Dar es Salaam. NBC is among the oldest financial institutions in the country that will be competing with Sharia-compliant banks.

 

“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans”

Last year Tanzania witnessed the visit of the investors from Gulf African Bank (GAB) who expressed their desire to operate a full sharia-compliant financial institution in the country. Sharia-compliant accounts operate both in secular and Islamic Banks (IB) like GAB, however the principles of IB are not clear to many especially in this country where such banks do not exist.This system of banking is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics which prohibits interest on loans or deposits.

Available literatures, however, indicate that today more than 250 sharia-compliant banks operating worldwide from China to the United States, managing funds to the tune of 200 billion US dollars. Some western offer sharia-compliant services through designated units in the United Kingdoms, Germany, Switzerland and Luxembourg. In East Africa, Kenya can be cited as one of the vivid examples in which GAB has invested successfully in full sharia-compliant bank and by the end of last year more than 10 branches of such banks had already been opened in the country.

History shows that the first modern experiment with Islamic banking was undertaken in Egypt as the form of a savings bank based on profit-sharing in the Egyptian town of Mit Ghamr in 1963 under cover without projecting an Islamic image for fear of being seen as a manifestation of Islamic fundamentalism that was anathema to the political regime. That, in 1975, the Islamic Development Bank was set-up with the mission to provide funding to projects in the member countries. The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975.

In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services. Local experts have given their views over the introduction of such bank in the country saying that it is proper and will stiffen competition. The former governor of Bank of Tanzania (BoT), Dr Idrisa Rashid said that there is no any obstacle for such banks to be registered in the country and therefore it can chip in anytime as long as all the registration procedures are observed.

He said that Islamic Banks are just like any other banks and their contribution to the country’s economy will be the same just like any other bank. “It is also a blessing since it will give chance for those who according to their faith do not like to take interests or pay interests from the money that they deposit or borrow from the bank,” he said.Dr Rashid said despite the fact that such banks do not charge interests.

“They do make profit through mortgages, they can buy a car for 10m/- and sell it to you for 15 or 20m/- and then you will be required to pay in installments and there is no interest required,” he explained. He added that the bank can also buy any commodity or house, sell it to a customer at a profitable price and ask him or her to pay in installments under the cost sharing policy and there are no additional penalties for late payment.

“It will be wrong to imagine that at all, they do not make profits, if that was the case then they could not survive and remain competitive in the countries where they exist,” he said.Dr Rashid does not consider the Islamic Bank as a threat to already existing banks because it has also been there in other secular countries and it never threatened the existence of other banks. “It can only stiffen competition in areas like Zanzibar with majority Muslims,” he said.

Another expert, Prof Ibrahim Juma who is the professor of law and the current Chairman of Law Reform Commission of Tanzania (LRCT) commented that fear is there in various countries as the Islamic Banks register a tremendous growth. In his opinion it is a good thing to have such a bank in the country because it will stiffen competition but urged that it should be slowly introduced since it is a new concept in the country.

“At this time when the world faces financial crisis it is appropriate that such banks should be welcomed since they give interest free loans,” he said. Prof Juma said that principles in which sharia-compliant banks operates aim at influencing morality in conducting businesses and therefore he believes that its existence may reduce tendencies of dishonesty and crimes like money laundering.

He said distribution of wealth is one of the core principles of Islamic banks, the principle which is vital in transforming people’s lives. “Since Islamic banking is restricted to Islamic acceptable deals, which exclude those involving alcohol, pork, gambling among others, is so sensitive and its customers should be careful not to involve themselves in such businesses, it is really interesting,” he said.

He, however, cautioned that an Islamic bank should not come with discrimination policy in favour of Muslims because such kind of bank could also attract many Christians who do not like to take or pay interests.He believes that in principle Islamic banking has the same purpose as conventional banking except that it operates in accordance with the rules of Shariah on transactions. Its basic principle is the sharing of profit and loss and the prohibition of usury.

 

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ABDULWAKIL SAIBOKO

dailynews.tz

CIMA discussion on Islamic Finance Perspective of the global economic crisis

CIMA Sri Lanka Division announces an evening discussion on “The Global Economic Crisis: an Islamic Finance Perspective” on February 18, 2009.

Is the current global crisis an economic crisis or a financial crisis? Do the causes lie only in the greed of human beings, the greed of investors and in the breed of investment bankers and their exotic investment banking product structures as believed by some; or do they also lie in the core economic theory that provided the framework upon which the world’s economic and banking system has been designed, built and driven?

The presentation by Faizal Salieh, Managing Director and Chief Executive Officer of Amana Investments Limited will attempt to answer these questions by viewing the current global crisis from an Islamic finance perspective; examining the core conventional economic and banking theory framework and analysing the fundamental causes of the problem in the context of that framework. It will also assess whether the core principles of Islamic finance and banking could help in the formulation of a sustainable future solution?

source : sundaytimeslk

Hong Kong eyes Islamic finance products

imagesHONG KONG: The Hong Kong Special Administrative Region government is finalizing new tax laws which would facilitate the introduction of Islamic finance on a par with equivalent conventional products, and there is a strong possibility that the Hong Kong Airport Authority (HKAA) will issue the debut quasi-sovereign Sukuk from the island enclave during 2009.

 

Professor K.C. Chan, the secretary for financial services and the Treasury, Hong Kong government, confirmed in his keynote speech at the inaugural Asia Sukuk Summit held a few days ago at the Treasury Markets Association organized in association with ICG Events, that the Hong Kong Administration “is putting in place tax neutrality measures to facilitate the development of Islamic finance. These measures seek to address disadvantageous treatments on the issuance and transactions of Sukuk vis-à-vis conventional bonds. They will enhance the commercial viability of Sukuk in our market.”

 

Although Professor Chan did not wish to give a timeline as to when the new laws would be in place, he did stress that Hong Kong was sparing no effort in coordinating the establishment of closer partnership with the financial industry to extend international business linkages, nurture talent, build up knowledge and facilitate the launch of new Islamic finance products including Islamic funds, indexes and banking windows, as well as Sukuk. “We continue to enhance our market infrastructure and raise our profile as an Islamic finance platform. Market response to our effort has been encouraging,” he added.

 

Chan said that the government was fully committed to supporting the development of Islamic finance in the city. The chief executive of the Hong Kong government has in fact alluded to this during his last two policy addresses. The government believes that being an Islamic finance hub especially for capital markets instruments and investments would diversify the island’s financial services offerings. Hong Kong, in fact, is the world’s third largest financial center after New York and London, and now sees itself as the gateway for Islamic finance to opportunities in mainland China and other countries in the region including Taiwan, Korea, Vietnam, Laos and Kampuchea.

 

However, Hong Kong is concerned about the effect on Islamic finance of the credit crunch and the global financial crisis, since no economy, including those in the Middle East and GCC (Gulf Cooperation Council) countries, have gone untouched. Thus it seems unavoidable that Islamic finance will slow its pace of development in the near term, “alongside growing downside risks in the global financial scene.”

 

However, Chan predicted that the government’s “commitment and confidence in developing Islamic finance remain strong… While economic cycles will have a bearing on the pace and intensity of Islamic finance development, prospects for the Islamic finance industry in 2009 and beyond would remain positive, given the strong fundamentals underlying the development.”

 

These included the relatively strong economic growth fundamentals of the MENA economies against a global financial backdrop; the small size and base of the Islamic finance industry compared to the conventional one; and the peculiar and intrinsic risk-sharing and asset-based features of Islamic finance – all of which are attractive to market players.

 

It is no secret that the Hong Kong Airport Authority is in the market to issue a Sukuk in the financial markets to raise funds for its expansion work. Sam Kwok, treasurer, HKAA confirmed that the authority is seeking to issue a debut Sukuk although its timing would depend on market conditions. Hong Kong International Airport is experiencing a huge growth in passenger arrivals and the Hong Kong International Freight Terminal is the largest in the world in terms of capacity and volume of freight handled.

 

Similarly, Christina Tung, managing director, Mayfair Pacific Financial Group, stressed that there are interesting opportunities for Islamic finance not only in and out of Hong Kong to Mainland China, but also further afield in Taiwan, Macau and the Kowloon Peninsula.

 

Perhaps a potentially major player in this region could also be the Jeddah-based Islamic Development Bank (IDB). Mohammed Tariq, treasurer of the IDB, revealed that the multilateral development bank is seeking to issue local currency Sukuk in both member and non-member countries as a way of leveraging local assets through local issuances thus helping these countries mitigate some of the effects of the credit crunch and the financial crisis.

 

Following its successful 1 billion ringgit MTN issuance in Malaysia last year, the IDB, according to Tariq is in talks with Indonesia, Kazakhstan and Singapore in issuing similar local currency offerings. An IDB delegation did meet senior officials of the Hong Kong Monetary Authority and the top asset managers to explore opportunities for cooperation.

 

The IDB is flush with liquidity and has callable capital totaling almost $17 billion available. However, the idea of issuing local currency Sukuk in markets where there are viable and quality asset pools and where such instruments are required by the respective governments is to utilize such local assets to raise funding in a cost-efficient way to help these countries.

Source : Islam Online

Islamic Banking – strengthened by the credit crunch?

mirrormere081000002by Dr. Nicos Rossides

 

Introduction

 

With world markets suffering extreme turbulence in the wake of the credit crunch and subsequent banking crisis, it is an opportune time to examine the merits of an alternative banking model which adopts a different attitude to risk and finance, based on the principles of Sharia-law. Islamic Banking had grown substantially in the decade or so until the start of the present global economic turmoil; arguably, the events of the past few months will provide a spur to even further growth in the sector as non-Muslim bank customers opt for the relative safety of institutions based on the principles of Islam.

 

The impact of economic and demographic changes

 

In the past decade, the world’s economic centre of gravity has begun to increasingly tip in favour of developing economies such as China, India and the Gulf States, to the extent that leading multinationals such as GE and P&G expect more than half of their future growth to come from these emerging markets. Experts such as the leading fund manager, Antoine van Agtmael, have predicted that the combined Gross National Product of emerging markets will overtake that of developed economies within 30 years. Already these emergent economies hold 75% of the world’s foreign exchange reserves.

 

At the same time, there has been a demographic change, with an increase in the population in Muslim countries at the expense of developed markets where populations are stagnating or falling. There are now approximately 1.6 bn. Muslims worldwide, comprising 24% of the total world’s population.

 

These Muslim populations are increasingly looking for financing tools which comply with the tenets of Islamic (Sharia) law, while offering the flexibility and range of traditional banking products. Choosing Sharia-compliant products has become a means for many Muslims of asserting their Islamic identity.

 

Islamic Banking is not, however, necessarily confined only to Muslims. It has been recently argued that the tenets of Islamic Banking are applicable to a wider population, and that the principles offer safeguards that may counter the excesses which caused the sub-prime crisis and frauds perpetuated by rogue traders.

 

Islamic Tenets

 

Islamic Finance is governed by Sharia (Islamic law), which is sourced from the Qur’an and Sunnah. The key tenet of Islamic financing is the prohibition of interest, Riba, the principle being that it is unacceptable to increase the value of any commodity merely by lending it to another person. Sharia law also prohibits Masir, which is involvement in speculation and gambling transactions, Gharar, which is uncertainty about the terms of contract or subject matter (prohibiting, for example, selling something which you do not own), and investing in businesses which are considered unlawful or undesirable e.g. alcohol, drugs, gambling, arms.

 

The dynamics of Islamic Finance

 

The recent rise of Islamic Finance has coincided with the record revenue generated from 5 years of high oil prices which has attracted funds into the Gulf States, prompting Muslim investors to pull money out of the US and developed markets and invest it within the region. At the same time, even for Muslims who are not particularly devout, using Sharia-compliant products has become a means of asserting their Islamic identity, and of enhancing their status in the local community.

 

Islamic Financing, however, is not confined to Islamic banks – non-Islamic banks can produce Islamic products, provided a Fatwa, a decree, is issued by a Sharia qualified scholar or board deeming that they are compliant. Western banks have thus enlisted respected Sharia scholars to review banking products, and issues Fatwas legitimising them. As a consequence, qualified Sharia scholars are in high demand, charging a substantial premium for their services.

 

This reliance on a few, highly-qualified Sharia scholars, is giving rise to concern at several levels. The paucity of qualified scholars means that they may divide their time among several banks, which may compromise their independence. The UK’s Financial Services Authority, for example, in November 2007, highlighted possible “significant” conflicts of interest in such concentration of expertise. At the same time, the lack of scholars is slowing down development of the industry, and raises questions about the ability of Sharia supervisory boards to provide enough challenge and supervision of banking products and services.

 

At a wider level there are issues of consistency and transparency, as there are differing interpretations of Sharia law and whether products and services are compliant. Malaysia has attempted to resolve this issue by adopting one set of rules for all Islamic banking products and services, but their lead has not yet been followed by other Muslim markets. More broadly, two international organisations, AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) and IFSB (Islamic Finance Standards Board) have been created to promote and enhance the soundness and stability of the Islamic financial services industry. However, at this stage, the regulatory environment for Islamic Finance remains relatively fragmented.

 

The Opportunity

 

Islamic banking is now one of the world’s fastest-growing economic activities, comprising over 300 institutions in more than 75 countries. Currently a $400 bn. market, it is expected that it will grow to $4 tn. over the next 5 years (Torsten Hinrichs, Standard & Poor’s). While Islamic banking is concentrated in the Middle East and South-East Asia (with Bahrain and Malaysia representing the largest hubs), it is also starting to appear in Europe and the United States, in countries where there are large Muslim minority populations.

 

In all dimensions of financial services, Islamic financing is now prevalent, from debt and capital markets and insurance, to asset management and structured and project financing. Since its early evolution, the complexity of products offered has increased dramatically, starting with commercial banking in the 1970 through to the present day where a full range of banking and financial products is available.

 

There is considerable room for growth as well, particularly in Asia, where there are very large Muslim populations and low coverage by Islamic banks. In Indonesia, with a Muslim population of 195 million, only 1.2% of total banking assets are under Islamic Finance. India, Pakistan and Bangladesh have 439 million potential customers but less than 10% of the market in each case has been tapped into by the banks offering Sharia-compliant products. Even in the Middle East and North Africa, which may be regarded as the natural home for Islamic banking, the penetration by Islamic banking is still relatively small. The potential for development of the sector, is, therefore, very large, especially given the relative population growth of the Muslim world versus the global population.

 

Product Development

 

To serve the growing market, financial institutions have developed a range of products catering for housing and consumer finance, business loans and infrastructure project funding. “Islamic equity” investment funds have been launched and both the Dow Jones and FTSE provide indices to monitor these funds. However, the major instruments utilised by Islamic banks still closely resemble conventional banking products. There is currently a relative lack of pure risk sharing instruments where gains and losses are shared equitably between investors and providers. This gap is expected to be addressed in the next generation of Sharia-compliant products.

 

For the past 30 years or more, financiers in the Muslim world have been trying to find ways of mixing Islamic laws with modern finance. These efforts started with the creation of so-called Islamic banks in countries such as Malaysia, Pakistan and Dubai, but have gradually expanded to include the creation of more complex and sophisticated products. These include Murabaha, where a financier buys a commodity and sells it to a purchaser at a higher price; Mudarabah which involves a bank providing funds to entrepreneurs who share the profits of any venture, without the entrepreneur being required to provide any capital; and Musharakah where a bank provides funding to entrepreneurs who contribute capital, with the profits from the venture shared.

 

The most common Islamic Finance products and their characteristics are outlined in Appendix A.

 

Islamic Banking and the Credit Crunch

 

The Islamic Banking model has developed on principles which, theoretically at least, are inherently less risky than the prevailing western alternatives. The current global economic crisis stemming from subprime mortgage debt write-downs is attributable to two main factors. The first was the relaxation of mortgage credit criteria in developed economies, such as the US, on the assumption that rising house prices would offer sufficient collateral against the lending risk. The second was the use of securisation to repackage these mortgage-based obligations into tradable financial products which diluted the underlying asset-backing. Once house prices began to stall, these financial securities became “toxic”, dragging down in their wake the banks with the greatest exposure to them. Banking instability and failure, in turn, led to a failure in confidence and a reluctance of banks to lend to each other, causing money markets to dry-up.

 

An Islamic Bank, theoretically at least, is less exposed to the type of lending and financing practices which are at the root of the present crisis. Because of the principle of Riba, Islamic banks do not borrow or lend on international money markets because interest is not allowed; traditionally they have a larger proportion of their assets in reserve accounts with central banks. Islamic banking is based on the principles of risk-sharing between depositor and investor – in theory, meaning that customers practice greater oversight of an Islamic bank’s lending performance than their Western banking counterparts. Sharia-law stipulates that Islamic securities should be asset-based, which means that a trader must own the asset being traded as opposed to the complex derivative products which have had such an adverse impact on Western banks. This, in turn, proscribes most forms of futures trading, as goods that the seller does not own or will not deliver cannot be the subject of an Islamic contract. Practices such as short-selling, consequently, are not a feature of Islamic Banking.

 

A note of caution, however, may be introduced at this point. Whilst the underlying precepts of Islamic Banking prohibit many of the practices which have imperiled Western banks, the efforts to offer an expanded range of Sharia-compliant offerings have led to the development of financial products which closely resemble more conventional financial instruments, such as Tawarruq and Sukuk, with exposure to the same type of risks, albeit not to the same degree. News may yet emerge in the coming months of an Islamic Bank suffering losses because of these new products.

 

The Saudi market

 

The Saudi banking system is by far the largest in the Middle East, with Saudi banks accounting for nearly 50% of all private sector deposits held by GCC, and 25% of all private sector deposits in Middle Eastern banks. Traditionally, the Saudi market was dominated by local banks offering the traditional range of Consumer and Investment banking products. However, the market for Islamic finance has taken off to the extent that now 64% of Saudi banking transactions are Islamic in nature.

 

In a parallel development, the Saudi government was forced to open up the banking and insurance sectors to foreign investors as a condition of WTO (World Trade Organisation) membership. Traditional Islamic banks, which had historically prospered due to the highly protected local market, now find themselves having to compete with new market entrants, hybrid banks offering a mixture of Islamic and conventional products. Generally more nimble, these banks tend to offer superior marketing and customer service skills. At the same time, banks such as HSBC and NCB (National Commercial Bank) have created Islamic-branded subsidiaries and networks in response to customer needs. As a result, customers no longer have to choose between Sharia-compliant banks and western levels of service. Faced with increasingly knowledgeable and demanding customers, a generic positioning as an Islamic bank is no longer sufficient.

 

Islamic Banking is increasingly starting to dominate the industry. Al Rajhi Bank, headquartered in Riyadh, for example, is not only vying with NCB to be the largest bank in the Saudi Arabia and the Middle East, but is the biggest Islamic bank in the world, with 100% of its products totally Sharia-compliant. It consciously promotes itself as an Islamic bank and, for the majority of its customers, this is a strong component of their loyalty and attachment to the bank. Not to be outdone, most of the other banks in Saudi Arabia now emphasise the Islamic nature of much of their products, even when conventional services are offered alongside the Sharia-compliant ones.

 

Conclusion

 

From a research perspective, financial institutions need to conduct the appropriate studies to evaluate the appeal of existing and new Islamic products in comparison with conventional products, and how best to communicate the functional as well as more emotive and intangible benefits of such products. This is emerging as one of the key research topics in the Gulf region, and is likely to become even stronger in the future.

 

For the research to be at its most effective, the researcher-consultant needs to combine in-depth knowledge of appropriate methodologies with a fundamental understanding of both the conventional banking sector and its Islamic variants.

Sourece :masmi.com

 

Theoretical Studies in Islamic Banking and Finance

Author : Mohsin S. Khan; Abbas Mirakhor
Mohsin S. Khan is Assistant Director, Research Department, International Monetary Fund. He was previously on the staff of the World Bank and has taught at the London School of Economics. He received his PhD from the London School of Economics and has published widely in the fields of macroeconomics, money and banking and international economics. Abbas Mirakhor is an economist in the Research Departmnet of the International Monetery Fund. He was formerly Professor of Economics at the Florida Institute of Technology. He received his PhD from Kansas State University, and has published in a variety of areas, including microeconomics theory, mathematical economics, and Islamic Economics.

Publisher: Islamic Publications International

ISBN-10: 1889999407
ISBN-13: 978-1889999401

summary
Islam proposes that the banking systems that operate on the basis of an ex ante fixed rate of interest to replaced by a profit-sharing system in which the rate of return to the financial resources is not known and is not fixed prior to the undertaking of the transaction. While in Islam interest is forbidden, trade and profits are permissible and in fact encouraged. The papers in this volume all address one or more of the basic questions at the theoretical level. The represent a start in the attempt to introduce rigor into the analysis of Islamic banking and finance, thereby clarifying the nature of the basic relationships underlying the system.

BIBF Appointed Sole Education Partner of ACAMS, USA

Manama, Bahrain- Feb 9, 2009- The Association of Certified Anti-Money Laundering Specialists, Inc. (ACAMS), USA, has appointed the Bahrain Institute of Banking and Finance (BIBF) as its sole education partner in Bahrain to train and certify financial executives and government officials in the field of Anti-Money Laundering and Financial Crime Prevention. A Memorandum of Understanding, to this effect, was signed between Garry Muriwai, Director, BIBF and Gregory J Calpokis, Executive Director, ACAMS.

“The MoU is intended to advance individuals knowledge towards the detection and prevention of money laundering experience,” said Garry Muriwai. “It is a very significant step forward in BIBF’s mission of bringing world-class professional qualifications to Bahrain and the region”.

Gregory Calpokis said that “ACAMS is indeed honored to have BIBF as its educational partner in Bahrain and the region and indicated that ACAMS, in collaboration with BIBF, will consider bringing its next annual conference to Bahrain.

Dr . Sat Paul Parashar, Head of the Center for Banking at BIBF explained that “with the collaboration of ACAMS, BIBF shall be offering first of its kind specialist Methods and Techniques in Anti-Money Laundering (SMAT-AML) program for compliance officers, MLROs and their deputies, internal controllers, auditors and professionals in banking, insurance and other financial institutions, lawyers, and officials from government departments like customs and the enforcement agencies”.

souce bbif

Aliens in Calicut : On the Scope of Islamic banking in Kerala

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Introduction

A UFO once landed in the Calicut town. The aliens came out of the space ship and began to roam in the streets and villages of the Malabar town. After a while, they contacted their HQ in Mars saying, ‘Negative’.

Apparently they were planning to install their relay station in order for the Earth inhabitants to stay in touch with their planet. But the choice of Calicut suffered the following defects:

1. Few potential number of people who could use/operate that facility
2. There were hardly an educational system to produce workforce to operate and carry on the required R&D for its future evolution
3. The Calicut residents also could not afford the cost of running and maintaining it

Dear friends, I wish to present here before you a sociological approach in the study of the scope of Islamic Banking in Kerala. Handicapped by incompetence, I do not wish to go into the theoretical details of this emerging banking practice. Other speakers in the session would delve on the in depth concepts. However, I wish bring into your attention certain opportunities we have overlooked in the past.

I drew my conclusions as part of the readings and interactions I conducted two years back during a visit to Kerala. Back then I had shared my perspectives on this topic with scholars and leaders such as Sheikh Muhammad Karakunnu, Dr Hussein Randathani, Munawwar Ali Shihab Thangal and Kamal Pasha.

I thank the organizers for inviting me to this scholarly function and giving me an opportunity to share my bits.

The case of believer is strange. He sees good in all that happens around him. The present global crisis is also an opportunity to highlight the positive aspects of practice of Islamic banking.

We have considered for long time that the Western concept of financial system was absolute and eternal. That is what we have studied and continue to teach our young ones. Nobody so far dared to question the ethics of Wall Street and its greedy investors.

In an article recently published on New York Times, Thomas Friedman, quotes a Hong Kong investor saying, ‘It is hard for America to take its own medicine that it subscribed so successfully for others. There is no doctor anymore. The doctor himself is sick’. In the same article, he also blames the Wall street which is ‘fuelled by cheap credit, low standards and high greed.’

It is at this point that we are projecting Islamic Banking, which is based on mutual help and risk sharing.

ISLAMIC BANKING BENEFITS

The Islamic financial instrument called ‘Sukuk’ is being considered as a solution to the badly affected world economy. According to experts, while conventional banks are on the verge of collapse, the facts and figures suggest that Islamic banks practicing Sukuk have come virtually untouched.

United Kingdom Treasury and the Ministry of Finance are seriously considering the use of Sukuk as a debt management tool in the wholesale sterling and yen markets.

Britain, which has less than 2 million Muslims, already has 6 Islamic banks, of which three were set up in 2008.

‘Allah will always help His servant for as long as he helps others.’

‘The place of relationships and feelings of people with faith, between each other, is just like the body; when one of its parts is afflicted with pain, then the rest of the body will be affected. (Narrated by Imam al-Bukhari and Imam Muslim)’

‘Basis of Mutual Protection By my life, which is in Allah’s power, nobody will enter Paradise if he does not protect his neighbour who is in distress.’

However we should understand that a bank has all the expenses as any other corporate entity. Staff salaries, electricity and water, rent and other overheads have to be borne. Islamic banking technically speaking is not about charity. The profit-motive is essential for any business. But Islamic banking cannot charge interest for this.

Islamic banking has still not reached this zenith. It is still under an evolving stage. The service charges in an Islamic bank maybe more than other conventional banks. But we should perceive such charges as fees paid for services of higher quality. Just as we are ready to pay high price for fruits of high quality in our grocery shopping, we should also be delighted to pay extra for using a service which would save us from hell-fire.

ISLAMIC BANKING IN INDIA

The Indian government is also pursuing the goal of introducing Islamic banking in India. The RBI has completed studies in this direction.

Raghuram Rajan Committee on Banking Sector Reforms in its report had recommended introducing Islamic banking in India. The term he prefers to us is ‘interest-free banking’ instead of ‘Islamic banking’. “Interest-free banking does not mean charity, of course. It only means that the investor/lendor does not get interest, but gets compensated through a form of profit-sharing.”

ISLAMIC BANKING IN KERALA

Back to the UFO story.

The aliens suggested three reasons for their ‘Negative’ attitude for implementing the relay station in Calicut. Now let us change the Relay Station to an Islamic Bank in Calicut or say Muslim Kerala.

Muslims in Kerala enjoy three exclusive features which entitle them to adopt Islamic Banking:

1. Potential population – Muslims are the second biggest community in the state. And in districts like Malappuram, Calicut and Kannur, they outnumber more than other communities.

2. The community is led by very capable political and religious leadership which has paved way for their prosperity in comparison to their counterparts in other states of India. Several groups run schools and colleges in a systematic and organized manner. The political will to implement the Islamic banking is easily available. Institutions of higher religious learning can provide the intellectual backing required for the research and development of Islamic Banking concepts.

3. Finally, there is no dearth of funds as Muslims in Kerala are perhaps the wealthiest in the country having the highest standard of living. “There is at least Rs5,000 crore of unclaimed interest in Kerala alone. People prefer to put their money in gold or jewellery, which is the worst kind of investment from an economic point of view,” says an expert.

These above factors necessitate the founding of Islamic Banking in Kerala much earlier than in any other part of India.

According to Sheikh Mohammed Karakunnu around 200 institutions exist today in Kerala operating to achieve the above goal.

There are bodies such as Indian Association for Islamic Economics (IAFIE), but the banking model is yet to hit the mainstream. The RBI is yet to recognize them as legal entities.

The bright side of life is Islamic Banking is seen by all as a workable financial system and not as a religious move by religious fanatics. Many conventional banks have opened their separate Islamic units offering sharia-compliant products and services.

It is interesting to note a comment by a lady investor Margaret McDougald,
‘I strongly believe that if we had operated on what I understand to be Islamic principles, we would not be in the current global mess we are today. I write not as a Moslem, but a Chirstian with great respect for Islam and I studied Islamic finance in order to understand how it was possible to operate without usury. The principle appears to be one of shared risk, leading to shared profit or shared loss. I am looking to put some (small) savings into an Islamic Bank as this seems to be a better way of doing things.’

We need to keep in mind that Islamic Banking is all about an ethical outlook in to the profit-motive of our lives. The present global economic breakdown is a result of beastly greed without concern for human conditions or the hand of God.

Banks are part of our community. Although individual profit-motive is not a crime, such a desire cannot kill thousands for achieving it. Allama Iqbal, the Poet-Philosopher who wrote Ilm-ul-Iqtisad, Book o Economics, talks about the explitation of banks in these ords

In splendor, in seduction and in grace,
The buildings of banks outsoar the Houses of God.
In appearance it is trade, in reality gambling,
Profit for one, for thousands sudden death

soure : jannah org

THE PERFORMANCE OF MALAYSIAN ISLAMIC BANK

DURING 1984-1997: AN EXPLORATORY STUDY

Abdus Samad & M. Kabir Hassan

The study evaluates intertemporal and interbank performance of Islamic bank (Bank Islam Malaysia Berhad (BIMB) inprofitability, liquidity, risk and solvency; and community involvement for the period 1984-1997. Financial ratios areapplied in measuring these performances. T-test and F-test are used in determining their significance. The study found thatBIMB is relatively more liquid and less risky compared to a group of 8 conventional banks. Our analysis of the primary dataidentified reasons why the supply of loans under profit sharing and joint venture profit sharing is not popular in Malaysia.40% to 70% bankers surveyed indicated that lack of knowledgeable bankers in selecting, evaluating and managingprofitable project is a significant cause.I. Introduction

Evaluation of bank performance is important for all parties: depositors, bank managers and regulators. In a com-

petitive financial market bank performance provides signal to depositor-investors whether to invest or withdraw

funds from the bank. Similarly, it flashes direction to bank managers whether to improve its deposit service or loan

service or both to improve its finance. Regulator is also interested to know for its regulation purposes.

Bank Islam Malaysia Bhd (BIMB) is a single full-fledged Islamic bank in Malaysia. The important underlying force

that led to the establishment of this Islamic bank in Malaysia was the elimination of riba that is used for interest.

Tabung Haji took the initiative to do business without using interest considered as being predetermined rate of

return to a deposit. Tabung Haji is an organization for the Muslim for taking care of pilgrims to Mecca. It is

basically act as a privately to facilitate the Muslims to perform their Hajj with the feeling of minimum financial

burden. Its objective is to implement Muslim code of life (shariah) in Hajj and all business transactions. All trans-

actions in the conventional banks are based on interest or “riba” which is prohibited by Islam. Tabung Hajj wanted

to get rid of “riba” (interest). Islamic bank is sought as a solution to it. With the increase in Muslim populations and

awareness of Islamic values, there was a greater demand for Islamic bank and interest-free finance by Muslim

consumers, traders, investors, and businessmen.

Bank Islam Malaysia was established in July 1983 to meet these demands and challenges. Since then BIMB

introduced and marketed various interest free products such as Wadiah ad Dhamana account, Mudarabah,

Musharakah and others. Bank’s business has expanded over the years. Its assets and deposits have increased

from RM 325 mil to RM 4,440 mil in 1997. The financing of loans and services increased to RM 991 mil in 1997.

The number of branches increased to 75 in 1998.

However, 15 years have passed since BIMB was established. There has been no study as to how the bank

performed in liquidity, profitability, risk and solvency, as well as its commitment to economy and Muslim community

during 1984-1997. The previous studies on profitability and other measures, Samad (1998), Ariff (1989), Dirrar

(1996), Mohiuddin (1991) Sum (1995) and Hassan (1999) are far from satisfactory. These studies used neither

statistical technique nor made inter-temporal and inter-bank comparisons with three sets of conventional banks.

However, such issues of profitability, liquidity, risk and solvency; and community involvement of the bank during

1984-1997 are very important to depositors and investors. So, the present study intends to evaluate the perfor-

mance of Islamic banks using the above mentioned criteria. This study is different from the earlier studies with

respect to contents, coverage of years and methodology. In evaluating BIMB’s performances, this study also

wants to test two hypotheses. The first hypothesis states that the liquidity ratios of Islamic banks are expected to

be higher in earlier years of operation than later years due to a learning curve. The second hypothesis states that as

Islamic banking makes its inroad in the society, the volume of two truly islamic financial modes of lending

(Mudharabah and Musharakah) are expected to grow larger in later years of its operation.

Hassan (1999) examines the Islamic banking principles in theory and its application with a case study of Bangladesh.

The abundance of short-term funds compared to long-term funds available for lending is a rational response on

behalf of banks to solve informational asymmetries prevalent in credit market. In traditional finance literature, it is

shown that debt contract (murabaha) is superior to equity contract. However, equity contract can be superior to

debt contract in an economy where informational asymmetries resulting from adverse selection and moral hazard

are smaller. In Islam, business is an Ibadah (worship) and is recommended whereas riba (interest) is prohibited.

From business point of view Islamic bank is not only a firm but also a moral trustee of the depositors where deposits

are trust given to banking firm. It is naturally expected that as a custodian of trust for the depositors’ deposits,

Islamic bank is likely to be more liquid and become more solvent compared to its counterpart conventional banks.

Islamic bank management, according to Islamic ethics, is accountable to the depositors in this world and the world

hereafter for their failure to keep the trust entrusted upon them. It is, therefore, expected that the liquidity and

solvency ratio of the Islamic bank will be higher than conventional banks.

However, it is also expected that the liquidity ratio of the Islamic bank may decline during the later periods com-

pared to its early eras. As the bank grows, it acquires more skill and the art of banking business, it will keep less

liquidity and thus the liquidity ratio may decline. This paper wants to test the hypothesis that the liquidity ratio and

solvency for Islamic banks in the early periods are higher than those of later periods are.

Instead of interest based contract, Islamic bank is founded on different philosophy; and it delivers a set of distin-

guished products in the financial market. Unlike conventional banks where interest is an integral part of bank

business, Islamic bank was established to avoid interest in all bank transactions. It does not deal with interest.

Interest is avoided because “riba” is prohibited in Islam. As a business firm BIMB delivers special financial prod-

ucts that are different from the conventional banks. It delivers interest-free products. For example, trust profit

sharing (called Mudarabah) and joint venture profit sharing (called Musharakah) are two distinguished and unique

products of an Islamic bank. The important feature of this loan (Mudarabah and Musharakh) is that they are

interest-free. There are no elements of interest involved in this transaction. For the Muslims there is a great

demand for them. BIMB was established to meet these demands. With the increase in Muslim population, business

firms and entrepreneurs in Malaysia, the supply of Mudarabah and Musharakah loan was a long waited product. In

these transaction Muslims can serve religious obligation and at the same time can earn profits. With the economic

development of Malaysia and the increase in Muslim population, Islamic values, Muslim business and firms, it is

expected that demand for these products (Mudarabah and Musharakah) are likely to increase gradually over the

years. It is also expected that the information gap between bank and the bank borrowers to be minimum because

both party jointly working to maximize profit and minimize losses. Projects undertaken under the Mudarabah and

Musharaka are constantly supervised and monitored by the Islamic bank. So the chances of failures are minimized.

Based on the expectation of minimum failure it is expected that the supply of these loans will increase over the

years. This paper will test the hypothesis that the supply for this loan (Mudarabah and Musherakah) of the Islamic

bank increases over years.

The paper is organized as follows. Following introduction and rational of this study in section I, Section II describes

methodology, data and the tools for measuring bank performance. Section III provides empirical evidence and

analysis. Summary and Conclusion are provided in Section IV.

 

Please refer for reference and appendix International Journal of Islamic Financial Services Vol. 1 No.3

Financing the Islamic way

A Michigan bank turns a profit on loan without chargning interest

DETROIT – Big financial institutions have been battered by mortgages gone bad.

But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.

Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky.

also rules out some of the activity that got Western finance in trouble — subprime mortgages, credit default swaps and the like.

“When you look at the economic crisis we’re in, if you were to follow Islamic or Sharia financing, you couldn’t have this crisis,” said John Sickler, corporate director for the bank, University Islamic Financial Corp. in Ann Arbor.

Islamic finance operations aren’t prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.

University Islamic Financial has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.

For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it’s a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.

The bank is a subsidiary of Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.

What is acceptable

Islamic law says money cannot grow by itself, the way it does with compounding interest. Trade is acceptable as long as the equal amounts of money are traded or two different things are swapped with a fairly negotiated price.

So a dime for an apple would be considered “halal,” or religiously acceptable, while one apple for two apples would be “haram,” or unacceptable.

Even at University, not everyone is on board. Some customers have closed their accounts when they learned it was engaging in Islamic finance. Some employees who objected to the move quit. The bank also stopped having a Christmas party and no longer serves alcohol at after-hours events.

The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it’s the nation’s first to offer Sharia-compliant, federally insured deposits.

Growth potential

Islamic banking is more common overseas, but some U.S. banks and credit card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.

Islamic banking is only expected to increase in coming years. Already, Citigroup offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.

The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.

“We haven’t made as much money as the conventional banks because we can’t, for example, sell what we don’t own,” he said. “We have to own it before we sell it. We may have missed out on gains in good times … but we haven’t suffered any losses.”

No guarantee

Of course, there’s no guarantee that banks will find immunity in Islamic finance from a severe global downturn.

“I am not doing banking on Mars,” said Afaq Khan, the head of Saadiq, the Islamic banking arm of Standard Chartered Bank, based in London. “If real economic activity slows down significantly, the Islamic banking industry will also be affected.”

A Sharia-compliant mortgage is like rent-to-own: There is no note, or mortgage, but typically part of each month’s payment is held toward the ultimate purchase. The property is titled to an individual trust, or limited liability corporation.

Deutsche Bank estimates total assets in the Islamic finance market at $1 trillion — a tiny fraction of global financial assets, but the bank said in a recent report that the sector has been growing at a clip of 15 to 20 percent per year.

source : Press E