Islamic banking in the Philippines

The first and and only Islamic bank in the Philippines, the Al-Amanah Islamic Bank, began its operations in 1973 and was recently bought by the Development Bank of the Philippines.

What sets this bank apart from the traditional banks in the country? Similar to any Islamic bank, it religiously abides by the Shariah, zeroing in on its transaction rules. Most people bridge this type of banking to the concepts of prohibited interests (usury) and profit sharing.

For example, profit, according to the Qíuran, is only warranted if it yields additional values in the economy and society; unwarranted profits are surplus values ‘without a counterpart.’ Working under such a definition, Islamic banking minimizes exploitative contracts and unjust transactions.

Early Islamic doctrines emphasize interest as a surplus value without an equivalent real value, thus making it unacceptable. Sukuk, as an example, is an Islamic financial instrument. It is the counterpart of bonds, but differing in the aspect that these types of bonds are non-interest-bearing and is utilized without fixed income.

Islamic banking also prohibits transactions related to alcohol and pork, in deference to common Islamic doctrine. Ethics and morality are at its pedestal; thus, gambling and other games of chance are also restricted.

How then can this financial service be highly profitable?

In Islamic banking, loans either carry service charges or entail absolutely zero costs. Loans with service charges do not impose interests but asks for service compensation. This amount is further restricted by the price ceiling decided upon by authorities. Loans with no charges, meanwhile, provide a more socially responsible view made by the agents of Islamic banking. These loans are granted to farmers, to the needy, and to the other unfortunate sectors.

Clearly, these loans do not provide for a big percentage of bank profits. Hence, trade and investment financing dominate the scene. The catch, though, is to operate these activities under PLS or the profit and loss sharing scheme.

For example, in compliance with PLS, Mudaraba provides a venue to put together resources, monetary or not, in erecting a financial plan or activity. Profits and risks are shared by the bank and entrepreneur. Similar to a venture capital, the financial risk gives justification for the profits that it will rake.

This very activity is an innovative way to integrate and benefit the society by providing funds to plausibly efficient and relevant projects. A probable dilemma lies in the associated expenses in measuring and examining participants and risks, as well as negotiations and further transactions costs.

Rooting from the fact that Islamic banks are ‘keepers and trustees of funds’, another source of profits are gifts. These gifts lure in more customers to open savings accounts, increasing their capital. Gifts are portions of profits from the bank investments using the savings as capital source. A concept of a ‘goodwill loan’ is also utilized, stating that the debtor is only asked to pay the principal. An option to give a token of appreciation is placed on the table, without any form of promises. This transaction is the epitome of the Islamic interest-free loan.

The estimated rate of return concept, on the other hand, states that the bank estimates profit before financing an activity. If in actuality the project earns more that what was gauged primarily, the bank gives the excess to the client. This truly reflects their concept of profit with actual value or counterpart.

Are the Islamic banking schemes effective?

It may come as a surprise that some of the biggest companies in the world utilize Islamic banking for funding. These companies reportedly include IBM, Daewoo, GM (General Motors) and Alcatel.

The main difference between traditional and Islamic banking lies in their concepts of profit. The maximization goal of traditional banks targets the shareholders; on the contrary, Islamic banks hurdle the interest of all economic agents.

A study conducted by Celent concluded that assets under these Islamic banks grew more rapidly than those under the conventional ones. Generally, assets linked to Islamic banking experienced a growth of over 10% for the past decade. The Economist also estimates that such assets amount to US$822. This system also remained formidable in the face of the recent financial crisis.

Trends are geared towards the untapped markets with a relatively high potential for growth. These locations include Turkey and the majority of North Africa. According to Standard and Poor’s, however, the profits of Islamic banking may be grabbed by conventional banks once they start offering a vast array of Islamic financial services.

Islamic Banking : A global perspective

Hotspots for Islamic banking are found all over the world, with the Middle East taking almost two-thirds of the entire pie. Mature markets in this region include Saudi Arabia and Kuwait. The former houses Al-Rajhi Banking & Investment Corp., the world’s largest Islamic bank, while the latter invests on project finance.

Services offered by these Islamic banks include current accounts, credit cards, money transfers and mortgages. Although these banks collide under a unitary belief, practices may vary depending on the laws of land where they are located or their special objectives.

Moreover, the political climate and numerous circumstances pave the way for novelty and unique techniques and treatments. Specializations within this system are apparent. UAE focuses on trade financing, and Bahrain, on corporate finance and investment.

Current trends and issues

At present, conventional Western banks are establishing subsidiaries which are Islamic in nature. Otherwise, they create special divisions to cater to the needs of their clients. The other side of the banking system coin counteracts this by developing ways and means to provide cost-effective packages to Muslims and non-members alike.

Truly, competition urges economic agents to innovate and design efficient services to benefit everyone, big or small, regardless of religion and beliefs. Even the Vatican stated that Islamic finance can be a ‘cure for ailing markets.’

The current issue of excess liquidity calls for rule reviews regarding the matter. Rules on financing in Islamic banking hinder trade, making the entire system inefficient. One of the main functions of financial institutions is to channel financial resources or money from those who have it to those who need it.

In conclusion, the probable secret formula of Islamic banks is that they cater to the special needs of their clients, especially the members of the Muslim community. It is their special need and task to do bank-related activities in accordance to the Qíuran, and Islamic banks simply does that.

In the Philippine case, Al-Amanah is continually in existence due to the unique services that it provides to our Muslim brothers and sisters, thus easing the banking process and including them in the financial scene and game.

Source : bwo

Sharia banking grows strong in Indonesia

It was with good reason that the Indonesian Ulema Council and the government established PT Bank Muamalat Indonesia on Nov. 1, 1991. Such a move was welcomed by the public, which invested Rp 84 billion in shares when the bank was established.

The people of West Java also showed their support by injecting Rp 106 billion into the bank. Although its business was not too bright in its early days, the bank recorded a profit of Rp 372.5 billion in the second quarter of 2009. The achievement of Bank Muamalat is proof of the great potential of sharia banking in Indonesia. Sharia banking is based on Islamic law.

The fact that Indonesia has the world’s largest Muslim population creates a huge market for sharia banking, and Bank Muamalat became the pioneer that made a breakthrough in the existing concept of banking.

Huge potential for sharia banking still exists in the country. Bank Indonesia data reveals there are currently five sharia banks operating in the country, namely Bank Syariah Mandiri, Bank Muamalat Indonesia, Bank Syariah Mega, Bank Syariah Bukopin and Bank Syariah BRI. Twenty-six other banks have sharia banking units, such as Bank Permata, Bank BNI, Bank CIMB-Niaga, Bank Danamon and BPD DKI.

The country’s Muslims, accounting for 80 percent of the estimated 240 million population, are the target market of sharia banking. This means that 31 sharia banks or bank with sharia units are available to serve about 192 million Muslims.

Major conventional banks are also interested in establishing sharia banking units due to the huge potential in the country. Bank Indonesia predicts that sharia banks will enjoy business growth of between 5 and 5.5 percent this year due to high consumer spending and exports.

“Banks based on Islamic law are predicted to enjoy further growth in 2010,” said Darmin Nasution, acting governor of Bank Indonesia, as quoted by BI deputy governor Budi Mulya at a seminar on sharia banking in Indonesia last month. Darmin added that sharia banks would continue to flourish due to the organic growth within existing banks and the establishment of new sharia banks and units.

Another reason for the growth potential of sharia banks is their ability to attract customers from conventional banks due to the impact of the global financial crisis. The universal principles held by sharia banks also make the growth possible. Hence, more and more customers are turning to sharia banks.

The profit sharing concept offered by sharia banks is attractive to most businesspeople in Indonesia.

This method makes it possible for a customer to benefit from a loan. In conventional banking, a customer must pay interest on a loan regardless of whether the business is successful or not.

However, with the sharia profit sharing concept the customer will not have to bear the burden of paying interest if his or her business fails.

Sharia banking products are also varied and no less attractive than conventional banks’ products.

Bank Syariah Mandiri, for example, makes available various savings products, such as personal, haj, education, time deposit and so forth. Naturally, the bank also offers various types of loans based on the profit sharing sharia concept.

It is predicted that more sharia banks will come into existence soon to compete with the five already established as the public is now more aware of the superior features of sharia banks. Among the banks that have applied to open sharia banks are: Bank BCA Syariah, Bank Jabar-Banten Syariah, Bank BNI, Bank Victoria and Bank Panin Syariah. Some bank authorities are targeting 26 percent growth for sharia banks with the assumption that the growth is based on organic growth.

Mulya Siregar, Bank Indonesia deputy director, said on Dec. 8, 2009 at a seminar on Islamic banking that sharia banks could grow by a maximum of 81 percent for asset ownership, adding that such growth could only be achieved if related government regulations supported the growth.

If government regulations did not fully support it, he said, growth would only be about 43 percent, which was based on the contribution of new players or new banks in this sector.

Bank BRI Syariah president director Ventje Raharjo also has a similar view on regulations, especially on the taxation applied to sharia banks. He said the taxes should be more lenient in this case.

“Sharia banks need to be given certain incentives, such as leniency in taxation and a lower ratio of capital ownership, or there should be a sharia banking development allocation in the state budget,” he said.

The success of sharia banking in Indonesia has also attracted some foreign banks, although currently only HSBC has a sharia unit, called HSBC Amanah. Mulya Siregar, Bank Indonesia’s head of Islamic finance, said there were strong rumors that new banks from Malaysia and Bahrain would establish sharia branches here.

In the midst of waning customer trust in particular conventional banks, sharia banks seem to provide a safer alternative for customers. However, along with the huge potential and many opportunities for sharia banks there are also challenges facing them as they still have to educate customers about the superior features and products of sharia banks that are equal to or better than those of conventional banks.

Iwan Suci Jatmiko