Downturn hits Islamic Finance, not Islamic banks

In 2008 the global Islamic financial services have felt the impact of credit crunch and consequently Sukuk issuance has more than halved and the value of the equity funds has fallen. according to IFSL’s Islamic Finance Report.

Islamic banks, however, have been less affected than many conventional banks as they are prohibited from activities that have contributed to the credit crunch, such as investment in toxic assets and dependence on wholesale funds, IFSL Finance Report said.

The global market for Islamic financial services rose by 37% to $729bn at end-2007. In 2008, IFSL’s Islamic Finance report notes that the industry has felt the influence of the credit crunch and downturn in the global economy – Sukuk issuance has more than halved and the value of equity funds has fallen

London has been consolidating its position as the key western centre for Islamic finance in 2008. Two Islamic banks, Gatehouse Bank and European Finance House, have been granted licences bringing to five the number of fully Sharia compliant banks in the UK. Principal Insurance became the first Shariah compliant independent company authorised to offer Takaful to UK residents. In capital markets, four new exchange traded funds and two new equity funds were launched.

IFSL’s report indicates that the UK’s offering includes a total of 22 banks, far more than in any other Western country. Professional services are provided by 18 law firms and the Big Four accounting firms. A cumulative total of 18 Sukuk issues raising $10bn have been listed on the London Stock Exchange, second only to Dubai. With 55 institutions offering educational and training products in Islamic finance, the UK has more providers than any other country worldwide.

Duncan McKenzie, IFSL’s Director of Economics said “The UK has benefitted considerably from supportive government policies intended to put Islamic services on the same footing as conventional services. Evidence of London’s growing role in Islamic finance is shown in the UK being the only western country to feature prominently, 8th with assets of $18bn, in a global ranking of Sharia compliant assets by country.”

Sir Andrew Cahn, UK Trade & Investment’s Chief Executive Officer said: “Despite its origins overseas, Islamic finance has found a natural home in the UK. Though no sector is immune to the global financial crisis, Islamic finance has shown great resilience. It is important we continue to work with our Islamic finance partners to maintain our position as the leading western centre for Islamic finance service providers
source : CommodityOnline

Islamic finance offers tips to correct faulty conventional system

images3Riyadi Suparno

The current global financial crisis stems from the absence of adequate market discipline, and Islamic finance can help fix it by injecting a greater discipline into the system, an expert at the Islamic Development Bank said.

Speaking at an international gathering here Saturday, Umer Chapra from the Bank’s Islamic Research and Training Institute said the global financial system lacks discipline because the reward and punishment mechanism in the banking system was not working.

Under current practices, banks are allowed to sell debt, transferring the risks of default to the purchasers, and use the proceeds to make more loans to increase their profits. After selling the debt, banks have no relationship with the debtors.

In such a system, the banks have no incentive to make a proper assessment of the debtors in the first place, and have no interest if the debtors are able to pay off all their debt.

Added to this is the introduction of derivatives like credit default swaps which make it possible for lenders to insure themselves against the risk of default.

This innovation might not cause any harm if the sellers of the swap (hedge funds) made some sort of risk assessment and sold the swaps to the actual lending banks, Chapra said.

The problem is they sold the swaps to a large number of institutions and individuals who were willing to bet on the default of the debtor.

As a result, the amount of derivatives is getting bigger and bigger. According to the Bank for International Settlements (BIS), outstanding derivatives rose to US$683.7 trillion as of June 2008, more than 12 times the world’s combined gross domestic products of $54.3 trillion in 2007.

“It’s OK when the economy is booming. But when the economy is going down, defaults increase, and it’s just not possible to recover the investment,” Chapra said.

Therefore, he said, the way to address the current crisis is to restore market discipline through a reward and punishment system. Banks making good loans must be rewarded through profits, while those making bad or excessive loans must be punished through losses or even bankruptcy.

In that sense, Chapra said, Islamic finance offers some solutions to the current problems through its risk-sharing principles. It introduces greater discipline into the financial system by requiring financier to share the risk.

Islamic finance links credit expansion to the growth of the real economy and minimizes speculation and gambling by allowing credit primarily for the purchase of real goods and services.

It requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby insuring that the creditor evaluates the risk more carefully.

“Thus, we can see that the Islamic financial system has the potential of minimizing the severity and frequency of financial crises by getting rid of the major weakness of the conventional system: market indiscipline,” he said.

Bank Indonesia deputy governor Muliaman Hadad agreed and said that Islamic finance proved to be more resilient to crisis, at least in Indonesia.

“The Indonesian Islamic banking industry, in particular, has proved its robustness against both this current financial disturbance and the 1998 financial crisis,” Muliaman said.

The problem is Islamic finance in Indonesia is still very small, compared to the whole financial system in the country. Currently the industry, at around US$5 billion, accounts for only 2.5 percent of the national banking industry.

The good news is that the industry is growing rapidly, at a rate of 40 percent annually in the last four years.

source : tjp

Islamic finance escapes worst of crisis

The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.


The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.

“I have not found any Islamic bank that has lost money by exposure to toxic assets – because they were forbidden,” says Humayon Dar, chief executive of BMB Islamic, one of the biggest managers of alternative investments for Muslims.

Indonesia easily raised $650m (£397m, €459m) recently with the first global dollar-denominated sukuk Islamic sovereign bond of 2009. The issue was oversubscribed, and set an encouraging example for Bahrain’s expected $1.5bn-$2bn of sukuk in May 2009.

Nevertheless, issuance of sukuk – or Islamic bonds – fell by more than half in 2008, to $20bn. But difficulty raising money was inevitable as the financial crisis led investors to shun debt, whatever their religion.

There is evidence that what happens in the world of conventional finance affects the Islamic financial world with a time lag. The first signs that US problems were worse than expected, and could have international repercussions, emerged in the middle of 2007.

“All of a sudden there was a lack of liquidity,” Mr Dar says.

“Mainstream markets started to fall at that point, but that struck Islamic banks only in September 2008, [although] they were affected indirectly.

“Because they did not lose money, they are in a relatively better position than their [conventional] counterparts.”

As a result, Islamic banks have more funds as compared to conventional lenders. They have not had to rebuild their balance sheets in a panic, or seek emergency help from governments.

“Once the opportunities are there in the market, they will be able to capture them in a better way than their traditional counterparts,” says Mr Dar.

Western banks have been active in Islamic finance – both institutional and personal – for a while now. They often have superior marketing skills to regional competitors.

But that has not guaranteed success. “They haven’t done as well as fully fledged Islamic banks have done,” Mr Dar says.

“There’s a perception in the Islamic world that they are in Islamic finance because they are making money. Once they are not, they will wind up their operations.”

Muslims, he says, are more likely to trust in fully fledged Islamic banks that will stay in the sector through thick and thin.

But at the same time, some Middle East banks have relied on what he calls a “sharia premium” – expecting Muslims to bank with them simply because they are Islamic, and failing to provide competitive services. That is changing.

“Even in Gulf Co-operation Council countries, there is an indication the sharia premium is going down,” he says. “Islamic consumers are becoming more demanding.”

Islamic banks should also learn from western counterparts such as UBS and HSBC on issues of corporate social responsibility. “This is something that western banks have excelled at,” he says.

“You pick any Islamic bank. They don’t have a well defined corporate social regime that they must follow. They have been charitable.

“But corporate social responsibility isn’t just about charitable giving. It’s about all the stakeholders. You have to be seen to be serving the community.”

Mr Dar is particularly critical of Islamic institutions that have seen a big rise in profits in recent years and kept the money to themselves.

“It’s wonderful to be profitable, it’s even more wonderful to be equitable in your distribution of profits,” he says. “Islamic banks should be distributing benefits among stakeholders.”

Depositors should receive more money as a result of banks’ bigger profits, he says, and he is particularly critical of overpaid executives. “If the benefits are going to bankers in the form of bonuses, then you are not really benefiting all the stakeholders.”

source : cibaif

Islamic banks safe from crisis

Islamic banks might come out unscathed from the raging global economic crisis thanks to their unique business model.Experts in Islamic banking now claim the current global economic downturn would never have happened if the banking sector had pegged its business on the Islamic model.

Gulf African Bank, which is one of the banks operating in Kenya under strict Islamic banking law, says all of their operations have not felt any heat from the meltdown.  The CEO, Najmul Hassan says none of the 375 banks that practice Islamic banking has been affected by the crisis so far.

“The reason for this is that Islamic banking does not go into the products that got these banks into the current downfall. Look at Societe Generale, it lost billions in speculative transactions; Somitu Corporation lost because it was speculating on prices of copper. These are the very things that Sharia banking disallows,”  Hassan explained.

He noted that Islamic banking is based on neither speculation nor interest but on real growth.

“All the trading that happens in this world is not interest-based; there is real trading taking place. Some assets are purchased, you add value, and you sell them out. That is what Islamic banks do,” he said.

Hassan explained that Islamic banks buy assets, add value and sell them on deferred payment and make their profit from taking part on real economic activity in a society as opposed to conventional banks which make money on fractional lending which he described as ‘paper business’.

Speaking during the first ever Islamic banking conference in Kenya, Hassan noted that the biggest challenge for Islamic banking in the country was demystifying the concept.

“Most people stereotype us and make our banking concept look like we discriminate people on grounds of religion. This is not the case because we are open to everyone,” he said.

His comments come at a time when most banking institutions in Kenya, especially those with connections to the Western economies are on high alert. Some have tightened their lending terms while others have raised the value of collateral.


Source busiweek

Vatican Says Islamic Finance May Help Western Banks in Crisis

images20The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.


“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue.

The Vatican said banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis.

“The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Vatican’s official newspaper Osservatore Romano said in an article in its latest issue late yesterday.

Author Loretta Napoleoni and Abaxbank Spa fixed income strategist, Claudia Segre, say in the article that “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” they say.

Pope Benedict XVI in an Oct. 7 speech reflected on crashing financial markets saying that “money vanishes, it is nothing” and concluded that “the only solid reality is the word of God.” The Vatican has been paying attention to the global financial meltdown and ran articles in its official newspaper that criticize the free-market model for having “grown too much and badly in the past two decades.”

Islamic Finance Market Less Affected By Crisis

0449-0811-1409-5850_tnIslamic Finance Market Less Affected By Crisis

By: Ramjit


KUALA LUMPUR, Feb 27 (Bernama) — The Islamic finance market is not severely hit by the global economic crisis like the conventional market as many Islamic finance products are structured in a more transparent way.

This was stated by Dr Zaha Rina Zahari, co-author of the “Islamic Finance Encyclopedia”, who said while there may be some impact, Islamic finance products are affected to a lesser extent compared to conventional products as they are backed by real assets.

According to Zaha Rina, the global Islamic financial services industry has experienced spectacular growth in the last four decades.

“This is driven in part by the greater awareness and understanding of Syariah-compliant instruments and a demand for an alternative market,” she said.

Islamic finance, she added, has become a US$1 trillion industry and was still growing at an average rate of 15 percent according to the Islamic Financial Services Board.

The encyclopaedia, co-authored by Zaha Rina, Professor Bala Shanmugan and Nafis Alam, was launched here today by Securities Commission chairman Datuk Seri Zarinah Anwar.

Speaking at the launch, Zarinah said Malaysia has a comprehensive Islamic finance system with a comprehensive Islamic capital market comprising products such as bonds, unit trusts, private equities and fund management.

“What is important is to grow and develop talent in human capital, and to encourage players to come up with more diversified products into the market,” she said.

The encyclopaedia, priced at RM250, contains 1,384 entries, which include a list of Islamic terminologies, Islamic equity funds and Islamic (real estate investment trusts (REITs),Islamic banks and investment companies as well as names of experts, academicians, bankers and heads of various Islamic bodies.


Islamic Banking – strengthened by the credit crunch?

mirrormere081000002by Dr. Nicos Rossides




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.




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.



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

Is Islamic finance answer to crisis?

Robert E. Michael


THE HOTTEST TOPIC in the Islamic intellectual world in the West is whether the financial meltdown and Wall Street collapse of the last year would not have happened if we had an Islamic system of finance instead of 20th Century capitalism. The answer is clearly yes, but for two mutually exclusive reasons. On the one hand, it is clear that, properly employed, Quranic restrictions would have prevented the excesses of leverage and gambling on derivatives that led to the current collapse; on the other hand, however, those same restrictions would have prevented our Western economies from reaching anywhere near the levels of size and complexity we enjoy that make it possible for such enormous problems to occur.

As a threshold matter, it is important to remember that Islamic law is at once ancient and modern. From its origins in the Quran and the words and acts of the Prophet Mohammed in the early 7th century, up until around the end of the 1st Millennium, it was unquestionably the most advanced body of law, as well as civilization in general, west of China (other than, perhaps, Byzantium). However, for theological reasons, it then entered a nearly 1,000-year-long period of constricted growth that only really ended for the Shi’a in the 19th Century and for the Sunni much more recently.

During that period, the Dark Ages ended in the West and the Renaissance and the Enlightenment ushered in not only nation-state democracy, but also modern capitalism. The real economic evolution started when Western merchant banking developed in Italy, in the 13th Century. In fact, our word “bank” comes from the benches (bancas) that the Medicis and others set up starting in the 14th Century. As Western financing vehicles advanced from these early compagnias to unincorporated associations, the evolution of the entity theory of partnership law and then incorporated entities, and finally, in the 20th Century, limited-liability structures, in Islam there was very little movement from the traditional forms developed in the 8th and 9th centuries.

Islamic finance is therefore still imbued with the principles of the 7th Century Quran. The most important is (whether or not honored in the breach) the concept of “social justice” or “social responsibility.” This means that relationships in the economic sphere must be based on the same ideals of fairness, honesty and charity that govern a person’s religious obligations as well as his relationships with other people. The most famous post-Enlightenment Western expression of this might be Marx’s “from each according to his ability, to each according to his need.” But unlike Marx and Engels, Mohammed and his disciples had nothing against profit being retained by enterprise owners. What they did forbid was (and therefore is) riba and gharar — interest and excess or unquantifiable risk.

For 1,000 years, Muslim scholars virtually unanimously interpreted that the prohibition on riba means that both charging and paying interest is a forbidden activity (haram). And since unlike the Jewish and Christian Bibles, every word of the Quran is the literal word of God, it is a divine edict, not a statutory or constitutional one. Therefore, finding safe ways around an express prohibition like riba is not a simple matter. Gharar is less precisely defined, and therefore more flexible. But some of the major aspects of modern finance that are covered by gharar’s prohibitions are gambling, promises to make loans or investments in the future based on conditions that are not certain to occur, pledges of currently non-existent collateral and property, casualty and life insurance.

One result of these prohibitions is that Islamic banking has developed very differently from Western models. First of all, they cannot finance in any way enterprises engaged in prohibited activities, such as alcohol, gambling and pork production, or any business predicated on the paying or charging of interest. Nevertheless, as today’s Islamic societies discovered that capital formation is needed to expand their economies, they had to confront the issues successfully navigated by Western capitalism 700 years before: the difference between “usury” and “interest.”

The capitalist solution was based on the realization that there are two aspects of interest: the risk value of money (the risk that the borrower will not repay it in full or at all) and the time value of money (ability to generate profits using the money over the time it is in the hands of the borrower). While the former, arguably, can be associated with social justice in that it involves an important aspect of trusting one’s borrower’s promises, the latter clearly does not.

In 1980, when I drafted the model loan documents for Saudi American Bank, basically all I had to do was change the word “interest” to “commission” throughout the documents. That would not work today. The level and scope of Islamic finance and banking has exploded exponentially. Yet, while there has been tremendous creative efforts made to find ways to use the traditional, 1,000-year-old vehicles (basically different forms of partnership, including mutual insurance pools [takaful]), the basic limitations of riba and gharar remain major obstacles to the development of Islamic finance within the current international finance system. And despite those efforts, including the hermeneutical investigations of ancient Arabic to re-translate those terms, there is nothing approaching a consensus on the horizon to change the traditional rules.

Legislating greed out of profit-seeking would certainly be a major blow to Wall Street. However, it would also be a major blow to entrepreneurship, as well as require a tectonic shift in human nature. And even then, there is still the issue of the failure to take into account the mathematical imperatives of the time value of loaned and invested capital. Without that, you can have equity investments, which derive profit from taking the speculative risk that the investment itself will increase in value, but you cannot have secured or unsecured lending.

So Islamic finance and banking remove one of the essential underpinnings of wide-scale capital formation — risk-averse capital. Their adoption would therefore end not only over-leveraged markets that lead to bursting bubbles but most of the rest of those markets as well.

Robert E. Michael is an international insolvency and finance lawyer who has created and led the Islamic law program at the New York City Bar Association.

source : pro jour

Global Economic Crisis: The Perspective of Islamic Banking

vvvMr. Amer Bukvić, CEO of the Bosnia Bank International, delivered very insightful academic lecture on “Global Economic Crisis: The Perspective of Islamic Banking.” This was the sixth lecture held at the International University of Sarajevo as a part of public monthly Academic Lecture Series. Mr. Bukvic, highly influential and prominent speaker, had attracted the attention of more than seventy participants. Such tremendous interest in this lecture arose as a result of widespread global economic forums dealing with the subject of present economic crisis and, more importantly, due to less known, to the extent ‘controversial’, promising future of the Islamic banking.

At the beginning of the session, Dr. Muhidin Mulalić, Coordinator of Academic Lecture Series, introduced the audience with the aims and objectives of such lectures, thus, articulating the very fact of their extensive role in providing a platform for experts, researchers, diplomats and professors to tackle various challenges of the 21st century. Indeed, as Dr. Mulalić rightly pointed out, presence of previous high-ranking speakers indicate very promising role of Academic Lecture Series.

Dr. Mulalic, in his welcoming style, made a brief yet soul-touching introduction of the guest-speaker. He introduced the educational background of Mr. Amer Bukvić whose Malaysian, Japanese and British educational experience has played the decisive role in his climbing top of the pyramid. Mr. Bukvić who is embodiment of youth, knowledge and experience is indeed promising future of Bosnia-Herzegovina. Mr. Bukvic has very rich professional international experience, from 2001 to 2004 he held different positions at Abu Dhabi Islamic Bank, Dubai Islamic Bank and Islamic Development Bank. He taught at the College of Business Administration in Saudi Arabia; University of South Africa in Saudi Arabia and in the International University of Sarajevo, Bosnia-Herzegovina. Mr. Bukvić was presented to the audience as sincere friend and supporter of the International University of Sarajevo. On behalf of the University, Dr. Mulalić extended sincere gratitude to the guest-speaker for sponsoring several students, being former member of IUS Advisory Council, recommending IUS application to the Islamic Development Bank and issuing student’s identity/credit cards.

Mr. Bukvić began his lecture with an attempt to put into the perspective current global economic crisis, taking into consideration ‘historicity’ of international financial system. Perhaps, being partly influenced with the dependency theory, Mr. Bukvić made quick conclusion that current global economic crisis originated from the West, whose economic foundations are at the verge of collapse. The speaker made in-depth comparison between Asian and Western economic future and made revolution-making statement, “Asia will rise and Europe will decline!?” Using such a premise, which is indeed another novelty, he articulated ‘look east economic policy’ for all the Balkan states. In this regard, Mr. Bukvić articulated Bosnia Bank International as a bridge between South Eastern Europe and Asia. According to Mr. Bukvić there is the need for new international financial system whereby he didn’t hesitate to declare that Islamic banking and its financial system have been already playing key global role. Islamic banking and its financial system, with it’s as the speaker said, “silent features” is indeed the serious alternative to the conventional banking and conventional financial system. Mr. Bukvić has also articulated present challenges of Islamic banking and its financial system. The bulk of his lecture was but the promotion of, and rightly so, Bosnia Bank International. He asserted that Bosnia Bank international is a key player and leader of economic development, banking and investment in South Eastern Europe, especially in Bosnia and Herzegovina. He stressed the challenges Islamic banking faces in Bosnia-Herzegovina such as a challenge to educate citizens, to introduce the insurance on Islamic principles and to create the new generation of bankers.

Mr. Bukvić had proposed various kinds of cooperation between Bosnia Bank International and International University of Sarajevo. Token of appreciation for honorable guest-speaker was given by Assoc. Prof. Dr. Ali Gunes, the Dean of the Faculty of Arts and Social Sciences.

sourece : ius