Islamic finance: Can it save Western banks?

The question whether the Islamic finance can save the Western banks or not is highly spoken nowadays in the global economical crisis.

The rules are simple, no dealing in alchohol, pornography or anything deemed morally harmful coupled with no interest and you have the foundation for an Islamic financial system, which has been able to withstand the current economic meltdown, presenting Islamic banks with a unique opportunity to flourish.

Unlike banks in Western economies, Islamic banks have been delt less of a blow by the financial crisis and experts believe it is because the laws followed are based on those set out in Islam’s Holy book, the Quran, which for Muslims is the word of God.

No interest and risk sharing

Islamic banks do not borrow in interbank markets as their funds are from their own deposits and they do not hold toxic collateralized debt obligations. Furthermore Islamic law forbids interest and encourgaes risk sharing, which means that any investment, profit or loss, is shared by both the bank and its clients.

The fact that Islamic banks have seen minimal adverse effects from the crisis has made them more attractive to investors, especially in the Gulf Cooperation Council (GCC), who watched the value of their investments in conventional banks plummet, according to a new report, named The development of Islamic finance in the GCC, from the London School of Economics and Political Science (LSE).

“There has been much questioning of the values underpinning the conventional financial system, and the search for alternatives means that Islamic banks are likely to receive more attention, especially as their raison d’être is morality in financial transactions, based on religious teachings,” said author of the report Professor Rodney Wilson, who wrote the report for LSE’s Kuwait Programme on Development, Governance and Globalization in the Gulf States.

The demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs means assets that comply with Islamic law range between $700 million and $1 trillion, with some estimates seeing assets growing to $1.6 trillion by 2012.

The value of Shariah-compliant assets in the GCC, which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates, amounts to more than $262 billion.

“The increasing international respect for Islamic finance has been noted in the GCC, and this should encourage local acceptance by both governments and bank customers, not least because no Islamic bank has failed in the crisis and required a substantial government bail-out,” Wilson said.

Linking the West with Shariah

Wilson said the GCC’s position in the heart of the Muslim world made the area a strategic hub that could link Islamic finance to Europe, Asia and Africa and argued the spread of subsidiaries of GCC-based Islamic banks was an indication that it was already happening.

However, regulatory differences and harmonization among different schools of thought, are just some of the main obstacles of Islamic banking as it looks to grow into a cross-border system, mainly targetting European countries with large Muslim communities.

As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.

In a sign that cultural barriers may be coming down, this week a London-based training program was launched by the Lord Mayor of the City of London, Ian Luder, to enable the European financial hub to better cater to the requirements of Islamic finance.

“Despite the current global financial crisis, Islamic finance continues its growth as an increasingly viable alternative banking system for both Muslims and non-Muslims. It will be a vital component of the new global financial infrastructure,” Luder said.

The program, which will be run by the Islamic Banking Finance Center U.K., was established to provide research and training for private and public organizations such as insurance companies, banks, non-financial businesses and academic institutions.

“The Islamic finance sector is expanding at an exponential rate…due to its strong financial principles and ethical values, which prohibits the charging or paying of interest and encourages mutual risk and profit sharing between parties,” Akmal Hanuk, chief executive of IBFC-U.K., said.

source : tkbb

Effect of economic turmoil on Islamic banking x-rayed

Legislation, governance and the effect of the economic crisis on Islamic banking and finance were the focus of a conference that was held last January 2010. The global economic turmoil was a test for both conventional and Shariah-compliant systems, said Hamad Al-Monawir, Assistant Undersecretary for Planning in a speech delivered on behalf of the Deputy Prime Minister for Economic Affairs, Minister for Development Affairs and Minister for Housing Affairs Sheikh Ahmad Al-Fahad Al-Sabah. The speech was delivered at the opening of the two-day conference that dwelled on the effects of the economic crisis on Islamic financing. The event was widely attended by banking and financial experts and representatives of Islamic banks and finance institutions.

 

Undoubtedly, just like everything else was affected by the economic turmoil, so was Islamic financing, Al-Monawir said while delivering the speech. He went on to add, “During last year’s conference on Islamic financing, the economic crisis had already started and had affected all financial systems worldwide. Islamic financing was not as largely affected by the crisis.” He said that the crisis did not differentiate between Sharia-complaint and conventional financing. Islamic and non-Islamic finances have undergone real tests of how strong the system was with regard to handling a crisis of such proportion, he said.

 

A major discovery that surfaced as a result of the economic crisis, he observed, was how feeble the arbitration systems were used in various financial companies. The crisis was largely linked to asset management, demands and the concepts of risk management, which contributed to the growth of the crisis, he added. The blame, he said, lies with the system, laws and legislation that were unable to restrain the crisis and contributed toward spreading it.

 

Talking to the Kuwait Times on the sidelines of the event, Emad Yousef Al-Monayea, Chairman and Managing Director of Liquidity House, a KFH subsidiary, said that one of the major elements that has enabled Islamic banking to resist the economic crisis were the assets that back the structures developed in Islamic banking. “Most of these structures have to be backed by these assets; these assets have to be actual, should have a value and have to have some kind of marketable features into them. This is one of the major elements that maintains Islamic banking,” Al-Monayea said.

 

The close control and the strong monitoring that the Central Bank of Kuwait was applying attributed to the lesser impact of the economic crisis on Islamic banking and on the majority of the banks overall, he added. According to Al-Monayea, although there are some positive signals at present the crisis has not fully subsided. “When we speak about international markets, the signs of recovery have started. Now, there are good investment opportunities for the people who have the capability and the liquidity, he said. Sheikh Ahmad Al-Yasin Al-Sabah cautioned the uptake of risky investments. In his words, good management and the following of Islamic teachings have made up the success formula of Islamic banking.

 

Source : kuwaittimes