Islamic finance marks new trend in the global banking

Islamic finance has continued to flourish in the Gulf, weathering the recent financial crisis better than many traditional commercial forms of finance. In Kuwait, this sector continues to grow as competition between powerhouse Islamic bank KFH and traditional bank NBK heats up, with NBK reportedly about to secure a stake in another Islamic bank, Boubyan.

Islamic finance has continued to flourish in the Gulf, weathering the recent financial crisis better than many traditional commercial forms of finance. In Kuwait, this sector continues to grow as competition between powerhouse Islamic bank KFH and traditional bank NBK heats up, with NBK reportedly about to secure a stake in another Islamic bank, Boubyan. Kuwait is increasingly a center for Islamic finance. Its Islamic finance powerhouse, Kuwait Finance House (KFH), was established in 1977 and today represents 25 percent of the total deposits in Kuwait. KFH operates in several Arab and Middle Eastern countries such as Bahrain, Malaysia and Turkey who hosts large operating branches of this bank. The second largest Sharia-compliant bank in Kuwait by market share is Boubyan Bank. Established in 2004, Boubyan Bank is currently at the center of a dispute between Investment Dar, the Commercial Bank of Kuwait and the Kuwait Investment Authority over a buyback plan and NBK's efforts to buy a majority stake. Two other Kuwaiti banks, BKME and the Kuwait International Bank, have also entered the Islamic finance market, adopting Sharia principles. NBK currently has the largest market share for attracting loans with a 28.5% of the market, with KFH coming second with 19.6%, while Boubyan Bank has the smallest market share at 1.1%. KFH has the largest market share in terms of attracting customers' deposits (25.7%), with NBK coming second (21.5%) and Boubyan Bank again coming last (1.1%). In the long run, NBK, which appears to be very close to KFH in market share distribution, as shown above, will be a serious competitor in the Islamic finance field, in which KFH has long been the predominant local force. Globally, at least $500 billion in assets is managed in accordance with Sharia, or Islamic law, with the sector growing at more than 10 percent annually. The Islamic banking capitals are Kuala Lampur, Dubai, Manama, Doha, London and Singapore. The world's largest Islamic bank is the Riyadh-based Al-Rajhi Bank, which held assets worth $44 billion at the end of 2008. Islamic finance applies "Morabaha" which is defined as a contract whereby an Islamic bank or financial institution purchases the goods or equip ment required by a customer and resells them to the customer at a predetermined profit. This type of interest used in Islamic finance is deemed compliant with Sharia law. Islamic finance and traditional commercial finance Sharia-compliant banks differ from traditional commercial banks in the banking system and approach to finance used, primarily over the issue of defining interest, which is known as 'Morabaha' in Islamic finance. "It's the same issue; both kinds of banks calculate the interest due to the debt asset leveraging," said Nasser Al-Masri, a financial expert. He explained that if one took out a loan of KD 10,000 to be repaid over a five year period at an interest rate of 8 percent, the interest would be KD 4,000. In Islamic banks it might be more; both traditional commercial banks and banks using Islamic finance impose additional interest payments on clients in case of the early settlement of debts. Al Masri went on to say that with Sharia-compliant finance, the customer who places a deposit in an Islamic bank is not allowed to know in advance the interest he will receive on this deposit, which is left to the bank to decide. There is a global trend towards favoring Islamic finance, with Islamic banks focusing on deposits since, under Sharia law, banks do not have to set interest rates or 'Morabaha' on deposits. Islamic banks' customers, therefore, do not know whether or not the money in their accounts is gaining more interest or indeed losing more interest than it would in an account in a non-Islamic bank, explained Al-Masri. This explains the global trend towards Islamic finance, since it can be more profitable for customers than traditional commercial banking. During a recent visit to Kuwait, French commerce minister Christine Lagarde announced that France has made large-scale amendments to its financial and trade legislation to attract Islamic finance in an attempt to compete with London in attracting Islamic finance investments from Kuwait in particular. Since the summer of 2007, the global financial system has undergone a period of dramatic turbulence, which has caused a widespread reassessment of risk in both developed and emerging economies. The global financial turbulence appears to have had a limited impact on the Islamic finance industry, which has been in an expansionary phase in recent years according to reports published in Economist and Financial times in 2008. This rapid growth has been fuelled not only by growing demand for Sharia-compliant products from Muslim financiers but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. In fact, there is currently over $800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, insurance schemes (known as Takaful), and Islamic branches of conventional banks. Besides its wide geographical scope, the expansion of Islamic finance has also been taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. Perhaps the most striking, however, has been the growth of Sukuk, the most popular form of securitized credit finance within Islamic finance. Sukuk commoditize capital gains from bilateral risk sharing between borrowers and lenders in Sharia-compliant finance contracts into marketable securities without interest rate charges. In spirit, Islamic finance seeks to promote social justice by banning exploitative practices. In reality, this boils down to a set of prohibitions - on paying interest, gambling with derivatives and options, and investing in firms that make pornography or trade in pork or pork materials. The Sukuk market has held its own amid a groundswell of concern about the credit crunch and dysfunctional money markets. Although the current level of issuance remains a fraction of the global volumes of conventional bonds and ABS, the Sukuk market soared in response to growing demand for alternative investments before the first episode of severe market disruptions in 2007 showed the first effects. Gross issuance of Sukuk has quadrupled over the past few years, rising from $7.2 billion in 2004 to close to $39 billion by the end of 2007, owing in large part to enabling capital market regulations, a favorable macroeconomic environment, and large infrastructure development plans in some Middle Eastern economies. In Kuwait, KFH has the lion's share and is at the beginning of a national and regional rallying of Islamic finance. This scenario may not remain the same, however, given the possible knock-on effects of the global financial crisis. Certainly the worldwide recession has left Boubyan Bank in a very embarrassing position, leading to Kuwait Investment Authority auctioning off its shares in the bank. NBK, Kuwait's leading commercial bank and the oldest in the country, seems interested in purchasing this share, giving it potential access into the rapidly growing flourishing world of Islamic finance. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=4035&Cat=0