Post - Economic Meltdown –The Impact on Technology Supporting Islamic Finance

The rapid growth of the Islamic financial market in the Gulf Cooperation Council (GCC) region and South East Asia over the last five years has created a thriving market for the suppliers of support technology to develop and enhance their offerings to meet the increasing demands of their customers who operate within this specialized segment.

However, the current economic meltdown in the US and European markets (which is likely to spread to other regions) will force Islamic finance players to review and redefine their focus on how to survive in a highly turbulent market place. Many proponents of Islamic finance claim that it will not be greatly affected by this meltdown due to the underlying principles of Shariah, nevertheless, regulators will require Islamic financial institutions to enhance key processes, including risk management, to withstand the shock should another meltdown occur.

Therefore, opportunities are in the offing for suppliers of supporting technology in Islamic finance to re-architect their offerings in anticipation of the changes required by Islamic finance regulators and players as they cope with the changing landscape post the economic meltdown.

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Islamic Finance to lead in financial services industry

The global financial meltdown has presented an unprecedented opportunity for Islamic Finance to establish itself as a truly global leader in the financial services industry, thereby realising its full, unique potential. The speakers at Islamic Finance seminar arranged by ACCA Pakistan expressed these views. They said in marketing terms, a large gap exists between the perception and the reality of its current brand attributes. The workshop facilitators Dr Afra Sajjad, Head of Education and Policy Development, ACCA Pakistan and Mr Aziz who represents ACCA at the Federation of European Accountants (FEE) Task Force on XBRL and UKTI Accounting Sub-group on Islamic Finance led the discussion deliberating upon the success of Islamic Finance in current economic scenario and ways to bridge this gap. staff report

Link: http://www.dailytimes.com.pk/default.asp?page=2009\11\25\story_25-11-2009_pg5_11

Islamic banks unaffected by crisis, says head of Union of Arab Banks

The global financial crisis has failed to have any impact on Islamic banking said Adnan Ahmed Yousif, the President and Chief Executive Officer of Albaraka Banking Group and the head of the Union of Arab Banks.

Speaking at a Ramadan Majlis held at the Atlantis Hotel by Dubai Press Club and Albaraka Group, Adnan Yousif identified three separate blocs of Islamic banks: those in countries where the banking system is closed to external factors such as Libya, Syria and Iran; countries where there is limited flexibility to invest externally such as Lebanon and Egypt; and banks in the GCC where there are few restrictions.

While Islamic banks in the first two blocs have no exposure to the financial crisis at all, Yousif said that on a consolidated balance sheet basis overall, Islamic institutions in the GCC faced little impact from the crisis because they had no involvement in derivatives.

“But that does not mean we remain isolated from the rest of the world. It is indeed possible for the GCC countries to become more influential internationally. GCC will actually be the fifth major economic block in a few years provided they implement a common currency system and consolidated economic activity across the region further,” he explained.

Indeed he claimed Islamic banking as a remarkable success story against the backdrop of the general gloom in the financial sector, noting that Albaraka Group itself not only remained unaffected by the financial crisis, but also managed to increase profits this year.

Yousif said though the end of financial crisis had already begun, recovery will be slow. “Proactive government initiatives are a precondition to get over the financial crisis. The developed countries must listen to Asian countries to avert this kind of situations in future,” he demanded.

Commenting on the Saad/Algosaibi situation, Yousif said the central banks should exchange information about corporate debts to avoid future problems, “It is important that the debts of corporate entities be made globally public in order for banks to avoid giving risky loans. This is something very easy to implement as all central banks have the information at their disposal.”

Yousif added that he did not believe that the Saudi groups’ debts pose a major threat to banks in the GCC, noting that the Arab banks affected have already made provisions of 25-50 per cent against their exposure to the firms.

Link: http://www.cpifinancial.net/v2/News.aspx?v=1&aid=3265&sec=Islamic%20Finance

Recession sparks interest in Islamic finance

LONDON, England (CNN) -- With irresponsible banking practices taking the blame for bringing about the global economic crisis, there has been a surge of interest in Islamic finance.

Islamic finance is estimated to be worth $700 billion and has been growing by 15 to 20 percent per year.

Now, a slew of academic courses are springing up to meet the demand of those wanting to break into an expanding market.

According to ratings agency Moody's, the global Islamic finance sector is worth $700 billion and has the potential to be worth $4 trillion.

What's more, the ethical principles underpinning Islamic finance are seen by some as offering a more sustainable alternative to profit-oriented conventional banking. The result is that academic institutions are lining up to offer formal training in the area.

"There is a huge demand for Islamic finance courses now, so large that it's difficult to cope with," Professor Habib Ahmed, Sharjah chair in the school of government and international affairs at Durham University, England, told CNN.

Durham will launch a Masters degree in Islamic finance from October, becoming one of a number of European institutions to offer Islamic finance programs.

"Islamic finance has been growing by 15 to 20 percent per year for some time and there is a lot of interest at the moment. People are looking for alternatives after the economic crisis."

"Islamic economists believe that if the principles of Islamic finance were followed the crisis wouldn't have happened. We are seeing a lot of non-Muslim countries, including the UK, France, Japan, Hong Kong and Singapore encouraging Islamic finance," he said.

There are many differences between Islamic and conventional banking practices. One fundamental difference is that Islamic banks do not charge interest. Rather than borrowers and lenders, the system is based on buyers and sellers.

"Conventional banking is biased to the seller. Islamic finance is trying to level the ethics between the two parties," Aly Khorshid, an Islamic finance scholar who writes for Islamic Banking and Finance magazine, told CNN.

"People think the Islamic system is based on faith, but it's based on justice. The system is based on justice for the two parties and how you get to the justice is extracted from Islamic faith," he said.

Khorshid said that there are similarities between "ethical investment" schemes and Islamic finance, in that the Islamic system does not allow investment that harms people or the environment. He credits the rapid growth of the Islamic finance sector on the success of "sukuk" -- Islamic bonds.

In the West, banks including Lloyds TSB, HSBC, Deutsche Bank and Citibank all offer Islamic finance products, catering to a niche market of Muslim borrowers.

But while Islamic banks allow Muslims to take advantage of financial services that are consistent with their religious beliefs, it is the ethics underpinning Islamic finance that are attracting the interest of conventional finance institutions keen to learn lessons from the banking crisis.

Although Islamic banks have suffered from the global repercussions of the economic downturn, they emerged largely unscathed from the initial banking meltdown that brought about that financial turmoil.

Ahmed told CNN that is because Islamic banks are not allowed to deal in mortgage-backed securities or credit-default swaps, two of the practices accused of helping bring about the banking crisis.

Khorshid said that although it's too early to say if Islamic finance has dealt with economic downturn better than conventional finance, the Islamic system has many more layers of risk assessment and management, which could help protect it from the problems afflicting conventional banks.

But the growth of Islamic finance has brought its own problems. Critics say some banks use Islamic finance to package what are essentially conventional products. "Islamic banks are also driven by the profit motive and sometimes that can dominate the ethics," Ahmed told CNN.

While Europe is catching up with the demand for these banking products, the U.S. is lagging behind. Ahmed says that regulatory and legal changes are needed for Islamic finance to grow in the U.S., but he adds there are signs that Canada may become a North American center for Islamic finance.

The lack of Islamic finance services in the U.S. is reflected in a relative lack of demand for Islamic finance courses, but in the UK there is the opposite problem.

With students coming from Asia and the Middle East to get the qualifications that will help them take advantage of the Islamic finance boom, Ahmed says it is difficult for universities to find qualified teaching staff. "Most people with PhDs in Islamic finance are working in the industry, making a lot of money," he told CNN.

He added that Islamic finance products have the potential to appeal to the non-Muslims market, pointing out that in Malaysia the majority of customers for Islamic banks aren't Muslims.

"If people look at the principles they'll see something beneficial in terms of economics, rather than just religious reasons. It's a type of ethical finance that may be attractive to a lot of people."

ink: http://edition.cnn.com/2009/BUSINESS/08/25/islamic.finance/

Islamic finance maintains growth despite global crisis

Despite the economic slowdown last year, Islamic finance resumed its rapid growth, exceeding 10 per cent annual growth in the last decade, said a top official in an Islamic bank in the UAE.

And that is not all. The outlook for the industry is promising in 2009 with interest from various quarters.

"The long-term pipeline for asset-backed sukuk issuance is healthy, and the market is attracting interest from around the world," Hussain Al Qemzi, Group CEO, Noor Islamic Bank told Emirates Business.

Analysts at Standard & Poor's also have the same view. "We believe that the outlook for asset-backed sukuk is positive despite the doubts raised by the disruption in global financial markets and in structured finance," said Paul Coughlin, Executive Managing Director, Corporate & Government Ratings at Standard & Poor's.

According to S&P figures, conservative estimates of the pipeline of sukuk that have been talked about or announced are in excess of $45 billion (Dh165bn). Several factors support the sustainable growth of this market, including increasing popularity of Shariah-compliant products and government openness to Islamic finance, massive investment and financing needs in the Gulf, and issuers' desire to tap investors from the Middle East and Muslim Asia.

Issuers from more than 20 countries have expressed interest in issuing, or announced their intention to issue sukuk, and several new sovereigns will enter the market, said the rating agency.

Despite the positive outlook of the industry and its better performance than conventional financial industry, there will be impact of short-term slowdown on the long-term sustainability of Islamic banks.

"The credit crisis has created an unsteady environment for the industry with the last six months bringing to light new developments. The continuing fallout has led to more worries about the outlook for the regional and the world economies. The knock-on effect of the financial crisis has put pressure on all financial institutions and created new obstacles for development such as scarce liquidity, stock market declines, and falling real estate prices," said Qemzi.

Low level of liquidity is also a worrying issue for Islamic banks just as it is for the conventional banks.

According to S&P, "like their conventional peers, Islamic financial institutions were ill prepared, in our view, to enter an environment where liquidity became scarce and cost of funds increased".

Islamic banks realise this, said Qemzi. "For long term growth, banks should enhance their liquidity risk management practices, focus on sharp balance sheet management building and work with regulators to comply with new requirements and policies, transparent and good corporate governance."

"The financial and market turmoil over the last year has placed increased focus on the interaction of credit, market, and liquidity risks during stressful periods. While the Basel II framework addresses market risk, credit risk, and operational risk in great detail – liquidity risk, which was a contributing factor of the recent problems, does not receive the same attention," he said while talking of key drivers to sustainability in the industry.

Despite the slowdown witnessed within Islamic banks, there is an increasing acceptability of its ways of doing business across the world, even in non-Islamic world markets.

"Islamic banks have already gained foothold in Europe and Asia, but there is tremendous room for growth. In the wake of the financial crisis, there is a perceptible gap of confidence in the conventional form of banking. At a time when conventional banks were posting massive losses, Islamic banks have proven resilient with solid growth," said Qemzi.

"However, Islamic banking is still in its nascent stages and has not reached the economies of scale that conventional banking has. I don't think that it is a question of succeeding over conventional banking, rather it is about co-operation and partnership between conventional and Islamic banks so as to provide solutions and services that are in demand by a growing customer base," he added. Going forward, Qemzi sees regions with a good Muslim population providing attractive opportunities for development.

"Regions with sizeable Muslim populations continue to offer the best opportunities for Islamic banks. These regions include Asian countries such as Indonesia, Malaysia, Pakistan and India; in Europe we can consider the UK, France, Germany; and of course the new frontiers of Africa."

"All of these regions are under-banked in terms of Islamic banking, but have the potential for growth as the consumers are much more aware of the benefits that Islamic banks can offer and government and corporates alike are structuring many of their transactions using Shariah solutions," he said.

As far as products are concerned, Qemzi sees mainstream consumer products such assavings, terms deposits, auto finance, personal finance, mortgage finance, with high growth potential.

He added these have now almost become standardised and commoditised. On the wholesale and capital market side, sukuks have seen increasing demand and appetite and will continue to be an effective mechanism of capital raising and asset and liability management. Similarly, there is a gap and subsequent need for offering insurance and investment products at the retail level in addition to the basic savings and time deposit products, he said.

Qemzi, however, believes that Islamic banks need to reach out to the masses to reach its full potential.

"Islamic banking is an ethical alternative to conventional banking. However, it has not reached the mass distribution of conventional banks. As is evident by the rising introduction of Islamic windows in conventional banks, there are customers that will choose to hold accounts in both conventional and Islamic banks, whereas others will choose to use only Islamic banks."

"Ultimately, Islamic banks are commercial institutions run according to Shariah rules. This is something that needs to be communicated effectively to potential customers who are wary of non-secular entities," said Qemzi.

LIQUIDITY CRUNCH

A look at sukuk market performance in 2008 shows the dent that the liquidity crunch has made in issuance. Total sukuk issuance worldwide reportedly declined to $14.9bn (Dh54bn) in 2008, compared with more than $34.3bn a year earlier.

Still, S&P continues to foresee positive prospects for the sukuk market in the long term. S&P expects Sukuk issuance to recover, at the earliest, during the second half of 2009 or, most probably, in 2010.

Link: http://www.business24-7.ae/Articles/2009/6/Pages/28062009/06292009_be8f554e5bbb46ffbd0cd1e4af6621b3.aspx

Could Islamic Finance Model Have Prevented Banking Collapse?

In a world now in financial crisis, thought to be brought about by banking problems, a Russian writer states the world may have been better off if it had followed an Islamic model. But is that true and what might Islam teach the West about money?

The report maintains one of the reasons why Islamic countries have not been impacted in quite the same way as the West in terms of its banking industry has to do with the fact that it bans the interest rate. In the West, like the United Kingdom, Canada, France and the United States as examples, the interest rate is the foundation for the development of wealth. The writer goes on to say it is also the source of trouble in the world of money. 

A financial system with an interest collection ban and complicated financial tools is said to have helped Islamic countries avoid the huge losses in default on loans. They are not, however, immune from the financial collapses in other countries due to the interactions in the international business world and the oil and gas markets. 

One of the unique features of the Islamic system is an economy that isn't based on getting as much profit as possible. Furthermore, it excludes certain forms of financial speculations. Equality is an aspect of the religion that emphasizes a sharing of resources under a banner that underlines needs of the poor as an obligation. 

I spoke with Dr. Khurshid Khan, one of the leaders in the Islamic community in Shreveport, Louisiana, about these matters. He and I talked about the financial systems in Islam. He prefaced his remarks by stating “there are those who do not practice Islam as they should, both in the social and in the financial areas. I am opposed to extreme thinking, and anyone who knows me, knows that is true.” Dr. Khan is originally from Pakistan, but has lived most of his life in the United States where he served more than 20 years as an officer in the military. He declares that he is therefore not biased against Western ways. 

Dr. Khan explained the monetary system under Islam as having some key features that are helpful in preventing financial problems. He declared “Islam says that an individual should be prepared for the future. In other words there is an emphasis on saving. Islam says also that an individual should make personal policies and take responsibility so he or she is not poor. Banks are established in a way so that there are enough resources to cover financial responsibilities. One of the most important ideas of Islam is the idea that if you can't afford something you shouldn't get it. That would prevent someone with a limited income from purchasing a house outside that person’s income.” 

Khan says that as for interest rates, there are various way so looking at these issue in Islam as opposed to saying the religion simply bans it. Instead, he explains, they have what is called profit sharing, which allows people to have a certain portion of the money deposits invested. This allows depositors then to share in the profits made by banks. 

But will the West follow an Islamic model or will middle eastern countries follow the West? A narrative of Egypt's banking system explains how Egypt has undergone major reforms since the 1990s and now is developing a more liberalized and modernized system, supervised and regulated according to internationally accepted standards. These are some of the changes that have taken place or are in process:- 

1. Introduction of laws giving more independence to the CBE, and an electronic signature law 

2. Regulation of connected and related party lending 

3. Management reforms of the four public sector banks, making clear the responsibilities of managers and boards of directors 

4. Development of an automated credit risk information system (CRIS), from which participants would be able to gain online access to clients' credit profiles.

Dealing with mortgages remains a struggle, however, in Egypt, although a new mortgage law is being examined to open up markets. Perhaps, however, Egypt has learned a lesson from the West and will continue the practice of conservative savings and credit when these markets open.

In these times of financial turbulence, Shariah-compliant banking and finance is being endorsed for its stability and is evolving as the best choice on the road to economic recovery.

According to Imtiazz Sarfaraz Khan, Head of Retail Banking and Finance Department at Abu Dhabi National Islamic Finance, Shariah-compliant finance has always been an appropriate and relatively risk-free route for financial dealings but was downplayed for quite some time mainly due to political considerations across the globe.

Khan said the definitions of Shariah-compliant or Islamic banking were endless.

"Some non-Shariah-compliant banks and financial institutions may choose to call it 'interest-free banking', while others are comfortable with 'zero interest on asset-backed finance'," Khan added.

"If one looks from the customers' point of view, the key attributes that drive consumer confidence are trust and transparency - not just quick-fix solutions."

He added that these positive attributes are considered "honesty of purpose" or "neeyah" in Arabic.

"Recently, there has been a very visible trend in Shariah-compliant banking and finance, which is here to stay - somewhat like a revolution of sorts, with a strong social message and a positive contribution to the individual and the economy as a whole. Shariah-compliant finance helps in filtering funds away from non-social, non-ethical areas, while promoting thrift," he said.

Khan said easy access to money through personal loans and a variety of credit products such as conventional credit cards and overdrafts have tempted the common man. People leveraged on their accounts and borrowed more than what they were eligible 

during the economic boom. In the downturn, it has been difficult for them to arrange their payment installments and has backfired on their saving plans. In traditional financial services, this short-term benefit has opened a Pandora's box.

This is due to the fact that money is not treated as a commodity in Islamic finance, but as a means of exchange to facilitate the flow of goods and services. A sharp eye on trust and transparency is maintained by the Shariah controllers of each bank, but implemented by the entire team policymakers, managers and front-end sales and service personnel.

Link: http://www.zawya.com/Story.cfm/sidZAWYA20090524034305/Shariah-compliant%20finance%20is%20the%20best%20choice

Financial crisis presents opportunity for Islamic banks

The financial crisis presents an opportunity for Islamic banks based in some of the Gulf States according to a new report from the London School of Economics and Political Science (LSE) released on May 28, 2009.

The financial crisis presents an opportunity for Islamic banks based in some of the Gulf States according to a new report from the London School of Economics and Political Science (LSE) released on May 28, 2009. The report The development of Islamic finance in the GCC, authored by Professor Rodney Wilson, points out that the Islamic banks have been less adversely affected than the major international banks by the 2008-9 crisis, making them more attractive to investors. Gulf Cooperation Council - based investors in conventional banks have seen the value of their investments plummet. These include Prince Waleed's Kingdom Holdings in Saudi Arabia, which holds 5% of Citibank, and the Abu Dhabi and Qatar Investment Authorities, which hold significant stakes in Barclays. In contrast, the value of the Saudi Al Rajhi Bank and Kuwait Finance House (KFH) investments in retail Islamic banking affiliates in Asia has been much more resilient. Professor Wilson, who wrote the report for LSE's Kuwait Program on Development, Governance and Globalization in the Gulf States said, '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. 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.' Islamic banks have been somewhat insulated from the current financial crisis because, in contrast to their conventional counterparts, they do not borrow in interbank markets, their funds coming instead from their own deposits. They also did not hold toxic collateralized debt obligations because they are not allowed to hold interest bearing securities. According to the report the GCC is well positioned at the heart of the Muslim world to serve as an Islamic finance hub linking Europe, Asia and Africa. The spread of subsidiaries of GCC-based Islamic banks illustrates that this is starting to happen. Furthermore a global economic recovery is likely to benefit the GCC as oil and gas prices rebound, resulting in fresh liquidity being pumped into Islamic banks to fuel further expansion. Despite being a reluctant supporter of Islamic banking to date, the report argues that Saudi Arabia could become the global leader in the Islamic finance industry worldwide if the Saudi Arabian Monetary Agency (SAMA) and the Capital Markets Authority become more proactive in promoting the industry. This would bring significant benefits to its economy including employment creation in the King Abdullah Financial District where, for example, although a grand mosque is included in the plans, there is no mention of Islamic finance in the vision. The value of shariah-compliant assets in the GCC is over $262.6bn when the figures for Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain and Qatar are aggregated. With total shariah-compliant assets worldwide amounting to around $640bn at the end of 2007, this implies that the GCC countries accounted for around 41% of the total. The Islamic finance industry encompasses retail and investment banking, insurance, fund management and the issuance and trading of shariah (consistent with the principles of Islamic law) compliant securities. Shariah prohibits the payment of interest on loans (Riba or usury), as well as investing in businesses that provide goods or services considered contrary to its principles (Haram or forbidden) such as pork, alcohol or gambling. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3575&Cat=0

Is Islamic finance the answer?

By Robin Brant  Malaysia correspondent, BBC News, Kuala Lumpur

Investments worth £800bn are made through Islamic finance products.

Experts in Islamic finance believe their way of doing business has shielded them from the global credit crisis.

But how does it differ from conventional Western finance?

A former executive director of the International Monetary Fund, Dr Abbas Mirakhor, says wider Islamic economics relies on God's guidance, handed down almost 1,400 years ago.

There is a "consciousness of a supreme creator and a system that he has provided", he says.

What we know as the conventional Western way does not have that, which is "really the major difference between the two", he adds.

In practical terms, the most significant difference is that charging interest is not allowed in Islamic finance.

FEATURES OF ISLAMIC ECONOMY Dealing in interest, liquor, pork, gambling or pornography are prohibited under Sharia law Islam forbids all forms of economic activity which it deems morally or socially harmful Individuals must spend their wealth judiciously and not hoard it, keep it idle or squander it Muslims have a duty to contribute a percentage of their wealth to deprived and poor sections of Muslim society

Neither are most forms of speculative investment permitted, such as hedging or derivatives trading.

"We don't recognise the concept of interest... to look for some profit from trading money," explains Dr Bambang Brodjonegoro from the Islamic Development Bank.

"In the Islamic concept, money is strictly for the purpose of exchange or storing value, but not for the transaction of looking for excessive profit," he says.

Sharing risks

How then, does an Islamic bank, and a customer who puts money in that bank, make a profit?

The Qur'an contains principles Muslims must follow when they do business

The system is asset-based, with tangible assets or commodities at the heart of it. There are buyers and sellers, not borrowers and lenders.

Here is a comparison.

In Los Angeles a customer who wants to borrow money to buy a car would go to a conventional bank and agree a loan. The bank would hand over the money.

There would be regular repayments, which include interest accrued on the loan.

In Lahore a customer could go to an Islamic bank and sign a contract with the bank to buy a car from them.

The bank would not loan the money but buy the car itself. Then it would sell it to the customer at a mark up.

The customer would agree to pay back the cost in instalments over a regular period.

One of the core principles at the heart of Islamic economics is risk sharing. The bank and the people who put their money in it share any profit, or loss, from investments.

"In Islam we appreciate merit, so if someone works harder in a business...they (the bank) will get the sharing benefit," explains Dr Brodjonegoro.

"The more important thing is that there will be no bank that rules everything. It will be bank and borrowers at the same level and they share the risk and benefit."

Alternative way

This sense of equality is important. It is one of the defining characteristics which proponents of Islamic economics say make it different from the conventional western way.

It is time for Islamic finance to pause and think of the direction it is taking  Prof. Habib Ahmed, Islamic finance expert

Islamic economics also highlights a belief in benefitting the wider Muslim community.

The former IMF Executive Director Dr Mirakhor says that it chimes with "a movement toward becoming more 'other conscious'...having consciousness about the other fellow, about the general public interest."

This contrasts with what he described as the "simple narrow basis of self interest which motivates, supposedly, the economic agents in the liberal economic system."

Some see the Islamic model as an alternative. Others see it as complementary to the system which has dominated the western world.

"I don think that this Islamic banking system is the alternative, that we have one or the other. I think this is a complimentary service, a way of doing service," says Prof Ekmeleddin Ihsanoglu, Secretary General of the Organization of Islamic Countries.

"It needs to be an option there where people can find different ways of doing the same thing."

Compromising principles

Islamic economics is not the exclusive preserve of Muslims.

UK has 8th largest Islamic finance sector according to the DTI

London is emerging as a major financial centre for Islamic finance. Islamic banking products are also widely used by non Muslims in Malaysia.

"This is an alternative system that can be applied to everybody. Everybody can use it regardless of their religion," says Dr Brodjonegoro from the Islamic Development Bank.

Major banks like Britain's HSBC and Citi of the US have set up Islamic banking subsidiaries that are flourishing. Some of the champions of the Islamic way want to see business expand beyond the natural market of Muslim countries.

They believe that now, more than ever, there is a market for non Muslims who share in the values espoused in Islamic economics.

But there are some who fear that by expanding the Islamic way is becoming less Islamic.

Time to reflect

"Unfortunately what is happening is that Islamic finance in some ways is moving more and more closely to the conventional finance," says Prof Habib Ahmed, a world authority on Islamic finance.

"If you look at the development in the past few years, Islamic finance appears to be mimicking most of the products of conventional finance."

There has never been a better time to champion an economic model which is different to the one laying in shreds on Wall Street, says Prof Ahmed. But he believes that the Islamic concept is being diluted.

"As people after this crisis are looking for solutions...the Islamic finance industry is moving towards that very system," he says.

"I think it is time for Islamic finance to pause and think of the direction it is taking".

Link: http://news.bbc.co.uk/2/hi/business/8025410.stm

Islamic banks have weathered sub-prime crisis well: Regulators

ISLAMIC banks and financial institutions managed to avoid the fallout from the sub-prime crisis, largely because they refrained from investing in toxic assets that were deemed 'un-Islamic'

ISLAMIC banks and financial institutions managed to avoid the fallout from the sub-prime crisis, largely because they refrained from investing in toxic assets that were deemed 'un-Islamic'. And this prudence has put Islamic finance in good stead with investors looking for safe havens, said Professor Rifaat Ahmed Abdel Karim, secretary-general of the Kuala Lumpur-based Islamic Financial Services Board (IFSB). The IFSB is an umbrella group of Islamic financial regulators. It was formed in 2002 and counts Saudi Arabia, Qatar, Indonesia, Bahrain, Sudan, Pakistan and Singapore as members. Prof Rifaat, who is in Singapore for the IFSB summit this week, told The Straits Times on May 6, 2009 that a lot of lessons could be learnt from the financial crisis. 'What I think people have realised is that Islamic banks have a model that they can study,' he said. 'They provide not an alternative to conventional finance, but a model to financial institutions which others can learn.' He is under no illusions that Islamic finance can replace the now discredited Wall Street financial services model. 'When you say 'be an alternative', it means to say to replace it. I don't think that would happen,' he said. Instead, the global crisis has highlighted the strength of the Islamic methods of banking and finance, where syariah-compliant rules govern the business model, behaviour and practices of Islamic banks and financial firms, he added. For instance, a basic rule of Islamic finance prohibits Islamic bankers from dealing in second-hand interest-bearing mortgages, or from even engaging in trading debt instruments. 'They're not allowed to participate in what you call toxic assets like sub-prime mortgages,' Prof Rifaat said. He said that while Islamic banks have avoided the worst excesses of the toxic-asset problem because they never invested in certain asset classes, some Islamic banks could still be hurt as the impact of the global crisis spreads. 'It all comes down to risk management. You've to have proper risk management and proper governance and practices so that an institution doesn't fall down,' he said. 'The point is that you really need good risk management practices and good governance, whether it's an Islamic financial institution or otherwise.' When the economy weakens, Islamic banks may suffer too. 'If we now move from a financial crisis to an economic crisis, then Islamic banks might be affected like any other banks,' he said. 'For example, if a country is export-oriented and there's a decline in exports, businessmen or firms will not go and ask for financing from banks, including Islamic banks.' He thinks Islamic finance will become stronger with more products and services on offer, and also more banks. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3295&Cat=0

‘Learn from crisis rather than cry’

Ali Al-Ghannam

LONDON: Kuwait Finance House (KFH) is a pioneer of Islamic finance, and is one of the largest Islamic banks in terms of capital, assets and balance sheet. KFH has subsidiaries in Turkey, Bahrain and Malaysia. It is a major player in the real estate sector financing pioneering portfolios in the UK, Sweden, the US, Johor Baru and Shenzhen. Here, Ali Al-Ghannam, head of International Real Estate, KFH, discusses the impact of the financial crisis on the real estate market and the prospects for Islamic banks in 2009. Excerpts:

What has been the impact of the credit crunch and the underlying causes?

The correction in the real estate market in the GCC (Gulf Cooperation Council) started at the end of 2006. Everyone in the industry knew that a correction was due because of the historical high prices and overvaluation of assets. But nobody anticipated a credit crunch to happen like this, because nobody knew what exactly was happening in the US market, except the US officials. The crisis was 100 percent US-made, but unfortunately the rest of the world has to deal with it. The impact on the GCC market is mostly psychological and I blame the media for overplaying this. I am not saying that the financial crisis is not a problem. But it is not that bad. We should learn from it rather than cry about it.

Don’t you blame the regulators all over?

We have to blame the US government first. They saw this coming and did not do anything about it.

What about the impact on the real estate market in Dubai?

If you talk about the GCC, I prefer to omit Dubai. I don’t see Dubai as a model to be copied. Dubai is a service provider, a back-up center for the world and not an actual city. Dubai was able to market itself as a brand name, just as Monte Carlo, Monaco and Singapore.

How has the credit crunch impacted on the Islamic finance sector?

Most of the Islamic investments are based in real estate. We are not immune. The industry itself is still in the developing stage. There is a long way to go. If the industry aspires to be a viable alternative system in the future — and it definitely can be such a system — then we have to create the necessary infrastructure and architecture both at country and global level. In the Kuwaiti real estate sector, its impact has been mostly psychological. The liquidity is there. It is just the confidence that is lacking. You need to encourage people to spend money. The Kuwaiti government with a KD2 billion stimulus package has followed other governments, but recovery will be a slow process. The media played a huge role in getting people scared. People are hearing and reading that there is a problem, so everyone is behaving as if there is a real problem.

How is KFH coping with the impact of the slowdown?

Many Islamic financial institutions are facing tough times and it is up to their governments to help them out. KFH is less affected. We are a solid institution but we are careful. We had the opportunity to successfully liquidate our funds in the US and UK in 2006. We are also in the process of liquidating our Pavillion Fund in Malaysia and our portfolio in Shenzhen in China. Subsequently, our real estate assets have declined from $6 billion in 2006 to $3 billion now. We also have a long-term Al-Nibras II Fund in Malaysia which has invested just under $1 billion in the South Johor Economic Development Project. Realty investments should follow simple supply and demand dynamics. We have to go back to basics. In the GCC especially Dubai, we have seen speculative developments targeting outsiders. This is not natural. Our project in Johor Baru is based on an actual need between Singapore and Malaysia.

Where do you see the new opportunities for investment?

Between the GCC and the Far East, we see huge opportunities. So far, the sector is not capitalizing on this. The US and UK markets are still ones which you cannot ignore. But if you open on another front, then East Asia — Japan, China, Malaysia, Singapore etc. are good markets. We are interested in assets that are based on a natural not artificial need for development. We like the UK market where we had a very successful Al-Manar Fund. We are looking for the right time and opportunities to re-invest in this market. We would love to be part of the London 2012 Olympics projects through financing a transaction or so, because it is a huge project. But nobody has approached us. — M.P.

Link: http://www.arabnews.com/?page=6&section=0&article=120991&d=30&m=3&y=2009

Islamic banks take share of the pain

Islamic prohibitions against fixed interest and most complicated financial instruments have helped Islamic banks avoid the avalanche of derivative debt losses that have wreaked havoc across the world financial system.

Islamic prohibitions against fixed interest and most complicated financial instruments have helped Islamic banks avoid the avalanche of derivative debt losses that have wreaked havoc across the world financial system. Devout Muslim investors have also fared better when buying global equities that do not violate Islamic principles. Shariah screening has shielded them from exposure to over-leveraged corporates, conventional banks, gaming companies and sellers of alcohol such as hotel groups, all of which have suffered from precipitous drops in value. The FTSE All-World Index has shed 42.3 percent over the past 12 months, while the shariah-compliant version of the index has lost 37.6 percent over the same period. But have investors in Gulf-based Islamic banks enjoyed a better time than shareholders in conventional ones?  Evidently not. Since oil prices peaked last July, regional Islamic banks have shed 45 percent of their value, compared with a 39 percent slide of their conventional brethren, according to Nomura, the Japanese investment bank.  As markets have picked up in recent months, Gulf Islamic banks have climbed 11 percent, while conventional banks have risen 10 percent. “The fact is that overall they haven’t performed that differently,” says Tarek Fadlallah, Executive Director of Nomura in Bahrain. “You have good and bad Islamic banks, just like you have good and bad conventional banks.”  On one side is Al Rajhi Bank, a conservative Islamic lender in Saudi Arabia. The world’s largest Islamic bank has lost only 22 percent of its value since July and now has a higher market capitalization than Citigroup.  In contrast, Dubai Islamic Bank, the world’s oldest Islamic bank, has seen its shares tumble 72 percent over the same period, partly because of alleged scandals and concerns about its real estate exposure. Both banks have still reported profits that would now be the envy of many western financial institutions, although DIB’s results have been tempered by some heavy writedowns related to the alleged scandals. But the global economic crisis hit the Gulf region later than developed markets and some economists say it is still to feel the full effects of the worldwide recession. Indeed, analysts warn that Islamic banks could be more exposed to effects of the credit crunch in the future than conventional institutions, with their exposure to property held up as a crucial risk.  There are exceptions but most Islamic banks have a higher exposure to flagging real estate markets than conventional institutions. This is because of the restrictions on investments in many asset classes and the shariah requirement to have a physical asset underlying all Islamic transactions. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3195&Cat=0