Challenges to growth of Islamic banking

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011

Although Islamic banking has grown rapidly over the last three decades, the volume of transactions touched $1.086 trillion (Dh3.98 trillion) in 2011, accounting for only one per cent of the world's total.

This point was made at a seminar organised last week by the Emirates Centre for Strategic Studies and Research in Abu Dhabi in cooperation with the Paris Institute of Geo-Political Studies.

The seminar also highlighted global interest in Islamic banking, motivated by the growing economic importance of Islamic countries and the increasing number of Muslims in places such as Europe. Even China is entering the market, recently approving a licence to set up the first Islamic bank in the country.

More than 310 Islamic financial institutions currently operate in more than 75 countries, and in the GCC the sector continues to flourish. The recent announcement that the world's largest Islamic bank, with a capital of $100 billion, would be headquartered in Bahrain, will boost this trend.But despite the global interest and new trends, Islamic banking still faces many challenges. Many of these challenges have complicated Sharia and professional characteristics.

Wide variation

Regarding Sharia, there is a wide variation in fatwas in each Islamic bank. Some of these fatwas contradict each other, thus creating hurdles in the progress of the sector.

This disparity reflects conflicts of interest and competition among Islamic banks on the one hand, and among scholars on the other. Some financial instruments adopted by some Islamic banks are prohibited or treated as undesirable in other lenders, which may hinder their adoption and the mission of the banking business in general.

On the professional side, although one of the most basic fundamentals of Islamic banking is based on the profit-and-loss sharing principle, the interest rate in Islamic banks mirrors interest rates in traditional banks, in that it moves up and down in accordance with the interest rate of the London Interbank Offered Rate (Libor) on the London Stock Exchange. This is the average interest rate that leading banks in London charge when lending to other banks.

Even though fatwa departments in Islamic banks are currently considering a substitute for this interest rate mechanism, in reality, Islamic banking is part of the global banking system and will remain so due to the integration of the economies of Islamic countries with the global economy.

This is because economic globalisation does not allow for such a separation between Islamic banks and traditional banks.

The impact of the global financial crisis on Islamic banking stand as evidence of strong association between Islamic banking and global banking, despite the fact that the effects on Islamic banks were less serious than those suffered by traditional banks. Let us not forget that one reason for this is that Islamic finance prohibits overestimating assets without sound financial foundations, and financial derivatives — two major causes of the crisis.

The efforts of Islamic banking to go global are important, particularly if they want to achieve the stature of French banks, for example, but it also requires finding a solution to the currently existing Sharia and professionalism-related problems.

Dealing with global fin-ancial markets is different from dealing with local and regional markets, especially given that there are complicated financial instruments and derivatives that are difficult to deal with in terms of Sharia only.

There are also major stock exchanges for commodities, gold and oil that deal with billions of dollars daily, thus putting big burdens on financial institutions because of the size and speed of transactions.

But if these issues can be resolved, it would be possible for Islamic banking to constitute an important part of the world banking system.

Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.

http://gulfnews.com/business/opinion/challenges-to-growth-of-islamic-banking-1.971299?flv=1

GCC urged to follow unified Islamic finance regulations

The Gulf Co-operation Council (GCC) should have a unified rule under one regulator for Islamic investment products for ensuring lower cost of funds, according to Islamic Wealth Management (IWM) Report 2012.
“The GCC countries could take a leadership role by establishing standards for the registration of Islamic investment products with one regulator,” the Bank Sarasin report said.

The report was launched by Bank Sarasin managing director and head of Islamic Finance Fares Mourad and Monzer Kahf, a leading Islamic finance scholar.

Such unified rule would allow asset managers to market the product to clients across the region, it said.

Currently any offering needs to comply with different regulations in Bahrain, Kuwait, Saudi Arabia, Oman, Qatar and the UAE, resulting in a lengthy and expensive registration process, the report said. “Reducing expenses and increasing the availability would increase competition, benefiting local investors and further the GCC’s development as a centre of excellence for Islamic finance.”

Although unified rules could be done either a state, region or Arab league level, it would be better to have a centralised agency that could interpret the legislations regarding Shariah investments, Mourad said.

Asked whether there was a need for a separate entity for the regulation and supervision of Islamic investments and products, he said “I really would like to have this” but it was for the regulators in the respective jurisdictions to decide.

Kahf said the Islamic Financial Services Board could take the lead in the centralised agency as it consisted of central bankers in the Muslim countries. “Once you have such an agency, there is no need for separate Shariah boards as lawyers specialised in the field could suffix its role,” he added.

The report also took note of the constant criticism of certain Islamic finance structures such as the ‘Tawarruq’, which involves purchasing a commodity with deferred payment and selling it to a third party for cash, hence replicating the effect of a loan.

“Regulations need to be adjusted to allow financial institutions to engineer products that fit the spirit of Islam while meeting legal and regulatory requirement,” it said.

In this regard, the report cited an example of recent co-operation between the halal industry (mostly foodstuffs) and Islamic finance – two sectors with similar goals that have had little contacts.

With issues related to the environment and social practices as well as corporate governance getting more attention, it said there has been more reporting on corporate social responsibility, which is important to Islamic finance.

“There is still much room for improvement with higher standards and a more strategic approach required at the state, company and private level. The Muslim countries face the greatest challenges,” the report said.


http://www.gulf-times.com

Islamic finance in the Middle East: Progress despite confusion and lack of information

December 2011

Introduction

Estimates vary of the size and growth rates of assets held internationally under Islamic finance, but suggest that Islamic finance is a rapidly growing industry. While it represents a small proportion of the global finance market (estimated at 1%- 5% of global share), the Islamic finance industry has experienced double-digit rates of growth annually in recent years (estimated at 10%- 20% annual growth). Industry experts estimate that assets held under Islamic finance management doubled between 2007 and 2010 to reach around $1 trillion.

A survey of the top 500 Islamic financial institutions shows that Shari'ah-compliant assets in these institutions rose from $822 billion in 2009 to $895 billion in 2010. In 2010, 18 new banks offering SCF entered the market and six conventional banks started providing SCF via "Islamic finance windows."

The Middle East is the origin of Islam. Islamic banking has also taken its practical birth with the foundation of first Islamic bank in Dubai (Dubai Islamic Bank) in 1975. There are 21 countries in Middle East and most of them are Islamic and have Islamic banking system. Though Islamic banking has been around for quite some time, the first experiment in modern times began in 1963 in Egypt.

Now, local players led by Saudi Arabia's Al Rajhi Banking & Investment Corporation and Islamic Development Bank, Kuwait's Kuwait Finance House, Bahrain's First Islamic Investment Bank and Al- Baraka Islamic Investment Bank, and UAE's Dubai Islamic Bank and Abu Dhabi Islamic Bank have been joined by global financial institutions across the Middle East.

Middle East Progress

Algeria has one Islamic bank and the country is doing its best to increase the number of banks which are working on Islamic principles. Bahrain, now established as a major regional hub, has eased entry barriers for new Islamic banks. Currently, there are 6 Islamic retail banks and 20 Islamic wholesale banks in the country, resulting in the highest concentration of Islamic financial institutions in the Middle East. The regulatory framework is well-developed and reasonably transparent. The Prudential Information and Regulatory Framework is the first framework especially designed for Islamic finance and provides a good platform for overall governance. In Egypt, out of 7 banks with Islamic operations, only one has been established since 2000, reflecting the reluctance of institutions to enter this market. While Islamic windows are operational in 5 banks, a lack of adequate regulations impede the overall growth of Shari'ah-compliant finance.

Iraq has one Islamic bank, but due to present unrest in the country the chances of more Islamic banks are low until the political situation in the country improves.

In Iran, after the revolution of 1979, the banking system was nationalized. Shortly thereafter, in 1983, the Law of Usury-Free Banking was passed, and on March 21, 1984, interest free banks started to implement Islamic banking based on the 1983 law. Presently there are many Islamic banks in the country.

In Jordan, demand for Islamic banking is estimated to be high; however, no new Islamic banks have been established in recent years. One of the reasons behind this is the lack of government support for Islamic financial institutions. Contrary to countries like Kuwait, where Shari'ah-compliant banks are surely supported by the authorities, there are no strong connections between Islamic organizations and the Jordanian government. Therefore, the status quo in the banking industry between conventional and Islamic banking is maintained. The situation is similar to the one in Egypt.

In Kuwait, the number of Islamic banks that can operate in the country is limited. Currently, there are four licensed institutions, all of which used to be public. Islamic windows run by conventional banks are not allowed. Thus, new entries into the market seem unlikely unless there is a change in regulations. In addition to that, Kuwait is not granting any new licenses; therefore, the conversion of the Commercial Bank of Kuwait into a fully Islamic bank, announced in early 2008, is still not completed.

In Lebanon, the minimum paidup capital required from Lebanese conventional banks to establish an Islamic institution is $20 million, whereas the minimum capital required from a foreign bank is $100 million. There are four full-fledged Islamic banks in the country. Oman does not have an Islamic banking sector as it does not allow Shari'ah-compliant financial institutions, and the situation doesn't appear to be changing in the near future. The governor of the Central Bank of Oman believes that all banks should be international.

Qatar opted for an initial period of license restriction to test the Islamic banking concept with only two banks allowed until 2006. Since then however, as restrictions have been eased, the market has developed manifold and today many banks offer Shari'ah-compliant products. In 2005, the government established the Qatar Financial Center (QFC) to attract financial institutions and capital into the country. QFC regulations are liberal and allow a relatively quick and easy establishment of Islamic wholesale financial institutions.

The development of Islamic banking in Saudi Arabia is hampered by the lack of clear laws, and technically Shari'ah-compliant finance is against the constitution. In practice however, Islamic finance institutions are present in the market, but they operate in a challenging environment with many licensing conditions being discretionary and subject to strong government influence. This directly reflects on the fact that only 4 out of 14 banks have been opened since 2000.

The UAE market is relatively competitive, with a large number of banks serving a limited population. Additionally, in 2004 the Dubai International Financial Center was established with the objective of making UAE one of the major global onshore financial hubs. To this end, a lot of incentives were introduced, most importantly a much more liberal business environment than in the rest of the country, especially in terms of foreign ownership. In spite of retail banking being excluded from DIFC regulations, a number of international institutions (such as HSBC Amanah or Citibank) have established operations there. At present there are 11 Islamic banks working in the country.

Conclusion

Progress has been made in the regulation of Islamic financial institutions in the Middle East in view of the increasing market share of these institutions. There is better understanding of Islamic finance by the monetary authorities and closer cooperation between them and these institutions, sometimes with the involvement of the Islamic Development Bank. Efforts to standardize Islamic financial products continue in all countries. The standards developed by the Accounting and Auditing Organization of Islamic Financial Institutions are being adopted. The need to standardize such basic elements of Islamic finance as mudaraba, murabaha and ijara is widely felt as the present lack of uniformity is baffling. There are moves to coordinate the activities of the various Shari'ah advisory boards of Islamic financial institutions as the way they function remains a source of confusion. Currently, different Islamic banks issue the same products but in different ways. Lack of information in the Islamic financial industry is hampering its further growth and development. The absence of rating agencies, especially agencies that would rate products as well as institutions on the ground of their Shari'ah compliance, is the biggest example of this deficit.

About the Author

Fayaz Ahmad Lone is a Research Scholar in Islamic Finance, Department of Commerce, Aligarh Muslim University, India. Website: www.wdibf.com E-mail: Fayaz_pulwamy@yahoo.com

http://www.zawya.com/

Shariah-compliant loans available for oil business

Houston is often described as the energy capital of the world, and for good reason. This city demonstrates all the skills and infrastructure needed as a global hub not just for the oil and natural gas sectors but also for renewable energy.

More than 5,000 energy-related firms now call Houston their home because policymakers and industry have worked together to meet the challenges of the day and exploit new opportunities.

In this post-credit-crunch world, however, energy companies both large and small face a difficult business environment.

The financial crisis has led to significant job cuts and hit margins across the sector due to concerns over global demand, with the price of crude oil slumping from record highs in mid-2008.

Meanwhile, tightening domestic and international liquidity in the face of burgeoning fiscal deficits has only exacerbated these difficulties at a time when extra business investment, especially in capital-intensive areas such as exploration and production, is precisely what is needed.

But new challenges also bring new opportunities.

The limited availability of capital through conventional sources makes it all the more important that the oil and gas industry, in particular, consider alternative financing products.

Shariah-compliant finance has the potential to unlock largely untapped liquidity in the Gulf and elsewhere that could add to and complement existing pools of capital required by the sector.

(According to the Times of London, Shariah-compliant government bonds, known as sukuk bonds, comply with Islamic law, which forbids the earning of interest on money lent. Instead, bondholders receive “rent” on leasing government assets such as buildings. At the end of the bond term, the Treasury buys back the asset, releasing payments to the investor. Most Islamic financial products work on the principle of investing in a fixed asset able to generate a rate of return, such as property that yields rent, or an asset that can repay a larger capital sum on redemption.)

This financing method is a growth market worldwide but currently supplies only a tiny fraction of the funds needed by industry players. However, U.S. companies in other sectors are beginning to exploit its potential. In fact, only two months ago General Electric became the first Western industrial company to issue a sukuk bond, worth around $500 million.

Clearly, there is a strong business case that Shariah-compliant finance — worth more than $1 trillion worldwide — could benefit the oil and gas industry by adding flexibility to the marketplace. Broadening the investor pool would allow companies to diversify their portfolio and lower the cost of capital. And as real property with clearly defined rights under Texas law, oil and gas are assets that perfectly fit the Shariah-compliant model.

Both independent companies and conglomerates stand to benefit from this underutilized funding stream. This is particularly true for those looking to launch new capital-intensive projects such as oil refineries, liquefied natural gas terminals and petrochemical plants in the Middle East and Central Asia at a time when credit conditions are unfavorable.

So where does London come into this? The U.K. today is the leading Western country offering Shariah-compliant products — with $19 billion in assets — and the leading market outside the Muslim world. London is the location of choice as far as Middle East capital markets are concerned, and 20 sukuk offerings on the London Stock Exchange raised $11 billion to the end of 2009.

Supportive government policies have also helped London become the most advanced Western market for retail services, with a range of Shariah-compliant banking products from mortgages to car loans already on offer.

As global ambassador for all U.K.-based financial services, I continue to emphasise that Shariah-compliant finance in the London market is not something strange, exotic and arcane.

Rather it is a natural and welcome addition to the range of products and services that the city can offer to international investors operating in the 21st century.

So we hope Houston's oil and gas industry will view us as natural partners when it comes to exploiting the advantages of this alternative financing method.

The balance of the global economy has radically altered and is evolving rapidly. These shifts have been accompanied by changes in financial techniques and products. The emergence of Shariah-compliant finance will play a major part in these developments.

And Houston and London are well-positioned to lead the way — together — in this energy-finance new world.

Anstee, lord mayor of the city of London, was the keynote speaker at an Islamic Finance Forum at the Houstonian Hotel this week.

Link: http://www.chron.com/disp/story.mpl/editorial/outlook/6840982.html

Bond, sukuk issuances to rise in Gulf

DUBAI -The issuance of Islamic bonds, or sukuk, is expected to rise in the Gulf region next year as confidence returns to capital markets, a senior executive at Japanese investment bank Nomura told Al Arabiya TV Saturday.

"We believe that we will see many issuances of either sukuk or bonds in the next 18 months, especially in Saudi Arabia and Abu Dhabi," Mohamed Idriss, Nomura's head of global markets for the Middle East and North Africa, told Al Arabiya television. "Particularly in the energy and transportation sectors."

Corporate and sovereign bond issuers in the energy-exporting Gulf region have raised over $14 billion in bonds this year amid rising interest from investors for high-rated bonds and banks reluctance to lend.

Total global sukuk issuance stood at $13.5 billion at the end of September, more than $1.8 billion of which were sold by power and utilities companies worldwide followed by $1.5 billion from oil and gas, data from Zawya's Sukuk Monitor shows.

Primary sukuk issued out of the Middle East and North Africa region accounted for 59% of total volume of global sukuk this quarter.

Link: http://business.maktoob.com/20090000384586/Bond_sukuk_issuances_to_rise_in_Gulf/Article.htm

Saudi Arabia topped the list of countries of origin, enjoying 44% of the total volume, according to Zawya data.

Sukuk market in the Gulf needs to be regulated, say analysts

Dr Mohd Daud Bakar

The Gulf can foster growth in Islamic bonds (sukuk) market by adopting regulations and going in for measures such as credit rating, say analysts. 

Even as the GCC holds a lion's share in the global sukuk market, estimated at $130 billion (Dh477bn), it lags behind when it comes to regulations. And a model like the one followed by Malaysia can help it tap the massive potential that the segment holds, they said.

"The GCC market holds a significant share of global market when it comes to volume. But if we talk of a regulated market, the comfort levels of having prudent policy guidelines from regulators are still not there, whether it is related to type of issuances or ratings," said Moinuddin Malim, Head of Corporate and Investment Banking, Badr-Al-Islami. Mashreq.

Malaysia, with its proper regulatory measures and incentives, has managed to create a success story of its sukuk market and "investors from various countries such as Korea and Japan too are going there to issue sukuks".

"Rating for sukuks in Malaysia is mandatory. Besides, they have created a platform to quote sukuks on a daily basis so people would know the fair value of the instrument," said Dr Mohd Daud Bakar, Managing Director, Amanie Islamic Finance Learning Centre.

"The government in Malaysia has also incentivised issuances when it comes to the taxation aspect of it," he added. "From the day of issuance to redemption, everything is clear."

Credit enhancement structures in bond market can be used for sukuks as well and these should be studied, said the analysts.

The region should focus on tapping into the opportunities after the market downturn and learn from other successful markets, they added.

"Sukuk is important when it comes to overall financial market. The region, with its huge capital needs, but a small debt market needs to look into opportunities," said Kamal Mian, Head of Islamic Finance, Saudi Hollandi Bank.

Link: http://www.business24-7.ae/Articles/2009/4/Pages/27042009/04282009_3d6e216c39514daab1ca9adddd58e9b8.aspx