Islamic Banking

The government-backed JBIC said it was studying the possibilities of issuing Islamic bonds to help Japanese businesses diversify their fund raising.

Japan is looking to become the first major industrialized nation to issue Islamic bonds in hopes of attracting money from oil-rich Muslim countries, a bank official said yesterday.

Islamic financial practices ban the payment or receipt of interest or any transactions that include alcoholic beverages or gambling, which are banned by the Koran.

"The bank is studying the possible issuance of the bond with Malaysia," said Hiromi Inukai, a spokeswoman of the government-backed Japan Bank for International Cooperation (JBIC).

"The bank has had talks with the central bank of Malaysia with the intention to attract ample petro-dollars not only to Japan but also to the whole of Asia," she said.

She declined to give further details such as how much of the bond JBIC officials, with the support of the finance ministry, would place with Bank Negara Malaysia, the Malaysian central bank, and when.

Japanese news reports have said that the JBIC has formed an advisory board of Islamic legal scholars to study Islamic financial practices. Britain’s Financial Times said the bond would be valued at US$300 million to US$500 million and launched around January.

First G7 nation

Japan would be the first G7 nation to issue the Islamic bond, called sukuk, bond on a national basis, although companies in the developed world have already done likewise.

Japan would be the first G7 nation to issue the Islamic bond, called , bond on a national basis, although companies in the developed world have already done likewise.

Hideki Nukaya, a researcher at the Institute for International Monetary Affairs, said JBIC’s envisaged Islamic bond placement would help diversify funding sources for many large Japanese businesses.

"Japan and its companies could get a foot in the door and become more active players in Islamic financing by gradually making progress and learning the methods," Nukaya said.

"Once JBIC places the sukuk bond and learns the methods, Japanese companies would be able to have more options for financial resources when they need a bulk of money, not only through conventional but also through Islamic bond issuance," he said.

"But compared with conventional projects, Islamic banking requires more preparation, which the Japanese financial institutions are doing right now," Nukaya added.

Japanese companies will likely need to study up on religious regulations, such as rules on interest, as the country has a miniscule Muslim community.

Demand for Islamic financing is growing in countries with significant Muslim populations, particularly in the Middle East.

Largely Muslim Malaysia is the current Asian leader in Islamic banking after introducing services in 1983.

Leading position

To cement its leading position, the country is liberalizing its Islamic financial system and promoting itself as a center for education about Islamic finance.

To cement its leading position, the country is liberalizing its Islamic financial system and promoting itself as a center for education about Islamic finance.

Total worldwide assets of Islamic financial institutions exceed US$250 billion and are growing 15 percent annually, according to the IMF.

In 2003, the Islamic Bank of Britain opened in London and last year Britain’s fifth-largest bank, Lloyds TSB, said it would introduce personal bank accounts compatible with Islamic law.

In 2004, the impoverished eastern German state of Saxony-Anhalt became the first in Europe to issue an Islamic bond in hopes of finding new sources of financing.

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This article critically discusses the ‘ethical’ discourse of the Islamic Banks and examines the ‘ethical’ approach of a mainstream bank.

Islamic banks often describe themselves as being providers of ethical financial services, but they do not attempt to make the link between what is ethical and the specific methods of conducting their financial transactions according to Islamic tenants.

Although Islamic banks and Western ethical institutions such as the Co-operative Bank have dissimilar values and aspirations and they are operating in different environments, there are numerous lessons that each can gain from the other’s experience.

Therefore, this paper examines the ‘ethical’ aspect of the Co-operative bank, and attempts to establish similarities in the objectives of a conventional bank and the Islamic Banks, and identifies potential areas of learning from each other’s experience.

To read more…

Thailand’s Stock Exchange is studying the feasibility of introducing "Islam Index" to draw Muslim investments into the local bourse, the Bangkok Post reported Monday, July 24.

Stock Exchange of Thailand (SET) President Patareeya Benjapolchai said a committee would be set up to study the introduction of "Islam Index".

She said the proposed Index would comprise listed companies whose activities are in compatible with Islamic teachings.

Islam Index is expected to comprise between 50 to 80 Thai securities.

Thailand is a predominantly Buddhist country with Muslims making up five percent of the population and mostly live in the five southern provinces bordering Malaysia.

Thai Muslims have long complained of discrimination in jobs, education and business opportunities.

Several international and local rights groups have condemned the government’s heavy-handed policy in the south.

Consultation

Benjapolchai said SET would consult with MFC Islamic Fund of the MFC Asset Management to work out the Islam Index.

It is prohibited for a Muslim to establish a company that indulges in prohibited activity and consequently, it is also prohibited to issue its stocks and offer them to the public for sale.

It is also prohibited to buy and own such a stock because by doing so the owner becomes a partner in the company whose management take up prohibited activities on behalf of all its owners as their deputed officers.

The Islamic banking industry, which began almost three decades ago, has made substantial growth and attracted the attention of investors and bankers across the world.

There are an estimated 300 Islamic banks and financial institutions worldwide holding $300 billion in assets predicted to grow to $1 trillion by 2013.

The fastest growing region has been the Gulf Cooperation Council, a region seeing windfall oil revenue, with 60-70 percent of new deposits there going into Islamic banks.

Europe’s giants like Britain and Germany expanded over the past three years in producing banking services and products aimed at the Muslim clients.

Japan is planning to introduce Shari`ah-compliant dealings into its beefy banking system in a bid to attract lucrative Middle Eastern oil money.

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By Zahid Zamir

THE recent measures taken by Bangladesh Bank with regard to Islamic banks are indeed unprecedented and absolutely uncalled for. While it is true that ever since the inception of Islamic banking system in Bangladesh, there was no expert group in Bangladesh Bank to monitor the activities of Islamic banks in Bangladesh, Islamic banks operating in Bangladesh have formed their own Shariah council to look into whether Islamic banking as a whole is in compliance with the Islamic principles.

A central shariah council has also been formed. Although Bangladesh Bank has made a focus group, consisting of members of Shariah council and Islami bankers, to formulate detailed guidelines for the Islami banks on the basis of the Banking Company Act, Bangladesh Bank utterly ignored the report that has been finalised by the focus group.

There are currently six commercial banks operating under Islamic principles. They are: Islami Bank Bangladesh Limited, Al-Arafah Bank, Social Investment Bank Ltd, Exim Bank Ltd, Oriental Bank Ltd, and Shahjalal Islami Bank Ltd. apart from some other banks that also provide Islamic banking services in some of their branches.

Conventional banks in many western, as well as eastern, countries after realising the huge benefit of the Islamic banking system have opened Islamic banking windows that run parallel with interest-based windows. Very recently the Reserve Bank of India and Japan have shown their interest to offer Islamic banking system to their customers, not only for their respective countries, but also to woo customers from Muslim majority Middle Eastern countries.

Virtually all major banks around the world have opened interest-free banking windows. In fact, those conventional banks that have opened interest-free windows are able to entice many non-Muslims in non-Muslim majority countries. The basic tenet of Islamic banking underlines its commitment to equitable and fair distribution of money resources.

There are more than 300 Islamic banks operating all over the world — from Africa and Europe to Asia and America. The Islamic banking industry is worth more than $200 billion and is growing at 15 percent annually, a rate much higher than that of conventional banking.

According to new proposed guidelines formulated by Bangladesh Bank, a commercial bank may form a separate company with Tk 100 crore paid up capital for providing Islamic banking services. The subsidiary company will need to off-load 49 percent of its share while the parent company may own the remaining 51 percent. As for the new Islamic banks, the proposed guidelines state that the sponsors will have to off-load 50 percent of the bank’s shares and sponsor directors will not be allowed to own shares worth more than Tk 2.5 crore.

It seems that Bangladesh Bank is creating unjustified trouble for the Islamic banks in the country and at the same time strongly discouraging other commercial banks to have separate Islamic, or interest-free windows that can run parallel with conventional windows. Onerous laws could not only act as hindrance for the growth of Islamic banks in Bangladesh but for the economic growth of the country as well.

Innovation is fuelling the development of the Islamic banking sector. In fact there are limitless horizons for innovation which are not available to conventional banks due to their limited and fixed mechanisms. The modes of mudarabah, musharakah, istisna and other modes combining capital wide effort, experience and craftsmanship, open wide spheres of innovation, and are paving the way for the introduction of new finance instruments following Shariah guidelines.

Islamic financial institutions are becoming resourceful. In spite of facing mounting competition in the banking industry, and the global number of groundbreaking deals, further development of Islamic financial institutions depends on how successfully the existing Islamic banks can focus on developing their ability to find solutions to their shortcomings.

But the onerous laws proposed by Bangladesh Bank could make the industry slow on the uptake. Instead of being a stumbling block to the growth of Islamic banks, Bangladesh Bank, as the central bank and guardian of all the commercial banks in the country, can formulate laws that could help smoothen the growth of Islamic financial system, thereby making Bangladesh an Islamic financial centre.

With the opening up of the economy and gradual removal of barriers, governments and regulatory bodies should cooperate in making the Islamic financial industry a part of the mainstream industry. Bangladesh Bank can encourage Islamic banks to strengthen their financial positions through merger, acquisition and strategic alliance with other Islamic banks. There is a need for Islamic financial institutions to work rapidly in the face of rapid economic development.

Mergers reduce cost of services and provide financial synergies. Islamic banks should be required to adopt rules for adequate disclosure. Bangladesh Bank, instead of making the operations of Islamic banks untenable by its onerous policy and by scrapping the Shariah councils, should closely study other central banks in the Muslim countries to see how they are monitoring the activities of interest-free banks in their respective countries. Central banks of Malaysia and Sudan are the two best examples that can help Bangladesh Bank pave the way for smooth functioning of Islamic banks.

A few years ago the central bank of Sudan, for example, successfully launched the Central Bank Musharaka Certificates (CMCs). This certificate is an equity-based instrument which is issued against Bank of Sudan (BOS) ownership in commercial banks. It is used by BOS as an indirect instrument to regulate and manage liquidity within the banking system.

In 1999 the Ministry of Finance (MOF) launched another instrument called Government Musharaka Certificates (GMCs), which are also equity-based instruments that are issued against MOF ownership in some profitable public and joint-venture enterprises in order to regulate and manage liquidity within the economy as a whole. The successes of these two instruments, and their wide market acceptability, have encouraged the Bank of Sudan to develop second generation of Islamic financial instruments.

There is a conspiracy to besmirch the reputation of interest-free institutions that have always been good citizens of the country. It is not a question of morality only but also of the protection of the interests of investors who like to see their money mobilised and invested in an Islamic way.

Terrorists have no religion. They can have accounts in any bank. But because of some ruthless and unscrupulous individuals entire institutions cannot suffer. As the chairman of the Jeddah based Dallah Albarakah Group and of the Bahrain based General Council for Islamic banks and Financial Institutions (GCIBFI) Saleh Kamel said: "Islamic banks are neither merely charities nor at all terror facades. Islamic banks should be operating under the supervision of central bank, receiving clients’ deposits and investing them … there is no surplus funds to finance terror, nor do they corridors for circulation of funds among terrorists."

There is an immense need for Bangladesh Bank to have a group of Islamic bankers and Shariah experts of its own who can properly monitor and formulate guidelines for all Islamic banks and Islamic banking windows in the conventional banks.

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