Islamic Banking

March 31, 2008

Singapore’s Islamic bank eyes opportunities in Qatar

Filed under: Islamic Banking News, Singapore, Qatar

Singapore’s first Islamic bank is looking for opportunities in Qatar, its chief executive officer has said.

The Islamic Bank of Asia, with a paid up capital of US$500mn was incorporated in May 2007, and its major shareholders include DBS, Singapore’s largest bank and some prominent businessmen based in the GCC region. Islamic Bank of Asia (IB Asia) chief executive officer, Vince Cook told Gulf Times here though the bank had not set any timeframe to expand to Qatar, IB Asia wanted to achieve it in the “medium term”.

“Qatar is a booming and very promising economy. We believe we will have significant opportunities there for growth. We have our eyes definitely set on Qatar,” Cook said without elaborating. (A general manager with QNB in charge of corporate banking and capital markets till last year, Cook had visited Qatar in early 2008 as part of a high-level Singaporean delegation led by the city state’s senior minister, Goh Chok Tong.

He said IB Asia focused on wholesale commercial banking, corporate finance, capital markets and private banking services.

“We are well-versed in typical Shariah-compliant structures that employ concepts such as Murabaha, Musharaka, Mudaraba, Ijarah and Istisna. We continually seek to create new and innovative solutions to our clients’ needs, especially in the Gulf region who are seeking new markets and innovative ways to protect and grow their wealth in line with Islamic principles,” he said.

Asked whether IB Asia would have adequate room for expansion given the neighbouring Malaysia’s head start in Islamic banking, Cook said: “We are not in competition with anyone. We are only trying to complement efforts in Islamic banking which is growing by leaps and bounds.” He said, “Although we are a dedicated and independent Islamic bank, we are fortunate to have promoters such as DBS, the Southeast Asia’s largest bank, and some prominent investors based in the GCC region. “Our goal is to create one of the largest, most profitable, innovative and truly Islamic universal banks in the world with significant positions across the GCC region and Asia.”

Cook said: “IB Asia is ideally positioned to facilitate access to Asian and Middle East investment opportunities and distribution capabilities.” He said IB Asia together with DBS was a mandated lead arranger (MLA) in many Islamic deals including the US$600mn Murabaha facility for Qatar’s Barwa in June 2007.

“We look forward to playing a key role in such syndications in future,” Cook said. The Singapore-headquartered IB Asia received a banking licence from the Central Bank of Bahrain to set up a representative office in the kingdom in October last year.

Besides being QNB general manager (corporate banking and capital markets) Cook was also the chairman of Qatar Capital Partners (when it was under formation), and a director of both QNB International Holdings and Ansbacher Group Holding. During this period he was responsible for the bank’s Islamic business before spinning it out into a new unit QNB Al Islami. Under his leadership, QNB launched the first corporate sukuk transaction in Qatar.

Source: Gulf Times

Devon Bank In Chicago Ventures Into Islamic Banking

Filed under: Islamic Banking News, USA

Chicago, IL (AHN) - Like a growing number of British banks which have discovered it pays to lend to Muslims, a bank in Chicago has recently ventured into Sharia banking. No interest loans now comprise 75 percent of the bank’s mortgage portfolio.

Devon Bank’s Islamic finance products are built on the following principles:
1. Products must be Shariah compliant.
2. Products must fit within both Islamic law and U.S. law, and without the uncertainty caused by separate agreements.
3. Products must make good business sense, both for the Bank and for our customers.
4. We must keep the transaction costs as low as possible.
Quoted from the bank’s website: "Our products are created to meet your needs by a staff versed in both U.S. and Islamic legal requirements, and then submitted to appropriate government regulators and Shariah scholars. We do not use conventional documentation with cover letters and we avoid the uncertainty of documents that do not properly reflect the Shariah requirements.
Wherever possible, our products are designed to resemble conventional banking products with which customers may already have some familiarity. Devon Bank strives to ensure that any extra costs incurred as a result of religious compliance are kept as low as possible. Where there are costs that exceed those of conventional transactions, we try to minimize them and clearly explain why they are being assessed."
With a neighborhood made up of Middle Eastern and Pakistani immigrants, the bank has its hands full of Muslim clients amid a slowdown in the U.S. banking sector. David Loundy, vice president and legal counsel of Devon Bank, told USA Today, "People started coming out of the woodwork" after word spread around the community that the bank was Sharia-compliant.
While Americans are grappling with home mortgage payments, Muslims are awash with cash from the spiraling oil prices, providing them financial means to acquire new homes. According to Moody’s Investors Service, the Islamic finance market has expanded by 15 percent annually since 2005 and is now valued at $700 billion.
Major global banks such as the Deutsche Bank, Citigroup and the Hong Kong and Shanghai Banking Corporation had forayed into Sharia banking through affiliates. Major industrialized countries like the U.K. and Hong Kong are bidding to be Islamic banking hubs in their regions. Other financial institutions have also discovered the good bottom line behind Sharia-compliant business practices. Mortgage investor Freddie Mac started to purchase Sharia-complaint mortgages in 2001. Like Devon Bank, Freddie Mac purchases mortgages from the American Finance House Lariba, University Bank and Guidance Residential.
Islamic mortgages works on a lease-to-own scheme. The bank purchases the house, leases it to the buyer over a period of time until he has paid the full amount. It has double paperwork as the transaction involves two houses.
Local colleges too, like the DePaul University, are catching up by including Islamic banking in some courses. Amir Davoodi, a student at the university, began a course on Islamic banking recently. Davoodi told the Chicago Tribune, "They’re saying there’s a market out there for it. I know I can learn a lot and it will help with my career."
Sources: http://www.allheadlinenews.com/articles/7010455460
http://www.devonbank.com/islamic/index.html

March 24, 2008

Helping the West Understand Islam through Finance

Filed under: Articles & Commentaries

Islamic banking derives its rulings and principles from the Holy Quran and Sunnah (Prophetic traditions). Both are divine sources that God revealed to the Prophet Mohammed (PBUH). In the Holy Quran, God said: “And Allah has revealed to you the Book and the wisdom,” (Surat An Nisaa, Verse 113).

According to Mufassirs, those who interpret the Quran, wisdom here refers to the Sunnah and this is what qualifies Islamic banking to solve a number of problems that the contemporary financial system suffers from as a result of using methods and tools that are purely governed by the selfish interests of humans irrespective of the catastrophic effects this may have on society for example usury, Gharar and Jahala [a sale involving risk], and Maysar [gambling] all of which are prohibited by Shariah law because they inflict serious damage upon individuals and society.

Perhaps the clearest example of the harm that these prohibited tools could inflict upon society and economy is the mortgage crisis that the world is experiencing today. It has led many international financial institutions to write off numerous debts and consequently has suffered many setbacks causing the dismissal of numerous employees and disturbance to financial markets. There has been a lot of talk recently about the possibility of an international recession as major financial institutions have collapsed one after another and their experiences have not assisted in avoiding or predicting this crisis. What has happened so far might only be the tip of the iceberg.

Despite the magnitude and the escalation of this crisis, it does not affect Islamic banks because Islamic law (Shariah) that governs these financial institutions prohibits using the financial tools that have led to the mortgage crisis. In view of the fact that a number of Western societies have been hit by this crisis, where numerous Islamic banking institutes are based, many researchers within these societies will look into the foundations upon which these institutions are based and the methods that they follow. Undoubtedly, any study of these institutions would implicitly lead the researcher to study the Quran and Sunnah.

I believe that any study of the Quran and Sunnah away from the preconceptions and abhorrent fanaticism, would push one to realize the greatness of the Islamic religion and its mercy upon mankind. In the Quran, God says, “And We have not sent you [the Prophet Mohammed] but as a mercy to the worlds,” (Surat Anbiya, Verse 107).

Therefore, I consider this a suitable opportunity to urge Islamic financial institutions to fund research and studies that are related to Islamic financial theories and to increase the number of symposiums and workshops that will explain the foundations upon which Islamic banking is based and the apparatus that it uses. In addition they should demonstrate the Islamic perspective of the causes of the mortgage crisis and how the Islamic financial institutions’ adherence to the provisions of Islamic Law allowed them to avoid this crisis. Furthermore, Islamic financial institutions must seek to achieve the goals of Islamic Law and keep away from formalism in its transactions, showing the world that Islamic law is capable of solving its difficult financial problems.

There is no doubt that making these societies understand the foundations and principles upon which Islamic financial institutions are based and the way that they work would positively reflect these institutions, whereby these societies would accept them and hostility towards them and Muslims in these countries will alleviate as a result of them understanding the civil message of Islam away from the negative stereotypical image of Islam that has emerged as a result of ill practices by some Muslims and the media.

By Lahem al Nasser

Non-muslim clients for Islamic Banks?

Filed under: Articles & Commentaries

 Q: I was interested to read that you were seeing non-Muslim clients looking to invest in Islamic insurance. Is the same thing happening with banks? How would you compare an Islamic bank with a normal retail bank, from the point of view of the customer?

 A: The growth of Islamic finance - across personal and corporate sectors - is certainly one of the most important trends reshaping the financial world today. In part this is because Islamic banking provides a vital service for the Muslim community, which accounts for around 1.79 billion of the world’s population.

However, as well as fulfilling an existing need, Islamic financial products are also very dynamic and the innovation being shown in the field is creating new market opportunities.

One of these, as you observe, is the number of non-Muslims increasingly drawn to invest, save and insure with Sharia-compliant financial companies.

Often people are drawn to Islamic finance because it has an ethical dimension. Islamic banks, for example, agree not to invest money in areas such as gambling or alcohol.

However, there are also several financial reasons why people consider Islamic policies, particularly if they see a better opportunity of a return on their investment.

Islamic banking differs from conventional banking primarily because it does not look to charge or deliver interest - you cannot "make money from money." Profit instead is generated through investment and trading.

An Islamic bank traditionally generates its profits from Sharia-compliant investment activity. This profit is shared back with the bank’s customers at a pre-agreed ratio. So, as an account holder, you are entitled to a share of these profits according to the funds you hold in your account.

Rate of return

For an Islamic bank to be competitive, this return rate has to match the level of return provided by interest levels of conventional banking, and it’s here that a consumer can best assess which account, fin-ancially, is the most suitable for them.

Look at the return rate offered by the Islamic bank and compare it to the standard rate of interest provided by a conventional bank. As discussed in an earlier column, this can be assessed most effectively by looking at the "annual percentage yield", which will make it easier to compare different rates if they are calculated at different frequencies.

You should also look at the costs of the account. Obviously, Islamic banks don’t charge interest if you go over your agreed limit. However, they will charge administrative fees, which can be as much as, or even higher than, conventional bank interest.

You should also compare the different features offered by the different banks. One of the reasons for the recent growth of many Islamic banks in Europe and the Middle East has been a strong focus on customer service. Customers have commented that the banks treat them "as an individual," compared to the impersonal service that some of the big retail banks sometimes offer.

In all, a big part of your choice will probably be dictated by your comfort level and determining how well the particular bank account matches your personal beliefs.

However, it’s also worth doing the math, and making sure the account is giving you the best possible return.

By Bashar Khatib, Special to Gulf News

Islamic finance is gaining importance in non-Muslim nations

Filed under: Articles & Commentaries, Japan, Bahrain

By Jasim Ali, Member of Parliament, Bahrain

I wrote this article in Tokyo during a week-long visit to Japan. The trip was partly designed to provide me the opportunity to appreciate the Japanese model of economic development. As it happened, the Japanese side wanted to benefit from my knowledge about the economies of Gulf Cooperation Council.

Among other things, I was asked to deliver a speech on Islamic banking at the Japan Institute of International Affairs (JIIA). I had to research the subject and meet with several specialists in the field during the course of preparing for the lecture. These are some of my key findings.

To begin with, in Islamic finance, money can only earn returns if used in productive or real investments. This explains why deposits in banks cannot earn interest. Still, prohibitions are made against guaranteed and predetermined rates of return. Conversely, Islamic finance encourages risk-sharing and entrepreneurship.

The Islamic banking sector is big. As of January, some 300 Islamic Financial Institutions (IFIs) operated in 75 countries, managing some $500 billion. The GCC has the largest concentration of IFIs due to the simple fact that the region is the primary source of funding for Islamic banking activity.

In addition, I explained to the audience some of the primary Islamic banking products. These include Murabaha or cost plus financing, which accounts for 75 per cent of Islamic financial activities such as purchase of cars and houses. Another well-known product is that of Mudaraba, or profit sharing, in turn used for general investments. Yet another product is Musharaka, or equity participation, used in joint ventures.

Other emerging products include Ijara (leasing), Salam (deferred payment or delivery of goods) and  Sukuk (Islamic bonds).

IFIs have been credited with undertaking mega projects, as they usually are not under pressure to bring in quick returns.

For example, Arcapita is developing the $2 billion Bahrain Bay, a project that should transform Manama once completed in 2010. The amount is substantial for a small economy like Bahrain, which has a GDP of $16 billion and state budgeted expenditures of $5.5 billion in 2008.

Growing demand

Furthermore, there is a growing demand for Islamic banking in non-Muslim countries. Established in 2004, the Islamic Bank of Britain (IBB) offers financial products compliant with Sharia. And it is suggested that the UK government is contemplating issuing sukuk. France is seeking to get a share of Islamic finance on the back of its considerable Muslim community. Against this background, I urged the audience at JIIA to ensure that Japan is not left out of a growing industry. By one account, Islamic banking is growing at the range of 15 to 20 per cent per annum.

Nevertheless, Islamic banking must overcome certain challenges. These include developing short-term products to absorb demand and to help develop a secondary market.

The second concern deals with ensuring the availability of Sharia scholars with knowledge of conventional and Islamic finance. The third matter deals with ensuring availability of qualified human resources meeting the requirements of an ever growing industry. It is believed that demand exceeds supply in all three cases.

Another test deals with ensuring uniformity of application of accounting principles for Islamic banks. The Accounting and Auditing Organisation for Islamic Financial Institutions sets accounting and auditing standards for IFIs. Yet no single body has jurisdiction over Islamic finance houses to implement standards.

I ended my talk at JIIA urging Japan to join the bandwagon of Islamic banking.

Source: Gulfnews.com

Bahrain: Centre urged to monitor Islamic banks

Filed under: Islamic Banking News, UK, Bahrain

MANAMA: A Bahraini banker has urged the government to set up an information and research centre and a national council for Islamic banks to monitor the growth rate of the Islamic banking sector regionally and internationally.

Al Safwa Islamic Financial Services president Abdullatif Abdul Rahim Janahi told Akhbar Al Khaleej on the sidelines of the 1st International Conference on Islamic Sukuk held in Bahrain recently that the Central bank of Bahrain needs to have a specialised team capable of safeguarding the kingdom’s achievements in the field of Islamic banking, which has to be more creative in order to develop its products.

Bahrain was the first country to issue Islamic sukuk, but has not made any effort to internationalise the product, while many European countries are now depending on this product to finance government projects.

The UK, for example, has recently announced its decision to finance the London development project through Islamic sukuk, he added.

Source: Gulf Daily News

Misconceptions about Islamic Finance

Filed under: Islamic Banking News, USA, Egypt

Hany Abou-El-Fotouh, First Vice President and Group Head of Corporate Governance and Compliance at ABC Bank Egypt has participated as the panelist at the ‘Money Laundering Alert 13th Annual International Conference’ held in Hollywood, Florida, organized by Miami-based Alert Global Media, Inc., the publisher of Money Laundering Alert and moneylaundering.com Premium.  More than 1,500 attendees from the United States and 40 countries have signed up to this conference.

In the conference Abou-el-Fotouh has tackled major misconceptions about Islamic finance and banking among other issues.

About the size of Islamic finance Abou-El-Fotouh said “Islamic finance is rapidly growing. It is estimated at USD 700 bn globally and expected to be USD 1.4 trillion. There are more than 300 Islamic financial institutions and Islamic windows operating globally. The major principles of Islamic finance are prohibition of all kind of interest, no financing of sinful and socially irresponsible activities as well and dealings are on contractual basis"
 
He clarified several common misconceptions about Islamic banking and finance. “The major myth about Islamic banking is that it is about a cluster of hard line religious believers and about religion only. The reality is nearly 60% of Islamic banks’ customers are non-Muslims who mostly believe that Islamic finance is an alternative way of doing business and making money through wealth creation and distribution” Said Abou-El-Fotouh.

He further added "another misconception describes Islamic banks as being regulated only by Sharia (Islamic law). The reality is Islamic banks draw their founding blocks from Sharia and they operate fully under the `law of land’ where they exist"

Source: PR-USA.net

March 22, 2008

Makkah Imam Calls for Islamic Common Market

Filed under: Islamic Banking News, Saudi Arabia

RIYADH, 15 March 2008 — Sheikh Saud Al-Shuraim, imam of the Grand Mosque in Makkah and a member of the teaching staff at Umm Al-Qura University, has called for the establishment of an Islamic common market.

Delivering his Juma sermon at the Grand Mosque yesterday, the imam said the proposed market should follow the teachings of the Shariah, keeping away from interest-based financial dealings.

Many international financial organizations have started adopting Islamic financing systems after the latter proved successful in terms of achieving substantial profits, Al-Shuraim said, adding that the Qur’an and Sunnah have explained the basic principles for financial transactions.

Ezzuddin Khoja, secretary-general of the Supreme Council of the Islamic Financial Banks, said Islamic banks in Arab and Muslim countries alone now handle more than $250 billion.

Islamic bank deposits in the Gulf rose by 29 percent to $58 billion in 2005 compared to the previous year. Islamic finances worldwide are estimated at about $450 billion, he explained.

Islamic and traditional banks apply different rules.

The Islamic banking system does not depend on loans and offers a variety of products such as murabaha, mudaraba, musharaka, ijara and istisna based on profit and loss sharing.

The Islamic banking system began in Saudi Arabia and Prince Muhammad Al-Faisal and Saleh Al-Kamil have played a pioneering role in promoting it, Khoja said.

Source: Abdul Rahman Al-Muafa, Arab News

March 21, 2008

Kenya: Islamic Banking Set to Gain a Foothold

Filed under: Islamic Banking News, Kenya

Islamic banking is set to take off in Kenya following the commencement of operations by the country’s first fully fledged Islamic bank targeting Kenya’s estimated nine million Muslims.

The entry of Gulf African Bank brings to an end months of waiting and speculation surrounding the licensing of an Islamic bank in the Kenyan banking system. Debate had raged on the viability of an Islamic bank in the banking system where interest is charged by all players, a prohibited practice in Islam.

But with two branches and expansion plans underway that will see Gulf African Bank step up its operations in Kenya as well as the region, Salim Abdalla, the bank’s chief executive officer, is confident that the bank’s model is a sure success.

"There is a huge market niche in Islamic banking that needs to be filled and we are looking forward to meeting this market’s needs," said Mr Abdalla.

Gulf African Bank is offering corporate banking, housing finance, car finance, retail banking products as well as other services that conform with tenets of Islam, which are available to any individual or outfit seeking an "alternative" banking solution.

The Islamic bank boasts of a capital base of Sh1.7 billion with private equity firm Istithmar World, BankMuscat International, PTA Bank,United Arab Emirates investment firm GulfCap as well as leading local and international investors forming the firm’s main shareholders.

Banking analysts had raised queries on the viability of a fully fledged Islamic bank in Kenya.

One major issue is that since all conventional banks participate in the interbank market where interest is charged on borrowing, an Islamic bank would find it somewhat difficult to operate since it goes against the tenets of Islam to charge interest.

But while agreeing that a fully fledged Islamic Bank would find it difficult to operate in the Kenyan banking scene, Hassan Zubeidi chairman of Dubai Bank last year insisted that such a bank would be able to transact with other such banks in other countries especially in the Middle East.

In most jurisdictions where Islamic Banks operate, they co-exist alongside conventional banks. Iran and Sudan are considered to be the only countries that have only Islamic Banks in existence.

Another Islamic bank, First Community Bank which has links with Kuwaiti investors is yet to commence operations as a fully fledged Islamic Bank despite obtaining a license last year.

The Central Bank says one of the critical considerations in assessing the licence applications for First Community Bank was ability to operate viably in the existing banking sector environment.

Interest in Islamic banking follows the amendment last year of section 53 of the Banking Act, removing prohibitions on trading in and holding of fixed assets.

The amendment was intended to promote the introduction of innovative products in the banking sector, including Islamic Banking products that may require an institution to hold a fixed asset, such as in the case of mortgage financing, or goods or commodities in the case of consumer lending.

An indicator of the potential of Islamic banking, in 2006, Barclays Bank of Kenya is understood to have attracted nearly Sh560 million from traders in the community through the introduction of La’riba account.

The Central Bank, however, cautioned that Islamic Banks will operate within the existing legal and regulatory framework, a challenge that Mr. Abdalla says Gulf African is up to.

"Before giving us a licence the CBK asked hard questions and went on fact finding missions in other countries such as Nigeria and Malaysia to see how other banks operate alongside conventional banks," says Mr. Abdalla.

Globally, HSBC and UBS have created separate brands for their Islamic offerings while others such as the Maybank in Malaysia and Samba Financial in Saudi Arabia have opened special branches that sell only Islamic banking prodcts.

Research carried out by Mckinsey & Company in partnership with the World Islamic Banking conference however points out the operational complexity of Islamic banking products in comparison with those offered by conventional banks.

Documentation, management of credit risk and breadth of transactions involved in Islamic bank products were some of the challenges highlighted.

To mitigate these complexities, Mckinsey recommends that Islamic banks need to pay greater attention to three identified pillars of successful operations: cost attainment, fast processing times, and low error rates.

Source: James Makau - Business Daily (Nairobi)

Shariah finance lawyers: The pool of specialist is very limited

Filed under: UK, Articles & Commentaries

Every cash-strapped company or institution seems to look to the Middle East for extra capital these days. There’s no cheap debt anymore, but the deep pockets of Middle Eastern investors has made sharia-compliant financing mightily attractive. Even the British Government is proposing its own sharia bond, or sukuk.

But Rahail Ali, Lovells’ Dubai-based head of Islamic finance wonders if this seminal moment won’t merely highlight the limitations of the law firms positioning themselves to grab a share of the market. Fresh from chairing an Islamic products conference at the London Stock Exchange, Ali warns that "the pool of specialists is very limited". Conventional finance lawyers can’t just be turned into sharia experts by reading a few textbooks, he says. "Until lawyers have the interaction with sharia scholars and spend a considerable amount of time satisfying Islamic jurisprudence there is going to be a reactive approach to Islamic financing."

A moderate Muslim, Ali is able to empathise with the subject more than most of his ilk. For an Islamic financing to proceed, it must be endorsed by sharia scholars. As one City finance partner puts it: "They like nothing more than debating various interpretations of the Koran." Sharia deals are not standardised like other, conventional transactions and no one transaction follows another. In terms of complexity, Ali says, it makes conventional loans seem as easy as "ordering a pizza".

It was in 2001, after the "horrendous" events of 9/11, that Islamic finance took off. The attacks forced Islamic investors to reconsider the make-up of their portfolios with their money suddenly not so welcome in some parts of the West. "9/11 was the seminal moment for the Islamic finance industry," Ali says. "One of the repercussions of it was the huge repatriation of liquidity back into the [Gulf Cooperation Council (GCC)] states, coupled with the GCC states being re-enlightened about retaining domestic liquidity and having investments compatible with their religious beliefs. It led to an upsurge in Islamic finance transactions."

The challenge over the next ten years for the sharia finance lawyers will be to ensure that the legal profession is not found wanting as the demand for Islamic financing mounts. The proposal by the British Government to issue its own sukuk merely confirms its potential in the global arena. With oil prices at over $100 a barrel, the wealth of Arab states can no longer be overlooked. "It displays at the very least the higher profile that Islamic financing has achieved and the need for financial centres to take a serious look at Islamic financing," Ali says. "It goes with the domain of London as major international financial centre that there needs to be a focal point for Islamic finance, and London has pushed that agenda."

 Source: Times on-line

Related article: As Islamic banks boom, scholars are hard to find






















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