The Financial Crisis: A Golden Opportunity for Islamic Banking: aawsat

By Lahem al Nasser

Riyadh, Asharq Al-Awsat-Before the international financial crisis, Islamic banking was marginalized and disregarded by international institutions. International institutions, such as the Basel Committee on Banking Supervision [BCBS] and the International Accounting Standards Board [IASB] that are concerned with financial regulation did not take into account the differences between Islamic banking, and traditional banking, in the setting of these regulations. In addition to this, many Western financial institutions considered the Islamic banking system to be simple and rudimentary, and not attuned to the [modern] times and new [financial] developments such as the innovative and complex financial tools that have dazzled the world. These financial apparatus are based upon mathematical equations and theories formulated by the fore-most mathematicians in the world, some of whom are Nobel laureates hired by large financial institutions to help boost their performance.

The Islamic banking system was looked upon as something that hindered the growth and development of the financial markets of the countries which adopted it. In addition to this, many Western countries viewed it as an ideological financial system based upon religious tenets rather than scientific fact, and therefore deriving its strength and popularity from the faith of those that believe in it, making it inconsistent with contemporary thinking that is based upon empirical knowledge and evidence, thus making it a threat to the principles of Secularism.

However the financial crisis has revealed to the world the invalidity in many of the assets and theories and mathematic equations upon which much of the modern financial system is based. Revealing also that these were the main factors behind the creation, spreading, and impact of the international financial crisis, the likes of which the world has not seen before. This financial crisis caused the collapse and bankruptcy of many firmly established financial institutions, and in the blink of an eye a dozen financial institutions that were internationally regarded as examples of professionalism such as "Lehman Brothers" and "Merrill Lynch" vanished. This crisis not only affected the financial institutions, for its effects expanded to burden many of the economic and industrial institutions as well, such as the pride of the American manufacturing industry "General Motors" which is well on its way to declaring bankruptcy, as well as "Toyota" which has declared losses for the first time in the company's history.

As the financial crisis worsened observers began to notice the stability and resilience of Islamic financial institutions in the face of this, and no Islamic financial institute has yet to declare losses in the financial securities and bonds that were a major cause of the crisis. On the contrary, many Islamic institutions have announced an increase in profits, which resulted in many commending the principles upon which the Islamic banking system is based, and the Shariaa Islamic Laws that regulate it, calling for its introduction to rectify the global financial system. Perhaps the most recent and strongest of these calls was reported in the Bloomberg Agency's report which revealed that the Vatican had stated that Western banks should carefully examine Islamic financial regulations in order to restore confidence amongst their clients at a time of international economic crisis.

This [global financial] crisis that has brought Islamic banking into the spotlight and presented it with a golden opportunity to introduce its fundamental methods and principles and present a practical [financial] model to the world. Islamic banking should capitalize on this opportunity and work quickly in order to expand, and gain a good position itself in the markets that were previously closed to it and which have now become open due to the financial crisis. Islamic banking must therefore seek to exploit the international recognition of its principles and regulatory system by gaining the recognition of international regulatory institutions with regards to its principles and uniqueness by enacting laws to institute [unified] regulatory body such as the BSBS and the IASB.

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Scotland urged to create an Islamic finance house: The Scotsman

By Jane Bradley

Business reporter

SCOTS banking veteran John Wright has called for the creation of a dedicated Islamic finance house in Scotland to attract more investment from the Middle East.

Wright, the retired former chief executive of Clydesdale and Yorkshire Banks, who also headed up the Oman International Bank for seven years, said the presence of an Islamic bank north of the Border would signal an "open door" for Islamic investors to do business in Scotland.

The facility would ideally be a joint venture between Islamic groups with financial backing and an existing Scots banking institution, Wright said. The Scottish Government yesterday said it had had "preliminary discussions" with Islamic organisations about the issue through its Scottish Development International arm.

Islamic banking complies with Sharia law, which prohibits the payment of fees for the renting of money, as well as investing in businesses that provide goods or services considered to be contrary to its principles.

A number of banks offer a range of business and retail banking accounts for the Islamic community, but there is no dedicated Islamic bank in Scotland.

Wright's comments came at the launch of the Scottish Islamic Foundation's Etisal event, a conference of Scottish and Islamic businesses to be held in Glasgow in October. Wright told The Scotsman: "Scotland is a financial centre and, despite the recent setbacks in the economy, we should definitely create a capability in Islamic finance. Given our huge financial services capability, it would be logical to do this here.

"There is a huge opportunity to set up links to sell product and generate investment from the Gulf, which at the moment is left untapped."

He said a number of Scotland's larger companies – such as Weir Group, Wood Group and Aggreko – had a presence in the Gulf, but added that hundreds of other firms were missing out.

He added: "The building blocks are there. Whether there is enough appetite on the part of any commercial bank at the moment, is the question. We need someone to say 'what about forming a joint venture?' Royal Bank of Scotland would be the obvious partner, although this may not be the ideal time for them. An Islamic financial facility would be an open door to investors to show them that we want them to come here."

He added: "In the last few years, it has been clear that it isn't just Muslims who are interested in the principles of Islamic banking. In the current climate, people are perhaps looking for an alternative to the mainstream banks."

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Islamic investors snap up sukuk ijara as risks grow: Alibaba

KUALA LUMPUR, March 17 - As the global downturn drags on, battering investor confidence and asset values, Islamic finance markets are expected to increasingly favour the certainty of lease-based bonds over profit-sharing structures to minimise risks.

With key sectors such as Dubai property and Malaysian manufacturing in a slump, Islamic banks have grown wary about financing through the once-popular musharaka structure that requires lenders to share a project's risks and rewards.

"Musharaka-based sukuk involve market exposure and not solely exposure to default risk as with ijara sukuk," said Rodney Wilson, an Islamic finance specialist with the Qatar Foundation.

"Given the current uncertainty in equity markets I do not believe many potential sukuk investors would want musharaka sukuk in present circumstances. If the market revives and confidence is restored, this may change, but this is unlikely in 2009."

Issuers and investors are expected to lean towards ijara or rental-based financing where possible, or look to create new lending structures in the $100 billion sukuk, or Islamic bonds, market.

In musharaka, parties contribute capital to a venture with profits to be shared according to an agreed ratio, while losses are generally divided as per the capital contribution ratio.

Sukuk ijara, rental bonds that are embraced by sharia scholars worldwide, were the most popular form of Islamic bond last year, according to rating agency Moody's.

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Sukuk Ijara, the world’s top Islamic bond: The Peninsula

Source ::: REUTERS

Sukuk ijara, a form of Islamic bond, became the dominant bond structure in the $1 trillion Islamic finance industry in 2008, ratings agency Moody’s said in a recent report. Bumper oil earnings in the Gulf and rising demand for ethical investments have boosted the profile of the three-decade-old Islamic finance industry in recent years from a niche sector to one with growing international reach. But Shariah debt issuance shrank in the past year as the global credit crisis slashed asset values and battered investor confidence. Here are some questions and answers about Sukuk Ijara and the sector.

WHAT IS SUKUK?

Sukuk are Shariah-compliant bonds that do not pay interest. There are different structures, but in general, Sukuk are certificates of equal value representing undivided shares in ownership of tangible assets, usufruct and services. Islamic principle forbids charging interest (riba).

WHAT IS SUKUK IJARA?

Under this structure, the seller sells assets to the issuer who will issue Sukuk to fund the purchase. The Sukuk represents beneficial rights in the assets and Sukuk holders have an undivided proportionate beneficial interest in the assets.

WHY IS IJARA SO POPULAR?

Its simple structure and the wide range of assets that it can be structured with make it attractive. Both governments and corporates can issue Ijara. Ijara’s popularity has also surged after landmark 2008 ruling by a top Islamic finance body that some hugely popular profit-sharing structures were not Shariah compliant.

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Islamic bank heads to PMB: The Witness

Durban-based Albaraka Bank, which this week posted a pleasing 19,5% increase in profits for the 2008 financial year, is set to appoint a local representative to serve the Pietermaritzburg area.

The CEO of the major Islamic bank, Shabir Chohan, told The Witness that the move is the first step in a process that will ultimately lead to a branch being set up in Pietermaritzburg.

“We recognise Pietermaritzburg as being a very important area for us,” said Chohan.

The bank reported profits of R21,7 million and basic and diluted earnings per share increased significantly to 144,9 cents.

“We have expanded our branch network … and taken a proactive approach to arrears management. In this economic climate, we have chosen to visit clients who are in trouble. One has got to be sympathetic to clients … it is a very difficult time.

“However, while we increased our deposit book by R174,7 million, or 12,1%, as was to be expected in terms of the prevailing trading conditions, our gross advances book experienced a relatively slower growth of 6,9%, or R91 million,” Chohan said.

He added that the implementation of a new R15 million computer system will go a long way toward enhancing efficiency and customer service while ensuring that the bank conforms with international standards.

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Unicorn Bank to make further investment of $12.9m in Dawood Islamic Bank: Online News

KARACHI: Dawood Islamic Bank Limited has received Rs. 1 billion (US$ 12.9 Million) investment from Unicorn Investment Bank Limited, based in Bahrain , this was stated in a statement issued from Bank’s headoffice in Karachi on Tuesday.

Unicorn already had a 22.2% equity stake in Dawood Islamic Bank prior to the current investment. With the new investment the equity of Unicorn Investment Bank, in Dawood Islamic Bank has increased to 37% percent

Aamir Khan Managing Director and Head Global Private Equity of Unicorn Investment Bank and a founder Director of Dawood Islamic Bank said that the decision to invest in Dawood Islamic Bank, at a time when the global confidence in financial institutions is at its lowest ebb in Pakistan, is based on excellent opportunities that are available in the Islamic banking sector of Pakistan. The stake in Dawood Islamic Bank provides Unicorn with access to the Pakistan market with its 160 million inhabitants, 97 percent of whom are Muslims, he added.

The investment by Unicorn Investment Bank, would further boost the ability of the Dawood Islamic Bank to provide support to trade and industry through its various Riba free banking products Said Rafique Dawood, Chairman Dawood Islamic Bank.

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A Hometown Bank Heeds a Call to Serve Its Islamic Clients: NY Times

By SAMUEL G. FREEDMAN

Until a stranger without an appointment showed up one day in late 2001, Stephen L. Ranzini was feeling rather pleased with himself. University Bank here, which he led as president, had just won a national award for community service. The honor attested to Mr. Ranzini’s success in working with local black ministers and a nonprofit agency to increase home-ownership in African-American neighborhoods.

Then, disturbing the aura of satisfaction, a well-dressed man arrived and insisted on seeing the president. “If your bank is so outstanding for community service,” the visitor said, as Mr. Ranzini recently recalled, “how come you’re not servicing my community?”

What community, the banker asked, would that be?

“I’m a Muslim,” the man responded.

Mr. Ranzini started to explain that University Bank already had plenty of Muslim customers, hardly a surprise in a college town in the area of southeast Michigan with the largest concentration of Arab-Americans in the United States.

That answer did not satisfy the visitor. Those Muslims, he said, were paying or earning interest.

“So what?” Mr. Ranzini said. Wasn’t interest sort of the whole point of what banks did?

Over the next 10 minutes, Mr. Ranzini, a Roman Catholic executive who had grown up in the vanilla suburbs of New Jersey, started an education that would ultimately transform an otherwise conventional hometown bank into a national leader in the growing specialty of Islamic finance. This year, the bank won an award from the American Bankers Association largely for its service to Muslim clients.

For more on this article, please click on the following link: A Hometown Bank Heeds a Call to Serve Its Islamic Clients: NY Times

Islamic Banking Assets Up 23 Pct: Bernama

KUALA LUMPUR, March 2 (Bernama) -- The country's Islamic banking system continued to expand last year where assets, deposits and financing recorded annual increase of 23 percent, 26.9 percent and 22.5 percent respectively.

Deputy Finance Minister, Datuk Ahmad Husni Mohamad Hanadzlah said total Islamic banking assets as of to date stood at RM192.8 billion, deposits RM154.6 billion and financing RM104.6 billion.

The risk rated capital ratio meanwhile stood at 15.2 percent and surplus capital was RM8.0 billion as at end of December last year.

Net non performing loans meanwhile declined to 2.4 percent, he said in reply to a question from Dr Dzulkefly Ahmad (PAS-Kuala Selangor) during the question and answer session at the Dewan Rakyat sitting in Parliament Monday.

For more on this article, please click on the following link: Islamic Banking Assets Up 23 Pct: Bernama

Vatican Paper Supports Islamic Finance. France Wants Its Share of Sharia Banking: BJ

In yet another act of conciliation on the part of Western religions towards Islam, the Vatican newspaper Osservatore Romano has voiced its approval of Islamic finance. The Vatican paper wrote that banks should look at the rules of Islamic finance to restore confidence amongst their clients at a time of global economic crisis. “The ethical principles on which Islamic finance is based may bring banks closer to their clients and to the true spirit which should mark every financial service,” the Osservatore Romano said. “Western banks could use tools such as the Islamic bonds, known as sukuk, as collateral”. Sukuk may be used to fund the “‘car industry or the next Olympic Games in London,” the article says.

The Vatican article is only one of many articles that have recently appeared on the acceptance by Western governments and bankers of an Islamic financing system. More than accepting it, they seem to be welcoming it, though they are certainly being pressured into this by unnamed forces bowing to the dictates of Islam.

For more on this article, please click on the following link: Vatican Paper Supports Islamic Finance. France Wants Its Share of Sharia Banking: BJ

Islamic Banks Unhurt By Toxic Assets, But Could Suffer As Crisis Evolves: rferl

By Ron Synovitz

Political and business leaders at the World Islamic Economic Forum in Jakarta this week have been praising the prudence of Islamic financial institutions.

They say Islamic banks have not been hit by the global financial crisis as hard as their Western counterparts because they refrained from investing in toxic assets that were deemed "un-Islamic."

Indonesian President Susilo Bambang Yudhoyono says the financial crisis has proved the strength of Islamic methods of banking and finance. He says Western bankers have a lot to learn from Islamic finance, and he is calling on Islamic banks to take more of a leadership role in the global economy.

The focus on the Koran's prohibitions arguably make it difficult for Islamic financial institutions to work in the same way as a conventional Western bank.

For example, Islamic law prohibits investment in businesses that sell alcohol or pork, or that are involved in gambling. That means an Islamic banker must ensure clients that their deposits are not being reinvested in a firm that does business deemed as "un-Islamic."

For more on this article, please click on the following link: Islamic Banks Unhurt By Toxic Assets, But Could Suffer As Crisis Evolves: rferl

Scandal-hit Dubai Islamic Bank seeks fresh start : The Peninsula

By Simeon Kerr

Dubai Islamic Bank claims to be the oldest Islamic bank in the world, but it also has a history punctuated by scandal. Its new management hopes the referral of seven defendants to court this week for allegedly participating in a scheme to defraud the bank of more than $500m will end the latest period of uncertainty, which has revived awkward memories of the past.

“We are pleased to close this chapter,” Abdulla al-Hamli, chief executive, said in a statement on Tuesday. The embezzlement case centres on CCH, an Islamic trade finance company, which received financing of about $440m, of which the bank says it provided about $330m. DIB has made provisions of $135m related to this transaction.

The seven defendants - mainly British and Pakistani nationals - are either linked to CCH or were former employees of DIB, and are accused of taking bribes to facilitate the alleged fraud.

DIB also says it has foreclosed on The Plantation, a polo-themed real estate development, which was being developed by one of the defendants in the case. It is also pursuing other assets and receivables in a range of countries. The bank says provisions and collateral already foreclosed or which it is pursuing will be enough to cover its CCH exposure.

“DIB remains a solid and trusted financial institution,” Khaled al-Kamda, group managing director, said in the statement.

For more on this article, please click on the following link: Scandal-hit Dubai Islamic Bank seeks fresh start : The Peninsula

Islamic banking combines morality with commerce: merinews

Sharia prohibits the payment of fees for the renting of money (riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (haraam, forbidden). All forms of interest is prohibite.

CJ: Vishnu Mohan

ISLAMIC BANKING system seems to be catching up in many parts of the world. Perhaps, it is time India should also welcome the concept of Islamic banking, which seems to adequately address the issue of solid economic growth.

First, let’s understand the concept of Islamic banking: Islamic banking refers to a system of banking or banking activity that is consistent with the principles of Islamic law (Sharia). Sharia prohibits the payment of fees for the renting of money (riba, usury) for specific terms, as well as investing in businesses that provide goods or services considered contrary to its principles (haraam, forbidden). All forms of interest is prohibited, whether it is simple or compound, low or high rate, personal or institutional, private or public. The question obviously which would arise is how then is the bank going to make a profit if it is not going to charge any interest based on Sharia!

To avoid interest or riba, Islamic banks have introduced instrument such as Mudaharba and Musharka. Mudaharba means that bank as a rab-ul-mal will provide the funds to an entrepreneur to do business.

But the bank has no right to interfere in the business. The entrepreneur has responsibility to run business and provide whole information to bank. In this kind of contract the bank will share the profit of business according to percentage fixed in contract. In case of loss the bank will bear all loss. In Musharka, both will share the loss and profit. This type of contract is called partnership.

A few special characteristics of an Islamic bank are as follows:

a) Firstly, Islamic finance involves a system of equity sharing and stake-taking. It works on the principle of a variable return depending on the actual productivity and how well theproject performs. The project can be in different forms such as specific or general, individual or institutional, private or public. However, the Islamic principle remains of equity and reward sharing unlike the western concept of loan-interest relationship.

b) Social and ethical aspects are a part of the Islamic economic system. It will ask question such as: What are the objectives for which money is being acquired? Will it benefit individuals, society and humanity? Will it lead to the establishment of a just, honourable, sustainable society; or will it result in exploitation, moral degeneration, social tensions and inequalities? These questions will be as relevant as the profitability and economic viability of the project in the Islamic system.

c) Islamic banking is entrepreneurial driven. It is directed not just towards financial expansion but also towards physical expansion of economic production and services. In the Islamic economy money will not produce money; it is expected to finance talent, innovation and new ideas, skills and opportunities. Whereas, conventional banking operates predominantly on the basis of financial collateral, therefore the more money you have, the more you can get. This means that the viability of a project mainly depends on the financial worth of the borrower; meaning that low collateral can reduce the chance of getting a loan, even if the project is viable and the person has impeccable character.

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Crossing over to Islamic banking: Times online

Sharia-compliant finance is prospering in Britain. But how can it stay insulated from the credit crunch?

Alex Wade

As the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty.

The UK now has five fully Sharia-compliant banks and another 17 financial institutions have set up special branches or firms. They include the Qatar Islamic Bank (QIB), with its London-based European Finance House in Berkeley Square, and the Islamic Bank of Britain, which has headquarters in Birmingham.

Both have answered Gordon Brown’s call of two years ago for Britain to become the global centre for international Islamic banking; a report by the International Financial Services London even says that Britain’s Islamic banking sector is now bigger than that of Pakistan.

Islamic banks, says Steven Amos, the Islamic Bank of Britain’s head of marketing, are prospering. “Our core business will always be Muslims but the numbers of non-Muslims are really picking up. We’ve had massive interest — and that’s down to a number of reasons, all of which have kept us insulated from the credit crunch.”

He alludes to the nuances of Islamic banking — specifically that Islamic finance has to be Sharia, or Islamic law, compliant. Sharia is taken from the Koran, one of whose central tenets — that money has no intrinsic value — might sound alien to the denizens of the City.

One British businessman believes that adopting Sharia principles might be just what the West needs.Roger Smee, a former professional footballer and now businessman, says the West has “lost the plot. All we have as a success guide is a number of rich lists. Instead of looking down on what we are quick to reject as cumbersome legal restrictions, we should take a page out of the Middle East’s book and use the principles of Sharia to begin building real and sustainable economies.”

Smee, who divides his time between the US, Europe and the Middle East on his real estate and office interiors business, realised six years ago that a financial time bomb was ticking. I was offered a controlling stake in a new US mortgage business. The company was involved in the refinancing of huge numbers of house mortgages, lending at 125 per cent of an already overinflated property value to people who obviously did not have the funds to maintain payments. As we now know, these loans were then packaged up and sold on, earning the mortgage business a 7 per cent fee on each transaction. But the underlying finances were totally flawed.”

For more on this article, please click on the following link: Crossing over to Islamic banking: Times online