Posted: Wed Sep 22, 2004 4:32 am Post subject: ISLAMIC BANKING?
First UK Islamic bank opens its doors
Wednesday September 22, 2004
The Islamic Bank of Britain opened the doors to its first branch, in Edgware Road, London, today. While other banks offer individual products that comply with Islamic rules, this will be the first bank in the UK that operates wholly in accordance with Islamic sharia principles.
Under sharia law, all money must be invested in purely ethical industries, so the bank will not invest in any business involved with tobacco, alcohol or pornography, for example. Islamic law forbids the making of money with money, and giving or receiving of interest is forbidden. Similarly, money cannot be simply traded for money, Instead, profits can be made by the buying and selling of goods and services.
From today, the bank will be offering a range of savings accounts through its London branch, and will also offer access to the accounts across the country through postal and telephone banking.
Instead of paying interest on savings accounts, the bank will trade in investments which comply with sharia law. The profits from those investments will then be shared with savers.
The bank will offer current accounts and loans from November this year, and mortgages, credit or charge cards and small business banking will be available next year.
Further branches will be opened in Leicester and Birmingham in November, and there are plans to open eight more branches, plus an internet banking facility, in 2005.
While the bank strictly complies with sharia principles, the services it provides are available to everyone.
Michael Hanlon, managing director of the Islamic Bank of Britain, said: "We are delighted to be opening our first branch. It marks a new era in Islamic banking in the UK and the beginning of our work to broaden our product offering and branch network.
"The current additional capital raising taking place will provide funds to allow us to implement these important growth plans, and we are confident that we can provide customers with a range of sharia compliant products and services. Our products will be equivalent to those available in a conventional bank and competitively priced," he said.
A supervisory committee, made up of a group of Islamic scholars, will ensure that the bank adheres fully to sharia principles. The committee will approve all services, activities and investments before they go on the market. The bank will also be regulated by the Financial Services Authority and will meet with UK banking regulations.
Posted: Wed Sep 22, 2004 9:50 am Post subject: Islamic Banking
So how are we different from other muslims regading this issue? Does this apply to us?
It is an interesting attempt to mitigate the usury factor in banking. It will be interesting to see how this experiment will evolve. Some form of interest is almost inevitable.
Mowlana Sultan Muhammad Shah was approached by a banker in Pakistan for advice on Islamic banking. The Imam said two things on it.
- A hadith where the Holy Prophet had said that if during his lifetime the people of Arabia observed 90% of his injunctions, 10% would be forgiven. But after his death, if the followers observed even 10%, 90% would be forgiven.
- Only usury was forbidden, not the legitimate interest.
BORROWED IDEAS Malaysia Transforms Rules
For Finance Under Islam
In a Lesson to Arabs,
Asian Bankers Mix
By YAROSLAV TROFIMOV
April 4, 2007;
KUALA LUMPUR, Malaysia -- Six years ago, a Malaysian bank asked 80 financial institutions in the Persian Gulf for help in selling a corporate bond that complied with Islamic prohibitions on interest.
All but one declined to participate, branding the novel security "haram," or banned by Islam. Just a few months after the $150 million offering proved a success, however, many of these doubters shelved their theological qualms and came up with similar Islamic bonds of their own.
The global Islamic bond market that has developed since then is now worth an estimated $50 billion in securities outstanding, part of a burgeoning Islamic financial industry that's fast approaching $1 trillion in assets. The torrents of cash that fuel this boom mostly come from the Persian Gulf's oil bonanza. But it is distant Malaysia, thousands of miles to the east, that has emerged as the industry's unlikely trailblazer.
"Malaysia is the catalyst for change," says Faiz Azmi, Kuala Lumpur-based global head of Islamic finance at PricewaterhouseCoopers, the accounting and consulting firm. Much of what is now considered conventional in the industry, he explains, was test-driven here first -- often against the objections of conservative clerics in places like Saudi Arabia. Now such innovations are not just commonplace in the Gulf, but also have become an important revenue source for Western financial giants with Islamic-banking divisions, such as Citigroup Inc. and HSBC Holdings PLC.
Malaysia's impact on the financial industry showcases a shift in the Muslim world's balance of power. For centuries, religious and cultural knowledge streamed from the Middle Eastern core to the Muslim periphery, as converted peoples in South and Southeast Asia adopted the Arabic script, traditions and mores.
But now, increasingly sophisticated Muslim communities in fast-growing Asian countries such as Malaysia are beginning to influence the Arab heartland, offering a vivid example that an embrace of the global economy can coexist with Islam.
Malaysia's cosmopolitan capital of Kuala Lumpur, a metropolis of glittering skyscrapers connected by futuristic monorail trains, is teeming these days with Arab tourists who gawk at the Petronas Towers, until recently the world's tallest buildings. (They were eclipsed by the Taipei 101 tower in Taiwan.) Unlike oil-rich Gulf monarchies that rely on guest labor, Malaysia derives its prosperity from an educated work force and cutting-edge manufacturing. Electric and electronic goods such as mobile phones, semiconductors and computer parts account for about half of its exports.
Peaceful Malaysia, so far spared the terrorist attacks that have rocked neighboring Indonesia, Thailand and the Philippines, also boasts a relatively liberal political system. The latest ranking of political rights and civil liberties by Freedom House, a New York think tank, puts it ahead of all Arab nations. At home and abroad, Malaysia's prime minister, Abdullah Ahmad Badawi, promotes his vision of "Islam Hadhari," or civilizational Islam -- stressing economic development, mastery of sciences, and respect for diversity as core values of the faith.
Reconciling modern finance with Islam is a key part of that vision. "Islamic finance is not just for the benefit of the Muslims," Prime Minister Abdullah told a conference of Islamic bankers in Kuala Lumpur last month. "Its significance is far wider, and needs to be seen in the context of global peace and prosperity."
The barrier that Islamic financial modernizers are trying to overcome is the Quranic prohibition on receiving or paying interest: "Allah permitted trading and forbade interest." While ignored by many secular Muslims and the conventional banks that operate in most Muslim nations today, this ban has long denied the benefits of modern banking to strict believers -- contributing, some say, to the Muslim world's relative decline after interest-based bonds and loans powered the West's Industrial Revolution. In Malaysia, Muslim distrust of conventional finance has also helped cement the historic domination of the country's economy by non-Muslim ethnic Chinese.
As Malaysia's government sought to lift the Malay majority out of poverty and promote native entrepreneurship, it focused on creating an Islamic financial alternative. Initial ideas came from Muslim revivalists in places like Egypt or Pakistan, who began Islamic banking experiments in the 1960s, often meeting opposition from secularist regimes. Malaysia's government, by contrast, encouraged banks to replace interest-based transactions with arrangements that, while benchmarked to interest rates, are technically based on profit-sharing, leasing or trading -- all activities permissible in Islam because they involve entrepreneurial work rather than simply moneylending.
The first step, in 1983, was to pass an Islamic banking law and set up Bank Islam, which gave out the nation's first Islamic loans. An Islamic insurance company, Takaful Malaysia, was created the following year, and the country's religious scholars issued a fatwa to spur stock-market investment -- more than a decade before Saudi clerics followed suit.
In the 1990s, as Malaysia's conventional banks were encouraged to open "Islamic windows," the industry became a testing ground for big Western lenders. HSBC began Islamic banking in Malaysia in 1994, years before establishing its international Islamic franchise. Malaysia also introduced the first sukuk, or Islamic bonds, years before Middle Eastern clerics accepted the practice.
Though rival Islamic banking and capital-markets centers have since sprung up in Dubai, Bahrain and London, Malaysia still accounts for two-thirds of the world's Islamic bond issuance. The country has achieved "the closest possible replication of conventional finance while giving it an Islamic label," says Mahmoud El-Gamal, Egyptian-born chair of Islamic finance and economics at Rice University in Texas.
Some 80% of shares traded on Bursa Malaysia, the country's stock exchange, are designated as compliant with Islam, while 12 Islamic banks and six Islamic units of conventional banks operate in Malaysia today, accounting for about 12% of total banking assets. The government expects the Islamic sector's share to reach 20% of assets by 2010.
One beneficiary is Azrulkhakim Suradi, the 31-year-old owner of a herbal-medicine business in the town of Shah Alam outside Kuala Lumpur. Mr. Azrulkhakim, who sports a shaggy beard and whose wife is shrouded in a black abaya, is a fervent Muslim believer and considers paying or receiving interest a grave sin.
Thanks to the availability of Islamic finance, Mr. Azrulkhakim became the first in his family to accept a bank loan. He has borrowed $43,000 from one Islamic bank to buy his dream car, a Mercedes-Benz C 200. He owes another Islamic bank $27,000 on a mortgage, and has just arranged financing for a second home. "I can sleep well at night," Mr. Azrulkhakim beams, "because I can be sure that everything my bank is doing conforms with the way of Islam."
Not every Muslim scholar would agree. One of the biggest issues in the industry is what exactly can be called Islamic. In the Middle East, the final answer usually lies with advisers on Shariah, or Islamic law, that every Islamic bank keeps on payroll. A few of the most senior clerics counsel dozens of institutions, and they often compete against each other in theological purity. By contrast, Malaysia is promoting its vision through a centralized religious regulator, the Shariah Advisory Council of the central bank, Bank Negara.
Last year, this clerical body -- which must approve all Islamic financial products -- bestowed its blessing on Islamic real-estate investment trusts, structured dual-currency derivatives, Islamic stock index funds and Shariah-compliant single-stock futures.
More innovation is in the pipeline. "The nomenclature may be suspicious -- hedge funds, derivatives -- and sounds very Western, but we have to make these products Islamic," says the Shariah Advisory Council's chairman, Mohamad Daud Bakar, 43, who wears a dark suit and a tie and holds a doctorate from the University of St. Andrews in Scotland. "We need to be able to protect from risk."
Dr. Daud is unapologetic about the fact that many recent Islamic financial products, while technically based on lease or trade contracts, have become virtually indistinguishable from those offered by interest-driven Western finance.
"It's all about the journey you take to that destination," he says, drawing a parallel between financial gain and sex. A seeker of sexual pleasure, he explains, can get married or fornicate on the side -- just as a seeker of financial gain can profit from an Islamic sukuk or a conventional bond. "You'll have enjoyment in both cases," Dr. Daud chuckles, "but one is halal [permissible] and the other is not."
Malaysia's comparatively liberal approach, as championed by Dr. Daud's council, has often earned the country criticism from Islamic clerics in the Middle East and Pakistan. Dr. Daud, who also studied in Kuwait and speaks fluent Arabic, says he frequently engages in "heated" discussions with Arab scholars when traveling to the Gulf.
This continuing doctrinal discord means that most sukuk denominated in Malaysia's currency, the ringgit, are still considered unacceptable in the Middle East, as are some lending practices widely used by Malaysian banks. The Arabs "are treating us as small brothers," complains Mohamad Bakir Mansor, a Malaysian scholar of Islamic finance who advises Bank Islam and Takaful Malaysia on Shariah. "They consider themselves senior and have an attitude."
Aware of this attitude, Malaysian banks in recent years have concentrated on crafting new structures based on leasing contracts, known as ijara, for global dollar-denominated sukuk marketed to Arab investors. The issuer of ijara sukuk places certain assets, such as a palm plantation or a building, in a special-purpose vehicle. In exchange for their cash, investors receive the right to the lease payments that the issuer makes to the special-purpose vehicle. The lease payments are usually set in advance and benchmarked to interest rates, making the investors' return comparable to interest from a bond.
The ijara principle was pioneered in corporate bonds in 2001, when Malaysian plantation company Kumpulan Guthrie issued the $150 million sukuk that were so controversial at the time. These days, almost identical ijara sukuk are commonplace in the Gulf. "If we persevere in educating the markets, eventually the markets will understand," says Badlisyah Abdul Ghani, the chief executive of CIMB Islamic Bank, one of Malaysia's largest. Mr. Badlisyah helped arrange the pathbreaking bond as an investment banker at Bank Islam.
Eager to educate oil-rich Gulf investors about such financial novelties, Malaysia's central bank, Bank Negara, is spending $57 million to invite Islamic scholars from around the world to Kuala Lumpur for a "Shariah dialogue" program. "To be an international financial center, you must allow a diversity of interpretations," says Bank Negara Deputy Governor Razif Abdul Kadir. "This is our strength."
As part of its drive for diversity, Bank Negara has also issued Malaysian banking licenses to three Islamic banks from the Gulf, including Saudi Arabia's Al Rajhi, which labels itself as the world's largest Islamic financial institution. For Al Rajhi, this was the first venture overseas -- and the Saudi giant spared no effort as it rolled out a Malaysian network of 12 glass-and-marble branches, with 38 more on the way. Plastering Kuala Lumpur with blue advertising billboards, Al Rajhi stressed its pristine Islamic credentials and promised to deliver the Saudis' "Just Values" to faithful Malaysians.
Since beginning operations here last October, however, Al Rajhi has had to adapt to Malaysian reality. "In Saudi Arabia, those religiously inclined would keep their funds with Al Rajhi and expect nothing in return," says Al Rajhi Bank Malaysia's chief executive, Ahmed Rehman, a Pakistani citizen who came to Kuala Lumpur after a career with Britain's Standard Chartered Bank in Dubai.
Customers in Al Rajhi's Saudi operation have stashed some $18 billion in no-return checking accounts; because of concerns about illicit interest, savings accounts do not exist there, says Mr. Rehman. In Malaysia, this was clearly a nonstarter, he realized. "At the end of the day you have to have deposits, which means you have to come up with the products...and give an element of return," he says.
After much soul-searching, Al Rajhi decided to introduce a Malaysian savings account of its own. As the bank's local Shariah board -- composed of two Saudi clerics dispatched from headquarters and two Malaysians -- discussed the product, theological complications arose. Technically, the return on savings accounts in Malaysia's Islamic banks comes from a profit-sharing contract with the bank. That, however, could cause big fluctuations if the bank posts a loss or higher-than-expected profits. Mitigating the risk for account-holders, the Malaysian banks use a special profit reserve that allows them to keep these payouts relatively steady and similar to conventional interest rates.
Though Mr. Rehman and Al Rajhi's Shariah experts entertained grave reservations about such arrangements, they went ahead nevertheless, citing the need to comply with Malaysian regulations. Customers flocked in response, and the bank now boasts some 8,000 Malaysian accounts. The savings account, as plasma-screen displays advertise in Al Rajhi's branches, was last offering a "profit" of an annualized 3.1% on one-month deposits, in line with interest rates in the industry.
Now, Al Rajhi is thinking of bringing such savings accounts, and other financial novelties it's testing in Malaysia, to consumers back home in the Saudi kingdom, Mr. Rehman says. "In terms of products, the market is much more sophisticated here than in the Middle East," he says. "Here, you have to work for your money. And it brings out innovation."
Write to Yaroslav Trofimov at yaroslav.trofimov@...
Diamond Trust falls back on ally to expand service
Written by Ole Turana
Mr. Mahmood Manji
14-June-2007: Diamond Trust Bank plans to leverage on its equity partner, Habib Bank, to offer Islamic banking products, the new product in the global financial services sector.
“Islamic based banking product is on our radar screen and we intend to tap in to Habib Bank experience to roll it out,” said Mahmood Manji, the bank chairman.
Habib Bank acquired 3.72 per cent of Diamond Trust’s shares during the Rights Issue carried out last year, making it the third largest shareholder in the bank.
Habib Bank, a Pakistan based bank, operates in Kenya and 25 other countries and has vast experience in the niche Islamic banking sector.
With banks increasingly launching specific products to suit customer needs, Islamic banking is emerging as the new frontier for competition with four banks - Dubai Bank, Barclays Bank, The Bank of India and Kenya Commercial Bank already offering the Sharia compliant products.
Recently, Finance minister Amos Kimunya licensed First Community Bank from Dubai to offer fully fledged Islamic banking services ahead of Dubai Bank, which has applied for a similar licence. At the global level, Islamic banking is gaining competition both for normal bank services such as accounts and investment options. The Bank of England is reported to be mulling over the need to launch an Islamic bond.
Among the proposals made in last year’s budget was one to introduce Islamic banking products in conventional banks for Kenya’s estimated eight million Muslims. Globally, most Islamic banks enjoy protected markets and other regulatory advantages such as higher lending limits than conventional banks offer. In many other countries, only pure-play Islamic banks are permitted to produce or sell most Sharia-compliant products, leaving hybrids, which combine an Islamic unit and a conventional banking parent, out of the market.
There are about 270 Islamic banks around the world- including subsidiaries of conventional banks- holding assets estimated at more than $265 billion. Holdings by Islamic banks are growing by an estimated 15 per cent a year, and although this amount represents just a small portion of assets held by banks of any stripe, Islamic banking’s growth potential has attracted firms such as HSBC and UBS.
The addition of Islamic banking products will complete Diamond Trust’s foray into the retail banking that has been taken a notch higher over the last two years.
In an interview with Business Daily, Mr Manji enumerated the various products the bank has launched alongside expansion of its network to attract more customers.
“We have used the proceeds of the successful Rights Issue to increase the bank core capital and finance the expansion program where we now have 11 branches”, says Mr Manji. The bank intends to increase the branch network to 20 by the end of the year.
Diamond Trust has revamped its operations in Tanzania and Uganda as it widens its regional presence. The bank is replicating the success realised in Kenya by targeting to raise $4.2 million in Tanzania through a Rights Issue.
The deal to be concluded on Monday will finance the bank’s growth through an increased branch network and a solid capital base. Currently, the bank has five branches in Tanzania.
Diamond Trust boasts an asset base in excess of Sh21 billion and Sh13 billion in lending. Its earnings stood at Sh681 million for the year to December 2006. Mr Manji said the bank had managed to grow despite interest margins thinning out.
“We are able to grow due to a diversified portfolio of products and our traditional focus on the small and medium enterprises (SMEs),” says Mr Manji. Its aggressive entry into retail banking dubbed Open Banking has increased the bank’s ability to lend.
For instance from 2002 to 2006 the bank loan book grew six times from Sh2.6 billion to Sh13.8 billion. The bank profit before tax for 2006 rose to Sh706 million from Sh427 million realised in 2005.
The lending has mainly come from the bank’s traditional financing of hire purchase as well as newer lease finance products that target potential motor vehicles buyers but also industries investing in plant and equipment.
Diamond Trust is one of the oldest financial institutions in the country and was listed at the Nairobi Stock exchange in 1972. Before acquiring a banking licence in 1997, Diamond Trust was principally engaged in hire purchase.
Islamic banking rises on oil wealth, drawing non-Muslims
By Wayne Arnold The New York Times
Thursday, November 22, 2007
Rising oil wealth is lifting Islamic banking - which adheres to the laws of the Koran and its prohibition against charging interest - into the financial mainstream.
Big banks, including Citigroup, HSBC and Deutsche Bank, as well as financial capitals like London, Tokyo and Hong Kong, are all going into the Islamic banking business. An estimated 300 Islamic financial institutions hold at least $500 billion in assets, an amount that is increasing more than 10 percent a year.
In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and even Islamic derivatives. Loans and bonds that conform to the Koran are already available in the United States. And Britain, Japan and Thailand are contemplating issuing Islamic bonds of their own.
"This is an industry on its way from a niche industry to becoming a truly global industry," said Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, the world's second-largest Islamic bank, after Al-Rajhi Bank. "In the next three to five years you'll see Islamic banks coming out in Australia, China, Japan and other parts of the world."
In Islamic banking, financiers are required to share borrowers' risks, meaning that depositors are treated more like shareholders, earning a portion of profits. Financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.
The stampede into Islamic finance is mostly an effort to tap an estimated $1.5 trillion of funds sloshing around the Middle East, largely from higher oil prices. Although a lot of this oil money was parked in the United States, Britain and Switzerland before Sept. 11, 2001, bankers say many wealthy Arabs are investing closer to home, in part to avoid the hassle of increased scrutiny.
At the same time, many Middle Eastern investors are eager to capitalize on Asia's breakneck growth.
By some estimates, as much as $800 billion of Arab money has moved from the United States and Europe to other regions. Those investments have helped ignite an economic revival throughout the Muslim world at a time of increasing religious conservatism among Islam's 1.6 billion faithful.
A result is expanding demand for financial services that adhere to Islamic law, or Shariah.
"The middle class have the luxury of making these Islamic versus non-Islamic decisions," said Nordin Abdullah, who runs KasehDia, a firm in Kuala Lumpur that advises companies on how to comply with Shariah. "They're educated and have money."
Last year, Saudi Arabia's largest lender, National Commercial Bank, overhauled its entire retail business to make it Shariah-compliant. Tunisia and Morocco authorized their first Islamic banks this year.
And while the biggest Islamic banks are in the wealthy Gulf states, the most attractive potential markets are in Turkey and North Africa and among European Muslims. Indonesia, the most populous Muslim nation, with more than 190 million Muslims, is the mother lode.
Malaysia, a predominantly Muslim nation with a secular government and a fast-growing, export-driven economy, has emerged as a center for the industry's development. Here, even non-Muslims are taking advantage of a growing range of Islamic products offering competitive returns.
For instance, David Ong-Yeoh, a public relations executive tired of fretting over the rising interest rate on his adjustable rate mortgage, refinanced to a 30-year fixed loan from an Islamic financial institution. Now, he pays regular installments that include a predetermined profit margin for the bank.
"The terms are better than on conventional loans," said Ong-Yeoh, 41.
Islamic finance also avoids other prohibited practices. Shariah-compliant bankers cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.
Proponents of Islamic banking say these are limits any socially conscious investor can support, Muslim or not. They also envision wider appeal for Islamic banking's ban on interest, which stems from the Koran's prohibition against usury.
This is a view that has a long religious and historical tradition.
Interest is repeatedly condemned in the Bible. Aristotle denounced it, the Romans limited it, and the early Christian church prohibited it.
Western theologians eventually distinguished interest from usury, and it was reintroduced to Christians and Muslims around the time of the Renaissance.
But when Britain took advantage of Egypt's mounting foreign debt in 1875 to buy Egypt's stake in the Suez Canal and occupy the country, it generated a backlash against traditional banking in the Muslim world. The belief that all interest charges are unjust now underpins Islamic finance.
"It's about respecting the interests of the different parties, avoiding taking advantage of any situation of any counterparty and putting in place fair treatment," said Rasheed Mohammed al-Maraj, governor of the central bank of Bahrain.
Hoarding is frowned upon in the Koran, so savings earn no return unless put to productive use.
"Money should be used for creating better value in the country or the economy," Maraj said. "Money cannot generate money."
Nor can Islamic banks simply trade money.
"In the Islamic finance model, the banks are supposed to mobilize funds through a fund management concept," said Rafe Haneef, head of Islamic banking in Asia for Citigroup.
Indeed, Islamic banking is supposed to function more like private equity firms than conventional banking. "Private equity is an Islamic concept," Haneef said.
Industry proponents say this risk-sharing requirement helps reduce the kind of abuses that led to the subprime mortgage mess in the United States. Scholars consider it un-Islamic to overload a customer with debt or invest in a company with excessive debt.
But this approach has inherent problems. Because Islamic financial transactions must have an underlying asset, Islamic bankers tend to have high exposure to real estate and construction projects.
Hedging that exposure is difficult; though Islamic derivatives exist, scholars differ on whether they are permissible under the Koran.
"There's a general acceptance that risk needs to be managed and therefore some form of financial instrument needs to be developed," said Zeti Akhtar Aziz, governor of Malaysia's central bank. But "in Islamic finance, you can't have such securities," he added. "We need to be able to look at some of the issues that revolve around this."
Industry skeptics also say the difference between Islamic financial products and their conventional counterparts is purely semantic. And most Muslims, they say, are not averse to accepting interest.
To ensure that they are strictly Shariah-compliant, Islamic financial institutions rely on their own boards of Shariah scholars to approve every product. Shariah scholars are rare, and those with financial understanding even rarer, so many scholars sit on several boards, earning up to $100,000 in retainers.
"If they're complaining there is a shortage, what are they doing to solve this problem?" asked Sheik Nizam Yaquby, a scholar based in Bahrain who sits on the boards of Citigroup, AIG and HSBC, among others. Shariah scholars, he noted, still earn less than accountants or corporate lawyers.
As part of longstanding efforts to develop the industry, Malaysia has created scholarships and training programs. Ungku Abdul Aziz, the father of the central banker, established the first modern Islamic financial institution, Tabung Haji, in 1962 to help poor Malays finance pilgrimages to Mecca and to mobilize rural savings.
Later, the Malaysian government set up Islamic banks as part of a reformist platform to promote national development and blunt the appeal of fundamentalist Islamic political rivals.
In early 2001, the government began offering tax incentives aimed at converting at least a fifth of the nation's assets to Islamic finance by 2010. (They now make up roughly 12 percent.) With China siphoning away some economic opportunities from Malaysia, Islamic finance has become part of a broader effort to lure tourism, trade and investment from the Middle East.
"We are trying to position ourselves as being acceptable to the Middle East, to petrodollars," said Wong Fook-Wah, chief executive of RAM Rating Services in Kuala Lumpur. "Hopefully they'll fund economic growth in Malaysia."
But as the price of oil has rebounded, Islamic finance has boomed elsewhere.
Clearly, faith is not the only thing driving the market. At Kuwait Finance House's Malaysian unit, Younis said, 40 percent of its depositors and 60 percent of its borrowers are non-Muslims.
E-lene Kee, a Buddhist corporate lawyer here who advises clients to use Islamic loans to finance construction projects, described his view this way: "We look at these things just like Apple or Berkshire Hathaway."
Ong-Yeoh, the public relations executive, said he felt the same way: "It's just taking advantage of the system."
After taking out an Islamic loan for his home, he took another for his car.
From the Los Angeles Times
Profit versus the prophet Islamic law has made Muslims into creative bankers.
By Joshua Kurlantzick
February 10, 2008
On a humid morning in downtown Kuala Lumpur, women wearing patterned head scarves and long skirts walk in groups to work, strolling beneath a futuristic, Epcot-esque monorail and past neatly trimmed coconut palms. One cluster of women stops for lattes at a Starbucks, one of many cafes blossoming on the ground floors of new glass-and-steel corporate skyscrapers in the Malaysian capital. Young male information-technology workers sit in shorts at the Starbucks' outdoor patio, furiously typing on computers. When the call to prayer rings overhead, several of them quickly down their espressos, pack up their laptops and hurry to the mosque.
Since 9/11, Muslims -- and many Westerners -- have wondered if Arab Muslim nations can reconcile Islamization and globalization. To some, Malaysia has found the balance of the two, creating a country comfortable for pious Muslims and for a company such as Intel, which has built a huge microprocessor plant in the northern city of Penang. The White House has praised the small Southeast Asian nation as a model of moderation. Malaysia has benefited enormously from globalization, throwing itself open to trade, building a high-tech corridor and growing into one of the wealthiest nations in the region. Yet it has boomed in part by embracing one of the oldest concepts in Islam -- Islamic banking.
Islam has had its own concepts of banking and finance for centuries. The Koran, striving to promote equity, prohibited the charging of interest on loans because poor borrowers and wealthier lenders did not face equal risks. It also barred Muslims from making money off such products as alcohol because Muslims are not allowed to drink alcohol.
Over time, scholars in some Arab Muslim nations deemed a small number of investment practices asSharia-compliant.In an Islamic financial transaction called musharakah, for instance, the lending Islamic bank and the borrowing company pool their capital, rather than the bank providing the loan at a fixed rate. The bank and the company jointly manage the money, so both profit or lose equally from the investment.
Before 2001, most Arab Muslim investors did not use transactions like musharakah. Instead, they placed their savings in Western banks. But that has changed over the last six years. One reason is the skyrocketing price of oil, which has fattened the coffers of many Arab governments and investors and given them more money to invest, including in Islamic banks. After 9/11, many leading Muslim investors also pulled out of the United States because they feared their money would be targeted. Finally, the growing power of Islamists put pressure on Muslim investors to save according to Koranic principles.
And these investors have. In 2006, there were 250 Islamic mutual stock funds worldwide with combined assets of $300 billion, according to Moody's. Overall, the Islamic finance industry may be growing as much as 15% annually. Deutsche Bank, HSBC, UBS and other banking giants have established Islamic finance subsidiaries or separate Islamic banks that offer products that comply with Sharia.
But it is Malaysia that stands at the forefront of this industry, which was virtually nonexistent before 9/11. Malaysian leaders recognize that Islamic finance allows Muslims to assert their religious identity without having to become involved in poisonous Islamist politics. Malaysian Prime Minister Abdullah Ahmad Badawi says as much when he embraces "civilizational Islam" -- Islam expressed through economics, science and culture, not just politics.
Malaysia's relative religious moderation and its progressive government, which is less focused on religious issues than some Arab regimes, have allowed it to push the limits of what is permitted in Islamic banking. Its central bank has established a national Sharia board of scholars to approve banking products. The board has established the benchmarks needed to standardize the industry, ensure that Islamic banks meet international financial rules and reassure customers that they are getting truly Islamic products. But it also has been progressive enough to consider how Malaysia could adapt Islam to such cutting-edge financial ideas as derivatives.
In just the last five years, Malaysian banks have introduced a staggering range of Islamic financial products. One of them was the world's first Islamic interest-less bond, or sukuk. Other products include Islamic mortgages, Islamic leases and Islamic funds that do not bear interest. Malaysia even has created a kind of Islamic ATM network so devout Muslims can withdraw money across the globe without worrying whether the banks collected interest from their deposits.
As Islamic finance has become a pillar of Malaysia's economy, some moderate Middle Eastern states have tried to copy its successful model. Dubai is attempting to establish itself as an Islamic banking hub.
But as Islamic finance has become more mainstream, conservative Muslims have criticized it as not strict enough. Banks in more conservative Persian Gulf states initially refused to help their Malaysian peers sell the most progressive Islamic bonds because they believed they came close to offering interest. Others believe there are too many modern thinkers on Malaysia's oversight board.
Some of the harshest criticism has come from Muslim reformers, some of whom have said that Islamic finance could serve as a bridge between globalization and Islam as well as a means of promoting Arab Muslim development. Timur Kuran, a prominent economist at the University of Southern California, is one such critic. In his 2004 book, "Islam and Mammon: The Economic Predicaments of Islamism," Kuran writes that one long-standing claim of Islamic economics is that it is uniquely fair and compassionate toward the poor. But Kuran complains that wealthier Muslim governments like Malaysia's don't build their Islamic credentials by tackling the tough problems of Muslim underdevelopment -- fragile civil societies and vast income disparities. Instead, they burnish their Islamic reputations by promoting Islamic finance -- bonds, hedge funds and other financial tools used mostly by the wealthy and the middle class, not by the poor.
Mahmoud El Gamal, an expert on Islamic banking at Rice University, goes further. He says many new Islamic financial instruments merely employ tricks to get around the Koran's prohibitions on interest. To El Gamal, the industry has become obsessed with the narrow letter, rather than the spirit, of Islamic law, which was designed to be truly fair. "You are taking some item and sprinkling holy water on it," he said. "If it's pork, it's not going to turn into beef."
But in the long run, if Arab Muslim states are going to leap the development gap, they may have to accept these concerns and find ways around them. After all, Malaysia, unlike many Middle Eastern states, has achieved an effective compromise, building a real Islamic finance business while keeping most of its devout scholars satisfied.
Joshua Kurlantzick is a visiting scholar at the Carnegie Endowment for International Peace and the author of "Charm Offensive: How China's Soft Power Is Transforming the World."
Finance, the Islamic way, shows promise at a small US bank
Jan. 15, 2009
Associated Press , THE JERUSALEM POST
Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.
Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky.
It also rules out some of the activity that got Western finance in trouble - subprime mortgages, credit-default swaps and the like.
"When you look at the economic crisis we're in, if you were to follow Islamic or Sharia financing, you couldn't have this crisis," said John Sickler, corporate director for the bank, University Islamic Financial Corp., in Ann Arbor, Michigan.
Islamic finance operations aren't prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.
University Islamic Financial has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.
For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it's a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.
The bank is a subsidiary of Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.
Islamic law says money cannot grow by itself, the way it does with compounding interest. Trade is acceptable as long as the equal amounts of money are traded or two different things are swapped with a fairly negotiated price.
So a dime for an apple would be considered "halal," or religiously acceptable, while one apple for two apples would be "harem," or unacceptable.
Even at University, not everyone is on board. Some customers have closed their accounts when they learned it was engaging in Islamic finance. Some employees who objected to the move quit. The bank also stopped having a Christmas party and no longer serves alcohol at after-hours events.
The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it's the nation's first to offer Sharia-compliant, federally insured deposits.
Islamic banking is more common overseas, but some US banks and credit-card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.
So Islamic banking is only expected to increase in coming years. Already, Citigroup offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.
The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.
"We haven't made as much money as the conventional banks because we can't, for example, sell what we don't own," he said. "We have to own it before we sell it. We may have missed out on gains in good times... but we haven't suffered any losses."
Of course, there's no guarantee that banks will find immunity in Islamic finance from a severe global downturn.
"I am not doing banking on Mars," said Afaq Khan, the head of Saadiq, the Islamic banking arm of Standard Chartered Bank, based in London. "If real economic activity slows down significantly, the Islamic banking industry will also be affected."
A Sharia-compliant mortgage is like rent-to-own: There is no note, or mortgage, but typically part of each month's payment is held toward the ultimate purchase. The property is titled to an individual trust, or limited-liability corporation.
Deutsche Bank estimates total assets in the Islamic finance market at $1 trillion - a tiny fraction of global financial assets, but the bank said in a recent report that the sector been growing at a clip of 15 percent to 20% per year.
Most big international banks already have Islamic banking arms, and a November report by Moody's Investors Service shows that Islamic banks have been fairly resilient to the global economic downturn.
The US banking industry has not embraced Sharia banking. Wachovia, Wells Fargo and JPMorgan Chase said they have not adopted Sharia practices and declined to comment about what they may do in the future.
"As far as the future, we are always looking for opportunities to better serve our customers, but our specific strategy is proprietary," Wells Fargo spokeswoman Lisa Westermann said.
University Bank chairman and president Stephen Lange Ranzini declined to name the US banks that University Islamic has talked to. But he said his bank soon plans to offer services such as residential lending to other banks and credit unions nationwide.
Sharia banking is an idea "that is long overdue in this country," said Amal Berry-Brown, vice president at Comerica, a Dallas regional bank that has talked with Ranzini. "At the same time, there really is quite a bit of work to be done."
Comerica has a strong customer base around Detroit, home to the nation's most concentrated Muslim population.
One issue: There is "a big variance" within Sharia law about exactly which financial practices are considered good and bad, said Mustafa Gultekin, a finance professor at the University of North Carolina at Chapel Hill.
For University Islamic, the niche appears to be paying off. Ranzini said he expects it to generate more than 25% of the overall bank's revenue this year, up from about 20% last year.
March 7, 2009
A Hometown Bank Heeds a Call to Serve Its Islamic Clients
By SAMUEL G. FREEDMAN
ANN ARBOR, MICH.
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.
University Bank now has an entire subsidiary devoted to financial products that comply with Muslim religious law, or Shariah. It has done nearly $80 million in Islamically approvable “mortgage-alternative” financing for residential and commercial real estate in 15 states.
This past week, while the stock market plunged to its lowest point in a dozen years and close-to-home General Motors teetered near bankruptcy, University Bank recorded one of its best periods ever. It completed 11 home sales, more than twice the weekly average, to observant Muslim customers, and pushed four more closings into next week.
“I never thought I’d be involved in Islamic banking because I’d never even heard of it,” Mr. Ranzini, 43, said in an interview. “And it’s been a stretch to learn it, succeed at it and make it work. But you feel best about the things that were hardest to do.”
To distill and simplify some complicated theological and financial concepts, the basis of Islamic finance is Shariah’s forbidding of “riba,” which can be variously translated as usury or interest. Mortgage alternatives, which are the most popular financial product for Islamic consumers in the United States, essentially add what would have been the monthly interest into the purchase price of a home.
In one variation, the bank actually buys the house at a qualified customer’s direction, and then sells it to that customer through monthly installments modeled on the payments of a 30-year mortgage. In two other common methods, the customer either acquires the home from the bank on a lease-to-own arrangement or purchases the home in partnership with the bank and gradually buys out the bank’s share.
University Bank’s boomlet forms only part of a national trend. Institutions like Devon Bank in Chicago and Guidance Residential in Reston, Va., also offer mortgage alternatives. The Amana Funds, based in Bellingham, Wash., has several mutual funds operating on Islamic principles.
For the past decade, Dow Jones has computed a stock index for Shariah-compliant companies. The law schools at Harvard, Fordham and the University of California, Berkeley, have held academic conferences on Islamic finance.
“It’s part of this religious revival, this return to roots, you see taking place not only in Islam but in many faiths,” said Isam Salah, an expert in Islamic financing at the international law firm King & Spalding. “And as people began to see the feasibility of Islamic financing, you had smart bankers saying: ‘There are seven million Muslims in the U.S. There’s a niche market no one is serving, and I can do it.’ ”
In Mr. Ranzini’s case in Ann Arbor, the decision to enter Islamic banking meant all sorts of challenges.
On the religious side, he needed to appoint a board of Shariah scholars to certify the mortgage alternatives as “halal,” or religiously permissible. On the secular flank, he put months into persuading both state banking officials and his own board of the new products’ legitimacy.
One of the bank’s vice presidents, Amjad Quadri, now has responsibility for marketing the Shariah-compliant products, speaking at mosques and meeting imams, and overseeing satellite sales offices in New Jersey and Virginia. The visibility of University Bank in Islamic financing has brought it, among other things, pillorying by Rush Limbaugh.
For customers like Abdul El-Sayed, though, the bank was literally a godsend.
A medical student and Rhodes scholar, Mr. El-Sayed bought a $123,000 condominium in Ann Arbor with a mortgage-alternative arrangement. A generation earlier, Mr. El-Sayed’s father had had no choice under Shariah but to save up until he could buy a home with cash.
“Ultimately, the question is,” Mr. El-Sayed, 24, said in an interview, “when I die and I stand before God and go through everything I did in my life, I don’t want to say I did it the easy way instead of the Shariah-compliant way. Not because of fear but because of obligation.”
The sense of religious and communal obligation has its fiduciary advantages to Mr. Ranzini. Besides carefully vetting prospective home-buyers, and besides having a well-educated, professional clientele among American Muslims, he has customers for whom default would be almost sinful. Indeed, there have been only a handful of failures among University Bank’s observant Muslim clients.
“In my heart, I’m doing this because it’s the command of my creator,” said Fariz Huzair, 51, who recently bought a home for his family in Canton, Mich. “You have a standard you’re supposed to live up to.”
World Islamic Economic Forum’s International Advisory Panel Discusses Issues On Innovation In Islamic Finance
NEW DELHI, July 4 (Bernama) — Developments and initiatives in innovative Islamic finance and capacity utilisation is one of the key topics at the 8th World Islamic Economic Forum (WIEF) International Advisory Panel (IAP) bi-annual meeting Wednesday.
The meeting, attended by industry experts, business leaders from the financial and banking sectors as well as thought leaders of the Organisation of Islamic Cooperation (OIC) related organisations also discussed on ways to propel the Asian region into an investment-based and innovation-led economy.
“We strive for an active and proactive meeting to give the members ample opportunities to voice out their opinions,” said Nasser Munjee, Chairman of Development Credit Bank Ltd & Aga Khan Rural Support Programme, India and host of WIEF IAP meeting
Islamic banking primed for growth in Canada – despite doubters
December 29, 2014. 8:18 pm • Section: Business, The Search
Worth $1 trillion in assets, Islamic banking is being lauded by British Prime Minister David Cameron and supported by Canada’s Conservative government, major banks and credit unions, leading business schools and influential Muslims across the country.
Islamic banking — which bans interest payments, pure monetary speculation and investing in such things as alcohol, gambling, pornographic media and pork — is being sold as the next big thing in financing for Canada, which is home to over a million Muslims.
“Awareness in Canada of Islamic banking has increased dramatically in the last few years,” says Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management, where he teaches on the subject.
“With the federal government’s efforts in this respect, Canada’s attractiveness to Islamic finance will grow,” Hejazi says. He cited how Prime Minister Stephen Harper’s government helped sponsor a World Islamic Banking Conference last year in the oil-rich Persian Gulf.
Many Canadian Muslims are seeking “Shariah-compliant banking solutions to their personal finances,” says Hejazi, a Lebanese-Canadian. They want home mortgages that are not based on conventional Western interest payments, but which operate more like a partnership.
The International Monetary Fund, Hejazi says, recently attributed the expansion of Islamic finance to demand from the increasing number of Muslims living in the West, growing oil wealth in Muslim countries and people seeking “ethical” and lower-risk financial products.
Even though Islamic banking has some harsh critics among Canadian Muslims who consider it unwieldy — with many still suffering from the 2011 bankruptcy of Toronto-based UM Financial, which offered Shariah-compliant mortgages — the movement is gaining energy.
When faced with a loss in the market versus a lapse in his faith, Nabeel Hamoui, 37, a radiologist in Chicago, will invariably opt for the loss. This is because Dr. Hamoui manages his retirement portfolio in accordance with halal, or religiously sanctioned, Islamic guidelines.
“I chose halal investing based on my religious beliefs, and try to remain in compliance with those beliefs,” Dr. Hamoui said. A return on his investment, he said, is beside the point.
For Dr. Hamoui and many other Muslims, both in the United States and abroad, saving for retirement means steering clear of investments in companies and funds that trade in a host of forbidden goods and services, which are known as haram. The lengthy list includes alcohol, tobacco, pork products and media or entertainment considered immoral, such as pornography.
The rules can be tricky to navigate. Investments are banned in companies with too much debt as a percentage of their assets. Interest on loans (known as riba) is also haram, which rules out investing in conventional banking and insurance sectors. Investing in companies earning a minimal amount of interest, typically 5 percent or less, may be allowed, so long as the dividend income derived from that interest is donated to charity.
Op-Ed: How green sukuk could help Africa fight & fund climate change
Africa’s green financing needs are alarming. If the continent’s green financing needs are not met, it could risk reversing Africa’s development.
By 2040, the economic cost of climate change disruption in Africa is expected to be between $45-50 billion per year, according to the African Development Bank.
Mozambique is an illustration of just how exposed the continent is to worsening climate change as demonstrated by the widespread devastation caused earlier this year by cyclones Idai and Kenneth.
The scale of funding needed to meet the continent’s green financing needs is far beyond the scope of governments. To help combat climate change, innovative approaches and alternative modes of financing need to be considered.
As African countries search for new green financing sources, green sukuk – capital market instruments similar to bonds where proceeds raised are exclusively earmarked for the financing of environmentally friendly projects – should be considered.
Sustainability is the next frontier for Islamic finance and instruments such as Green sukuk have great potential to help Africa meet its green financing needs.
Islamic Finance and Socially Responsible Investing
Islamic finance is one of the fastest growing sectors in the global financial industry. The World Bank forecasts the industry to reach $3 trillion in total assets and a billion users this year. However, in Africa, Islamic finance represents only 1.5% of the global Islamic finance market.
The Islamic finance industry was founded and developed on strong ethical and moral values. There are a lot of similarities between the principles of socially responsible investing (SRI) and Islamic finance as both seek a gain greater than financial return.
SRI instruments such as green sukuk are an example of how the Islamic finance industry can create innovative instruments for green financing.
Green sukuk are Shari’ah compliant instruments whereby proceeds raised are exclusively earmarked for the financing of environmentally projects. It is a form of SRI which seeks to achieve not just a financial return but also an environmental good.
Green sukuk issues, such as those in Asia and the Middle East have demonstrated that they are indeed an effective tool for environmentally related funding for governments and corporates alike.
There is vast potential and opportunity for green sukuk in Africa to help bridge the green financing gap.
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