Latest from GIFC

Friday, 31 October 2008

Islamic Banking: Steady in Shaky Times

Islamic finance...standing tall

JIDDAH, Saudi Arabia -- As big Western financial institutions have teetered one after the other in the crisis of recent weeks, another financial sector is gaining new confidence: Islamic banking.
Proponents of the ancient practice, which looks to sharia law for guidance and bans interest and trading in debt, have been promoting Islamic finance as a cure for the global financial meltdown.
This week, Kuwait's commerce minister, Ahmad Baqer, was quoted as saying that the global crisis will prompt more countries to use Islamic principles in running their economies. U.S. Deputy Treasury Secretary Robert M. Kimmet, visiting Jiddah, said experts at his agency have been learning the features of Islamic banking.
Though the trillion-dollar Islamic banking industry faces challenges with the slump in real estate and stock prices, advocates say the system has built-in protection from the kind of runaway collapse that has afflicted so many institutions. For one thing, the use of financial instruments such as derivatives, blamed for the downfall of banking, insurance and investment giants, is banned. So is excessive risk-taking.
"The beauty of Islamic banking and the reason it can be used as a replacement for the current market is that you only promise what you own. Islamic banks are not protected if the economy goes down -- they suffer -- but you don't lose your shirt," said Majed al-Refaie, who heads Bahrain-based Unicorn Investment Bank.
The theological underpinning of Islamic banking is scripture that declares that collection of interest is a form of usury, which is banned in Islam. In the modern world, that translates into an attitude toward money that is different from that found in the West: Money cannot just sit and generate more money. To grow, it must be invested in productive enterprises.
"In Islamic finance you cannot make money out of thin air," said Amr al-Faisal, a board member of Dar al-Mal al-Islami, a holding company that owns several Islamic banks and financial institutions. "Our dealings have to be tied to actual economic activity, like an asset or a service. You cannot make money off of money. You have to have a building that was actually purchased, a service actually rendered, or a good that was actually sold."
In the Western world, bankers designing investment instruments have to satisfy government regulators. In Islamic banking, there is another group to please -- religious regulators called a sharia board. Finance lawyers work closely with Islamic finance scholars, who study and review a product before issuing a fatwa, or ruling, on its compliance with sharia law.
Islamic bankers describe depositors as akin to partners -- their money is invested, and they share in the profits or, theoretically, the losses that result. (In interviews, bankers couldn't recall a case in which depositors actually lost money; this shows that banks put such funds only in very low-risk investments, they said.)
Rather than lend money to a home buyer and collect interest on it, an Islamic bank buys the property and then leases it to the buyer for the duration of the loan. The client pays a set amount each month to the bank, then at the end obtains full ownership. The payments are structured to include the cost of the house, plus a predetermined profit margin for the bank.
Sharia-compliant institutions also cannot invest in alcohol, pornography, weapons, gambling, tobacco or pork.
Computer engineer Tarek al-Bassam said the crisis made him glad that he had chosen an Islamic bank to take his money. His Islamic savings account has made about 4 percent profit, he said. "Usually it's a very low risk or a very low gain. But I'm happy with it," Bassam said.
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Bank of England under fire over handling of downturn

The Bank of England failed to respond to warning signs of a looming recession and had been wrong to delay cutting interest rates until too late to stop growth contracting and unemployment rising sharply, a member of the Bank's monetary policy committee (MPC) said last night.
Speaking as the US Federal Reserve cut interest rates to just 1% in an attempt to halt a slump in activity, David Blanchflower launched an outspoken attack on his eight MPC colleagues, saying the Bank had been too optimistic about the UK's ability to survive the global crisis, and Britain would now endure 18 months of falling output as it felt the full impact.
The Bank is expected to follow the Fed's lead by cutting at least half a percentage point off UK rates next week, although some analysts want a one point cut after news the economy shrank by 0.5% in the third quarter of this year.
Blanchflower's intervention came as David Cameron attempted to pile the pressure on Gordon Brown when the Tory leader challenged the prime minister to admit that his fiscal rules were now dead and he was planning a "spending splurge".In their most bruising encounter in the crisis, Brown hit back at prime minister's questions by accusing the Tories of mixed messages, saying in one breath that it was right to increase borrowing in a recession and saying in another that it was not.
Cameron asked of the fiscal rules: "Why will he not now admit that they are dead? Let us just remember them - he used to be so proud of them. Rule one was: 'Only borrow to invest'; now he is having to borrow to pay for unemployment benefit. That rule is dead. Rule two was: 'Don't have debt over 40% of national income.' Even on his own fiddled figures, that rule is now dead. Why will he not admit that the rules failed to deliver responsibility in the good years and that, as soon as the bad times came, they collapsed completely?"
In a speech last night, chancellor Alistair Darling said it would be "perverse" to stick rigidly to the rules during a downturn.
Blanchflower was a lone voice on the MPC calling for cuts in interest rates this summer. Speaking in Canterbury last night he criticised fellow MPC members for ignoring his warnings. "I believe the trend has been apparent for some time. The synchronised downturn in so many surveys should have led us to realise sooner that the UK economy was entering a recession," he said.
"If rates are not cut aggressively [when the MPC meets next week] we do face the prospect of a relatively deep and long-lasting recession."
In his speech, he said tighter credit conditions imposed by banks had yet to be fully felt. Policymakers faced an "unusually severe" international financial problem, possibly more significant than 1929, a crash which principally involved bank failures in the US. "The current difficulties in financial markets are more comparable to what happened in world war one, when stock exchanges in several countries closed for extended periods."
The MPC had been reluctant to cut rates during the summer as inflation rose to a 16-year-high of 5.2% in September.
Blanchflower said the MPC had over-reacted to the threat of higher imported oil and food prices repeating the 1970s inflationary spiral. But workers' bargaining power was weaker now, with little chance that they could push up wages in response to rising prices.
"In its last health check on the economy, released in August, the Bank said it expected output to be flat over the coming year, with employment falling a little. Output growth was expected to recover in 2009 as energy prices fell, the credit crunch eased and a weaker pound helped exports. This was an optimistic view," Blanchflower said. "Clearly output is now beginning to contract, but I think this likelihood was apparent in August."
He added that at last month's MPC meeting some had argued for higher borrowing costs. "I was alone in voting for an immediate cut of half a percentage point. I am concerned about the detrimental effect of recent events in financial markets on the UK economy," he said, adding that the 0.5% drop in GDP had occurred mainly before this autumn's market meltdown.

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Al-Majallah al-Ahkam al-‘Adaliyyah #6 - Chapter 1: The Contract of Sale - Section 3: The Place Where the Sale is Concluded

Section 3: The Place Where the Sale is Concluded

181. The place where the sale is concluded is the place where the parties meet together with a view to the conclusion of the sale.
182. Both parties posses an option during the meeting at the place of sale, after the offer has been made, up to the termination of the meeting. Example: One of the two parties to the sale makes an offer at the meeting place of the parties to the sale by stating that he has sold such and such property for a certain sum of money, or that he has bought such property, and the other party fails to state immediately afterwards that he has bought or has sold and some time later accepts at the same meeting. The sale is concluded, no matter how long the meeting may have lasted or how long the period between offer and acceptance may have been.
183. If one of the parties gives any indication of dissent after the offer and prior to acceptance, either by word or by deed, the offer becomes void and there is no longer any reason for acceptance. Example: one of the two parties to the sale, after stating that he has bought or that he has sold, occupies himself with some other matter, or discusses some other question. The offer becomes void, and thereafter the sale cannot be concluded by acceptance.
184. If one of the two parties to the sale makes an offer, but revokes such offer before the other party has accepted, the offer becomes void, and thereafter the sale cannot be concluded by acceptance. Example: A vendor states that he has sold such and such goods for so much money, but revokes such offer before the purchaser has accepted, and the purchaser later states that he has accepted such offer. No sale is concluded.
185. A renewal of the offer before acceptance cancels the first offer and its place is taken by the second offer.
Example: The vendor states that he has sold such and such property for one hundred piastres, but before the purchaser has accepted, revokes the offer, and states that he has sold for one hundred and twenty piastres, and the purchaser accepts such offer. The first offer is of no effect, and the sale is concluded on the basis of one hundred and twenty piastres.

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So many jobs, but so few experts for Islamic finance industry

KUALA LUMPUR — The swift rise of the Islamic finance industry could hit a wall in the coming years as the sector struggles to find enough experts to do the job, an industry official said on Tuesday.
Sharia banking’s sudden popularity has created a scramble for bankers, scholars and lawyers conversant in both conventional finance and Islamic economics, and produced a shortage that sometimes compromises the quality of products, experts say.
Many Islamic bankers are drawn from the conventional finance sector and have structured products which have drawn criticism that sharia banking is little more than usury-based financing cloaked in Islamic dress.
The Islamic industry’s rapid growth has outpaced the rate at which the sector is able to churn out workers, said Agil Natt, chief executive of Kuala Lumpur-based INCEIF, which says it is the world’s only dedicated Islamic finance university.
"We want to bring the Islamic finance professionals closer to understanding sharia principles and we want the sharia advisers to be able to understand some of the problems of practitioners," Mr. Natt said in an interview.
About 30,000 Islamic finance professionals will be needed in the Middle East in the next 10 years, he said, citing figures from consultancy AT Kearney.
In Malaysia, another leading center of Islamic finance, an estimated 8,600 sharia bankers would be needed by 2012, almost double the 4,800 available now, according to the central bank.
The Islamic insurance, or takaful, industry would require just over 2,000 professionals by 2012, up from 1,250 now.
The industry’s lack is especially glaring in commercial banking and takaful in the Middle East, retail banking in the United States and fund management and investment banking in Malaysia, Mr. Natt said. Modern Islamic banking, which has its roots in the 1970s oil boom, has been growing about 20% annually, driven mainly by a surge in Middle East oil revenues.
It aims to be a viable alternative to the conventional industry but with over 300 financial institutions worldwide and the sector valued at about $1 trillion, the size of the Islamic industry is still just a fraction of conventional banking.
The shortage of talent in the industry is creating a fierce competition for workers. Middle East institutions, in particular, are trying to draw in professionals by offering top dollar.
It has also driven up wages, with it not uncommon for sharia bankers to draw higher pay than their conventional peers.
The Islamic industry’s growth was not expected to stall despite easing energy prices, as the global financial meltdown have put the spotlight on ethical investing, Mr. Natt said.
The industry also faces a shortage of sharia scholars, he said, estimating that there are about 200 such scholars worldwide.
All financial institutions that offer Islamic products must have a board of sharia advisers who decide if instruments comply with Islamic law’s standards. — Reuters

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The Report on the Global Islamic Finance Conference (GIFC2008) ...The Premier Annual Event on Islamic Finance

The Second Global Islamic Finance Conference (GIFC2008) has been successfully organised by GlobalPro Consulting in Kuala Lumpur on 29-30 October 2008. It has attracted a global audience from countries such as Malaysia, Indonesia, Singapore, United Kingdom, Canada, Pakistan, China (Hong Kong), South Korea, Sri Lanka, Ghana, Iran etc.

Based on feedbacks, GIFC2008 received excellent review and comments from audience and the organiser will make continuous improvement to produce better, bigger and smarter conference from year to year.

The Third Global Islamic Finance Conference (GIFC2009) will be held in Kuala Lumpur in May 2009. It will be a truly and genuinely global Islamic finance event, insya Allah (God's willing). Please write to the organiser at if you are interested to be a participant, speaker, media partner, affiliate, sponsor or supporter.

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Wednesday, 29 October 2008

GIFC08: Lively debate on BBA ruling expected

slamic bankers can expect a lively discussion on the recent High Court judgment on Al-Bai' Bithaman Ajil (BBA) at the Second Global Islamic Finance Conference (GIFC 2008) that begins today in Kuala Lumpur. Shariah and product development is one of the first sessions for the two-day forum.
In one session, Dr Aznan Hasan, an assistant professor at the International Islamic University Malaysia's (IIUM) Kulliyah of Law, will lead a discussion on ensuring Shariah-compliant Islamic financial instruments.
Recently, High Court judge Justice Datuk Abdul Wahab Patail ruled that since some BBA contracts in the cases heard were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transactions.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and escape from paying the profit portion. The forum will also look at sukuk and efforts in promoting its secondary market. It will also touch on Islamic venture capital and private equity.
Among the areas expected to be covered are the opportunities and limitations of Islamic private equity and venture capital investments and ways and means to meet the legal, regulatory and judicial requirements.
Participants will also discuss the limitations to the growth of Islamic private equity and venture capital Ahmad Sanusi Husain, CEO and chief consultant of event organiser GlobalPro Consulting Sdn Bhd, will lead the session on human resources, another area of interest for the Islamic finance sector, especially with the current exodus of talent to the Middle East and other jurisdictions also promoting the sector.
Azmi Mohd Ali, managing partner of legal firm Azmi & Associates, is scheduled to discuss issues related to Islamic venture capital and private equity, where he will touch on the scope for Islamic private equity in mergers and acquisitions. The session will also discuss the oportunities and limitations of Islamic private equity and venture capital investments and ways and means to meet the legal, regulatory and judicial requirements. It will also touch on limitations to growth of Islamic private equity and venture capital.
In another session, Takaful Ikhlas Sdn Bhd executive vice president and chief operating officer Wan Mohd Fadzlullah Wan Abdullah will present a paper on innovation and solutions in takaful. He will discuss the new growth and global market opportunities for takaful and assess recent developments in the global takaful landscape.
On the second day, GIFC 2008 will have a session on risk management and accounting led by Crescent Risk and Wealth Management Consultancy Sdn Bhd managing director Hassan Ahmad and Amanie Business Solutions Sdn Bhd principal consultant Dr Syed Musa Al Habshi.
In the first session, it will look at risk analysis for Islamic banking, concerns about risk and unique risks in Islamic financial services. Dealing with issues on accounting and auditing for Islamic financial institutions, the speakers will inspect the framework for the preparation and presentation of financial statements for Islamic financial institutions and standards locally and internationally.
Minister in the Prime Minister’s Department Datuk Seri Dr Ahmad Zahid bin Hamidi will present the forum's keynote address entitled "Evolution and opportunities in Islamic finance". (By Habhajan Singh, The Malaysian Reserve, Oct 29, 2008, Page 8)

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Tuesday, 28 October 2008

Greenspan admits 'flaw' in the US free-market ideology

Greenspan said he was in a 'state of shocked disbelief' over the crisis

Alan Greenspan, the former US Federal Reserve chairman, has publicly admitted that the US free-market ideology that he and others have championed for decades is flawed.
Greenspan, who headed the US central bank for more than 18 years, said on Thursday that he had "found a flaw ... in the model that I perceived is the critical functioning structure that defines how the world works".
The admission is one of the most significant comments made by a key architect of the world financial system that is now in chaos amid the global economic crisis.
His comments came as he gave evidence to the US House committee on oversight and government, which is seeking to discover if regulatory failings had contributed to the turmoil.
Henry Waxman, the committee chairman, asked Greenspan: "You had the authority to prevent irresponsible lending practices that led to the subprime mortgage crises. You were advised to do so by many others and now the whole economy is paying its price.
"Do you feel that your ideology pushed you to make decisions that you wish you had not made?"
Greenspan replied: "Yes I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact."
Al Jazeera's John Terrett, reporting from New York, said: "Greenspan used to be treated like a returning victorious general every time he went to Capitol Hill.
"During his 20 years as head of the US central bank, the Federal Reserve, Americans never felt better off.
"Today, it wasn't quite like that. It was a very different Alan Greenspan who was dragged back to Capitol Hill and grilled ... in came hostile questions about unfettered lending and lack of oversight.
"Gone was the usual deference for the man considered chief architect of America's 80s and 90s boom years.
Greenspan said he was shocked at the banks' inability to self-regulate and blamed over-eager investors for the sub-prime housing meltdown that led to the financial crisis, our correspondent said.
Greenspan's critics had accused him of leaving interest rates too low in the early part of the decade, spurring an unsustainable housing boom which went largely unregulated.
'Credit tsunami'
Admitting to the "flaw" in his free-market ideology, he said: "That is precisely the reason I was shocked, because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well."
Greenspan also said that the current crisis had "turned out to be much broader than anything that I could have imagined".
He said that the current global financial crisis was a "once-in-a-century credit tsunami" which will have a severe effect on the US economy and drive unemployment higher.
He admitted he had also been "partially" wrong in opposing the regulation of derivatives in recent years.
He was joined by John Snow, the former treasury secretary, and Christopher Cox, the securities and exchange commission (SEC) chairman.
Waxman said that he believed that the Federal Reserve, which regulates banks, the SEC and the treasury had all played a role in contributing to the mistakes.
Many mistakes
Waxman, a Democrat, said: "The list of mistakes is long and the cost to taxpayers is staggering.
"Our regulators became enablers rather than enforcers. Their trust in the wisdom of the markets was infinite. The mantra became that government regulation is wrong. The market is infallible."
In his testimony, Greenspan blamed the problems on heavy demand for securities backed by subprime mortgages by investors who did not worry that the boom in home prices might come to a crashing halt.
"Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment," Greenspan said.
"Fearful American households are attempting to adjust, as best they can, to a rapid contraction in credit availability, threats to retirement funds and increased job insecurity."
Bailout 'adequate'
Greenspan said that a necessary condition for the crisis to end will be a stabilisation in home prices, but he said that was not likely to occur for "many months in the future".
When home prices finally stabilise, Greenspan said, then "the market freeze should begin to measurably thaw and frightened investors will take tentative steps towards re-engagement with risk".
Greenspan said until that occurs, the government was correct in moving forward aggressively with efforts to support the financial sector.
He called the $700bn rescue package passed by the US congress on October 10 "adequate to serve the need" and said that its effect was already being felt in the markets.
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Monday, 27 October 2008

Financial storm and Sharia finance - the lawyers' view

Spending a year within the perfect financial storm has been an interesting ride for the participating lawyers, as documented in this bumper Special Report.
Leveraged lending was one of the first casualties, swiftly followed by all other lending. Meanwhile, the capital markets were parched and CDO practically turned into a financial pariah. But who better to restructure a burning vehicle than the lawyers who built it?
The sharia markets appeared to many a less giddy antidote to the sky-high financial structures. But, as one of our reports shows, the appetite for sharia is growing not just in the City, one of the traditional gateways to the Islamic financial world.
And then, most recently, derivatives lawyers found themselves in demand to untangle the strings for clients who did not quite know what they had let themselves in for when they signed up with Lehman.
Come rain or shine, finance lawyers will not be going home just yet.
(The lawyer)
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Islamic Development Bank - Economic crisis reinforces Islamic banking

The Islamic Development Bank (IDB) says the global financial crisis created an opportunity that can help strengthen Islamic banking.

"It is a must for Islamic finance to seize the opportunity that came with this global financial crisis," Ahmad Ali, president of the Jeddah-based Islamic Development Bank (IDB), said at a Saturday forum which saw discussions on the current financial turmoil.

"Global investment banks should be set up that realize the Islamic economy and offer the world a new vision and different way to manage assets, invest wealth and create products."

Ezzeddin Khoja, secretary general of the General Council of Islamic Banks, said the Islamic banking system is based on principles that shield the sector from the current financial crisis.

While the global financial turmoil has not had a significant impact on Islamic banks, Saleh Kamel, the head of the General Council of Islamic Banks, says the depreciation of the US currency will affect Islamic banks as they use the dollar in their transactions.

There are more than 300 Islamic banks and financial institutions worldwide with a value estimated at $1 trillion, which is expected to reach $2 trillion by 2013.

"Perhaps through this crisis, that is a great evil for the world, God will lead us to the school of moderation," said Kamel. "Communism has failed and capitalism failed, and only now are they starting to admit this failure."

The Islamic Development Bank was established in 1975 to promote the development of Muslim countries by providing funds for their infrastructure projects.
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Saudi Arabia sees launch of Islamic real estate

Saudi Arabia's Sumou Holding and Geneva-based Encore Management have launched the first Islamic Real Estate Investment Trust (REIT) for the Kingdom of Saudi-Arabia. This Saudi-Swiss joint-venture may change the real estate landscape in the GCC.

A Real Estate Investment Trust or REIT is a company which invests in real estate projects.

A REIT can be a publicly listed or privately owned entity.

Usually nine tenths of the rents of the REIT are distributed to its shareholders in the form of dividends, but the legal aspects of a REIT vary from country to country.

In the US the first REITs were launched in the1960s. In Europe, this innovative securitization has only recently been passed. The global REIT-volume is estimated at around $700bn.

Emerging asset class

Due to the real estate boom in the Middle East, REITs have attracted attention in GCC markets. REITs can also be structured in a Shariah-compliant way.

This put them in the limelight of global Islamic Finance. According to IIR, the organizer of Cityscape, there are an estimated $260bn worth of real estate projects in the Kingdom of Saudi-Arabia. This has motivated Geneva-based wealth manager Encore Management S. A. and the Sumou Holding from Al- Khobar, KSA, to establish the first Islamic REIT in the Kingdom. It is also the first REIT ever launched in the GCC country.

A lack of available Shariah-compliant products in all sectors (including financial markets and insurance) is considered to be a main obstacle in Islamic Finance. 'With the new REIT we will give not only wealthy investors a vehicle to benefit from the boom in the KSA real estate market, but also provide a Shariah-compliant instrument to retail investors', says John A. Sandwick, Founder and Managing Director of Encore and also a founding member of Cityscape, where the initiative was presented to the media for the first time.

'The common REIT-company will be established at the beginning of 2009 and registered in the DIFC. The name of the company is yet to be announced', says Ayedh Bin Farhan Al Qahtani, Chairman of Somou Holding.

Economic and religious benefits for the GCC

An Islamic REIT does not invest in a complex which plans to provide un-Islamic or haram services. This can be a supermarket selling alcohol, a hunting rifle store or a butcher stocking pork products.

While in Western countries, REITs are an attractive tax-vehicle because the proceeds are not taxed at the corporate level but at the shareholder's level, the benefits in an almost tax-free environment (KSA) are different.

John Sandwick: 'This is the first time that Saudi investors from all income levels have the opportunity to invest in different real estate projects without actually buying them. I know that the Saudis do not like the term, but our initiative is really revolutionary.'

The launches of the first Islamic REITs in Malaysia on May 15 2006 and in Singapore last August, both centres of Islamic Finance in Asia were also seen as revolutionary. Even in Germany, where the legislators approved REITs in 2007, Islamic REITs are now being developed. This will allow GCC investors to buy properties in Frankfurt or Munich (a popular place for Arab tourists) without contravening Shariah principles.


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Kenya: Banks urged to introduce Shariah compliant products

Chief Kadhi Sheikh Hammad Kassim has challenged banks in the country to introduce Shariah compliant products to benefit the Muslim clients in the country.

Sheikh Kassim said the interest based banking system that is practiced by most contemporary banks has not benefited savers over the years, with many Kenyans ending up losing property after failing to pay accumulated interests on loans.

"In Islamic banking, it is on mutually pre-agreed terms between the bank and the customer with no interest charged on the principal amount, but only a profit for the institution" he said.

He said Islamic banking with Shariah compliant products is beneficial even to non Muslims, and challenged banking institutions to promote these products which have assisted millions of muslims worldwide.

He was speaking at the Mombasa branch of the Imperial Bank the winners of a competition who had opened accounts with the bank's Shariah compliant Imani account were awarded with various prizes.

He regretted that before the introduction of Shariah compliant banking, many Muslims who could not do business with the interest based banking system because it is against their religious beliefs preferred either to keep their funds at home which is risky or banked in current accounts which did not earn any profit for them.

Sheikh Kassim said Islamic banking is not a new concept as it is successfully being practiced even in the developed world, and Asia.

Nominated Member of parliament Sheikh Mohamed Dor who was present said banks that embrace Islamic banking concepts suffered no losses unlike the interest based banking systems.

Imperial Bank's area manager Assad Ahmed Hassan assured both Muslims and non Muslims that the bank's products were compliant with the Shariah law and urged them to open the accounts with the bank so as to benefit from loans and other services.

"The larger community in Kenya has not been adequately catered for and the introduction of the Imani account is the first step for the bank to reach out to these clients with a product that is fully compliant with their religious beliefs", he said.

Imani account is a unique Islamic banking account that provides an ethical banking alternative specifically designed to be Shariah compliant, and is an interest free demand-deposit account which is practical and highly responsive to the modern financial needs of the market.

The first prize in the competition which commenced on December 1 last year upto September 30 this year is a fully paid trip to Mecca worth US dollars 3800, and was won by Hajj Abbas Ali Abdulrehaman from Malindi.

The second prize, a 47 inch television set was won by Ibrahim Mohamed Hajj of Mombasa while the third prize was won by Hamed Athman Fumo of Mombasa.

231 customers of the new Imani account participated in the competition, with other winners being awarded various prizes including television sets, mobile sets and other goodies.


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Sunday, 26 October 2008

U.N. says financial crisis needs global solution

GENEVA (Reuters) - Reform of the world's financial system requires a global approach and countries cannot act in isolation to deal with a crisis caused by uncontrolled international speculation, the United Nations said on Friday.
The United Nations Conference on Trade and Development (UNCTAD) said the U.N. had the most credibility to adopt that approach, as developing countries had a limited voice in other institutions.
The call for a U.N.-led approach comes as major rich and poor countries prepare for a series of meetings to review the architecture of the world's financial system.
In an inter-dependent world where financial markets are linked electronically, no country can act in isolation, UNCTAD, whose analyses of developing country economics are closely followed by investors, said in a policy brief.
"It's simply not possible today for all countries to generate current account surpluses or improve their international competitiveness simultaneously by devaluing their currency or cutting costs," UNCTAD said.
"One nation's advance is another's retreat."
Global cooperation and regulation were necessary in finance just as international trade in goods required a predictable rules-based system, it said.
"The failure of governments to pursue such an approach is the primary reason for the current global predicament," it said.
UNCTAD pointed to a close correlation between different asset prices recently, saying it was only explicable by interrelated speculation in commodity, currency and stock markets.
It said the foreign exchange market "carry trade," in which investors borrow in low-interest currencies to invest in high-interest units, had clearly moved many exchange rates in the wrong direction over long periods.
Contrary to economic theory, currency markets were not balancing the competitive positions of nations but driving them away from equilibrium by allowing speculation on interest rate differentials, which intensified global imbalances.
The currencies of countries such as Iceland, Hungary and Brazil had come under enormous devaluation pressure, it said.
And commodity and stock markets have come under pressure as the perception spread that the world was on the brink of a major recession and that policy measures to tackle the financial crisis could not prevent a drop in real activity, it said.
The recent drop in commodity prices has a good and bad side, UNCTAD said, affirming that a tremendous rise in food, metal and oil prices since mid-2007 was largely driven by speculation.

But the correction in this surge is hurting developing country commodity producers, by hitting export revenues and devaluing investments made in response to the earlier boom.

But it was good for countries relying on commodity imports.

UNCTAD called for three policy responses:

-- First, the international community should assist countries whose exchange rates have come under downward pressure, mainly smaller countries where recent unfettered speculation led to considerable currency overvaluation.

-- Second, the international community must assist commodity-dependent countries where speculation now threatens to drive prices far below levels reached before the full unfolding of international speculation in mid-2007.

-- Third, countries with low and falling inflation must stimulate their economies with interest rate cuts and fiscal measures.

"Fortunately, policymakers in many developed countries stand ready to fight big fires at home. Unfortunately, however, the thick smoke at home has clouded their view of their neighbors' fence," UNCTAD said.

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Timely Offer Of Stability From Islamic Finance

RIYADH, Oct 26 (Bernama) -- In creating the awareness and benefits of Islamic financial system, Malaysia is offering itself as the perfect gateway for Middle Eastern financial players to tap in to the Asean region's potential of 600 million population.

Bank Negara Malaysia deputy governor, Datuk Mohd Razif Abdul Kadir today said Islamic finance was no longer a domestic agenda for Malaysia as it was integrating globaly, and that the regulator was even offering various incentives to get the ball rolling for foreign investors and players in the country.

"We have to create awareness of the various opportunities available under the Malaysia International Islamic Financial Centre (MIFC)," he said on the sideline of the MIFC road show to Kuwait and Saudi Arabia, here.

MIFC came into existence in 2006 under a collaborative effort by the country's financial and market regulators including BNM, Securities Commission, Labuan Offshore Financial Services Authority (LOFSA) and Bursa Malaysia - together with industry participation from the banking, takaful and capital market sectors in Malaysia.

"Under MIFC, we can isue new licenses for Islamic banking, takaful and fund managements to conduct international business in Malaysia," he said adding that another incentive for players was a 10-year corporate tax free business.

According to Razif, sukuk or Islamic bonds are now also an important alternative for corporate fundings and Malaysia was a centre for sukuk origination and trading with a record of about 60 percent issuance.

He said despite the globl economic uncertainty since late last year which made it impossible to raise funds via conventional bonds in markets elsewhere, the issuance of sukuk was the opposite with some being oversubscribed.

"The US$4 billion sukuk raised for Maxis buy-out last December was at the peak of the subprime crisis, where it was impossible to tap bond markets elsewhere."

"It was oversubscribed two times, eventhough it was the largest sukuk issuance in the world. This proves that Malaysia's sukuk market is large and very liquid for both local and foreign investors," he said.

Razif said another focus in the Islaimc financial sector was to encourage Middle Eastern players to set up wealth management business in Malaysia to tap high networth investors who want to park their money in Islamic instruments.

"Malaysia has developed a very comprehensive Islamic banking system and robust financial market with various products. The timing cannot be better where the conventional financial instruments have had a depreciation while the Islamic instruments remain steady," he said.

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US studying features of Islamic banking

RIYADH (Arab News, 26-Oct-08): The US government is currently studying the salient features of Islamic banking to ascertain how far it could be useful in fighting the ongoing world economic crisis, Robert M. Kimmitt, US deputy secretary of the Treasury, said at a press conference held at the US Embassy here yesterday.
Kimmitt, who is on an official visit to the Kingdom, also held discussions with Finance Minister Ibrahim Al-Assaf. Today, he is scheduled to meet Saudi Arabian Monetary Agency (SAMA) Gov. Hamad Al-Sayari, Saudi Arabian General Investment Authority (SAGIA) Gov. Amr Al-Dabbagh, Prince Alwaleed bin Talal, chairman of the Kingdom Holding Company, and Saudi investors and bankers. He said that the agenda for the G-20 summit to be held in Washington on Nov. 15, has to be carefully prepared since important topics are to be discussed in just one day. “I am not sure that Islamic banking will also be itemized in the agenda, but it is a subject that is often dwelt in the public and private sectors,” he noted. He said that experts in the US Treasury Department are currently learning the important features of Islamic banking.
However, he added that his country is focusing on activities of various governments and central banks in tackling the economic issues. He pointed out that the member countries in the G-20 also includes Islamic countries such as Indonesia and Turkey, besides the Kingdom which has been a member for the past 10 years. Representatives from these countries could present their experiences of Islamic banking in the light of the prevailing situation.
He hoped the G-20 summit will provide an effective platform for the member countries to exchange their views on the current economic problem and lay out a plan for the countries to draw out their respective national plans to ease the situation.
Commenting on his meeting with Al-Assaf, Kimmitt said the items that could be included in the agenda were also discussed. “The geographical representation from member countries would provide a broader view of the crisis and would also benefit the non-member countries through their experiments,” he added.
The G-20 summit, said Kimmitt, was proposed by Europeans which was readily accepted by President George W. Bush, who is seeking a common response to the global crisis.
Spelling out the purpose of his visit to Saudi Arabia, Kimmitt said that he has been associating with the Kingdom for more than two decades, but this is a significant visit since he was coming to the Kingdom at a time when there is a threat to the global financial market. “It’s an opportunity for me to present the US perspective ... and hear from the Saudi leadership on the current situation in the Kingdom and in the region,” he said, adding that even at a time of crisis, US wants to stress its commitment to tell the countries in the region of the US open investment policies.
Pointing out that a good number of American investors are coming to the Kingdom, Kimmitt said the US government expects reciprocation in the same manner. The deputy secretary is slated to visit the United Arab Emirates, Qatar, Kuwait and Iraq where he would meet the leadership and investors on similar lines.
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Saturday, 25 October 2008

Malaysia Progressively Liberalising Its Islamic Finance System To Attract Foreigners

RIYADH, Oct 25 (Bernama) -- Malaysia has been progressively liberalising its Islamic financial system to increase foreign participation, as it forms an integral and competitive component of the country's overall financial system.

The Islamic financial system operates in parallel with the conventional banking system, servicing both the Muslim and non-Muslim communities.

Pointing this out, the Raja Muda of Perak, Raja Dr Nazrin Shah Saturday said the syariah principles which underline Islamic finance have contributed towards its stability and resilience in facing issues such as the current global financial turmoil.

"Therefore, it comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds," he said.

He said this in his speech at a luncheon talk with investors in conjunction with the Malaysia International Islamic Financial Centre (MIFC) roadshow to Kuwait and Saudi Arabia, here.

Liberalisation of Malaysia's Islamic financial system has taken the form of the issuance of new licences and increasing foreign participation in Islamic banks and takaful companies, coupled with new licences issued to foreign fund managers and foreign stockbroking firms.

Raja Dr Nazrin also cited syariah injunctions like those prohibiting excessive leverage and speculative financial activities as having insulated Islamic funds from too much risk exposure, thus limiting their exposure to the meltdown of the financial system in the United States and Europe.

"It therefore comes as no surprise that during the current global financial turmoil, Islamic funds have seen less volatility and risk, and as a result have performed better compared with conventional funds," he said.

Raja Dr Nazrin said Malaysia believed there was tremendous upside potential for Islamic finance and that the current financial turmoil provides an opportunity for Islamic finance to position itself as a complementary, if not alternative, to conventional finance by providing investors with other asset classes and markets that provide stability.

He said over the last few years, there has been increasing interest among the Middle Eastern investors in the Asian market with Saudi Arabia financial institutions already having made their presence felt in Malaysia including Al-Rajhi Bank and Rsud Bank's shareholding in Asian Finance Bank.

To date, one of the more prominent investments in Malaysia is the Saudi Telecom's US$3 billion stake in local telco firm, Binariang.

"We welcome the continued participation of Saudi financial institutions and investors in Malaysia, especially to take advantage of the numerous opportunities offered under the MIFC initiatives," he said.

Raja Dr Nazrin also explained that Malaysia could be the perfect gateway for investors to take advantage of the Asean region which comprises a potential market of about 600 million people and a combined gross domestic product of US$1 trillion.

The MIFC was launched in 2006 as part of Malaysia's initiative to globally integrate within the international Islamic financial community, and to position the country as an international Islamic financial centre.

Since then, significant progress has been made as the Islamic financial system in Malaysia today comprises the Islamic banking institutions, the takaful (insurance) and re-takaful industry, and the Islamic money and capital markets.

Raja Nazrin said significant progress has been achieved, in particular, in positioning Malaysia as a centre for the origination, distribution and trading of Islamic bonds or sukuk.

"The Malaysian sukuk market has now evolved into the world's largest Islamic bond market, accounting for about 60 percent of the global sukuk outstanding.

"Malaysia is also becoming a centre for Islamic fund and wealth management services and for international Islamic banking business, as well as a centre for Islamic finance education, training, consultancy and research," he said.

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European takes closer look at Islamic financing

PARIS: With commercial bank financing tight, Europeans have been taking a closer look at Islamic banking.
"The potential is there," Ahmad Jachi, the first deputy governor of the Central Bank of Lebanon, said at a conference this past week in Paris. "It's a matter of really enabling and creating the market."
Islamic banking has already been integrated into the British and German banking systems, and banking executives at the conference said efforts were under way to allow Muslims in France to bank and invest under regulations that conform to Shariah, the legal code of Islam.
Estimates of the Islamic banking market's current size vary from $500 billion to $1 trillion. It has only about 5 percent of the overall banking market, but attendees at the conference, which was sponsored by The Economist, said Islamic banking has a huge potential for growth, since one-sixth of the world's population is Muslim.
The International Monetary Fund estimates that the Islamic banking sector has grown 10 percent to 15 percent a year over the past decade.
There is no specific code to govern Islamic financing. Businesses that are trying to be compliant usually set up a board of Islamic scholars who study the investment structures and products and reassure investors or customers that their money is being held under Shariah guidelines. Mufti Abdul Kadir Barkatullah, an imam in Britain and a Shariah scholar who is regularly consulted by corporations, said Islamic banking regulations generally require investors to be "very prudent and careful with your money, and you only put your money to very good uses."
One general principle that has proved useful of late is that banks are not allowed to be heavily leveraged or to take too many risks.
The lender and the borrower share the risks and the rewards of a loan - which means loans can have no interest rates attached. Investments are also not allowed to profit from an enterprise involved with conventional finance, weapons, tobacco, gambling, pornography or alcohol.
One company to benefit from Islamic banking is Velcan Energy, which has 200 employees, is based in Paris and develops hydropower plants in Brazil and India. Antoine Decitre, managing director at Velcan, said he was contacted by an Islamic bank, which he was not authorized to identify, that said it was interested in the company because it was environmentally friendly and its projects helped poor people in developing countries.
Velcan was able to get capital to execute its projects without having to wait for credit markets in the West to unfreeze, Decitre said. But the process has taken some time because the practices were new to Velcan. "There are many conflicting views about what you and cannot do," he said. "So take your time well in advance."
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Islamic banking is reshaping trends

Gulf News/by Nigel Watson

I have been seeing a lot of people opting for Islamic insurance and finance. I understand how Takaful insurance works but how would you compare an Islamic bank with a normal retail bank, from the point of view of the customer?

The growth of Islamic fin-ance - 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 fin-ancial 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 like gambling or alcohol. However, there are also financial reasons why people consider Islamic policies, particularly if they see a better opportunity for 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.

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, financially, is the most suitable for them.

Charge interest

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," and value their custom.

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 maths, and making sure the account is giving you the best possible return.
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Can Islamic finance be the cure?

Credit crunch, mortgage crises, Interest rates, debt, foreclosures, bankruptcy and mergers are all familiar words to hear nowadays. These are reflections and indications of the failure of the current financial system worldwide. A quick review to the current chaos witnessed in economies worldwide motivated some scholars and commentators to analyze the system more closely.
Looking closely at the causes and roots of the problem led some economists to question the role of Islamic financial systems and the ability of the Islamic financial systems to safeguard, cure and provide a way out of the current chaos.
One can say that the main cause of the problem started by credit expansion based on a certain credit rating system in American markets. The story began due to the expansion in lending in real estate.
The crises raised the issue of credit rating standards, credit expansion with no real assets and investments, accumulated interest rates and hence loans and many other defects in the current financial system. The chaos led some to compare current market rules and regulations with Islamic financial banking systems rules.
According to Sharia law interest rates are not permissible and so there are no accumulated loans. Thus, accumulated interest rates and current credit crises did not touch Islamic financial institutions as opposed to the current system. Under Sharia, Islamic banks are only custodians and liquidity transfer on a debt finance basis is not permitted in Islam. The credit rating under Islamic finance has nothing to do with rises in asset values but it depends on actual business. Islamic banking and finance evaluates real term business potential and growth trends, instead of evaluating manipulated asset values which has caused recent damage to credit markets. Thus, there is no fear of sub-prime mortgage and hence financial stability.
Business in Islam is based on capital and profit sharing and Islamic banks don’t give loans with interest rates. Instead they become shareholders. Islam prohibits interest but doesn’t prohibit gains on capital. This prohibition of a risk-free return and permission of trading marked the financial activities in an Islamic system of real assets backed with the ability to cause value addition.
Although Islamic financial banking systems had witnessed a considerable amount of attention and growth in the past five years particularly in western societies, the fact remains that Muslims are still hesitant to turn to such an unclear system that lacks many regulations and is still considered underdeveloped.
The current crisis might be a possible push for interested regulatory bodies and institutions to enhance and clarify rules and regulations so that people might turn to Islamic financial banking systems as a cure and a way out of the global crisis.

Doaa Khairy Mohsen, (PhD. MBA, BSc) is a business management consultant specialized in issues of organizational behavior, management reform, leadership and economic development in the MENA region, with particular interest in the Arab world and GCC Studies.
(Daily News Egypt)
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Friday, 24 October 2008

Death of the American Empire - America is self-destructing & bringing the rest of the world down with it

by Tanya Cariina Hsu
I believe that banking institutions are more dangerous to our liberties than standing armies. (Thomas Jefferson, US President; 1743 - 1826)
America is dying. It is self-destructing and bringing the rest of the world down with it.
Often referred to as a sub-prime mortgage collapse, this obfuscates the real reason. By associating tangible useless failed mortgages, at least something 'real' can be blamed for the carnage. The problem is, this is myth. The magnitude of this fiscal collapse happened because it was all based on hot air.
The banking industry renamed insurance betting guarantees as 'credit default swaps' and risky gambling wagers were called 'derivatives'. Financial managers and banking executives were selling the ultimate con to the entire world, akin to the snake-oil salesmen from the 18th century but this time in suits and ties. And by October 2009 it was a quadrillion-dollar (that's $1,000 trillion) industry that few could understand.
Propped up by false hope, America is now falling like a house of cards.
It all began in the early part of the 20th century. In 1907 J.P. Morgan, a private New York banker, published a rumour that a competing unnamed large bank was about to fail. It was a false charge but customers nonetheless raced to their banks to withdraw their money, in case it was their bank. As they pulled out their funds the banks lost their cash deposits and were forced to call in their loans. People now therefore had to pay back their mortgages to fill the banks with income, going bankrupt in the process. The 1907 panic resulted in a crash that prompted the creation of the Federal Reserve, a private banking cartel with the veneer of an independent government organisation. Effectively, it was a coup by elite bankers in order to control the industry.
When signed into law in 1913, the Federal Reserve would loan and supply the nation's money, but with interest. The more money it was able to print, the more 'income' for itself it generated. By its very nature the Federal Reserve would forever keep producing debt to stay alive. It was able to print America's monetary supply at will, regulating its value. To control valuation however, inflation had to be kept in check.
The Federal Reserve then doubled America's money supply within five years, and in 1920 it called in a mass percentage of loans. Over five thousand banks collapsed overnight. One year later the Federal Reserve again increased the money supply by 62%, but in 1929 it again called the loans back in, en masse. This time, the crash of 1929 caused over sixteen thousand banks to fail and an 89% plunge on the stock market. The private and well-protected banks within the Federal Reserve system were able to snap up the failed banks at pennies on the dollar.
The nation fell into the Great Depression and in April 1933 President Roosevelt issued an executive order that confiscated all gold bullion from the public. Those who refused to turn in their gold would be imprisoned for ten years, and by the end of the year the gold standard was abolished. What had been redeemable for gold became paper 'legal tender', and gold could no longer be exchanged for cash as it had once been.
Later, in 1971, President Nixon removed the dollar from the gold standard altogether, therefore no longer trading at the internationally fixed price of $35. The US dollar was now worth whatever the US decided it was worth because it was 'as good as gold'. It had no standard of measure, and became the universal currency. Treasury bills (short-term notes) and bonds (long-term notes) replaced gold as value, promissory notes of the US government and paid for by the taxpayer. Additionally, because gold was exempt from currency reporting requirements it could not be traced, unlike the fiduciary (i.e. that based upon trust) monetary systems of the West. That was not in America's best interest.
After the Great Depression private banks remained afraid to make home loans, so Roosevelt created Fannie Mae. A state supported mortgage bank, it provided federal funding to finance home mortgages for affordable housing. In 1968 President Johnson privatised Fannie Mae, and in 1970, Freddie Mac was created to compete with Fannie Mae. Both of them bought mortgages from banks and other lenders, and sold them onto new investors.
The post World War II boom had created an America flush with cash and assets. As a military industrial complex, war exponentially profited the US and, unlike any empire in history, it shot to superpower status. But it failed to remember that, historically, whenever empires rose they fell in direct proportion.
Americans could afford all the modern conveniences, exporting its manufactured goods all over the world. After the Vietnam War, the US went into an economic decline. But people were loath to give up their elevated standard of living despite the loss of jobs, and production was increasingly sent overseas. A sense of delusion and entitlement kept Americans on the treadmill of consumer consumption.
In 1987 the US stock market plunged by 22% in one day because of high-risk futures trading, called derivatives, and in 1989 the Savings & Loan crisis resulted in President George H.W. Bush using $142 billion in taxpayer funds to rescue half of the S&L's. To do so, Freddie Mac was given the task of giving sub-prime (below prime-rate) mortgages to low-income families. In 2000, the "irrational exuberance" of the dot-com bubble burst, and 50% of high-tech firms went bankrupt wiping $5 trillion from their over-inflated market values.
After this crisis, Federal Reserve Chairman Alan Greenspan kept interest rates so low they were less than the rate of inflation. Anyone saving his or her income actually lost money, and the savings rate soon fell into negative territory.
During the 1990s, advertisers went into overdrive, marketing an ever more luxurious lifestyle, all made available with cheap easy credit. Second mortgages became commonplace, and home equity loans were used to pay credit card bills. The more Americans bought, the more they fell into debt. But as long as they had a house their false sense of security remained: their home was their equity, it would always go up in value, and they could always remortgage at lower rates if needed. The financial industry also believed that housing prices would forever climb, but should they ever fall the central bank would cut interest rates so that prices would jump back up. It was, everyone believed, a win-win situation.
Greenspan's rock-bottom interest rates let anyone afford a home. Minimum wage service workers with aspirations to buy a half million-dollar house were able to secure 100% loans, the mortgage lenders fully aware that they would not be able to keep up the payments.
So many people received these sub-prime loans that the investment houses and lenders came up with a new scheme: bundle these virtually worthless home loans and sell them as solid US investments to unsuspecting countries who would not know the difference. American lives of excess and consumer spending never suffered, and were being propped up by foreign nations none the wiser.
It has always been the case that a bank would lend out more than it actually had, because interest payments generated its income. The more the bank loaned, the more interest it collected even with no money in the vault. It was a lucrative industry of giving away money it never had in the first place. Mortgage banks and investment houses even borrowed money on international money markets to fund these 100% plus sub-prime mortgages, and began lending more than ten times their underlying assets.
After 9/11, George Bush told the nation to spend, and during a time of war, that's what the nation did. It borrowed at unprecedented levels so as to not only pay for its war on terror in the Middle East (calculated to cost $4 trillion) but also pay for tax cuts at the very time it should have increased taxes. Bush removed the reserve requirements in Fannie Mae and Freddie Mac, from 10% to 2.5%. They were free to not only lend even more at bargain basement interest rates, they only needed a fraction of reserves. Soon banks lent thirty times asset value. It was, as one economist put it, an 'orgy of excess'.
It was flagrant overspending during a time of war. At no time in history has a nation gone into conflict without sacrifice, cutbacks, tax increases, and economic conservation.
And there was a growing chance that, just like in 1929, investors would rush to claim their money all at once.
To guarantee, therefore, these high risk mortgages, the same financial houses that sold them then created 'insurance policies' against the sub-prime investments they were selling, marketed as Credit Default Swaps (CDS). But the government must regulate insurance policies, so by calling them CDS they remained totally unregulated. Financial institutions were 'hedging their bets' and selling premiums to protect the junk assets. In other words, the asset that should go up in value could also have a side-bet, just in case, that it might go down. By October 2008, CDS were trading at $62 trillion, more than the stock markets of the whole world combined.
These bets had absolutely no value whatsoever and were not investments. They were just financial instruments called derivatives - high stakes gambling, 'nothing from nothing' - or as Warren Buffet referred to them, 'Weapons of Financial Mass Destruction'. The derivatives trade was 'worth' more than one quadrillion dollars, or larger than the economy of the entire world. (In September 2008 the global Gross Domestic Product was $60 trillion).
Challenged as being illegal in the 1990s, Greenspan legalised the derivatives practise. Soon hedge funds became an entire industry, betting on the derivatives market and gambling as much as they wanted. It was easy because it was money they did not have in the first place. The industry had all the appearances of banks, but the hedge funds, equity funds, and derivatives brokers had no access to government loans in the event of a default. If the owners defaulted, the hedge funds had no money to pay 'from nothing'. Those who had hedged on an asset going up or down would not be able to collect on the winnings or losses.
The market had become the largest industry in the world, and all the financial giants were cashing in: Bear Stearns, Lehman Brothers, Citigroup, and AIG. But homeowners, long maxed out on their credit, were now beginning to default on their mortgages. Not only were they paying for their house but also all the debt amassed over the years for car, credit card and student loans, medical payments and home equity loans. They had borrowed to pay for groceries and skyrocketing health insurance premiums to keep up with their bigger houses and cars; they refinanced the debt they had for lower rates that soon ballooned. The average American owed 25% of their annual income to credit card debts alone.
In 2008, housing prices began to slide precipitously downwards and mortgages were suddenly losing value. Manufacturing orders were down 4.5% by September, inventories began to pile up, unemployment was soaring and average house foreclosures had increased by 121% and up to 200% in California.
The financial giants had to stop trading these mortgage-backed securities, as now their losses would have to be visibly accounted for. Investors began withdrawing their funds. Bear Stearns, heavily specialised in home loan portfolios, was the first to go in March.
Just as they had done in the 20th century, JP Morgan swooped in and picked up Bear Stearns for a pittance. One year prior Bear Stearns shares traded at $159 but JP Morgan was able to buy in and take over at $2 a share. In September, Washington Mutual collapsed, the largest bank failure in history. JP Morgan again came in and paid $1.9 billion for assets valued at $176 billion. It was a fire sale.
Relatively quietly over the summer Freddie Mac and Fannie Mae, the publicly traded companies responsible for 80% of the home mortgage loans, lost almost 90% of their value for the year. Together they were responsible for half the outstanding loan amounts but were now in debt $80 to every $1 in capital reserves.
To guarantee they would stay alive, the Federal Reserve stepped in and took over Freddie Mac and Fannie Mae. On September 7th 2008 they were put into "conservatorship": known as nationalisation to the rest of the world, but Americans have difficulty with the idea of any government run industry that required taxpayer increases.
What the government was really doing was handing out an unlimited line of credit. Done by the Federal Reserve and not US Treasury, it was able to bypass Congressional approval. The Treasury Department then auctioned off Treasury bills to raise money for the Federal Reserve's own use, but nonetheless the taxpayer would be funding the rescue. The bankers had bled tens of billions from the system by hedging and derivative gambling, and triggered the portfolio inter-bank lending freeze, which then seized up and crashed.
The takeover was presented as a government funded bailout of an arbitrary $700 billion, which does nothing to solve the problem. No economists were asked to present their views to Congress, and the loan only perpetuates the myth that the banking system is not really dead.
In reality, the damage will not be $700 billion but closer to $5 trillion, the value of Freddie Mac and Fannie Mae's mortgages. It was nothing less than a bailout of the quadrillion dollar derivatives industry which otherwise faced payouts of over a trillion dollars on CDS mortgage-backed securities they had sold. It was necessary, said Treasury Secretary Henry Paulson, to save the country from a "housing correction". But, he added, the $700 billion taxpayer funded takeover would not prevent other banks from collapsing, in turn causing a stock market crash.
In other words Paulson was blackmailing Congress in order to lead a coup by the banking elite under the false guise of necessary legislation to stop the dyke from flooding. It merely shifted wealth from one class to another, as it had done almost a century prior. No sooner were the words were out of Paulson's mouth before other financial institutions began imploding, and with them the disintegration of the global financial system - much modelled after the lauded system of American banking.
In September the Federal Reserve, its line of credit assured, then bought the world largest insurance company, AIG, for $85 billion for an 80% stake. AIG was the largest seller of CDS, but now that it was in the position of having to pay out, from collateral it did not have, it was teetering on the edge of bankruptcy.
In October the entire country of Iceland went bankrupt, having bought American worthless sub-prime mortgages as investments. European banks began exploding, all wanting to cash in concurrently on their inflated US stocks to pay off the low interest rate debts before rates climbed higher. The year before the signs had been evident, when the largest US mortgage lender Countrywide fell. Soon after, the largest lender in the UK, Northern Rock, went under - London long having copied Wall Street creative financing. Japan and Korea's auto manufacturing nosedived by 37%, global economies contracting. Pakistan is on the edge of collapse too, with real reserves at $3 billion - enough to only buy a month's supply of food and oil and attempting to stall payments to Saudi Arabia for the 100,000 barrels of oil per day it provides to the country. Under President Musharraf, who left office in the nick of time, Pakistan's currency lost 25% of its value, its inflation running at 25%.
Meanwhile energy costs had soared, with oil reaching a peak of almost $150 per barrel in the summer. The costs were immediately passed on to the already spent homeowner, in rising heating and fuel, transport and manufacturing costs. Yet 30% of the cost of a barrel of oil was based upon Wall Street speculators, climbing to 60% as a speculative fear factor during the summer months. As soon as the financial crisis hit, suddenly oil prices slid down, slicing oil costs to $61 from a high of $147 in June and proving that the 60% speculation factor was far more accurate. This sudden decline also revealed OPEC's lack of control over spiralling prices during the past few years, almost squarely laid on the shoulders of Saudi Arabia alone. When OPEC, in September, sought to maintain higher prices by cutting production, it was Saudi Arabia who voted against such a move at the expense of its own revenue.
Europe then decided that no more would it be ruined by the excess of America. 'Olde Europe' may have had enough of being dictated to by the US, who refused to compromise on loans lent to their own broken nations after WWII. On October the 13th, the once divided EU nations unilaterally agreed to an emergency rescue plan totaling $2.3 trillion. It was more than three times greater than the US package for a catastrophe America alone had created.
By mid October, the Dow, NASDAQ and S&P 500 had erased all the gains they made over the previous decade. Greenspan's pyramid scheme of easy money from nothing resulted in a massive overextension of credit, inflated housing prices, and incredible stock valuations, achieved because investors would never withdraw their money all at once. But now it was crashing at break-neck speed and no solution in sight. President Bush said that people ought not to worry at all because "America is the most attractive destination for investors around the globe."
Those who will hurt the most are the very men and women who grew the country after WWII, and saved their pensions for retirement due now. They had built the country during the war production years, making its weapons and arms for global conflict. During the Cold War the USSR was the ever-present enemy and thus the military industrial complex continued to grow. Only when there is a war does America profit.
Russia will not tolerate a new cold war build-up of ballistic missiles. And the Middle East has seen its historical ally turn into its worst nightmare, be it militarily or economically. No longer will these nations continue to support the dollar as the world's currency. The world's economy is no longer America's to control and the US is now indebted to the rest of the world. No more will the US be able to demand its largest Middle Eastern oil supplier open up its banking books so as to be transparent and free from corruption and terrorist connections lest there be consequences - the biggest act of criminal corruption in history has just been perpetrated by the United States.
It was the best con game in town: get paid well for selling vast amounts of risk, fail, and then have governments fix the problem at the expense of the taxpayers who never saw a penny of shared wealth to begin with.
There is no easy solution to this crisis, its effects multiplying like an infectious disease.
Ironically, least affected by the crisis are Islamic banks.
They have largely been immune to the collapse because Ilamic banking prohibits the acquisition of wealth via gambling (or alcohol, tobacco, pornography, or stocks in armaments companies), and forbids the buying and selling of a debt as well as usury. Additionally, Shari'ah banking laws forbid investing in any company with debts that exceed thirty percent.
"Islamic banking institutions have not failed per se as they deal in tangible assets and assume the risk" said Dr. Mohammed Ramady, Professor of Economics at King Fahd University of Petroleum & Minerals. "Although the Islamic banking sector is also part of the global economy, the impact of direct exposure to sub-prime asset investments has been low" he continued. "The liquidity slowdown has especially affected Dubai, with its heavy international borrowing. The most negative effect has been a loss of confidence in the regional stock markets." Instead, said Dr. Ramady, oil surplus Arab nations are "reconsidering overseas investments in financial assets" and speeding up their own domestic projects.
Eight years ago, in May 2000, Saudi Islamic banker His Highness Dr. Nayef bin Fawaaz ibn Sha'alan publicly gave a series of economic lectures in Gulf states. At the time his research showed that Arab investments in the US, to the tune of $1.5 trillion, were effectively being held hostage and he recommended they be pulled out and reinvested in the tangibles of the Arab and Islamic markets. "Not in stocks however because the stock market could be manipulated remotely, as we have seen in the last couple of years in the Arab market where trillions of dollars evaporated" he said.
He warned then that it was a certainty that the US economic system was on the verge of collapse because of its cumulative debts, ever-increasing deficit and the interest on that debt. "When the debts and deficits come due, they just issue new Treasury bonds to cover the old bonds due, with their interest and the new deficit too." The cycle cannot be stopped or the debt cancelled because the US would no longer be able to borrow. The consequence of relieving this cycle would be a total collapse of their economic system as opposed to the partial, albeit massive, crash of 2008.
"Islamic banking", said Dr. Al-Sha'alan, "always protects the individuals' wealth while putting a cap on selfishness and greed. It has the best of capitalism - filtering out its negatives - and the best of socialism - filtering out its negatives too." Both systems inevitably had to fail. Additionally, Europe and Japan did not need to be held accountable and indebted to America anymore for protection against the Soviets.
"The essential difference between the Islamic economic system and the capitalist system", he continued "is that in Islam wealth belongs to God - the individual being only its manager. It is a means, not a goal. In capitalism, it is the reverse: money belongs to the individual, and is a goal in and of itself. In America especially, money is worshipped like God."
In sum, the crash of the entire global economic system is a result of America's fiscal arrogance based upon one set of rules for itself and another for the rest of the world. Its increased creative financing deluded its people into a false sense of security, and now looks like the failure of capitalism altogether.
The whole exercise in democracy by force against Arab Muslim nations has almost bankrupted the US. The Cold War is over and the US has nothing to offer: no exports, no production, few natural resources, and no service sector economy.
The very markets that resisted US economic policies the most, having curbed foreign direct investments into America, are those who will fare best and come out ahead.
But not before having paid a very high price.
Tanya Cariina Hsu is a political researcher and analyst focusing on Saudi Arabian and US relations. One of the contributors to recent written testimony on the Kingdom of Saudi Arabia for the US Congressional Senate Judiciary Committee on behalf of FOCA (Friends of Charities Association) in its Hearing on Capitol Hill in Washington D.C., her analysis has been published and critically acclaimed throughout the US, Europe and the Middle East.
The first to break the barrier against public discussion of the Israeli influence upon US foreign policy decision making, in Capitol Hill's "A Clean Break" Symposium in Washington D.C. in 2004, as the Institute for Research: Middle East Policy (IRmep) Director of Development and Senior Research Analyst, Ms. Hsu remains an International Fellow with the Institute.
Born in London, she re-located to Riyadh, Saudi Arabia in 2005 and is currently completing a book on US policy towards Saudi Arabia.
(Global Research by Tanya Cariina Hsu)

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