Latest from GIFC

Friday, 12 November 2010

Islamic banks grow as recession impact muted

HONG KONG — Islamic banking is gaining popularity in emerging markets after helping some financial institutions avoid the worst of the economic meltdown.
In its simplest form, Islamic banking requires that financial products — from mortgages to savings accounts — be structured to comply with sharia law under the Quran. Sharia law restricts rates and encourages clear terms, which means that under an Islamic home financing, banks can't charge interest, but may buy the property outright and lease it back to the consumer for a set amount each month.
From 2007 through 2009, Islamic banks' assets grew an average of twice as fast as conventional banks' assets in major Muslim markets, research released in September by Maher Hasan and Jemma Dridi of the International Monetary Fundshow. While Islamic banks weren't necessarily more profitable than traditional institutions during this time, they were able to extend credit to customers at a faster rate.
Islamic banks' growth, along with their tendency to avoid excessive leverage and risk-taking — most didn't have the off-balance-sheet loans or derivatives that nearly toppled the U.S. banking system — have given some consumers, even non-Muslims, a new appreciation for the sector.
"People got a little concerned about the conventional (banking) sector, and the interest to explore Islamic banking has increased," says Afaq Khan, chief executive for Standard Chartered Saadiq, an Islamic bank launched by the U.K. company.
Overall, while Islamic banking has gained ground most rapidly in the Middle East, the "focus now is on the Asia-Pacific region," says Prathima Rajan, a Celent analyst.
Assets in the Asia-Pacific region reached $450 billion — roughly 60% of the global industry — by 2007, the latest data available, according to Celent. Given the industry's 10% to 15% annual growth rate in the last decade, total assets are likely approaching $1 trillion.
Within Asia, Malaysia is a growing hub for Islamic finance. But other nations, including Singapore, South Korea and Hong Kong, are also competing for these assets.
Nations are eager to attract investment from the Middle East to fund infrastructure, airports, toll roads and real estate projects, according to Rushdi Siddiqui, global head of Islamic finance for Thomson Reuters, a data and information firm.
Eddie Yue, deputy chief executive for the Hong Kong Monetary Authority, said in a speech last year that a "key part of the government's strategy for developing Hong Kong as an international financial center is a focus on Islamic finance."
An Islamic mutual fund and equity index have been launched in the city as it tries to become a gateway to the greater China market for Middle East investors. CIMB, a Malaysia bank, also helps arrange "sukuks," or Islamic bonds, and other forms of financing in Hong Kong.
Islamic banking comes with risks, however. The interpretation of what's allowed under sharia law can vary from country to country. Islamic banks have also been the target of lawsuits, including those filed by the families of victims of the Sept. 11 attacks, alleging that they financed terrorist activities. And like conventional institutions, Islamic banks can be vulnerable to property and equity market downturns.
"This is not a subsector of the financial sector that's isolated from broader market trends," says Rachel Ziemba, a senior research analyst at Roubini Global Economics.
These issues, critics say, could tamp the long-term growth of Islamic finance. Yet, the short-term appeal — and one reason the customer base is growing rapidly, at least for now — is that Islamic banking operates on relatively simple and easy to understand principles.
"It is considered boring finance, but boring finance is in vogue after the (financial) crisis," Siddiqui says.
The Vatican has taken the unusual step of expressing support for Islamic banking, suggesting in a 2009 issue of its publication L'Osservatore Romano that conventional banks can regain clients' trust by adopting the "ethical principles" that form the cornerstone of Islamic finance.
Modern-day Islamic banking got its start more than three decades ago, with the opening of the Islamic Bank of Dubai in 1975. Other banks in the Middle East entered the market, and Islamic banking eventually spread to Asia and Europe. Islamic banking even gained a foothold in the United States: A handful of community banks there now offer sharia-compliant products.
Western institutions including CitibankHSBC and Standard Chartered have also broken into Islamic banking in the Middle East and Asia. Standard Chartered Saadiq, for instance, has expanded to six countries in seven years, buoyed by client interest.
The bank offers savings accounts to individual customers, as well as sukuks and other types of Islamic financing to corporate and government clients.
Critics see Islamic banking as merely another way to charge consumers fees. But Stephen Lange Ranzini, CEO of University Islamic Financial in Ann Arbor, Mich., says "the ingredients are very different" from conventional banking.
So are the risks to customers. If a consumer defaults on an Islamic home financing, the bank could take the house, but the consumer's personal assets wouldn't be at risk, as could be the case with a traditional mortgage.

No comments:

Upcoming Events on Islamic Finance, Wealth Management, Business, Management, Motivational Alfalah Consulting, KL-Malaysia:


Register Online . Register Today

Islamic Financial Planning & Wealth Management by Ahmad Sanusi Husain