|
 Email to a Friend!
 Print it!
|
 |
|
|
| TEXT |
Islamic banking and finance is poised to take
advantage of a decade of growth to become an even
greater player in the global capital markets. Growing at
a rate of 15 percent per year, with a presence in 75
countries and accounting for around $200 billion in
assets, Islamic finance continues to be successful in
the face of misperceptions and misconceptions. After the
terrorist attacks of September 11 last year it was
expected that the Islamic banking sector might be
crippled, as investors sought to disengage from all
things Islamic. In fact, if anything, the Islamic
finance industry has emerged in the past year stronger
and more visible than before.
The
Bahrain-based General Council for Islamic Banks and
Financial Institutions (GCIBFI) describes Islamic
banking and finance as one of the fastest growing and
most innovative financial industries in the
international capital markets. Since the first modern
Islamic bank experiment was set up in 1963, this sector
of the international capital markets has steadily gown
in size, sophistication and breadth to a $200 billion
industry. In addition, there are some $200-$300 billion
in assets that are managed in accordance with Islamic
principles by Islamic departments of conventional banks
and finance houses. Due to the excellent potential in
terms of expanding audience and demand and solid
performance of Islamic banking and finance to date, more
and more institutions are offering Islamic financial
services either exclusively or in conjunction with
conventional services.
What sets
Islamic banking apart from conventional banking is that
investments must be made in ethical sectors and
industries. Investment is prohibited in activities that
contribute to the production of alcoholic beverages,
gambling, pornography, tobacco, mass destruction
weaponry, and all other morally questionable practices.
In this context, Islamic investment resembles similar
developments in the West where socially responsible
investment funds have emerged. Secondly, due to the
Islamic prohibition of paying or charging interest,
Islamic banks instead accept deposits on investment
basis whereby depositors share in the bank’s actually
realized returns on their investments. These banks
provide financing to businesses on the basis of
installment sale, leasing, and/or equity participation,
thus the bank and their depositors share financial risk
with the entrepreneurs and both then reap the benefits
of investments. For the purpose of continuous
monitoring, Islamic banks are normally and periodically
reviewed both by auditors, chartered accountants, and
each bank’s own board of experts in Sharia
law.
The potential for growth in the
industry led the Zurich-based UBS Group to incorporate
the Noriba Bank BSC in Bahrain this past May. The bank
is wholly owned by the UBS Group and is a dedicated
Islamic investment bank that will, according to the
chief executive officer of the new bank “follow a
Sharia-compliant investment” and “offer a wide range of
Sharia compliant investment vehicles including mutual
funds, discretionary portfolio management, private
equity, Islamic bonds, real estate, leasing, foreign
exchange, and Murabaha (cost-plus financing)
transactions” (Menafn.com). UBS joins HSBC in major
Western financial institutions that have a dedicated
Islamic banking division. HSBC Amanah Finance is the
leading Western blue-chip bank involved in Islamic
banking.
While Islamic banking and
finance is clearly not only a stable and successful
market, but an sector with incredible growth potential,
there still remains a great deal of education to be
achieved before the industry takes off in the U.S. To
address the need for a better understanding of this
industry, the International Islamic Finance Conference
was held in Washington DC on September 26. Entitled
“Bringing the Financial World Together”, the conference
was held by the General Council for Islamic Banks and
Financial Institutions (GCIBFI) and organized by the
Islamic Free Market Institute Foundation (Islamic
Institute). Sponsored by, among others, the National
US-Arab Chamber of Commerce, the conference served as an
opportunity for an outstanding array of speakers to
educate and inform about Islamic banking and finance.
Welcome remarks for the conference were given by Khaled
Saffuri, chairman of the Islamic Free Market Institute
Foundation, The Honorable Randal Quarles, assistant
secretary of the Department of Treasury, His Excellency
Sheikh Ahmad Bin Mohammad Al Khalifa, chairman of the
Bahrain Monetary Agency, The Honorable Bob Barr,
congressman (R-GA), and Dr. Ezzedine Khoja, general
secretary of the GCIBFI.
The first
session of the conference addressed regulatory and
supervisory issues of Islamic banking. Her Excellency
Tan Sri Dato’ Dr. Zeti Akhtar Aziz, governor of Bank
Negara Malaysia, opened the panel by addressing the
regulatory challenges for international financial
systems in regards to Islamic banking. Dr. Aziz stressed
the point that due to the unique liability structure for
Islamic banking, full disclosure is needed to insure
confidence in the system. Another point raised by Dr.
Aziz, and one that would be echoed throughout the
conference, is the need for trained regulators
conversant in the issues unique to Islamic banking. The
Deputy Director of the International Monetary Fund, Mr.
V. Sundararajan, spoke next regarding the key issue of
risk in the Islamic financial service industry.
Professor Rifaat Ahmad Abdul Karim, secretary general of
the Accounting and Auditing Organization for Islamic
Financial Institutions (AAOIFI), finished the first
panel by speaking of the regulatory environment of
Islamic financial institutions. Professor Karim gave an
overview of the regulatory environment in general, while
concentrating upon the work of the AAOIFI and the
Islamic Financial Services Board (IFSB).
The AAOIFI was set up in 1991 and is
perhaps one of the most important institutions in
Islamic banking, as the organization, an Islamic,
international, and autonomous non-profit making
corporate body, sets the accounting, auditing,
governance, ethics, and Sharia standards for Islamic
financial institutions. The other key regulatory body
detailed by Professor Karim is the IFSB, to be
inaugurated in November 2002, and created with the
purpose of promoting, disseminating, and harmonizing
best practices in the regulation and supervision of the
Islamic financial services industry. The IFSB will have
three main objectives: to set and disseminate standards
and core principles; to liaison and cooperate with other
standard-setters in the areas of monetary and financial
stability, and to promote good practices in risk
management in the industry through research, training,
and technical assistance.
The
conference’s second session concentrated upon prospects
and trends for the Islamic banking sector and featured
Mr. Thomas Tellner of the Guidance Financial Group as
moderator. Mr. Glenn Fortin, managing director for
TransOcean Capital, gave a speech entitled Private
Equity Investment “rolling out”, while Sheikh Yusuf
Delorenzo, an independent Sharia supervisor, gave an
overview of the history of Islamic banking, stressing
that this is not a “new” industry, but is instead a
modern version of what has existed for hundreds of
years. Dawood Taylor, assistant general manager and head
of Takaful Ta’awuni at Bank Aljazira, spoke of the
differences and similarities between takaful ta’awuni
(Islamic life insurance) and conventional mutual
insurance. Mr. Taylor was one of many of the
conference’s speakers who stressed that while
differences obviously exist between Islamic and
conventional financial products—in this case life
insurance—the differences are not so great as to prevent
more Western institutions from greater involvement as
consumers of both conventional and Islamic financial
products often have the same goals.
A. Rushdi Siddiqui, managing
director of the Dow Jones Islamic Market Index Group,
finished the session on prospects and trends in Islamic
banking with his speech Overcoming Obstacles in
Establishing Trends. Mr. Siddiqui pointed out that while
there exist a small number of factors preventing an
increased popularity of Islamic funds, such as sector
and regional constraints, the reaction to the Dow Jones
Islamic Market has been overwhelmingly positive (70
percent). He stressed the need for consolidation—too
many funds chasing too few assets—while reiterating the
need for standardization and need for more training
programs in order to increase the number of qualified
Islamic scholars. At the conference’s luncheon the
keynote speaker Mr. William L. Rutledge, executive vice
president of the Federal Reserve Bank of New York, gave
a detailed overview of the new Basel Accord, which
further refines prior Basel agreements on international
capital adequacy requirements for financial
institutions.
H.E. Dr. Ahmad Mohammad
Ali, president of the Islamic Development Bank,
moderated the third session of the conference, entitled
Islamic Banking, Finance & Investment in the West.
The panelists for this session were Atif A.
Abdulmalik, CEO of First Islamic Investment Bank,
Abdulkader Thomas, principal at Strategic
Guidance, Virginia, Mike McMillen, a partner at King and
Spaulding, and Tariq Al-Rifai, vice president of HSBC
New York. Mr. Abdulmalik spoke of Islamic investment
banking in the U.S. through a practitioner’s
perspective, while Mr. McMillen gave an overview of the
structures and current developments of Islamic financing
products in the U.S.
Mr. Thomas
titled his speech Intersections: Western Demand--Eastern
Product, and spoke of the problems in understanding
Islamic banking and finance and misconceptions that have
limited the growth of this industry in the U.S. Firstly,
there is the mistaken belief that Western demand is only
limited to multinationals seeking cheap funding. Mr.
Thomas named a number of companies such as HSBC, Shell
Malaysian, Freddie Mac Pilots, and AT&T that are
seeking balance sheet management and diversified
consumers, not cheap funding. Secondly, there is a
misperception that the U.S. market for Islamic banking
and financing consists of “misplaced eastern
constituents”. Mr. Thomas pointed out that while the
Arab population in the U.S. is a desirable target
audience, studies have shown that the average person who
wants Islamic banking is born in the West and is locally
educated. Thirdly, there is the mistaken impression that
the industry is uniquely non-systematic. This argument
is countered however, not only by the work of the AAOIFI
in its work to develop standards, but also by the fact
that all major firms in the U.S., and an increasing
number of smaller firms are well versed in auditing
Islamic financial institutions. Lastly, Mr. Thomas
pointed to the erroneous belief that those in the West
who desire Islamic banking do so because they have
rejected Western values. The speaker pointed out this is
obviously a falsehood, as in fact those who prefer
Islamic banking institutions and products do so with the
same values as conventional banking consumers: home
ownership, education, and planning for future needs. Mr.
Thomas stressed that the choice of Islamic financial
institutions by Americans is a middle class phenomenon,
not a political statement.
Mr.
Al-Rifai, in his speech Creating Retail Banking Products
for American Muslims, spoke of four main questions to be
answered: why are particular banks in this market, where
are the other banks, what do American Muslims think of
Islamic banking, and what do regulators think of Islamic
banking? As for the first question, Mr. Al-Rifai noted
that those banks in the U.S. offering Islamic financial
products do so because American Muslims are not only
very interested in Islamic products, but also because
this demographic has consistently high education and
income levels. The second question of why more U.S.
financial institutions have not embraced Islamic banking
was answered throughout the conference—misconceptions
are prevalent. Third, what do American Muslims think of
Islamic banking? Mr. Al-Rifai pointed out that surveys
have shown that Sharia familiarity for a financial
institution is not as important as the quality of the
same issues American customers of conventional financial
institutions value—issues such as customer service,
range and quality of products, etc… At the same time
Al-Rifai believed that American Muslims view Sharia
compliance as equaling quality. The speaker summed up
the answer to the last question—what do regulators think
of Islamic banking—by saying that while regulators are
becoming more interested in the Islamic finance, further
dialogue and particular education regarding the Sharia
is needed.
The conference’s fourth
session was entitled: Islamic Finance, Myths and
Reality, and moderated by Dr. Naser Al-Sane, a member of
Parliament in Kuwait. The panel’s first speaker was Dr.
Mahmoud El-Gamal of Rice University, whose speech
Co-Evolution of Islamic Jurisprudence and Finance:
Distinguishing the Road from the Destination was a short
history of the continuing evolution of Islamic
jurisprudence. Samer R. Alhaj, executive vice president
of Gulf Investment House, in From Concept to Final
Product: An Innovative Approach to Islamic Financial
Investment gave a case study in building an Islamic
product—emphasizing that like all products, the key
emphasis must be on investor needs, in addition to the
idea that innovation is key. Dr. Hasnita Dato’Hashim,
executive vice president of Guidance Financial Group,
whose speech was Practical Aspects of a Viable Islamic
Secondary Market and Dr. John Lightstone of Pace
University, who spoke of Quantitative Methods of Stock
Selection in the Construction and Testing of
Sharia-Compliant Strategies, rounded out the last
panel.
As the International Islamic
Finance Conference emphasized, Islamic banking and
finance has not emerged overnight, nor will it find its
place in global finance overnight. However, based upon
the testimony of the leading scholars and financial
experts in the field of Islamic finance, it is clear
that the Islamic banking investment and financial
management market is one that offers substantial
potential to Western financial institutions.
Opportunities are present for a variety of financial
services in this area, both in terms of serving the
region and in terms of emerging Islamic markets outside
the Middle East and traditional Islamic world. Islamic
‘windows’ in corporate and retail environments present
an opportunity to serve an emerging and growing customer
segment. All that remains is for the Western banks and
financial institutions to take full advantage of the
opportunity to enter one of the fastest growing and
innovative financial
industries. |
|
