Double digit growth for Islamic banking assets in 2009

by Soren Billing

Islamic banking assets posted double-digit growth this year despite the global economic slowdown, according to a new report.

Assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks rose by 28.6 percent to $822bn from $639bn in 2008, according to The Banker’s “Top 500 Islamic Financial Institutions” survey.

The London-based magazine found in a July survey that the world’s conventional banks posted annual asset growth of just 6.8 percent.
“A conservative approach to risk and a close link between the financial sector and real assets has helped shield the sector from the worst of the credit crisis,” said editor Brian Caplen.

“But finding improved ways to manage liquidity at Islamic banks, as well as harmonising Shariah and prudential compliance between institutions and markets, remain significant hurdles.”

GCC states accounted for $353.2bn or 42.9 percent of the global aggregate, while Iran remained the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the total.

Source : Arabian Business

Double digit growth for Islamic banking assets in 2009

Sukuk defaults seen rising as global slowdown weighs

by Reuters
A default on Islamic bonds by Kuwaiti firm Investment Dar is just the tip of the iceberg, with more failures expected as the weak global economy hits issuers, industry experts warned on Wednesday.

Unlike traditional banking, the $1 trillion Islamic finance industry has just begun to feel the chill of the global downturn, with practitioners and analysts trying to assess the extent of the fallout on the sector.

Investment Dar said in May it had defaulted on a $100 million Islamic bond, the first such default for a major, public Islamic instrument in the Gulf.
Troubled Saudi conglomerates Saad Group and Ahmad Hamad Algosaibi & Bros, are restructuring their debt, triggering concerns of a spillover effect on the Islamic finance industry.

Neale Downes, a Bahrain-based lawyer at Trowers & Hamlins, estimated that 5-8 percent of Islamic bonds, or sukuk, in the market are susceptible to default as many were raised for real estate projects which have been hurt by the slowdown.

"A lot of the issuers are ultimately really sovereign or quasi sovereign so they will probably be able to draw on government support either directly or behind the scenes," Downes said on the sidelines of an Islamic banking conference in Kuala Lumpur.

The value of sukuk issued in 2008 dropped by more than 56 percent compared with 2007 to $14.9 billion, due mainly to the global credit crunch, according to Standard & Poor's. It expects the market to recover in the second half of 2009 or early 2010.

"The longer the global recession goes, the higher the likelihood of default," said Mohammad Faiz Azmi, global Islamic finance leader at PricewaterhouseCoopers.

"People are now using reserves or savings to try to keep themselves going. How long can that last? So far what we've seen is the tip of the iceberg."

Source : Reuters

NBK raises Boubyan Bank stake

by Rania El Gamal
National Bank of Kuwait (NBK) raised its stake in Boubyan Bank to more than 12 percent, becoming the third-largest shareholder in the Islamic lender to help boost its Sharia-compliant business.

NBK, the country's biggest bank by assets, increased its stake to 12.43 percent from 10.16 percent, according to data on the Kuwait Stock Exchange on Thursday.

Islamic banking is one of the world's fastest growing financial sectors, rising 15-20 percent a year, according to industry estimates.
Kuwait Investment Authority, the country's sovereign wealth fund, is the largest shareholder in Boubyan with a 20 percent stake while Commercial Bank of Kuwait (CBK) owns 19.19 percent, the data showed.

"We've been buying those shares through the Kuwaiti bourse," a spokesman for NBK said.

NBK has said it has central bank approval to buy up to 40 percent in Boubyan. The current approval period ends on June 21, according to a previous statement by NBK. It was not immediately clear if this approval could be renewed.

On Sunday, NBK said it reached a deal with CBK to buy its stake of about 19 percent in the Islamic lender for around KD120 million ($417 million) as it wants to tap growth in Islamic banking.

But the deal was halted after Investment Dar said it had won a court ruling against CBK to suspend the sale of Boubyan shares.

Dar, the Islamic finance firm that owns half of British luxury car maker Aston Martin, filed a complaint last month against CBK over a 19.2 percent stake in Boubyan.

Dar sold the stake to CBK in December with the right to buy it back, as it sought financing and to restructure its debt. But CBK has since said that Dar and its related firms have lost their right to buy back the stake.

A Kuwaiti court has suspended selling any shares in Boubyan currently under CBK's name until it settles the dispute between CBK and Investment Dar and rules in another lawsuit, for which the hearing is set for September 9.

Boubyan Bank, which complies with Islam's ban on interest, competes with larger rival Kuwait Finance House and Kuwait International Bank.

In February, Boubyan faced a wave of resignations with all of its board members stepping down without giving a reason.

Source : Reuters

Finance the Islamic way at Michigan bank

By JEFF KAROUB and SEBASTIAN ABBOT
Big financial institutions have been battered by mortgages gone bad. But a tiny Michigan bank is getting attention in the industry by turning a profit on loans without even charging interest.

Its specialty: financial products that comply with Islamic law. That means no collecting interest, no short selling and no contracts that are considered exceedingly risky.
It also rules out some of the activity that got Western finance in trouble - subprime mortgages, credit default swaps and the like.

"When you look at the economic crisis we're in, if you were to follow Islamic or Sharia financing, you couldn't have this crisis," said John Sickler, corporate director for the bank, University Islamic Financial Corp. in Ann Arbor.

Islamic finance operations aren't prohibited from making a profit. Far from it. Instead, banks that comply with Islamic law, or Sharia, earn money from fees that are part of the cost of the loan, some paid up front and some over time.

University Islamic Financial has two types of financing, one called a marked-up installment sale and the other a lease-to-purchase sale. Fees in both cases are comparable to interest payments in traditional loans, bank officials say.

For example: A seller who bought a house for $100,000 could sell it for $120,000 or even $300,000, provided the buyer agrees it's a fair deal. The home could be sold on an installment plan negotiated by buyer and seller.

The bank is a subsidiary of Michigan-based University Bank, and its leaders say they have talked recently with executives from two national banks hoping to learn more about the business.
Islamic law says money cannot grow by itself, the way it does with compounding interest. Trade is acceptable as long as the equal amounts of money are traded or two different things are swapped with a fairly negotiated price.

So a dime for an apple would be considered "halal," or religiously acceptable, while one apple for two apples would be "harem," or unacceptable.

Even at University, not everyone is on board. Some customers have closed their accounts when they learned it was engaging in Islamic finance. Some employees who objected to the move quit. The bank also stopped having a Christmas party and no longer serves alcohol at after-hours events.

The Michigan bank focuses on contracts that clearly spell out the risk and reward between lender and borrower. University Islamic Financial says it's the nation's first to offer Sharia-compliant, federally insured deposits.

Islamic banking is more common overseas, but some U.S. banks and credit card companies are exploring the idea of branching out into Sharia products to reach out to the growing Muslim population.

So Islamic banking is only expected to increase in coming years. Already, Citigroup (nyse: C - news - people ) offers Sharia products and services to clients overseas, and Visa says it has worked with banks around the world to offer Islamic-compliant products.

The conventional banking system could learn a lot from the idea, said Jawad Ali, a finance lawyer based in Dubai and London who specializes in structuring Sharia-compliant deals.

"We haven't made as much money as the conventional banks because we can't, for example, sell what we don't own," he said. "We have to own it before we sell it. We may have missed out on gains in good times ... but we haven't suffered any losses."

Of course, there's no guarantee that banks will find immunity in Islamic finance from a severe global downturn.

"I am not doing banking on Mars," said Afaq Khan, the head of Saadiq, the Islamic banking arm of Standard Chartered (other-otc: SCBEF.PK - news - people ) Bank, based in London. "If real economic activity slows down significantly, the Islamic banking industry will also be affected."

A Sharia-compliant mortgage is like rent-to-own: There is no note, or mortgage, but typically part of each month's payment is held toward the ultimate purchase. The property is titled to an individual trust, or limited liability corporation.

Deutsche Bank (nyse: DB - news - people ) estimates total assets in the Islamic finance market at $1 trillion - a tiny fraction of global financial assets, but the bank said in a recent report that the sector been growing at a clip of 15 to 20 percent per year.

Most big international banks already have Islamic banking arms, and a November report by Moody's (nyse: MCO - news - people ) Investors Service shows that Islamic banks have been fairly resilient to the global economic downturn.

The U.S. banking industry has not embraced Sharia banking. Wachovia (nyse: WB - news - people ), Wells Fargo (nyse: WFC - news - people ) and JPMorgan Chase (nyse: JPM - news - people ) said they have not adopted Sharia practices and declined to comment about what they may do in the future.

"As far as the future, we are always looking for opportunities to better serve our customers, but our specific strategy is proprietary," Wells Fargo spokeswoman Lisa Westermann said.

University Bank President Stephen Ranzini declined to name the U.S. banks that University Islamic has talked to. But he said his bank soon plans to offer its services such as residential lending to other banks and credit unions nationwide.

Sharia banking is an idea "that is long overdue in this country," said Amal Berry-Brown, vice president at Comerica (nyse: CMA - news - people ), a Dallas regional bank that has talked with Ranzini. "At the same time, there really is quite a bit of work to be done."

Comerica has a strong customer base around Detroit, home to the nation's most concentrated Muslim population.

One issue: There is "a big variance" within Sharia law about exactly which financial practices are considered good and bad, said Mustafa Gultekin, a finance professor at the University of North Carolina at Chapel Hill.

For University Islamic, the niche appears to be paying off. Ranzini said he expects it to generate more than 25 percent of the overall bank's revenue this year, up from about 20 percent last year.

AP Business Writer Jeff Karoub reported from Detroit; Associated Press Writer Sebastian Abbot reported from Cairo; AP Business Writer Ieva M. Augstums reported from Charlotte, N.C.; and AP Business Writer Emma Vandore reported from Paris.

Source : Associated Press

Global financial collapse - Is Islam the best cure?

Al Rajhi Bank


By Dr. Robert D. Crane

The recent implosion of the Western financial system and its adverse impact on the real economy may have a silver lining if it produces a paradigmatic change in attitudes toward the possibility of avoiding the injustices and inefficiencies of both populist socialism and oligarchical capitalism.

An immediate challenge is to explain in simple and politically sensitive ways the theory and workings of a just third way designed to overcome the mistakes of the past. Reliance on greater transparency and governmental regulation may accomplish nothing more than to solidify the current system rather than to address the fundamental changes necessary to replace its faulty premises with better ones.

As an example of the stubborn challenges, some Muslims do not see the difference between pure credit backed by real goods and the ponzi scheme of debt derivitives. Understanding the difference seems to pose almost a paradigmatic barrier to real change. Of all people, Muslims should be able to see the fraudulent nature of money treated as a commodity rather than merely as measure of exchange, because the nature of money is the absolute core of Islamic economics. The Islamic opposition to riba or financial interest is merely a by-product of more fundamental principles.

Another serious problem is mainline acceptance of the scarcity theory of value, whereby the expansion of population supposedly will outstrip the resources to support it. The Prophet Muhammad said, ‘’For every sickness there is a cure, so find it.’’ This applies to the use of human ingenuity in multiplying the bounties of God available in nature without destroying the source of the bounties. The ‘’limits to growth’’ doctrine, first accepted as mainline doctrine through efforts of the Club of Rome more than thirty years ago, is perhaps the most serious threat to both economic and political justice, because peacefully broadening access to wealth can come not from redistribution from the rich to the poor in a world of scarcity but only by the use of pure credit to assure that the millions of new people in the world will share not past wealth but the many trillions of dollars of new wealth that will be created in the future.

The only way equitably to ‘’spread the wealth around’’ is to create new wealth. Any other approach would violate the sanctity of private property in the means of production, which is the absolute bedrock of any just system of economics and is valued in every world religion as the surest protection against political oppression.

The National Association of Muslim Lawyers is trying to recruit scholars who can think beyond the box to give a paper on Islamic banking next year at the American Bar Association’s annual convention, because the professional Islamic banking experts can not see beyond their own noses. The people already invited to this session of the International Law Section are part of the establishment crowd of well-paid riba advisers - the top dozen earn on average more than a quarter million dollars a year in consulting fees. Perhaps this will provide an opportunity to break open the closed shop of paid professionals who can’t see the forest for the trees.

There is much to celebrate in the field of Islamic economics. Investors are now rushing to shift their assets to the so-called Islamic banking system because it does not allow creating money out of debt and then selling the fraudulent product supposedly with a guaranteed profit from interest. The Islamic banking industry now is approaching a trillion dollars in real assets, led by the three largest biggest Islamic banks, the Dubai Islamic Bank, the Kuwait Finance House, and the Al-Rajhi Bank of Saudi Arabia, which latter provided the early funding for the International Institute of Islamic Thought near Washington, D.C.

A good sign is that the goal of maintaining the fifteen percent annual growth rate that has obtained since the inception of the institution of Islamic banking by Prince Muhammad al Faisal thirty years ago is being surpassed by success. This permitted a veritable revolution in the business since the ninety billion dollar market in sukuk was declared to be un-Islamic a few months ago. This form of commercial paper was good because it is tied to a specific asset and confers ownership of it, but it generates a predetermined return that is identical to interest even though it is called a ‘’profit.’’ Once the sukuk was declared to be un-Islamic, the market in sukuk immediately fell by fifty percent, which shows that ethics can still trump profits in a just world.

During the past twenty years the real experts in Islamic economics, specifically in the branch of the maqasid al shari’ah known as haqq al mal, have been sidelined as threats to the status quo and to the billionnaire investors who like this new way to concentrate wealth because the ‘’experts’’ tell them that they are not doing so. The recent implosion of the Western financial system may prompt scholars outside of the Islamic banking world to take a more careful look at what until now has been merely an Islamic alternative. As a successful survivor in a world of collapse, Islamic banking based on the essential principles of Islamic economics could provide a model for a new generation of central banks and perhaps a world resource bank to address the need for a revolution in both money and credit. The details are readily available in an entire shelf of books available online and in print at the Center for Economic and Social Justice.

The current institution of Islamic banking is half right, but still has another half to go. The real problem may be that the so-called experts have been thoroughly brainwashed by graduate studies in mainline Western universities, so that their real objective is to fit Islamic banking into an un-Islamic paradigm. The result is a phenomenon that waddles and looks somewhat like an Islamic duck, quacks even louder than a Western duck, but really is an Australian platipus.

Source: The American Muslim (TAM)