Category Archives: Financial crisis of 2008

Dubai Exports Islamic Finance to Europe

Posted on January 26, 2011 | Leave a comment

Dubai Exports Islamic Finance to Europe

While the conventional financial system is recovering from the fallout of the international financial crisis Islamic finance on the other hand is growing rapidly. Statistics show that global Islamic banking assets have grown approximately 10% per annum from the mid 1990s when they were about US$150 billion.

Today, global Islamic financial assets stand at approximately US800 billion. Industry experts claim that over the next decade the sector may reach US$4 trillion. The growth of Islamic Financial Services has been driven by a growing Islamic population that is enjoying a rapid rise in purchasing power, due to better education and employment opportunities. This has been supported by financial engineering and innovation in the provision of Islamic financial products and services.

No longer is Islamic finance limited to simply the provision of interest free bank accounts but includes a whole spectrum of such as fund of funds, exchange traded funds, hedge funds and real estate funds are gaining wide acceptance. These new products have increased investor awareness of Islamic products. The same is true in the corporate sector whereby Islamic financial innovation has developed products while being shariah compliant meet the needs of the modern business.

The financial innovation has been greatly assisted by financial centers and their regulators who have understood the importance of the sector and its unique structure. In this respect Dubai has become the leader and pioneer with the first recognized Islamic bank being established in the country, the first Islamic stock exchange and not only does it have the greatest number of listed Islamic bonds or sukuks, but also the largest ever sukuk issued.

Moreover, with its business clusters such as the Dubai International Financial Centre (DIFC), this has been a catalyst for the development of diverse range shariah compliant products. The Centre has allowed a number of Shariah compliant firms to develop their products and services. In terms of regulation Dubai through the Dubai Financial Services Authority has developed advanced level of regulation to supervise the firms within the DIFC. Dubai has shown that it can be innovative through the development of new shariah compliant products to meet the needs of an ever increasing and sophisticated investor.

"The expertise of Dubai in the area of Islamic Financial Services is something that we hope to capitalize through our export facilitation services"’ commented Engineer Saed Al Awadi, the CEO of Dubai Exports, an agency within Dubai Department of Economic Development. Al Awadi continued to state that, "we have carried out two very successful trade missions in Islamic financial services which have linked our firms with opportunities in foreign markets".

Dubai Exports held a seminar to highlight Islamic Financial Opportunities in Germany and France which are two of the main economies within the Eurozone. The seminar was aimed at the very senior management within the Islamic financial services sector.

The German market poses great opportunities for Islamic Financing, with a population of 4 million Muslims that holds wealth of up to €25 billion. This potential is further bolstered by a significant rate of saving in Muslim households, which at 18% is nearly double the national average. Almost 83% of the total Muslim population identifies as religious, and consequently serves as an ideal customer base for products offered in Islamic Financing. This is even with a large demographic of young residents, where a 77% majority of the Muslim population falls between the ages 14 to 49 years.

"More than 70% of Muslims in Germany responded in a survey last year that they are interested in Islamic Finance products, and of these nearly 60% of respondents would consider availing of such services if offered by an existing German bank," stated Dr Baltz, who is a senior lawyer with Amereller legal Consultants and one of the speaker’s at Dubai Exports’ seminar.

Dr Baltz further added that, "A chief advantage for the development of Islamic Financing in Germany is the absence of any restrictive regulations that could hinder the practices and products of Islamic banking. This is partially because the Federal Financial Services Authority (BaFin), Germany’s banking regulator did not recognise Islamic Financing until much recently, and thus there were no specific regulations surrounding Islamic banking products. "

Meanwhile, Dr Goepfrich, CEO of AHK Germany announced that, "Dubai with its expertise in the area of Islamic Financial services is an ideal partner for Germany firms seeking to enter the sector."

Although, foreign expansion is natural for Dubai’s financial institutions they must however be aware of the implications of their domestic regulatory commitments. Judy Waugh from Al Tamimi and Company spoke at the seminar regarding this aspect. Waugh stated that, "sensible foreign expansion implies that firms adhere to both the home regulation as we alls that of their host country."

The door to foreign expansion has been possible as in recent years, a number of countries have taken the initiative of making the necessary changes to their legal and regulatory systems so as to allow Islamic financial institutions to be established and recognized at par with conventional financial firms.

"These changes provide considerable opportunities to our firms and we hope to capitalize on them" commented Al Awadi who also announced that AHK and Dubai Exports will be leading a Trade Mission consisting of financial institutions from Dubai to Germany and France in April of this year.

Source: http://ae.zawya.com/story.cfm/sidZAWYA20110125105229

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Posted in Current trends and news, Financial crisis of 2008, Growth

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Posted on January 12, 2011 | Leave a comment

Sukuk issuance to reach pre-crisis level by end 2011: Daud Vicary Abdullah

Global issuance of Islamic bonds will take another year to reach pre-crisis levels as new markets in Europe and Asia have yet to make up for the slump in the Gulf, said Deloitte’s head of Islamic Finance on Tuesday.

Underwritten issuance of Islamic bonds, or sukuk, reached $14.3 billion last year, according to Thomson Reuters estimates, well below the $20-30 billion in annual issuance before the global financial crisis.

Malaysia, the industry’s biggest market, held up well in 2010 but issuance in the Gulf Arab region has been hurt by some sukuk defaults and investor confidence has yet to return.

“I think it’s going to be another year or so before (sukuk issuance) gets back to pre-crisis levels,” said Daud Vicary Abdullah, head of Islamic finance at advisory firm Deloitte.

He said that new markets will help a come back in sukuk issuance, as governments in Brazil, Australia, Western Europe and Central Asia are considering issuing sukuk to tap the Muslim wealth pool and nurture their own Islamic financial industries.

He said that American re-insurers are considering entering Islamic re-insurance business, or re-takaful, which would also increase demand for Islamic bonds.

The global financial crisis popped a Gulf real estate bubble in 2008, severely hitting regional investors and pushing the region’s business hub Dubai to the brink of default.

Investors are still holding back their funds as the full extent of the damage took long to surface due to a lack of strong and transparent regulations in the region.

“This market is always much more sensitive to economic ups and downs…there is still some ground to make up and people are sort of nervous about what they have seen in Dubai,” said Abdullah.

The Gulf saw a modest revival in sukuk issuances in the last quarter of 2010 but market experts fear it could be a fragile recovery with investors fearful of any more bad news. [ID:nLDE69618P]

Sukuk issuance has also been hurt by a debate about the compliance of some of its structures with Islamic law. Sukuk are structured around underlying assets, from which returns to bondholders are derived.

Estimates of sukuk issuance can vary significantly depending on the methodology applied.

Experts polled by Reuters in October estimated that sukuk issuance will likely be less than $25 billion as Gulf debt restructurings and state deficit constraints dampen borrowing.

Source: http://sg.news.yahoo.com/rtrs/20110111/tbs-sp-islamicfinance-sukuk-7318940.html

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Posted in Accounting firms, Current trends and news, Financial crisis of 2008, Growth, Sukuk

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What if the world had been following Islamic financial practices?

Posted on January 10, 2011 | Leave a comment

What if the world had been following Islamic financial practices?

Imagine a world without a financial crisis. No moral hazard, so brokers won’t sell mortgages without carrying out appropriate credit checks. Imagine banks not deliberately selling complex derivatives, knowing that they will be worthless. No short-selling speculation, so companies tinkering on the edge won’t be pushed over. Imagine a world with Islamic finance.

“The practices that caused the financial crisis would not have passed muster with sharia boards – committees of religiously inspired legal scholars who conduct a religious audit of a bank’s activities. Neither the securitisation of sub-prime loans nor credit-default swaps are acceptable in Islamic finance,” says Ibrahim Warde, author of Islamic Finance in the Global Economy and a professor at Tufts University.

“Similarly, negative Islamic attitudes towards short-selling were vindicated by the role short-selling played in many aspects of the crisis and subsequent limits placed on short-selling in London and New York. Some old-fashioned principles such as the distrust of excessive leverage and of open-ended innovation proved well founded. As for the systematic vetting of new products by sharia advisers, it could be looked at as a system of checks and balances, a useful corrective to the groupthink that had overtaken conventional finance.”

Islamic finance extends beyond its well-known characteristics: interest-free banking and the prohibition of investment in items or activities deemed un-Islamic, such as prostitution, gambling, pornography, pig farming and alcohol. In contrast to conventional loans, Islamic bank loans are confined to financing the purchase of physical assets, to which they have recourse in case of default.

Creditors and debtors alike must share business risk, Islamic finance prohibits speculation (such as was practised by AIG with credit default swaps) and similarly prohibits trades that are considered to have excessive risk due to uncertainty, such as naked short-selling, where there is uncertainty involved in the future delivery of the underlying asset. Arguably, Islamic finance also prohibits speculation that property prices will forever continue to rise, as well as bailouts, since they are only loss and not profit sharing for governments. (The UAE may disagree.)

Islamic banks largely mimic conventional commercial banks through profit- and loss-sharing contracts. The bank will buy goods on behalf of the borrower and then sell it on a deferred basis at a markup. The profit-sharing principle prevents Islamic banks from outsourcing debt origination to brokers who would have no incentive to perform thorough due diligence on prospective debtors.

Additionally, according to Warde, Islamic mortgages are attractive to customers because they are vetted by sharia advisers, and predatory practices, which are common practice with traditional mortgages, are forbidden. If customers are unable to keep up with their payments, banks are encouraged to show forbearance and are allowed to count such losses as part of their mandatory annual zakat payment, the Islamic equivalent of a charitable tax.

“This has a cost, but if you weigh the social benefit, it’s a worthwhile cost. The obligation can be handled in a prudential way. At the time of the Asian crisis, the Malaysian banks reasoned that they would have collapsed had they shown forbearance to all of their debtors. The socially desirable thing should not come at the expense of a bank’s ability to survive as a business,” says Warde.

Islamic finance has its limitations. It does not wave a magic wand to do away with inherent business risk, nor does it have a way of dictating that investors avoid correlated and fat-tail risks that lead to bubbles prone to bursting.

Auditing, too, remains a problem. Though standards are set by external bodies – the Islamic Financial Services Board and the Accounting and Auditing Organisation for Islamic Financial Institutions – it is the bank-employed sharia advisers who decide whether a financial institution is compliant with those standards or not. This maintains the inherent conflict of interest present in the relationship between traditional financial institutions and their auditors, such has been seen with KPMG and New Century Finance, a US sub-prime lender.

With Islam being the diverse religion that it is, there is some scope for hiring scholars who will interpret the standards liberally. Western banks, with their more liberal advisers, are increasingly responsible for innovations in Islamic finance. But there are no checks to stop banks from paying for fatwas. Islamic finance has, like its non-Islamic counterpart, yet to devise a system whereby auditors are paid for by an external body.

Would Islamic finance have allowed the world to realise the technologies that it has? Perhaps not. One spinal-repair researcher at University College London, Jacqueline Kueh, recalls how more research was funded during the boom times. Secondly, the elimination of interest that most sharia boards require would have created a highly inefficient debt market. Here, businesses would be at the mercy of Islamic bankers for the purchase of every asset they required as the banks contrived to stick to the form of their interpretation of Islamic requirements. Greater inefficiency in financing means slower growth.

Islamic finance is not necessarily an end in itself, but it does serve to remind of the need for humane banking, the elimination of moral hazard and the reassessment of assumptions that speculators and derivatives add more value than they destroy.

Source: http://www.guardian.co.uk/commentisfree/belief/2011/jan/07/islam-fairer-finance-moral-risk

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Posted in Financial crisis of 2008

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Report: Islamic Finance and Global Financial Stability

Posted on January 6, 2011 | Leave a comment

Islamic Finance and Global Financial Stability: A joint report published by the Islamic Financial Services Board (IFSB), Islamic Research and Training Institute (IRTI) and Islamic Development Bank (IDB)

Report extract:

The global financial crisis of 2008-09 has brought to the forefront issues concerning the stability and resilience of financial systems.At the heart of the crisis is the near-breakdown of the functioning of the financial intermediation process, amid a generalised loss ofconfidence in the financial system.

Many factors have been cited as the cause of the crisis. They include a combination of misalignments in the incentive structure and unbridled financial innovation which led to indiscriminate lending and excessive risk-taking. Other contributory factors include the erosion of sound prudential practices, with banks compromising on underwriting and risk management standards in pursuit of short-term gains and market share. While the banking institutions had employed increasingly sophisticated financial engineering techniques to repackage mortgages into complex structured securities, such financial innovation was not supported by commensurate enhancements to their governance processes and risk management infrastructure and practices.

In the wake of the crisis, the global financial community has intensified efforts to reform the international financial architecture to ensure its stability and resilience in a more challenging environment.The challenge before us is to not only undertake the necessary regulatory reform that will minimise potential risks, but to also build a new financial architecture that will promote greater efficiency in the financial intermediation process, including across borders.

In the search for a new financial architecture, there is a general consensus on the need to return banking to its basic function – to provide financial services that add value to the real economy. This in fact represents the very essence of Islamic finance. These are the very elements found in the Shari’ah principles that form the foundation of Islamic finance. It is these inherent elements that contribute towards the overall stability and resilience of the Islamic financial system. This foundation is further reinforced by the values that are extolled in Islamic finance that are similar to those found in ethical finance and socially responsible investment. The key strength of the Shari’ah injunctions is its emphasis on a strong linkage to productive economic activity, its inbuilt checks and balances and its high level of transparency and disclosure. The Islamic financial services industry has thus been in a relatively stronger position to weather the global financial crisis, demonstrating its robustness as a stable form of financial intermediation. The inherent features of Islamic finance have the potential to serve as a basis to address several of the issues and challenges that have surfaced in the conventional financial system during the current crisis. As the role and relevance of Islamic finance in the global financial system gains significance, it has potential to contribute to greater global financial stability and towards strengthening global growth.

Read the full report here.

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Posted in Financial crisis of 2008, Reports and publications

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Basel III in support of the Islamic banking principal

Posted on January 2, 2011 | Leave a comment

Basel III in support of the Islamic banking principal

By Dr. Aly Khorshid

basel iii

The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced a substantial strengthening of existing capital requirements and fully endorsed the agreements it reached on 26 July 2010. These capital reforms, together with the introduction of a global liquidity standard, deliver on the core of the global financial reform agenda and will be presented to the Seoul G20 Leaders summit in November.

The Committee’s package of reforms will increase the minimum common equity requirement from 2% to 4.5%. In addition, banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%. This reinforces the stronger definition of capital agreed by Governors and Heads of Supervision in July and the higher capital requirements for trading, derivative, and securitization activities to be introduced at the end of 2011.

Islamic banks are among the best capitalized banks in the world, and historically comply with inflexible standards of capitalization, Islamic Bank for capital requirements means that local banks already exceed norms set by the Bank for International Settlements (BIS) as part of the Basel III accord.

Islamic banks already have stricter capital requirements than what are proposed in Basel III. With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III.

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments. This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial.
The transition arrangements will enable banks to meet the new standards while supporting the economic recovery. The Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."

Islamic Banks comply with Basel III
Islamic banks are among the best capitalized in the world, and historically stringent standards set , Islamic Bank for capital requirements means that local banks already surpass norms set by the Bank for International Settlements (BIS) as part of the Basel III accord, which has a 2019 deadline.

Islamic Bank already has stricter capital requirements than what is proposed in Basel III.

With the Islamic banks being amongst the best capitalized on a global scale, they are on the safe side compared to their European or US counterparts, Tier 1 and total capital requirements currently stand at 8 per cent and 12 per cent, respectively, which are already higher than the target 2019 ratios set by Basel III (of 6 per cent and 8 per cent, respectively)."

The BIS reported this week that it has reached an agreement to increase key capital ratios for banks. The minimum requirement for common equity, the highest form of loss absorbing capital, will be raised from the current 2 to 4.5 per cent after the application of stricter adjustments.

This will be phased in by January 1, 2015. The total Tier 1 capital requirement, which includes common equity and other qualifying financial instruments based on stricter criteria, will increase from 4 to 6 per cent over the same period. There will also be a ‘buffer requirement’ of 2.5 per cent that can be drawn down to the 4.5 per cent minimum requirement during times of stress. This effectively will raise common equity requirements to 7 per cent.

If a bank draws below the 7 per cent common equity requirement, including the buffer, distribution of earnings must be curtailed until the 7 per cent level is recovered. These restrictions would apply to dividends and executive compensation, including bonuses.

These changes are intended to reinforce banks’ capacity to absorb future potential losses. The transition period for the world’s banks to comply with these rules has been extended to January 2019 vs. the end-2012 deadline set by the regulators last year. This news was positively welcomed by the investor community as evident through the climb in banks share prices in Europe and Asia.

It appears that while actual implementation won’t start until 2013, the accords will not be fully implemented until 2018.

At this point we believe it is too early to assess the full consequences of these new regulation changes especially that Islamic banks have been complying with Basel II.

"However, until further analysis is made, we believe local banks could elect to conserve capital through constrained dividend payout," they said.

Source: http://www.english.globalarabnetwork.com/201012228432/Finance/basel-iii-in-support-of-the-islamic-banking-principal.html

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Posted in Current trends and news, Financial crisis of 2008, Innovations and developments, Shariah standards and regulation