Islamic Finance –
Islamic Banking
Introduction
From Q109, BMI’s
commercial banking reports will include updated commentaries on Islamic finance
in relation to the relevant countries. Over time, we hope to build a detailed
picture of the protagonists, products and general development of this segment
of the global financial services industry. The long-term prospects for Islamic
finance remain exciting. However, challenges in the short term are such that
2009 could either be extremely good or the year in which the protagonists in
Islamic banking and insurance succumb to the effects of the global financial
crisis.
At this point,
it may be useful to consider a basic question: What is Islamic finance? It
differs from conventional finance in that all transactions are structured so
that they are consistent with the Fiqh al Muamalat, the part of sharia
law that deals with financial transactions. The prohibition of the payment of receipt
of interest (riba) is the best-known aspect of Islamic finance: the
asset side of the balance sheet of a purely Islamic bank will not include any
interest-bearing loans, but instead will be dominated by Islamic bonds and
other permissible investments undertaken with its clients. Sharia law also
forbids speculation and gambling (maisar). Purely speculative
transactions are not allowed: however, transactions which involve the risk of
incurring losses as well as the possibility of earning profits are allowed.
Also prohibited is uncertainty (gharar) which rules out, for example, certain
hedging or derivatives-based transactions revolving around the occurrence or
the non-occurrence of a particular event. Finally, sharia law does not
permit involvement with activities such as production of alcohol and tobacco,
pornography, supply of arms, gambling and/or conventional financial services.
Some Hard
Numbers
Quantifying the
universe of Islamic finance is complicated by a number of factors. Many
important protagonists, in commercial banking, especially, are not purely
Islamic institutions, but are essentially Islamic ‘windows’ within a much
larger conventional institution. Not all institutions involved in Islamic finance
make public information pertaining to their sharia-compliant assets. Separate
consideration and renumeration of Islamic financial institutions by central
banks and other regulators is very much the exception rather than the rule.
Some of the most active and innovative protagonists operate in countries where
only a small minority of the population are Muslims. Finally, the fact that a
bank or insurance company in a particular country is considered by its
management, and the regulator, to be an Islamic institution does not, of
itself, mean that it would be recognised as such in another country.
Perhaps the most
comprehensive and scientific survey of the universe of Islamic finance
undertaken in recent months is that which was carried out for The Banker magazine
by consultancy firm Maris Strategies. In November 2008, the magazine’s
Top 500 Islamic Financial Institutions (TIFI) listing found that those banks’
sharia-compliant assets had risen by 27.6% to US$639.1bn while November 2007’s equivalent
figures were 29.7% and US$500.5bn. However, these figures pale into
insignificance relative to the US$90,256bn in assets held by their Top 1,000
world banks.
The Banker’s TIFI survey
quantifies the relative importance of particular countries in terms of the
sharia-compliant assets held by
the institutions that are based in those countries. Considered in this way, the
six Gulf Co-operation Council (GCC) states – Saudi Arabia, Qatar, Oman, Kuwait,
Bahrain and the United Arab Emirates (UAE) – are the largest players in Islamic
finance with combined sharia-compliant assets of US$262.7bn. Non-GCC countries
in the Middle East and North Africa spoke for sharia-compliant assets of
US$248.3bn: however, Iran accounted for over US$235bn of this. Sharia-compliant
assets held by institutions in Malaysia and other Asian countries amounted to
US$67.1bn. The remaining US$61bn or so in sharia-compliant assets was held by
institutions domiciled in the UK and other predominantly non-Muslim countries.
At this point,
two observations must be made. Firstly, not all the institutions approached by The
Banker provided information in relation to sharia-compliant assets. The
number of firms “reporting Shariacompliant assets rose by 57 to 280 [in 2008],
from 221 in last year’s report. But no matter how welcome this increase may be,
there are clearly still 334 institutions not reporting sharia-compliant assets
and a number of international banks with Islamic subsidiaries, such as Standard
Chartered Saadiq, not willing to provide basic information.” The total
number of institutions recognised as holding shariacompliant assets rose from
524 in 2007 to 614 in 2008.
Iranian Banks
Are Not Really Islamic Banks
The second
observation concerns Iran. As noted above, Iranian banks account for most of
the sharia compliant assets in the
Middle East and North Africa outside the GCC states. Taking a ‘bottom-up’ approach
to quantifying the universe of Islamic banking (i.e. on the basis of
information provided by individual institutions), The Banker’s TIFI
survey indicates that Iran accounts for about 37% of shariacompliant assets
worldwide. However, it is far from clear that the Iranian banks would be
regarded as truly Islamic financial institutions in other countries:
- · The framework for determining Sharia-compliance within the opaque and weakly regulated Iranian banking system is not as clearly defined as in Malaysia or the GCC states.
- · The major Iranian banks do not appear to have separately constituted sharia-boards, unlike Islamic banks in other countries.
- · The Central Bank of Iran (CBI) determines the annual “profit margins” on which are based the profit-participation payments that are made by Iranian banks to depositors in lieu of interest. Anecdotal evidence suggests that the CBI is usually 18 months behind schedule in determining the profit margins. Further it appears that the banks have not necessarily complied with the guidelines set down by the CBI.
- · The Money and Credit Council is the element of the CBI which is responsible for the regulation of banking in Iran. Over the last two or three years, the modus operandi of the Money and Credit Council has been repeatedly challenged by President Ahmadinejad, who has sought reductions in the official “profit margins”.
- · Unlike the rest of the Islamic world, the vast majority of the Iranian banking system is owned by the state. This, along with USA-imposed sanctions and a general lack of competition mean that the Iranian banks do not have the levels of sophistication attained by Islamic banks in other countries and, in particular, Malaysia and Bahrain.
- · Iranian banks are members of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), which “prepares accounting, auditing, governance, ethics and sharia” standards. Iranian institutions are, however, absent from the membership of the Islamic Financial Services Board (IFSB), which develops prudential standards for supervisory review, processes and transparency/ market discipline, and from the Islamic International Ratings Agency (IIRA). Iranian banks were not sponsors of the 15th World Islamic Banking Conference (WIBC) which took place in Bahrain in late 2008: nor, apparently, were they major participants. The key point is this: Excluding Iranian banks from the universe of Islamic finance reduces the total size of sharia-compliant assets to around US$400bn.
Some More Hard
Numbers
In spite of
official support for Islamic finance in many countries, it is not possible to
quantify the universe ‘from the top down’ – or by drawing on statistics
published by central banks, regulators, trade associations or government
departments. A minority of predominantly Muslim (and no predominantly non-Muslim)
countries publish separate figures for their respective Islamic financial
sectors. The small amount of official data that is available includes the
following:
- · Over the 12-month period ending 31 August 2008, the total assets of Islamic banks in Indonesia rose from around US$3.3bn to US$4.8bn, increased from about 1.7% of the commercial banks’ total assets to approximately 2.2%.
- · Over the 12-month period ending 30 November 2008, the total assets of Bahrain’s Islamic banks increased from US$17bn to US$24bn. On that date, the Islamic banks’ assets represented about 9% of the banking system’s aggregate assets, including Islamic and conventional institutions.
- · Over the 12-month period ending 30 September 2008, the assets of Kuwait’s sharia-compliant investment companies rose from US$20.5bn to US$27.6bn.
- · Over the year to 30 November 2008, Islamic banking assets in Malaysia increased from US$43bn to US$51.3bn. Ot that date, the Islamic banks and ‘windows’ within conventional institutions amounted to 13% of the aggregate assets.
- · Between January and June 2008 Islamic banking assets in Pakistan rose from US$3.1bn to US$3.5bn. At that time, Islamic banks accounted for about 4% of the total assets of the banking system.
- · Analysis by the International Islamic Financial Market (IIFM), which seeks to promote cross-border trading in sharia-compliant financial instruments, showed that the value of sukuks outstanding globally increased by US$12.6 billion to US$112.0bn through H108. Of the US$112.0bn in sukuks outstanding by mid-2008, US$64.9bn had been issued in Malaysia, US$25.7bn had been issued in the UAE and US$9.2bn had been issued in Saudi Arabia. Bahrain, Kuwait and Qatar accounted for sukuks of US$4.6bn, US$2.2bn and US$1.6bn, respectively.
- · Other countries had issued sukuks of US$3.8bn: of this, Pakistan accounted for US$1.9bn.
I If you want Expert Writing Services on Islamic Finance, than contact Professional Research Writers on Islamic Banking at Mahasagar Publications. Also Read Indian Banking during Global Financial Crisis.
