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Tuesday, 18 December 2012

Islamic financial system shows inherent resistance to global crises


KARACHI: Islamic finance is one of the fastest growing segments of the global financial industry. In 2008 the size of the global Islamic banking industry was estimated about $820 billion. Now it is closer to $1.35 trillion according to Global Islamic Finance Report (GIFR), and is expected to cross $1.6 trillion before the end of the current fiscal year. 







The Islamic financial industry now comprises 430 Islamic banks and financial institutions and around 191 conventional banks having Islamic banking windows operating in more than 75 countries, according to the GIFR.
Pakistan is also a fast growing country with regards to Islamic finance and growth has been phenomenal. Starting from scratch in 2002, it is now about 8% of the local banking industry.
While Islamic banks play roles similar to conventional banks, fundamental differences exist. The central concept in Islamic banking and finan
ce is justice, which is achieved mainly through the sharing of risk. Stakeholders are supposed to share profits and losses, and charging interest is prohibited.
There are also differences in terms of financial intermediation, the paper notes. While conventional intermediation is largely debt based, and allows for risk transfer, Islamic intermediation, by contrast, is asset based, and based on risk sharing. One key difference between conventional banks and Islamic banks is that the latter’s model does not allow investing in or financing the kind of instruments that have adversely affected their conventional competitors and triggered the global financial crisis. These include toxic assets, derivatives, and conventional financial institution securities.

Analysis done by the IMF suggests that Islamic banks fared differently, if not actually better than conventional banks during the global financial crisis. Factors related to the Islamic banking business model helped contain the adverse impact on their profitability. In particular, smaller investment portfolios, lower leverage, and adherence to Shariah principles—which precluded Islamic banks from financing or investing in the kind of instruments that have adversely affected their conventional competitors — helped contain the impact of the crisis when it hit in 2008.
The study used bank-level data covering 2007−10 for about 120 Islamic banks and conventional banks in eight countries — Bahrain, Jordan, Kuwait, Malaysia, Qatar, Saudi Arabia, Turkey, and the United Arab Emirates. These countries host most of the world’s Islamic banks (more than 80% of the industry, excluding Iran) but also have large conventional banking sectors. The key variables used to assess the impact were the changes in profitability, bank lending, bank assets, and external bank ratings.
While the study showed that Islamic banks were able to better withstand the initial impact of the crisis, the following year (2009), weaknesses in risk management practices in some Islamic banks led to a larger decline in profitability compared to that seen in conventional banks. The weak 2009 performance in some countries was associated with sectoral and name concentration—that is, too great a degree of exposure to any one sector or borrower. In some cases, the problem was made worse by exemptions from concentration limits, highlighting the importance of having a neutral regulatory framework for both types of banks.
Despite the higher profitability of Islamic banks during the pre-global crisis period (2005–07), their average profitability for 2008–09 was similar to that of conventional banks, indicating better cumulative profitability and suggesting that higher pre-crisis profitability was not driven by a strategy of greater risk taking. The analysis also showed that large Islamic banks fared better than small ones, perhaps as a result of better diversification, economies of scale, and stronger reputation.
Islamic banks contributed to financial and economic stability during the crisis, given that their credit and asset growth was at least twice as high as that of conventional banks. The IMF paper attributes this growth to their higher solvency and to the fact that many Islamic banks lent a larger part of their portfolio to the consumer sector, which was less affected by the crisis than other sectors in the countries studied.
However the post-crisis years have also shown where the Islamic banking sector is relatively weak. It lacks as efficient a structure for liquidity management as seen in conventional banking. The IMF report also recommended that the sector needs a stronger supervisory and legal infrastructure, including bank resolution.
The paper also recommended that Islamic banks and supervisors work together to develop the needed human capital, saying expertise in Islamic finance has not kept pace with the industry’s growth.

(The Express Tribune / 17 Dec 2012)



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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Oman: New islamic banking regulations due "first quarter of 2013"


The Central Bank of Oman (CBO) will issue the final draft of the guidelines for Islamic banking in the first quarter of 2013,according to executive president H E Hamood Sangour al Zadjali.
Speaking to Muscat Daily on the sidelines of the opening of the Standard Chartered branch in Qurm on Saturday, H E Zadjali said, We have already circulated the draft guidelines to the banks and have told them to start work on the guidelines to prepare themselves for the roll out of the Islamic banking business. We will keep the directives almost in the same format and see how the banks function. And we will issue the final rulebook in the first quarter of 2013.
Hinting that there would be no major differences between the draft and final guidelines, H E Zadjali said that Islamic windows of existing local banks and the two new Islamic banks - Bank Nizwa and alizz islamic bank - would be able to start operations by 2013.
He said, Bank Nizwa is set for a soft opening on December 23, 2012. The Islamic banking windows are almost ready and could start their operations by the end of 2012. alizz islamic will probably need three to six months to finalise its preparations.
When asked whether the central bank would allow foreign banks to start Islamic banking services in the sultanate, the CBO chief said, There was some interest shown by international investors, but we will have to see how the two new banks and windows perform. Then based on the market size and favourable factors, we will decide whether to add more banks and products, H E Zadjali added. 
(Albawaba Business / 16 Dec 2012)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Bermuda: Island ‘Has Role To Play In Islamic Finance’


A delegation from Business Bermuda attended the World Islamic Banking Conference, the world’s largest annual gathering of international Islamic finance industry leaders, which took place in Bahrain from December 9- 11.
In addition to exhibiting at the event, Business Bermuda’s Chief Executive Officer, Cheryl Packwood, joined a distinguished panel of international experts for a roundtable debate exploring how Islamic finance is being further deepened and mainstreamed in traditional core markets. Speaking on the panel, Cheryl Packwood said: “Offshore jurisdictions like Bermuda have had a role to play in the development of the Islamic finance industry so far and we can do more to contribute to this natural expansion.
“The discussion should not be about the offerings of each country as competitors, but rather what we can do together with the international Islamic finance community to expand the industry, grow capital and benefit from its growth.
“Islamic finance is not just for Muslims. The principles behind it – transparency, ethical investment, fair dealing and risk and reward-sharing can appeal to a number of investors. The manner in which companies approach Islamic Finance must evolve to embrace this wider audience. This is about both sides participating in the risk and the profit. It is an alternative way and also potentially a very good way to do business and grow economies. ”
Prior to the conference, Business Bermuda hosted a seminar in partnership with the Bahrain Association of Banks and a networking reception at the Capital Club in Manama before traveling to Dubai for a series of meetings with some of the region’s leading consultancies including Almaali Training and Consultancy, Kane Group and Dar Al Sharia Consultancy.
A second reception was held at the Capital Club in the Dubai International Financial Centre, which attracted key figures from the banking, legal, real estate and professional services sectors.
Speaking after the Dubai reception, Cheryl Packwood said: “Bermuda continues to enjoy close ties with GCC States, especially the United Arab Emirates and the Kingdom of Bahrain and our visit to the region has been a resounding success.
“Bermuda has long been committed to developing its Islamic Finance offering and we were delighted to further the promotion of Bermuda as a centre for international business to distinguished figures in both countries. We have a wealth of experience in Sukuk transactions and a significant number of companies based in Bermuda regularly borrow funds through Murahaba financing,” she continued.
( Bernews / 17 Dec 2012)


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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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