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Monday, 21 July 2014

Islamic banking: growing fast but can it be more than a niche market?

For years, Islamic banks have been growing at a double digit pace.
Ernst and Young (E&Y), in their latest World Islamic Banking Competitiveness report, shows the assets of Islamic banks grew at an average rate of 17% per year between 2008 and 2012.
This is two to three times faster than the rate at which conventional banks grew over the same period, due in part to the global financial crisis.
Islamic banks differ because they have to run their operations in a way that is consistent with the principles of Islamic law or sharia.
This prohibits banks from dealing with businesses that are considered sinful or haraam such as pork, alcohol and gambling. Admittedly, this is not much of a constraint.
However, usury or riba is also prohibited under sharia law so in principle banks cannot charge fees or interest for money lending.
How it works
Given this is how banks generally make their money, you may ask how Islamic banks prosper?
The answer is they still make money by lending out their capital but do so in ways where interest and fees are not explicit.
For instance, Mudharabah is a profit sharing arrangement like a venture capital deal where the bank provides the finance and the borrower the labour and entrepreneurship.
If the business were to fail, the lender loses their money and the borrower the time and effort committed to the enterprise.
Similarly, Musharakah describes a joint venture between a bank and business where the profits are divided according to their relative capital inputs.
In this way, bank returns are tied to company profits and the partnership ends when the loan is repaid.
This approach could be used to provide mortgage financing to buy a property. The property earns rent from the occupier which is paid to the buyer and the bank in relation to their share of the equity.
At the same time, the buyer agrees to buy the bank's share in instalment payments, so over time their equity increases and the bank's falls, until the mortgage principal is paid off.
Another way of profiting from providing credit is a simple form of sale and buy-back agreement known as Murubahah.
Here, the bank buys the house, car or other commodity and sells it to the buyer at a profit but allows them to pay in instalments.
In this case, the profit margin should be clear, agreed upfront and be reflect the bank's costs in providing the service.
Fast growth explained
It is partly because economic growth has been strong in several emerging market countries with a large Muslim population.
E&Y identify 25 "rapid growth market" countries which they predict will account for half of global GDP by 2020. Of these, 10 have a high Muslim population.
Iran accounts for nearly half of the banking assets in Islamic banks worldwide.
Three-quarters of the rest is in the QISMUT nations [Qatar, Indonesia, Saudi Arabia, Malaysia, UAE and Turkey] where growth has averaged 6.5% per year for the last five years.
The rapid expansion of Islamic banking has been mainly through Islamic windows in conventional banks rather than in pure Islamic banks.
This has allowed existing banks to easily enter the Islamic banking market and is likely to continue being a mechanism for growth for the foreseeable future.
'Huge untapped Muslim populations'
There is certainly space for E&Y's estimate of 20% growth for each of the next five years.
Even in countries where Islamic banking has a strong foothold, such as the Gulf states and in South East Asia, its share rarely accounts for more than one third of the market.
In Indonesia, the world's most populous Muslim country, Islamic banking currently has less than 5% market share.
There are also huge untapped Muslim populations around the world including India, Pakistan and Bangladesh in South Asia; Egypt, Nigeria, Morocco and Nigeria in Africa; and a number of the former Soviet Republics.
It is also expected that growth will not just be limited to regions with a high Muslim population.
Last month, the UK issued a £200 million sovereign sukuk or Islamic bond.
Although the amount is small, a fraction of the value issued by Malaysia each year, it was a clear signal of intent.
It comes on the back of the Islamic Finance Task Force launched last year by the British government with the aim of making London a western hub for Islamic finance.
Challenges ahead
Many of the rapid growth market countries face ongoing economic and political instability.
As the era of cheap money ends and the huge monetary stimuli from central banks is withdrawn, growth in these regions may slow down, especially in the banking sectors.
Islamic finance is also less profitable than conventional banking.
The E&Y report finds that shareholder returns are 20% lower as a result of higher costs and operational inefficiencies.
Islamic banks tend to be much smaller than their conventional counterparts, making it hard to achieve economies of scale.
There is also far less standardisation in the products available because of different interpretations between banks and jurisdictions of what is acceptable under sharia law.
Islamic banking products are also more complex which adds to their cost.
The importance of face-to-face relationships means the branch network is important, but has resulted in an under-development of phone and internet banking.
And, Islamic banks are relatively poor at cross-selling with an average of 2.1 products per customer compared to 4.9 products per customer in conventional banks.
When regulators in Qatar acted to prevent banks from offering both Islamic and conventional banking products forcing a choice between the two, many decided to close their Islamic banking operations in the country.
Islamic banks have tremendous scope to keep growing within the niches, compatible with sharia law and in certain parts of the world. But, unless they face up to these challenges, they might struggle to take the conventional banks head on.
(BBC News Business/18 July 2014)
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Prudential sees big potential for takaful business in Sarawak

KUCHING: Prudential Assurance Malaysia Bhd (Prudential) foresees huge opportunities for takaful business to widen its reach throughout Sarawak.

A Prudential senior agency mananger said the local market is widely untapped and believed that the increasing level of awareness on standard of living and quality healthcare will attract people to obtain more protection services.

Firdaus Lau Abdullah, a senior agency manager with Prudential said, “For the whole Malaysia, there are still a significant percentage amount of people who do not have insurance.

“A statistic which was conducted not so long ago revealed that there are just 11 per cent insurance penetration rate throughout Malaysia.

“Therefore, the remaining 89 per cent are still in need of insurance and the market is huge.

“In Sarawak, there are a lot of Bumiputera and they will require insurance services for instance takaful as the standard of living keeps going up and people require better healthcare services,” he told The Borneo Post when interviewed recently on the sidelines after Prudential’s carreer talk held here on Saturday.

He added that Sarawak is a land of rich resources which enables its economy to grow strongly.

He explained that as the economy grows, people will need more insurance as a solution for retirement purposes or financial benefits against illness.

Firdaus who hails from Kelantan and comes here from Kuala Lumpur, also observed that there are more private hospitals being built compared to the last time he visited Kuching several years ago.

He noted that the rising number of private hospitals showed that people wants better and quality healthcare for their families and loved ones. He added, insurance is one of the services which can reduce the financial burden of the people in the event that they are struck with certain illness.

Meanwhile, Firdaus pointed out that Prudential BSN Takaful Bhd’s (PruBSN) business has a leading market share in the takaful industry.

His view was in line with PruBSN which had recently reported that its new business increased 15 per cent to RM265.7 million on an annual contribution equivalent (ACE) basis for the financial year ended December 2012.

PruBSN added that the results has confirmed the company as the leading takaful provider in Malaysia with a market share of 28.4 per cent.

PruBSN noted that its strong financial performance in 2012 was achieved due to the strength of Prudential’s franchise in Malaysia, its robust multi-distribution channel strategy and new product launches.

On a side note, Firdaus’s wife, Norlia Hassan is one of the top agents for Prudential Malaysia and was awarded the top Bumiputera agent for 2010 and 2011; attributable to her strong determination and willingness to live a better life with her family.

She observed that having been in the insurance industry for more than 14 years and gaining numerous awards with Prudential, she followed a good system which include several attributes such as discipline, determination, sincere, sacrifice, structure, persistent, goals setting and willingness to learn.

Norlia revealed that during her earlier days in the industry, she approached approximately 50 to 100 people a day to educate people about the need of having an insurance. Norlia said her inspiration is her children and her aspiration is to have a better standard of living with her family members.

As for Firdaus who has more than 19 years of experience in the insurance industry, he said he considers success as living financially independent and having a balanced life in work, spiritually and in social life.

(Borneo Post Online / 21 July 2014)
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Ramadan Question: How much Zakat Al Fitr?

At the end of the Month of Ramadan every Muslim individual bears the responsibility to donate Zakat al Fitr, an amount of money specified by the local religious authorities to be donated for the cause of charity.

The amount of this donation in the UAE has been assessed to be Dh20 for the year 2014, confirmed a mufti speaking on the Fatwa toll free number of the General Authority for Islamic Affairs and Endowments (GAIAE).

This amount should be referred to whenever the individual has performed his fast in the UAE, he added.

If a person has performed his fast in a foreign country, the amount determined in that country should be taken in to account. If the person carried out some of the fast in the UAE, and then traveled to complete the fast in another country the second country should be referred to for the determination of the amount.

This being said, the destination of the donation can be anywhere, as long as it serves a poor Muslim person. If people prefer to send Zakat al Fitr to their home country they are permitted to do so, explained the mufti.

It is important to send the money on time so it will reach the destination before Eid al Fitr, he added.

If the fast was performed in the UAE and the donation will be sent to another country, the amount should be Dh20.

In order to donate Zakat al Fitr in the UAE there are many channels, such as the various charity organisations in the country.

But if the zakat is paid to a poor individual Muslim this is also accepted, the mufti concluded concluded.

(Emirates News / 18 July 2014)
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