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Islamic banking escapes global financial crisis

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  • Islamic banking escapes global financial crisis

    KUALA LUMPUR, October 20, 2008 -- Islamic banking has largely escaped the fallout from the global financial crisis, thanks to rules that forbid the sort of risky business that is felling mainstream institutions.

    But experts say that because of its heavy reliance on property investments and private equity, the booming 1.0 trillion dollar global industry could be hit if the turmoil worsens and real assets start to crumble.

    "In the current financial turmoil, it is interesting to note that Islamic financing may have prevented a majority of the mess created by the conventional banking and financial institutions," Kuwait Finance House said in a report.

    "The outlook for Islamic financing is bright and will likely take the lead in terms of providing funding for major projects as the conventional banking system reevaluates its business model."

    The rules of Islamic banking and finance - which incorporate principles of sharia or Islamic law - read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets.

    Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling, so highly complex instruments such as derivatives and other creative accounting practices are banned.

    Transactions must be backed by real assets - not shady repackaged subprime mortgages - and because risk is shared between the bank and the depositor there is an incentive for the institutions to ensure the deal is sound.

    Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

    "Islamic banking has, thus far, remained positive, despite the current challenging global financial environment," said Zeti Akhtar Aziz, the central bank governor of Malaysia, which is Southeast Asia's leader in Islamic banking.

    Zeti said this month that because of the slowing global economy, plans for Islamic "sukuk" bonds had been postponed or scrapped by companies including Kuwait's Abyaar Real Estate Development Co. and Malaysia's Perisai Petroleum.

    And Jennifer Chang, a partner at Pricewaterhouse Coopers in the Malaysian capital Kuala Lumpur, said that given the extent of the global crisis, Islamic banks may suffer damage despite their strong position.

    "Islamic banks, especially in the Middle East, got heavily into private equity and real estate investments, and a lot of loans may be backed by properties. So if the property market goes down, there will be an impact," she said.

    "If a borrower is not able to pay then the bank will foreclose and the question is -- can you sell the property in the market and at what value? These are issues which all banks can face."

    There have been calls for the conventional banking industry to take a leaf out of the book of Islamic finance, which also shuns investments in gaming, alcohol and pornography in favour of ethical investments.

    Influential Sunni cleric Sheikh Yusuf al-Qaradawi earlier this month called on Muslims to take advantage of the turmoil to build an economic system compatible with Islamic principles.

    "The collapse of the capitalist system based on usury and paper and not on goods traded on the market is proof that it is in crisis and shows that Islamic economic philosophy is holding up," said the Egyptian-born, Qatar-based cleric.

    In recent years the sector has broken out of its niche and been embraced by mainstream banks. As well as basic bank deposits and investment accounts, it has expanded into areas including equity funds, bonds and Islamic hedge funds.

    Abhishek Kumar, a senior research analyst at Financial Insights, a company under market research and analysis firm International Data Corp (IDC), said recent events may further boost the sector.

    "More and more institutions will be interested in providing Islamic services to diversify their risk portfolio," he said, while warning that in the current financial storm there were no absolutely safe harbours.

    "We're not really sure what the real extent of the impact is, and whether we've passed the worst of it or not, But the extent is not going to be as bad as in the mainstream sector," he said.

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    • #3
      Akram Belkaïd:

      November 7, 2008 -- The suggestion that Wall Street should adopt the rules of Islamic finance might surprise, or even irritate, some people. But there is one very simple reason why the idea is under serious consideration around the world: the fact that this form of finance, now worth more than $400bn, prohibits interest charges which may make it more resistant to the damage caused by subprime mortgages and speculation on the derivatives markets.

      During Pope Benedict XVI’s visit to France in September, an unexpected editorial by Vincent Beaufils, in the French weekly Challenges, tackled the issue head on. The magazine’s editor pointed out that at a time when the world was undergoing “a financial crisis that has swept aside every sign of growth, we would be better reading the words of the Qur’an than those of the pontiff.” He continued: “If the bankers who are so desperate to profit from equity capital had shown even the slightest respect for sharia principles, we wouldn’t be in this mess.” Beaufils ended by praising bankers from the Gulf “who refuse to compromise a sacred principle: money must not produce money” - a principle translatable, in modern financial terms, as: “Any credit must be matched by clearly identified assets.”

      The editorial has spread across the internet in various languages, often accompanied by the observation that Islamic banking remains subject to safeguards that international finance abandoned in the name of deregulation. Several Arab television stations, including Al-Jazeera, devoted special programmes to the theme, in which they speculated about the possibility of a flow of savings from non-Muslim countries to Islamic financial institutions. But the Central Bank of Bahrain, the world centre of Islamic finance, remained cautious: “The reason the region’s banks have avoided the subprime crisis is because they lack the technical and human resources to invest in products of this type.”

      Nevertheless, one French banker working in Dubai expected Islamic finance to take advantage of the crisis and expand in the West: “In countries with significant Muslim communities, the current crisis will give Islamic banks a marketing advantage... They are already promoting the fact that their businesses are sharia-compliant; now they will begin to emphasise how they avoided the deregulation of the financial system.”

      Not that the sector is immune to accidents. During the 1990s, the spectacular collapse of Islamic banks in Egypt halted their development in Muslim countries. And one Tunisian banker, who views the establishment of such banks in his country with extreme suspicion, recalled that the International Monetary Fund (IMF) had sounded the alarm on several occasions, calling upon them to be more transparent and to observe standard international accounting and prudential practices.

      Other experts are concerned about the increasing sophistication of the investments offered by Islamic banks. In order to get round the prohibition on interest, these products are often tied to tangible assets like property or raw materials – volatile sectors, targeted by speculators, which could undermine the funds that depend upon them.

      But such reservations are unlikely to halt the rise of Islamic finance. Crisis or no crisis, more than 10 major conferences on the topic are planned in Europe and North Africa over the next few months.


      • #4

        DUBAI, February 6, 2009 -- More than half the building projects in the United Arab Emirates, together worth 582 billion dollars or 45 per cent of total value, have been put on hold amid the global financial crisis, a study said on Thursday.

        The number of projects suspended is 52.8 percent of the total but the ones which are ongoing have a greater combined value of 698 billion dollars, according to figures published by the Dubai-based Proleads market research company.

        The study put the total value of construction orders in the oil-rich state at 1.28 trillion dollars.

        Proleads cast doubt over the completion timetable of real estate developments scheduled to be ready in early 2009.

        "While numerous real estate projects are scheduled for completion in early 2009, the rate at which projects are being completed has slowed down," the market search group said.

        Yet more projects may be deferred in 2009 in the real estate sector, which represented in mid-January 84 percent of the total value of construction orders, but suspensions will be fewer among infrastructure schemes, it said.

        The study said the projects which are continuing indicate that the UAE economy is still doing better than other economies hit by the global financial crisis.

        "To put it into perspective, the 698 billion dollars of continuing work we are reporting is almost equivalent to the latest stimulus package proposed for the United States," said Emil Rademeyer, director of Proleads Global.

        "The UAE may no longer be the land of milk and honey but it is still in a far better position than most," he said.

        Proleads said that a frenzied real estate sector in the emirate of Dubai led to five-years of unrelenting growth in the UAE construction industry, but the global financial crisis has cast its shadow.


        • #5

          Vendredi 6 Février 2009 -- Des projets de construction totalisant 582 milliards de dollars ont été gelés aux Emirats arabes unis en raison de la crise financière mondiale, selon une étude publiée jeudi * Dubaï. Des grands projets, dont le coût total est estimé * 698 milliards de dollars, sont en revanche en cours de réalisation dans ce riche pays pétrolier, selon cette étude élaborée par le centre de recherche Proleads basé * Dubaï.

          Le secteur immobilier a connu un boom sans précédent ces dernières années aux Emirats arabes unis, un pays affecté par la crise financière mondiale qui a conduit * un manque de liquidités et * un durcissement des conditions d'octroi des prêts bancaires.

          Un responsable de la Chambre de commerce d'Abou Dhabi, capitale des Emirats arabes unis, avait averti en décembre que jusqu'* 45% des employés du secteur du bâtiment pourraient perdre leur emploi en 2009 en raison de cette crise. L'émirat d'Abou Dhabi a annoncé mercredi qu'il allait injecter plus de 4 milliards de dollars (3,1 milliards d'euros) dans le système bancaire pour faire face aux effets de la crise mondiale.

          L'Etat des Emirats, membre de l'Opep, a été frappé par la chute des cours du brut et la récession mondiale, mais ses dirigeants ont affirmé que l'économie de ce pays était en mesure de surmonter la crise.


          • #6

            Samedi 12 Septembre 2009 -- Si les banques islamiques ont été épargnées et avaient continué * enregistrer des bénéfices, même au plus fort de la crise financière mondiale, c’est parce qu’elles sont des «banques éthiques». Tel a été, en substance, le résumé de l’exposé de l’expert international Lachemi Siagh sur le thème «L’impact de la crise financière sur les banques islamiques». Un événement organisé mercredi soir au Sofitel d’Alger, * l’initiative de la chambre algéro-allemande du commerce et d’industrie (AHK). Rappelant les causes et les manifestations de la crise dont notamment la récession mondiale, les faillites et les pertes de millions d’emplois, les nationalisations de banques par des pays considérés comme les «champions du libéralisme» tels la Grande-Bretagne ou les Etats-Unis, M. Siagh a relevé que la finance islamique a été épargnée. «À peine si elle a été affectée par le ralentissement de l’activité économique», a-t-il toutefois tempéré, expliquant que «les causes sous-jacentes * la crise n’ont pas eu d’effets sur la finance islamique». Pourquoi ? «Parce que le paradigme des banques islamiques est différent de celui des banques conventionnelles», a-t-il dit en exposant ces différences entre les deux modèles. D’abord, «l’intérêt est le moteur de l’activité bancaire classique et le fondement de l’intermédiation bancaire. Or, les opérations bancaires islamiques ne doivent en aucun cas, de façon directe ou indirecte, comporter une rémunération fixée au préalable et assimilable * l’intérêt ou «riba», le Coran interdisant formellement les revenus provenant de l’usure ou «riba», note le président de la revue Strategica finance. Ensuite, les banques classiques usent d’une «spéculation éhontée et proposent des produits financiers exotiques très complexes et risqués pour l’investisseur». Par contre, souligne encore Lachemi Siagh, «la doctrine économique islamique rejette toute forme de spéculation ou gharar», expliquant que celui-ci est, selon la charia, «la transaction qui comprend un élément d’incertitude relatif soit * l’objet, soit au prix, soit au délai dans lequel il s’exécute». Le conférencier a également évoqué le filtrage exercé par l’investisseur islamique qui refuse de mettre son argent dans toutes les activités prohibées par l’islam. Il en est ainsi de l’alcool, de l’industrie porcine, des jeux de hasard, des services financiers conventionnels comme les banques et les assurances, des produits spéculatifs et leurs dérivés, de l’industrie de l’armement, et de la pornographie», énumère M. Siagh. L’expert en finance a également décortiqué les points relatifs au ratio d’endettement ou * celui des liquidités qui ne doivent, pour chacun des deux, «jamais être supérieurs * 33%». En plus des différences dans les critères d’octroi des bonus et rémunérations et dans les mécanismes de régulation entre les deux systèmes bancaires, le conférencier a mis en évidence la différence dans leur système de gouvernance. Pour M. Siagh, «les dérives de l’économie néolibérale et financière nécessitent de rechercher d’autres voies pour la conduite des affaires», et la finance islamique peut, selon lui, constituer une alternative.


            • #7

              ALGER, Jeudi 12 Novembre 2009 -- Un forum sur la finance islamique en Algérie s'est tenu mardi * Alger en présence des professionnels des secteurs bancaire et financier. Les différents intervenants ont relevé, lors de cette rencontre, que la finance islamique en Algérie est encore * un "stade embryonnaire" puisque sa part dans l’ensemble du système financier national stagne autour de 1% malgré son introduction depuis 1991 dans le paysage bancaire national. Selon les explications données par le PDG du bureau de conseil financier "Strategica Finances", Hachemi Siagh, la loi sur la monnaie et le crédit autorise, certes, les opérations d’investissement et de commerce conformes aux préceptes de la loi islamique (charia) mais ne les a pas clairement définies en tant que catégorie spécifique de financement.


              • #8

                BRUSSELS, November 22, 2009 (KUNA) -- A financial firm in Luxembourg has developed a concept combining some of the modern financial techniques with the principles of Sharia (Islamic law) to design a new type of investment set up which it has named "Imtiaz". "Islamic finance is an opportunity for the world to develop a new ethical approach in financing a variety of projects and, definitively, in encouraging entrepreneurship," Jean-Paul Letombe, Managing Director of the firm Otim Business Solutions, told KUNA in an interview. He explained that the turmoil in conventional finance was big enough to "force us to reconsider what we did and how we did it for many years". "Increase of regulation should help but the best of all would be to change in our minds the way we see things, and to adopt new and better practices in designing and running financial products," he said.

                Letombe was in Brussels to attend a conference on Islamic banking held last week."Here is the point where we should consider Islamic finance as a large part of the answer, especially if we focus on its foundations rather than just on the technical content of its contracts," said the European finance expert. "With the generous help of people in the Middle East, we have discovered Islamic finance by learning first its foundations and holy values, and next by looking through the different contract types," he stated. "Progressively we got a better understanding, and when we got enough confidence we humbly combined some of the financial techniques already in our hands with the principles of Sharia, to design a new type of financial product that we named Imtiaz," Letombe added.

                Imtiaz is a product involving investors, a financial company, an engineering company, and a state-owned company for a period between 15 to 30 years, and by using the "concession principle" (Imtiaz). In essence, one or many investors can collectively invest directly into the development of an industrial project where a nominal production can be estimated for example typically in a, but not limited to, power/water/vegetable plant. Under the concept, the design, development, operating and maintenance of the project is managed by the engineering company acting as a Mudarib. Letombe says Imtiaz has the potential to deliver high returns (six percent to 15 percent and eventually a bit more) without the use of any leverage, speculation, or complex structures. "Imtiaz will never put excessive pressure to maximize returns to repay debt, because there is no leverage at all. We are open to share and to refine our Imtiaz concept with those Islamic financial institutions that may be interested in the subject," he told KUNA.


                • #9

                  PARIS, Mercredi 3 Février 2010 -- La finance islamique, qui a bien résisté * la crise financière mondiale, devrait maintenir sa croissance soutenue en 2010, a prévu l'agence de notation Standard and Poor's (S&P) dans une étude publiée lundi. "Nombre d'institutions financières islamiques semblent avoir été préservées de la crise financière mondiale, ce qui est probablement attribuable, selon nous, au fait que les principes de la loi islamique interdisent les intérêts", estiment les analystes de S&P. Ces principes de la loi islamique (Charia) auraient ainsi dissuadés les banques islamiques d'investir dans des produits financiers complexes qui étaient * l'origine de transmission de la crise financière.


                  • #10

                    Lundi 31 Mai 2010 -- La banque Zitouna est la première du pays * répondre aux exigences de la finance islamique, qui interdit l’intérêt et la spéculation, et implique une responsabilité sociale. Disposant d’un capital de 19 millions d’euros, la banque compte attirer les investisseurs étrangers. Agréée en 2009, la banque Zitouna, dernière-née du système bancaire tunisien, a ouvert ses premiers guichets vendredi dernier. Ce nouvel établissement dirigé par Abou Hafs Amor Najaii possède une particularité : il est spécialisé dans la finance islamique. C’est une première en Tunisie où aucune des 21 banques de détail n’a encore choisi cette approche. «Dans un contexte de crise, la finance islamique a été identifiée comme une alternative crédible et sûre, a expliqué le secrétaire général de la banque, Hichem Ben Fadhl, au journal français le Figaro. Des personnes recherchent des produits financiers conformes * leurs principes. Or, il n’existe pas encore d’offres de ce type en Tunisie.»

                    La finance islamique interdit l’intérêt, la spéculation et implique une responsabilité sociale de l’investissement, l’incertitude est proscrite, les contrats sont stables dans le temps. Les profits d’une opération donnée sont partagés entre la banque et son client. Par ailleurs, les placements dans les jeux de hasard, le commerce des armes, le tabac, l’alcool sont prohibés. Actuellement, une seule des 10 banques «offshore» installées dans le pays est ouverte * la finance islamique, dont le volume d’affaires atteindrait 700 milliards de dollars dans le monde, selon les estimations communément admises. L’une des ambitions de la banque Zitouna, dont Mahfoudh El Barouni préside le conseil d’administration, est de proposer dans un avenir proche aux investisseurs internationaux un produit compatible avec la charia et participant au financement de l’économie tunisienne. La banque dispose d’un capital social de 19 millions d’euros (35 millions de dinars) qui devrait atteindre 54 millions d’euros (100 millions de dinars) l’année prochaine.


                    • #11


                      • #12

                        November 12, 2011 -- For Algerian consumers seeking to avoid interest payments, sharia-compliant mortgages and other loans remain limited by an inadequate legal, institutional, and regulatory framework. An Islamic financing forum held Tuesday (November 9th) in Algiers examined how to satisfy these clients. "The law on money and credit permits Islamic banking transactions and products, including mortgages, because these products don't constitute any breach of the Algerian law, and not because these financial institutions are compliant with the principles of Sharia," said Zoubir Ben Terdeyet of Isla Invest Consulting, which helped organise the conference. Ben Terdeyet confirmed that this financial concept is deemed an important alternative solution, as it includes measures that can curb inflation and avoid financial crises that lead to bankruptcy.

                        Al-Baraka Bank chief Nacer Haidar highlighted the importance of the Islamic banking system in solving the problem financing private-sector businesses. He also emphasised the need to expand the scope of Islamic financing system in Algeria, calling for implementing murabaha (sale on profit) at the level of banks and for using funds to expand production and providing means of work. ''The share of the Algerian banking market doesn't exceed 1% of the total assets circulated around the world," Haider said, adding that measures included in the Islamic banking system would put an end to the tax problems with investments and riba-based practices that cause financial crises. Algerian authorities need to "enact special laws for some Islamic banking products, as was the case with financing through musharaka (joint venture), which complies with the laws and procedures related to investment capital," Haidar said. "In Algeria, 99% of the real estate loans that are granted by banks are based on interest rates," said Abdelkader Beltas, general manager of the Mortgage Refinancing Company. "Although this formula is prohibited in Islam, people continue to borrow money to buy housing units in the absence of alternative formulas."

                        There are four financial institutions operating as per Islamic financial principles in Algeria: al-Baraka Bank, Gulf Bank in Algeria, al-Salam Bank and Salama Insurance Company. However, the share of Islamic banks in the Algerian market is still marginal, not exceeding 1.5%. Public banks control the banking sector in Algeria, where the private banks only constitute 12%. During the discussion of the Bank of Algeria governor's report last October, some lawmakers representing Islamic parties in the parliament raised the question of poor Islamic financing options. One of these MPs, Mohammed Hadibi of the Ennahda Movement, criticised the pressures exerted on banks that operate according to sharia rules in Algeria, compared to the complete freedom given to European banks that operate in country. He also called for implementing the Bank of Algeria governor's obligation by opening Islamic windows at public banks. The government responded to these demands by amending the Law on Money and Credit, after consulting experts in Islamic banking and specialists in the fighs of Islamic sharia. Passed in May 2010, the amendment will take effect next January. It aims to reconcile the current financial system in Algeria and get it closer to the rules of Islamic transactions, especially with regards to interest payments at traditional banks.


                        • #13

                          April 14, 2011 -- Algeria needs legal reforms to encourage the growth of sharia-compliant finance, bankers and business experts concluded at a Monday (April 11th) symposium in Algiers. The El Moudjahid forum attendees stressed that allowing the sector to grow would reduce unemployment and create new businesses. Islamic finance currently accounts for 1% of banking activity in Algeria. Fouaz Sid, a bank clerk working for the Algerian arm of the French bank Société Générale, said he hopes that possible legal changes to the banking system would help to introduce more diversity into financial products. "For this to happen, we'd like to see legal changes being introduced to make every product which conforms to sharia law able to compete with the more traditional products. This would give us a legal footing and encourage us to diversify finance products in Algeria," Sid said. On Tuesday, the chairman of the MSP's parliamentary group, Mohamed Said Boubekeur, called for traditional banks to open counters dedicated to Islamic banking. This "in no way means getting rid of the traditional banking operations currently available, but rather supporting them with another kind of operations which will satisfy sharia law," Boubekeur said.

                          One of the arrangements offered by Islamic financiers to avoid usury is called Murabaha, a purchase and resale contract in which the bank buys a material good from a supplier at its customer's request, and the price at which it is sold on to the customer is based on the cost price plus a profit margin. Other such finance tools include Salam, a purchase contract involving the deferred delivery of goods. For agricultural finance, Istisnaa can be used prior to delivery while lease-purchases can be used for financing long-term projects. Other options include Qard Hassan (a gracious loan), which serves as a loan without interest, usually tied to a debt security instrument. Finally there is Ijarah, a lease-purchase agreement by which a party leases an item for a fixed rent and period. Under these mechanisms, "any financial profitability must be justified by economic profitability," explained Sid.

                          The faltering performance of Islamic finance in Algeria should give way to a more audacious approach inspired by those adopted by key international finance locations, according to Mustapha Bouazza, an MP for the Movement for the Society of Peace (MSP). The law on money and credit "lacked clarity when it came to the activities of the Islamic banks", economist Abdelmalek Serrai said. He blamed delays in reforming the sector on the "dominance of state-owned banks". However, Nacer Haidar, Secretary-General of Al-Baraka Bank, the first one to specialise in Islamic banking products in Algeria, said that his institution's success bore witness to the "flexibility of the Algerian authorities when dealing with Islamic products". "If there is any resistance, then it's not to do with the Islamic products, but it's a characteristic of the financial market in Algeria, which is still lagging behind in terms of product diversification," he said. Algeria has one bank branch for every 26,000 people, compared with one branch per 7,000 people in neighbouring countries and one for every 2,000 in developed countries, according to Haidar. He added that his bank was willing to help fund projects to reduce youth unemployment, provided that they were "economically profitable".