Islamic Finance

Islamic Banking in GCC – resilience in the Financial Crisis

From Global Arab Network

The global financial crisis has prompted calls to return to basics and emphasise sound fundamentals. While most of the formerly fashionable financial innovations – such as credit-default swaps, mortgage-backed bonds and single-tranche collateralised debt obligations – took a beating, one segment exhibited remarkable resilience: Islamic banking.

Modern Islamic financial services have been around for more than three decades, but they gained widespread attention only recently, as rising prosperity in the GCC and South-east Asia fuelled demand for financial instruments that avoided inclusion of interest payments, which are forbidden by Islamic law.

Islamic banks, as well as traditional banks that offer Islamic services, have been a part of RAK’s financial scene from the outset. Major regional players such as Abu Dhabi Islamic Bank, Dubai Bank, Dubai Islamic Bank (DIB) and Noor Islamic Bank have active branches in RAK, and the home-grown National Bank of RAK received a licence from the UAE Central Bank to offer sharia-compliant services in 2007. DIB has been especially active, opening a fourth branch in RAK in late 2009 and becoming the official escrow agent for real estate deals via an agreement with RAK Investment Authority.

While the financial sector as a whole recorded historic drops in activity and profit over the last two years, a WTO report on trade levels predicted aggregate asset growth of Islamic banks to reach an impressive 15-20% in 2009 – down from the optimistic 20-30% predicted in 2008, but far from disappointing. Yet despite their strong showing, some analysts warn that Islamic banking, like so many of the financial vehicles that enjoyed soaring popularity over the past decade, is attracting investors with false impressions of lower risk.

Islamic banking is commonly seen to have two advantages over conventional banking. The first is a perception that Islamic banks are bound to a higher moral standard: they will not take on irresponsible amounts of risk or pay outsize bonuses to their top bankers. The second is that earnings come from identifiable assets, not opaque combinations of derivatives and securities. Because Islamic banks cannot make money through interest, they rely on ties to tangible assets such as real estate and equity, charging “rent” instead of interest.

Until recently, this was seen as a strength of the sector. However, the relative volatility of the real estate and equity markets, especially in the UAE, has created challenges for Islamic banks. The near-default of Dubai World’s Nakheel sukuk was only the most high-profile in a series of events that called into question the supposed safety of Islamic financial products.

An assessment of Islamic financial services may lead the investor to question their viability. The changes needed to make funds sharia-compliant – who buys what, who rents what – lead to a proliferation of transactions, each with its own cost. The frequent reliance on real estate as an underlying asset subjects Islamic financial products to the unpredictable swings of the real estate market. And, in the absence of any overriding regulatory body, the exact definition of sharia-compliant is difficult to pin down. Perhaps most importantly, a standard course of action in the case of a default has not been established.

Yet despite these risks, public and private investors are still creating high demand for Islamic financial services. RAK’s government unveiled a $2bn sukuk programme in 2008, with a preliminary issue of Dh1bn ($272m) in May 2008 and a heavily subscribed Dh1.47bn ($400m) issue in the summer of 2009. The strong investor response indicates the RAK government’s credibility among international investors is solid. And while historically sukuk issues have attracted the most attention within the GCC region, over half the stakeholders in the 2009 issue are from outside the region: 34% of investors are in Asia and 19% in Europe.

While many of the most well established Islamic banks are based in the UAE, continued demand shows that there is still space for new players in the market. Greater competition should stimulate efficiency and growth in 2010 and beyond, marking the rise of Islamic banking as no fleeting fashion. For the sake of investors, it is to be hoped that Islamic banking regulation rises along with it.

To learn more about Islamic Finance, please visit our website


9th February 2010

KUALA LUMPUR (Reuters) – Islamic banks are expected to move more deeply into riskier, equity-based financing as they seek alternatives to controversial debt mechanisms like the tawarruq, a prominent sharia scholar said on Monday.

Sharia banks have been reluctant to adopt equity models like the mudaraba to avoid taking on more risk, but there is growing pressure for the industry to reduce its reliance on debt instruments.

The slow shift towards more risk-sharing structures is also expected to expose investors to greater uncertainty, with returns on investments based on performance rather than guarantees.

“Banks must be ready to take extra risks, do extra jobs, expand their role rather than just provide credit,” Mohamad Akram Laldin told Reuters ahead of the Reuters Islamic banking summit from Feb 15-18.

“Now the emphasis is on real economic activities, rather than some sort of artificial arrangement that is being done,” said Akram, who advises HSBC’s Islamic banking arm and Malaysia’s central bank, which oversees the world’s largest Islamic bond market.

He estimated that less than a tenth of Islamic financing worldwide is currently equity-based.

Some sharia scholars see equity financing as a purer form of Islamic finance, as opposed to some debt instruments which have been compared to interest-based lending.

Under mudaraba, a bank will provide capital for a project while the entrepreneur will manage the deal. Profits are split according to a pre-determined ratio and the bank will bear any monetary losses that arise.

Takaful, or Islamic insurance, and third-party guarantees can be used to mitigate Islamic banks’ risks in equity structures, Akram said.

Some Islamic banks in the Middle East are extending equity-type financing by setting up construction companies that build and sell property rather than giving straight financing to builders to develop projects, he said.

Islamic bankers have been under pressure to use more equity structures after an influential group of clerics questioned the use of the popular tawarruq munazzam financing instrument.

The OIC Fiqh Academy said last April tawarruq munazzam was a “deception” which contained usury, calling into question deals in a market estimated to be worth over $100 billion.

Tawarruq, the mechanism used to execute commodity murabaha transactions, involves the sale of an asset to a purchaser with deferred payment terms. The purchaser then sells the asset to a third party to get funds.

Tawarruq munazzam is similar although the transactions are executed through banks.

“From the Islamic law perspective, (commodity murabaha) is allowed but that is not the ideal,” said Akram. “It does not really help in creating real economic activities. Basically you are giving cash.”

But tawarruq would still be used for now as the industry’s heavy reliance on the structure means that “many banks will close down” without it, he said.

Scholars are now pressing for the application of tawarruq mundhabit, where banks are required to follow the structure’s guidelines, Akram said.

To hear more about Islamic Finance and how to develop Shari’ah-compliant products – visit our website


January 28 2010

India is planning to overhaul regulation of its financial system to attract investments from the Gulf and to encourage its largely unbanked Muslim population to save money in a way compliant with their religion, a senior government adviser has said.

K Rahman Khan, deputy chairman of India’s upper house of parliament, told the Financial Times that the ruling Congress Party is proposing reforms to the finance ministry, the Reserve Bank of India and Securities and Exchange Board of India to allow for the introduction of Islamic financial services.

“Islamic finance has been growing at a steady pace and it is the most attractive from of alternative (banking) system in the financial sector, it makes no sense for India to exclude itself from this success story,” said Mr Khan.

India, with more than 150m Muslims, has the world’s largest Muslim minority. Many muslins are discouraged from banking with commercial banks by religious proscriptions against interest. Some are wary of investing to avoid financial involvement with gambling or alcohol companies, according to the Institute of Objective Studies, a research group focusing on the Muslim community.

The southern state of Kerala, which has a large Muslim population and many workers overseas in the Gulf, is backing the launch of a company that would offer Islamic banking services, but its opening has been held up by a legal challenge from a former government official who argues the venture would violate consitutional provisions on a religious neutrality.

The Congress party’s report, which Mr Khan said had been endorsed by Manmohan Singh, the prime minister, falls short of supporting the creation of a full-fledged Islamic banking sector at a time when regulator are shy of liberalisation.

Mr Kahn said that the “main goal at the moment is to help set up non-banking institutions that will allow Indian citizens to save and invest in a sharia-compliant manner and to attract foreign direct investment from the Gulf…At a later stage we will be looking into setting up Islamic banking.”

Some western and emerging economies are taking steps to facilitate Islamic investment. China, with 80m Muslims, recently awarded its first licence for Islamic banking to Bank of Ningxia, a move that could pave the way for sharia-compliant financing in the rest of the country.

India is keen to attract a greater share of Gulf investment. The United Arab Emirates is already one of India’s largest trading partners, while about 4.5m Indians work in the Gulf. Political and business leaders in the region have expressed their enthusiasm for larger investments in the Indian economy.

Sheikh Nahyan bin Mubarak al Nahyan, the UAE’s minister of eduction and a leading Arab investor, said:” While countries around the world continue to feel the pinch of the economic downturn, India’s economy is buoyant and in relatively good condition. Investment opportunities abound in this vast, innovation-driven country.”

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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Uncertainty surrounds the growth of the Islamic finance market in 2010, according to a new report, with the sukuk bond market in particular facing tests of its ability to deal with defaults. The report comes as the UK Government and the Gulf Cooperation Council launch separate initiatives to promote the market.

According to a report by the International Financial Services London, an independent organisation which promotes UK-based financial services, the Islamic financial sector “paused for breath in 2009.”

The report said: “Parts of Islamic Finance face particular challenges: some Islamic banks are exposed to the downturn due to the falling real estate market and to liquidity constraints. The sukuk market, despite a 30% recovery in issuance from a low of $15bn (€10.6bn) in 2008 to $20bn in 2009, is being tested by its ability to deal with several defaults.”

Last summer, Investment Dar, the Kuwaiti Islamic investment firm that owns nearly half of Aston Martin Lagonda, defaulted on a $100m sukuk. More recently, Dubai said in November it would restructure its largest corporate entity. Dubai World announced a six-month standstill on its debt, impacting on a $3.5bn sukuk bond issued by real-estate subsidiary Nakheel.

There was also less activity in London, which remains the main western hub for Islamic finance products. Two sukuk listings took place on the London Stock Exchange, following three in 2008 and 12 in 2007, while three funds launched in 2009 compared to 6 in the previous year.

The report follows moves by the GCC and the UK Treasury to support Islamic finance. On Monday, the Gulf Bond and Sukuk Association, or GBSA, was launched in Dubai in order to provide a forum for local bond market issuers in the future.

He said: “Deep, liquid and efficient markets – both conventional and Shariah-compliant – are essential if the Gulf is to fully realise its ambition of becoming a leading global financial centre.” The GBSA will be based in the United Arab Emirates, and will work across the Gulf region.

Last week, the UK Treasury launched the Financial Services and Markets Act 2000 Order 2010 to provide clarity on the regulatory treatment of corporate sukuk, and to reduce legal costs and remove unnecessary obstacles to their issuance.

Exchequer Secretary to the Treasury, Sarah McCarthy-Fry MP, said last week: “This measure is another important step in the development of the Islamic finance sector in the UK and will help to provide a level playing field for Islamic financial products in this country. It is good news for the UK economy and for our Islamic finance industry.”

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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The global market for Islamic financial services is estimated to have risen by 25 per cent to reach $951 billion by end-2008. The Islamic Finance report from International Financial Services London (IFSL) notes that the Islamic finance sector is feeling the influence of the downturn in the global economy with asset growth likely to have pauses for breath in 2009.

Part of Islamic finance face particular challengs: some Islamic banks are exposed to the downturn due to the falling real estate market and to liquidity constraints. The Sukuk market, despite a 30 per cent recovery in issuance from a low of $15 billion in 2008 to $20 billion in 2009, is being testet by its ability to deal with several defaults. A $10 billion loan by Abu Dhabi staved off threat of a potential default by Dubai World on its repayment on the Bakheel $4 billion Sukuk in December. Quality Sukuk issuers continue to attract demand from investors.

Reflecting the economic downturn, there was less activity in London in 2009: with two Sukuk listings on the London Stock Exchange following three in 2008 and 12 in 2007. There were three fund launches in 2009 compared with six the previous year. No further licences to Shari’ah-compliant banks were sought to add to the five established since 2004, and the one independent Takaful operator in the UK ceased to take new business in 2009.

IFSL’s report indicates, however, that the UK’s position as the key Western hub for Islamic Finance remains strong. London’s total of 22 banks offering Islamic finance products, is greater than that of any other Western country. This is buttressed by the UK’s uniquely strong infrastructure of professional support for Islamic finance deals and transactions, including twenty major law firms and the Big Four accounting firms. This has yet to be seriously rivalled, although both Paris and Frankfurt are gradually developing capabilities. The LSE’s 20 Sukuk listings worth $11bn is second only to Dubai.

Duncin McKenzie, IFSL’s Director of Economics said, “The UK is the only western country to feature prominently in provision of Islamic finance and remains in eighth position with assests of $19 billion in a global ranking of Shari’ah-compliant assets by country.”

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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Seven Islamic banks were included in this year’s study which tested the service quality performance of 27 banks across the UAE. Five of the seven Islamic banks included claimed a place within the top 10 performance ranking table.

Islamic banks scored an overall service quality performance score of 81.5% during the study carried out during the entire month of October, 2009. Non-Islamic banks were 3.8% behind, totaling an overall score of 77.7%.

Customer experience amongst the UAE banking sector is definitely improving with customer satisfaction up almost 10% since October 2008, however Islamic banks are setting the standards and excelling throughout all key customer contact methods. Islamic bank’s face-to-face customer service performance at branches has increased from 71% in 2008 to 82.9% in 2009, an 11.9% improvement on last year. Non-Islamic banks have also improved their branch service quality by 9.1% since last year. Both Islamic and Non-Islamic banks have made positive progress within their call centers, managing to increase their overall call center customer service scores by 11.1% and 10.2% consecutively.

Online website enquiries have always been the weakest customer contact channel since Ethos introduced this measure into their UAE Service Quality Bank Benchmarking Study in 2006.

Non-Islamic banking has outperformed Islamic banking consistently in this area until this year. Islamic banks have altered this trend considerably with website enquiry performance increasing from 43.8% in 2008 to 50.4% this year, a healthy 6.6% increase indicating positive measures have been taken by Islamic banks to improve their customer’s online banking experience. Unfortunately, Non-Islamic banks have little to celebrate when it comes to website enquiry performance scoring a total of 46.8% which is 1.9% less than last year.

This year’s Bank Benchmarking Study has definitely revealed measurable evidence indicating Islamic banks are placing high importance on their customer’s satisfaction and continual service quality improvements. Abu Dhabi Islamic Bank has improved their overall score by 13.2% as a direct result of consistent service quality measurement, staff training and awareness activities over the last 12 months. Dubai Bank have achieved second place overall as well as being named this year’s ‘Most Improved Bank’ and ‘Best Shari’a Compliant Bank’. Since 2008, Dubai bank has moved up 19 places from 22nd place, a fantastic achievement.

Speaking about the survey, Salaam Al Shaksy, chief executive officer of Dubai Bank, said:

“The dramatic improvement accomplished by the bank in just 12 months clearly indicates our team’s dedication, commitment and hard work. Every member of the team has worked together to strike the right balance between the twin challenges of business growth and service delivery.”

Robert Keay, Managing Director of Ethos Consultancy also comments, “There is no mistaking Islamic banks are improving their service quality in leaps and bounds. Shari’a compliant banks are extremely competitive within the UAE and great customer service is a must. All Islamic banks included in this year’s study should be pleased with their result.”

Islamic Banks included in the 2009 Bank Benchmarking Study:
* Dubai Bank
* Dubai Islamic Bank
* Emirates Islamic Bank
* Noor Islamic Bank
* Al Hilal Bank
* Abu Dhabi Islamic Bank
* Al Masraf Bank

2009 Bank Benchmarking Study winners:
* Best Bank-Overall: RAKBank
* Best Bank- Visits: RAKBank
* Best Bank- Call Center : First Gulf Bank
* Best Bank- Websites: First Gulf Bank
* Best Shari’a Compliant Bank: Dubai Bank
* Best international Bank: Lloyds TSB
* Most improved Bank: Dubai Bank

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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Mannheim, Germany – Germany’s first Islamic Bank, a unit of Kuveyt Turk Bank of Turkey, is to open its doors in early 2010 in the southern city of Mannheim, an executive confirmed Tuesday. Under Islamic Banking principles, interest on loans is forbidden and money cannot be lent to enterprises that flout Sharia law.
Instead, borrowers must offer collateral and lenders receive a shar of business profits.

The unit will open in March at the latest in Mannheim, a factory city with a large ethnic Turkish population, Istanbul-based Kuveyt Turk bank said. It would seek a full local banking licence for Germany later.

An area newspaper,  Rhein Neckar Zeitung, broke the news. The bank executive, who asked not to be named, said Kuveyt Turk Bank intended to establish further branches in Germany, then in other European nations.

Some German retail bank offered banking advice in Turkish, but walk-in branches with Islamic products would be new in the country.

In Germany, 5 per cent of the 80-million-strong population has a Muslim background, according to Berlin government data.

The Central Council of Muslims, an Islamic group, says its data show three-quarters of  them feel a strong bond to Islamic tradition and at least one fifth are interested in Islamic-approved investing.

The council said it was only a matter of time before German banks also realized there was a domestic retail market for Islamic banking investments, which are usually certified by Islamic scholars who review how they work to ensure they conform with Sharia.

The certifiers also make sure the money is not being invested immorally, such as in gambling or sex, or in enterprises that are obviously on the brink of collapse.

Germany’s biggest bank, Deutsche Bank, runs a major Islamic investment arm, DWS Noor Islamic Funds, in the Middle East and North Africa. A German state, Saxony Anhalt, has raised 100 million Euros internationally via a sukuk, or Islamic bond.

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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Thanks to its ethical low-risk approach Islamic banks have managed to weather the global financial crisis, achieving high growth rates in 2009, a new study has found.

“A conservative approach to risk and close links between the financial sector and real assets has helped shield the sector from the worst of the credit crisis”, Brian Caplen, editor of the Banker Magazine, said in the study cited by Agence France-Presse (AFP).

The study, commissioned bu the London-based magazine and a unit of HSBC Bank, said Islamic finance institutions have overcome the crisis that harshly hit conventional banks.

A financial firestorm swept the US and the world in September 2008, after the demise of Lehman Brothers, one of the Wall Street giants.

It has knocked down many major companies wordwide, causing mounting job losses, falling household wealth and forcing consumers to hold back on spending.

The study attributes success of the Islamic banks to rules that forbid investing in collaterilzed debt obligations and other toxic assets that caused the financial crisis.

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

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets – – not shady repackaged subprime mortages.

Shari’ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreement, or partnerships.

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.


Due to its safety, the Islamic finance industry is building a “solid track record”, on the global market, the study says.

“At the moment there is a great demand for capital guaranteed or capital secured products,”David Dew, Deputy CEO of HSBC Amanah, told Reuters.

The study notes that assets held by Shari’ah-compliant banks or the Islamic unites of conventional banks rose by 28.6 percent ot 822 billion dollars in 2009, up from 639 billion dollars in 2008.

This contrasts sharply with the stagnation in the conventional banking sector.
A Banker’s survey of the top 1.000 world banks published in July showed annual asset growth of just 6.8 percent.

Islamic finance is on of the fastest growing sectors in the global financial industry.
Starting almost 3 decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are goind into Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

To hear more about Islamic Finance and how to develop Shari’ah-compliant products, watch this space

with Warren Edwardes

March 25th & 26th, 2010

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