Sunday, April 05, 2009

Liquidity risks in Islamic finance; news from Japan and South Africa

An opinion piece in Reuters discusses the possibility for a $10 billion 'mega Islamic bank' to be launched by the end of the year. The most interesting part of the article to me was a few paragraphs that describe the potential for Islamic banks to 'break the buck' on depositor accounts if they suffer more severe writedowns on the real estate projects they financed. Margaret Doyle explains:
"But investors are taking a risk if they assume that Islamic finance is a whole lot safer than its discredited western counterpart. After all, most Gulf banks are heavily exposed to real estate. As Spanish and Irish banks have found to their cost, it is little consolation to avoid complex U.S. sub-prime debt if you are hammered by a local property bust.

"More generally, Islamic banks have yet to test the central tenet of Islamic banking-that depositors are co-investors who share in the risks that they take on. In practice, like U.S. money-market funds, they strain every sinew to ensure they don't "break the buck", or give customers back less than they deposited.

"But big real-estate write-downs could mean that banks do not have enough to repay deposits in full. That would test depositors' loyalty. And many Islamic banks, like their western counterparts, have lent long. Therefore, if depositors turn away from their local banks, they could face a liquidity squeeze just as acute as when wholesale markets closed to western banks in August 2007.
. The bolded sentence was the focus of an article I wrote for Business Islamica magazine last fall that described a hypothetical banking crisis triggered by writedowns on real estate that led to a liquidity crisis following the departure of many depositors afraid their deposits were not safe.

An article on Zawya has an interview with the head of Japanese financial firm Daiwa Asset Management, which recently became the first Japanese company to offer a Shari'ah-compliant ETF which is currently listed on the exchange in Singapore. The Japanese parliament passed revisions to its banking laws in December 2008 that open the way for Islamic finance companies to operate in the country, albeit only allowing them to use a few types of products now, primarily ijara and murabaha.

There is another article that interviews the managing director of the Islamic banking division of Absa, a bank in South Africa.

Other News
  • The Dubai government completed a $600 million ijara facility to refinance the ijara facility coming to maturity this month for Dubai Civil Aviation. The emirate has had its ratings outlook cut.
  • A British website describes the benefits of Islamic banking to an audience of non-Muslims. The head of the Islamic Bank of Britain is quoted as saying: "The concept of sharing profits is quite appealing to non-Muslims as well as Muslims. Up until recently, when banks were making huge profits, the shareholders were obviously taking a share but the depositors were not. I think that grated with many people. Here, the shareholders and depositors are more linked."
  • The Islamic Bank of Britain is launching its first expansion into the Scottish market. The bank is headquartered in Birmingham and has been exclusively focused on the British market until this announcement.
  • Malaysian-based airline AirAsia completed an ijara transaction with French investors to finance the purchase of new airplanes, the first French-Malaysian Islamic finance transaction according to the article.

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