Monday, February 01, 2010

Islamic finance & SRI, Islamic banking in Indonesia

Islamic Finance & SRI - A new report

Dinar Standard and Dar Al Istithmar released the results of a survey on Islamic finance and SRI where they surveyed 29 Islamic financial institutions (including Islamic windows and non-bank financial companies). The results of the study are well documented and, although the sample size is rather small (not something to fault the organizers for), they describe quite clearly the goals, insights and limitations of the data they present.

The final summary of the study is:
Within its limited sample, it is evident that the majority of IFIs have yet to embrace the concept of financial institution utility to enhance their social responsibility. Financial institutions have the ability to redirect funds from the capital rich to the capital deficient to ensure the redistribution of wealth in the long term.
As an example, one method to efficiently utilize an Institutions infrastructure is by maintaining policy targets for financing to SMEs and micro-finance entrepreneurs in the developing world. Micro-finance and SME finance has continuously proven to be a sustainable revenue stream, subject to appropriate risk management strategies, including portfolio diversification, low concentration risk and stringent credit and social collateral requirements.

[...]

At the same token, IFIs can also invest in particular industry sectors that demonstrate social and/ or environmental impact while providing profitable revenue streams, such as education, healthcare addressing the needy water desalination, waste management etc.
I would encourage everyone to take a look through the individual responses (available from the above link as a PDF).

On the conclusions about microfinance, I address my thoughts on Islamic banks and microfinance just below. With regards to the environmental/social/development investments of Islamic financial institutions, it is heartening to see that there are a majority who have investment quotas on these areas, but there remains limited exposure of these activities which may be a question of these quotas being too low. The current environment for business provides benefits for companies that promote their sustainability-related work (whether it is significant or 'greenwashing') and from the preparation of this blog, I read a lot of the press releases and articles about what the Islamic finance industry is doing and there remains limited visibility about sustainability-related business from Islamic banks. So either they are doing very little or they are not promoting what they are doing.

In either case, there is a lot Islamic finance could gain by grasping the sustainability agenda and promoting their involvement in it, especially in the West. I would be hard pressed to come up with a specific reason to switch to a Shari'ah-compliant financial product and many other non-Muslims (with less understanding of how Islamic finance works) may feel similarly. If Islamic financial institutions demonstrated their concern with sustainability, whether environmental, social or developmental, it would surely attract my interest as a non-Muslim consumer with concern for sustainability (for example, I just moved my banking relationship from a major bank to a local credit union). I think there are plenty of other people who share my views and this creates an opportunity for Islamic finance to expand outside of its natural constituency of Muslim consumers (particularly in the West).

I commend Sayd Farook and Rafi-uddin Shikoh (and all others involved in the report) on a job well done creating a thought-proviking and interesting report.

Islamic banking in Indonesia

I thought this article about Islamic banking in Indonesia was interesting. It describes the limited inflows of money into Islamic banking because of unclear regulations and pervasive corruption, but then points out the Islamic banking industry in Indonesia is more focused on small- and medium-sized businesses and microfinance than Islamic banks in other countries.

Although it is clearly sub-optimal for the Islamic banking system to be constrained by regulatory uncertainty and corruption, the Indonesian example shows that Islamic microfinance and banking focused on small and mid-sized businesses can work. I remember seeing Hans Dieter Seibel present a paper (available as a PDF) on institutional diversity in Islamic microfinance in Indonesia and the challenges in terms of capital adequacy and solvency between different types of Islamic microfinance institutions.

One thing I think is certain is that there is too little focus on Islamic microfinance and its impact as one component in poverty alleviation alongside other forms of aid including zakat and waqf. There is certainly enough smarts in the Islamic finance industry to be able to develop cost-effective Islamic microfinancial products and it would be a natural fit for the industry if some of this knowledge and experience were donated to develop Islamic microfinance without having to have the costs of development incorporated into the financial products and passed along to the end-consumers.

Capitas Group

The Islamic Corporation for the Development of the Private Sector signed a deal with Capitas Group, a U.S.-based company that develops Shari'ah-compliant finance companies. Other companies within their portfolio are the U.S.-based Zayan Finance and Zayan Takaful which provide commercial real estate financing and takaful, respectively. The new company will be based in Jeddah, Saudi Arabia and according to Capitas Group CEO Naveed Siddiqui, "there is a huge demand for mortgage finance in Saudi Arabia and the broader region". With a new mortgage law expected soon in Saudi Arabia, this will probably be the focus of the new company.

Other News

  • Tamweel is considering its options in case the merger with Amlak falls through. The merger has been in the works since 2008 and is expected in the first quarter of this year, but there appears some doubt on the part of Tamweel officials that it is a sure thing.
  • Officials at the Philippines' only Islamic Bank, Al-Amanah Islamic Bank, expect the country to miss the growth in Islamic finance in Asia as it continues to 'refurbish' and 'rebrand' the bank after a capital infusion from the Development Bank of the Philippines. S&P released another report on the future growth of Islamic finance today.
  • The state-owned Islamic Bank of Thailand is planning 55 billion baht ($1.66 billion) sukuk issuance. 5 billion baht would be raised as a local Islamic bond with the remaining 50 billion baht as a sovereign sukuk.
  • During the last year, the "brand value" of Islamic banks grew rapidly. The article about the study from Brand Finance plc did not define how this was measured.
  • In a long overdue change, Kuwait Finance House upgraded its website.

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