I was interested by the Asian Development Bank's decision to work with the Islamic Financial Standards Board over a five-year period to "support member countries in legal and regulatory aspects of meeting the IFSB's standards". The reason cited by the ADB is that the majority of the IFSB's membership is located outside of the three countries with the largest Muslim populations (Indonesia, Pakistan and Bangladesh, which are home to only 7 members).
The development of Islamic finance has naturally occurred in countries that have either decided to extensively promote Islamic finance (like Malaysia) or countries where there is a large number of ultra-high net worth Muslims because that is where the profits are likely to be easier to come by. With more resources to be potentially tapped by Islamic financial institutions, it will attract larger institutions that can provide the scale needed for Islamic finance to become large enough to reach the scale where it becomes profitable.
As I wrote in my newsletter (which you can subscribe to on the right side of the blog), the recent decision by HSBC Amanah to leave many of the markets where it operates is a recognition that the bank is so large that many of the markets where Islamic finance exists are not large enough to support a bank of its size (and also move the needle in terms of its profitability).
HSBC noted that although it is leaving 6 of the 9 markets where it offered Islamic banking services (with most post-restructuring business based in either Saudi Arabia and Malaysia), it expects to retain 83% of the pre-restructuring revenues. Included in the markets it is exiting are Bangladesh (it will remain in Indonesia, although with a limited presence), two of the three largest Muslim-majority countries in the world.
Islamic finance exists already in Pakistan, Indonesia and Bangladesh, although these countries represent a small portion of total Islamic finance assets, with no countries appearing in the 9 largest countries (according to data as of the end of 2010 from The Banker, included in the UK Islamic Finance Secretariat's 2012 report). The assets outside of those 9 countries accounts for just $83 billion, 8% of the total Islamic finance industry, even though 570 million people, most of them Muslim, live in these three countries.
It boils down to a simple point. Islamic finance, like conventional finance, is by and large not focused across the wealth distribution, it is targeted at people of moderate or high net worth. And where microfinance has developed to provide financial services to those without significant wealth, there has been limited development of Islamic finance and it has not received much support from the Islamic finance industry. The ADB helping countries adopt IFSB standards will not change this, but by supporting Islamic finance in countries where it is not well developed, and where there is likely to be demand for it, it may provide the governments with greater familiarity with Islamic finance that is a precondition for adopting regulations that could allow Islamic microfinance to develop.
Showing posts with label Bangladesh. Show all posts
Showing posts with label Bangladesh. Show all posts
Tuesday, October 09, 2012
Thursday, January 14, 2010
Islamic finance should focus on poverty; Dubai World fallout, updates
The Senegalese president Abdoulaye Wade says that Islamic banks should fight poverty, including in Africa. In related news, Bahrain became the home of a new Shari'ah-compliant microfinance bank, Family Bank of Bahrain. The bank is based on the Grameen Bank model and is majority (63%) owned by the Royal Charity Organization and the Social Development Ministry, with the remainder owned by Kuwait Finance House, Ahli United Bank, Bank of Bahrain and Kuwait and Ithmaar Bank.
These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.
An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.
The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.
Other News
These two stories illustrate something important that has been somewhat sidelined in the attention paid to sukuk and other institutional forms of Islamic finance. There is a strong social mandate in Islamic finance and microfinance, both within the Gulf and in other countries, can play a part in fulfilling this mandate. It is also clear that there are many things that microfinance cannot accomplish in terms of poverty reduction, but the Islamic financial industry has largely overlooked the role that microfinance can play in fighting poverty and promoting greater economic equality, which is often cited as one of the fundamental reasons for Islamic finance to exist. I will be interested to see how the microfinance bank develops and if any readers of this blog have information about the products it uses, please email them to me at blake@sharingrisk.org.
An article overviews the impact of Dubai World and Nakheel debt problems on the Islamic finance industries. One of the important conclusions to the article is the claim that "One thing remains certain: Islamic institutions were no different than conventional bankers in ignoring the speculative frenzy that took Dubai by storm and incurred massive losses for many sukuk holders." This is an important point because Islamic banks in the GCC have relatively large exposure to the real estate markets. Regardless of the structure used in the financing, whether conventional or Islamic, a steep decline in real estate values had an impact on the ability of debtors to repay their obligations. There may have been aspects of conventional financing markets that accentuated the decline in these investments, but that does not mean that the crisis avoided having an impact on Islamic financial institutions with large real estate exposures.
The Dubai World debt problems may move into a new phase if reports that a standstill agreement is imminent are accurate. The standstill agreement would protect Dubai World from creditor's claims for six months while a restructuring plan is created and agreed upon. The Nakheel 2 sukuk is scheduled to pay a periodic distribution of $10.3 million on January 19, 2010. Meanwhile, Barclay's Capital recommended that sukukholders sell their sukuk because the current trading value exceeds their projection for recovery values of 40 to 50 percent of par.
Other News
- The National newspaper has a long article about the pending merger between Islamic mortgage firms Amlak and Tamweel.
- Bursa Malaysia was the largest location for new listed sukuk with 12 issues totaling $17.6 billion. The first listing occurred in August 2009.
- Australia's government said in a report that Islamic finance should be placed on an equal tax footing with conventional financial services.
- Morocco, which has lagged in Islamic finance, reduced the value-added tax applicable to Islamic financial products.
- Bangladeshi finance company Bank Asia Limited began offering a musharaka financing product. Musharaka is largely underused by many Islamic banks compared to murabaha and ijara.
- A report from Alpen Capital, an investment banking firm, says that takaful will grow by 16.1% in the Gulf during 2010, faster than conventional insurance. The growth in takaful has lagged the overall Islamic finance industry and is far smaller. Alpen Capital estimates that it will be $3.5 billion in the Gulf at the end of 2010. One of the interesting differences between takaful companies and conventional insurers highlighted in the report is that takaful providers are reliant upon a smaller investment universe including real estate and equities in addition to mudaraba and wakala placements with Islamic financial institutions. The lack of sukuk products could limit the growth of takaful if there is another decline in equities or real estate values.
Saturday, June 28, 2008
UK Islamic home finance, sukuk; DIFC CEO calls for standardization; Indonesia plans sukuk in August
The Guardian newspaper in the UK describes in detail the different types of Shari'ah-compliant home financing available in the country. There were a few very interesting facts presented. First, a small minority of customers using the Shari'ah-compliant home financing are non-Muslims; currently about 2 percent of the Islamic Bank of Britain's customers are non-Muslims who turn to Islamic home finance for ethical reasons. Second, and this may provide a way for Islamic banks to broaden their interest beyond the Muslim market, is that in some cases, Islamic home finance is cheaper than traditional mortgages.
Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.
The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.
Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.
The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.
"If you bought a property for £250,000 using a diminishing Musharaka plan from HSBC Amanah, you would pay around £1,553 a month (made up of £1,246 in rent and £307 in contribution payments to increase your share), based on the bank buying 90 per cent and you putting down a 10 per cent deposit. If you took out a conventional two-year fixed-rate loan with HSBC (at 6.29 per cent and with a £799 fee) on £250,000, you'd pay around £1,655 a month over 25 years.". There are of course differences in availability and structure that could negate the difference, the development of cost competitive Islamic home financing is a good thing for the industry as it seeks to expand beyond its current niche role.
Nasser Al Shaali, the CEO of the Dubai International Financial Center (DIFC), commented on the difficulty of operating Islamic finance in regulatory environments premised on only conventional banks operating, but also that the lack of standardization (such as standard, widely accepted fatawa) is hampering the industry's growth. While many countries are anathema to developing parallel regulatory systems for Islamic and conventional banking (as Malaysia has already done), there is still a case for assessing whether regulatory requirements designed for conventional banks are adequate for supporting a sound financial system where conventional and Islamic banks operate side-by-side.
The Indonesian government plans to issue its first sukuk in August and will use an ijara structure based on assets from the finance ministry. A cynical observer might question whether the assets of the finance ministry are Shari'ah-compliant since many activities in the finance ministry surely involve interest such as the also announced ORI005, the fifth retail (conventional) bond.
Meanwhile, Islamic banking continues to develop in Bangladesh but faces challenges in Thailand.
The UK government is "dragging its feet" and is unlikely to issue its first sukuk this year according to Mohaimin Chowdhury, head of legal, Shari'ah and compliance at the European Islamic Investment Bank. Although the difficulties for a sovereign sukuk from a tax perspective are real and the uncertain market conditions create challenges, Mr. Chowdhury feels they could "deal with them quicker". Kitty Ussher, the Finance Ministry is quoted as saying "There's no doubt in my mind that if we can find a way that works for the taxpayers to do it, the benefit to the City of London in terms if prosperity, jobs and expertise will be enormous [however] we just felt that since this is the first time we are doing it, it would be simpler and less risky to sell Treasury bills". Dr. Mohammed Ramady speaks to the situation in the U.K. and U.A.E. regarding the Islamic finance market as a whole in an editorial.
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