Tag Archives: globalization

Why the Day of Judgment is Necessary, and Globalization Doesn’t Work

20 May

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Islamic Banks Relatively Safe During Global Financial Crisis

15 May

 

http://www.ft.com/cms/s/0/4894b482-1d44-11de-9eb3-00144feabdc0.html

 

Islamic finance must resolve inner tensions

By Roula Khalaf

Published: March 30 2009 18:22 | Last updated: March 30 2009 18:22

A small idea is developing into a big hope in the Middle East. It is that the answer to the global financial crisis lies in Islamic finance.

Proponents of the $800bn industry argue that the prohibition on dealing in interest has saved Islamic institutions, preventing them from investing in all the dubious structures that have brought down high-flying international institutions.

“But I’m pleasantly surprised. The inquiries we’ve been receiving are numerous,” he says.

On the surface, the story of Islamic banking as a haven in a world torn by financial mayhem is an attractive tale. But is it more than what one analyst describes as “good marketing”?

To be clear, many of the Gulf’s Islamic banks have not been immune to the financial crisis – the liquidity squeeze in the region has put pressure on these banks just as much as their conventional counterparts. The volume of sukuk, or Islamic bonds, has dramatically declined, though predictions abound that it will take off again later this year.

But it is true that Islamic banks have been relatively protected because they had no exposure to securitised debt-based assets.

This fortunate condition, however, may be due to the immaturity of the industry. The financial wizards who flocked to Islamic banks in recent years had not yet engineered the synthetic structures that would pass muster with sharia (Islamic law) scholars, whose job is to sign off on the probity of products.

As Emmanuel Volland, analyst with Standard & Poor’s, the rating agency, says: “Islamic banks were not caught by toxic assets as sharia law prohibits interest. At the same time, you can create and invest in very risky assets and be sharia compliant.”

In fact, Islamic banking is all about taking risk. Depositors keep their money in profit-sharing accounts and so, in theory at least, they participate in both the profits and the losses of the banks. In practice, however, banks have consistently given depositors returns that are on a par with the interest rates that conventional banks deliver.

Now, as their profits decline, banks are dipping into “profit equalisation reserves” to keep depositors satisfied. But they will face a dilemma if the economic downturn continues. Devout Muslims have increasingly migrated to Islamic banks in recent years, but will the trend survive if some of them start losing their money?

Islamic banking has always struggled to balance the pressure to safeguard deposits against the need to abide by religious principles. Now the balancing act is more difficult to manage.

Last year a leading sharia scholar questioned a popular type of sukuk that promised to pay back the face value of the bond at maturity or in case of default. The scholar argued – and others had to agree – that this guarantee ran counter to the spirit of Islamic finance, which stipulates that risk must be shared.

For those who closely watch the industry, there are more pressing concerns. As a recent S&P report noted, because of a lack of liquid sharia-compliant asset classes, some Islamic banks invested in equities, exposing themselves to the correction of recent months. The leading risk today, however, comes from the exposure to the real estate market. The rating agency estimates that this amounts to 20 per cent of total loans.

When the short-term risks and the longer-term uncertainties are put together, the outlook for the Islamic finance industry looks less rosy than its supporters claim.

It may have been lucky so far, and perhaps it will learn lessons from the troubles of conventional banks. But Islamic bankers will also have to think harder about how the industry can develop, and how it can resolve the tensions within.

 

 

 

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/Business/10-Feb-2009/Islamic-banks-less-affected-in-global-recession

 

Islamic banks less affected in global recession

Published: February 10, 2009

LONDON (APP) – Islamic banks have been less affected than many conventional banks in the current global recession as they are prohibited from activities that have contributed to the credit crunch such as investment in toxic assets and dependence on wholesale funds.

The International Financial Services London report notes that the industry has felt the influence of the credit crunch and downturn in the global economy with Sukuk issuance being more than halved and the fall in the value of equity funds.

In 2007, the global market for Islamic financial services rose by 37% to US $ 729 billion but by 2008 the industry began to feel the impact of the credit crunch as it enveloped the globe.

Nevertheless, London has been consolidating its position as the key western centre for Islamic finance in 2008. Two Islamic banks, Gatehouse Bank and European Finance House, have been granted licences bringing to five the number of fully Sharia compliant banks in the UK .

Principal Insurance became the first Shariah compliant independent company authorised to offer Takaful to UK residents. In capital markets, four new exchange traded funds and two new equity funds were launched.

IFSL’s report indicates that the UK ‘s offering includes a total of 22 banks, far more than in any other Western country. Professional services are provided by 18 law firms and the Big Four accounting firms.

A cumulative total of 18 Sukuk issues raising $10bn have been listed on the London Stock Exchange, second only to Dubai. With 55 institutions offering educational and training products in Islamic finance, the UK has more providers than any other country worldwide.

Duncan McKenzie, IFSL’s Director of Economics said: The UK has benefited considerably from supportive government policies intended to put Islamic services on the same footing as conventional services. Evidence of London’s growing role in Islamic finance is shown in the UK being the only western country to feature prominently, 8th with assets of $18bn, in a global ranking of Sharia compliant assets by country. Added Sir Andrew Cahn, UK Trade & Investment’s Chief Executive Officer:  Despite its origins overseas, Islamic finance has found a natural home in the UK. Though no sector is immune to the global financial crisis, Islamic finance has shown great resilience. It is important we continue to work with our Islamic finance partners to maintain our position as the leading western centre for Islamic finance service providers.