Thursday, October 27, 2005

(9) How the West Came To Run Islamic Banks

Giants like Citigroup dominate the sector, through Islamic subsidiaries and hired Sharia scholars.
By Owen Matthews

Newsweek
Oct. 31, 2005 issue –

You're a pious Muslim with a few million in oil dollars to invest. So would the perfect Islamic bank for you be Citigroup, perhaps? HSBC?

Actually, yes. Giant Western banks—or, rather, their Islamic subsidiaries—are leading the market for financing that complies with Qur'anic laws forbidding lending money for profit, or sponsoring un-Islamic activities such as gambling or smoking. Citigroup's Bahrain-based Citi Islamic subsidiary was first into the market in 1996, and now leads the pack with deposits of more than $6 billion. Citi and at least 10 other Western majors dwarf the biggest locally owned rival, Al Baraka of Bahrain, worth a little more than half a billion.

Westerners are drawn in by oil money. The Middle East is enjoying its fastest growth in a generation. According to Islamic Banking and Finance magazine, there are $265 billion in deposits that comply with Sharia, the law that governs the behavior of Muslims, finances included. That's up 17 percent in the past year, and by almost 10 times in the past decade, according to the U.A.E.'s Sharjah Islamic Bank. Since 1996 Dow Jones has offered indexes of stocks vetted by Sharia scholars. Now there are more than 40 Islamic indexes, and last year Islamic stocks on average outperformed the market by 5 percent.

How did Western banks come to dominate a market predicated on Islamic purity? A generation ago, an Islamic bank was just a simple investment house that, instead of paying interest on deposits, created dividends by buying and renting out property. "Islam forbids making money on money," says Alun Williams, marketing director of the new Islamic Bank of Britain. "But it does allow you to rent, and to trade." Now Western banks are using that template to pioneer Islamic credit cards, Islamic mortgages and Islamic bonds (known as sukuks) that during the past year have financed everything from a $1 billion upgrade of Dubai airport to Pakistani government debt. As growth picks up in the Middle East, more and more Muslim-run corporations find they need sophisticated services, from bond issues to derivatives, that so far only Western banks provide.

The Western banks gain Islamic credibility by hiring top-drawer Sharia scholars to sit on their boards. "The caliber of your scholars is the basis on which these [financial products] are marketed," says Majid Dawood, a London-based consultant on Sharia compliance. Because there are just a handful of financially literate Islamic scholars in the market, most sit on the boards of many institutions and can, says Dawood, command salaries of as much as $88,500 per year per bank. Sheik Mohammed Taqi Usmani, a former Sharia judge on the Supreme Court of Pakistan, sits on the board of Citi Islamic, HSBC, Al Baraka and eight others, and is chairman of the Dow Jones Islamic indexes' Sharia panel.

But the trend toward investing in Islamic funds really took off after 9/11, when many Muslims began bringing their money home from America. Since then, international banks like Societe Generale, BNP Paribas, Deutsche Bank and Standard Chartered have all entered the Islamic banking business. Accounting and consulting firms like Ernst Young are now offering Islamic financial services. The recently opened Islamic Bank of Britain, owned by leading Islamic banks and other institutions from the Middle East, plans to create a retail-banking chain for "average income" Muslim Britons, says Williams.

Customers in Muslim nations are driven to Western banks in part by distrust of their own banks. Prominent failures, such as the 2001 collapse of Turkey's Ilhas Finance dented depositors' faith. In Turkey, the Islamic world's largest economy, the fledgling Islamic-banking sector is lobbying the state to guarantee deposits of up to $36,000, which could in time make Turkey a major player. In Malaysia, where more than 11 percent of deposits are now Sharia-compliant, local houses like Bank Muamalat are working to gain on the multinationals. "Local Islamic banks lack sophistication," says Humayun Dar, an Islamic economist. "Customers are still more comfortable with an international name." Even if the rules are strictly local.

9 Comments:

Anonymous Ayesha said...

Bilal, Well done! I think you have presented a very sensible and realistic basis for discussion. The advice for the Ulema is superb and also done in a very appropriate and polite manner- whether the Ulema take your advice is another story! I personally hope they do... But the issue at hand, Islamic Finance, is the responsibility of all of us in the field- we should all start studying what Islam says about an economic system...

October 25, 2005 1:39 AM  
Anonymous NasK said...

Slmz

I just like to say that it would be great if we can have an Islamic finance system.

The other issue I would like to bring up-- the daral -ulooms teach abt history ,fiqh, deenyat,aqaaid but do they really teach abt politics and finance or even basic social stuff...I believe if these madressa incorporate education with the genaral islamic education --the learners cud be better equip to deal with all walks of life that effets the muslim today. And we can be a proud nation with our own system

October 25, 2005 3:34 AM  
Anonymous Bilal said...

Slmz

Yes, it would be really great- but it can only happen if Muslims educate themselves properly! And by educate yourself, I mean pick up books, discuss with others, every possible means of education- not just what we are used to traditionally…

I think that recently steps have been taken to better equip students from Ulooms with skills needed to exist and progress in this day and age! Change is happening- Alhumdulillah…

October 25, 2005 3:37 AM  
Blogger saaleha said...

well constructed argument.

October 25, 2005 6:04 AM  
Anonymous S said...

Salaams Huzruth

A few suggestions:

1.Starting a Muslim Political Party with Islamic Principles, where the
"politicians" do NOT get paid, except where absolutely necessary and are made a refund of expenses incurred.

2.Organising a world meeting of Ameers where a chief ameer is elected,
who then becomes the Caliph of the Muslim Ummah, wiping out all corrupt, puppet, shaythaani controllers of Muslim lands and resources.

October 26, 2005 12:06 AM  
Anonymous AK said...

Dear Bilal

Assalamulaikum warahmatullah

The engagement below with ulema is encouraging. All the best and lets hope some benefit results therefrom. I wish I could have been part of it but my own search over the years has led me to the conclusion that shariah, which is law based on Allah's revelation, needs to have an effective enforcement mechanism i.e political control. Now whether one achieves this with the bottom-up or top-bottom approach is the subject of intense debate amongst those who share the viewpoint of the need for political control (there are those whose understanding of Islam is such that they don't even recognise the need for political control for us to live as muslims-but lets exclude that discussion for now). My concern is that whether we adopt the bottom-up or top-bottom approach for political control, it does not seem to be a realistic goal in South Africa, but I can't be sure. I am therfore of the opinion that hijrah and jihad are the two prerequisites for achieving this as also exemplified by the Prophetic example. so this is where I am: to find my 'Madina' and my 'Muhammad' to make jihad with! Care to join me???

Salaams
AK

October 26, 2005 12:08 AM  
Anonymous bilal said...

Salaams

Shukran for your response...

I understand your points but don’t agree fully- for each his own:) Looking at the Prophets SAW hijrah from Makkh, a land hostile to Islam that was dampening his efforts, to Medina, a land where he could better organise himself and strategise- when you look at it from that point of view, South Africa seems to be one of the few countries where are unhindered in your efforts. Unhindered from the outside but unfortunately still to some degree from within!

October 27, 2005 12:59 AM  
Anonymous Zubair Habib said...

Slms,excellent work on creating awareness, which inshAllah will lead to constructive efforts. I must however caution that whilst we must do all that is possible to remedy the unfortunate situation our ulama is in, we must not bluntly discredit the institution. In today's world, we all are too eager to throw away reverence for authority,and whilst the desired result is that we empoer ourself with knowledge, a likely outcome is that we disregard ulama, without replacing with anything better.Apathy seems to be our desired natural state,and such independance could well lead to a dilution of Islam (eg i dont go to mosque cos the maulvi's talk nonsense) Also, by damaging the credibility of the institution of Learned Men, even once it has been remedied, there will have to be substantial effort to re-create credibility. A much more favored approach would be to attempt to remedy the situation top-down. Approaching the relevant parties with our concerns, and working side by side to bolster existing establishments rather than fragment our already splintered society and expend resources on fighting within.
From the discussions i have had with people in the traditional Islamic institutions, they are fully aware of the deficiencies, and are taking steps to remedy the situation. People should be awakened and encouraged to approach ulama directly, rather than throw stones.

October 28, 2005 12:19 AM  
Anonymous bilal said...

Slmz Zubair

True- thats the approach thats currently being used: top down...

But somehow it seems as if the whole issue on hand has been sidetracked: Islamic Finance in this country- Something needs to be done urgently to prevent a major debacle happening. And the Ulema need the assistance of professionals in the field to come up with viable solutions!

Problem is not many Muslims have the slightest idea what Islam requires us to do with the knowledge that we have! It seems as if we don’t realise that we will be questioned about how we used the knowledge that Allah allowed us to obtain, for the benefit of the Ummah and for His pleasure…

But we can only go up from here- as a start, if we can start constructively engaging, then we may soon be equipped to deal with any challenges that come our way! InshaAllah…

October 28, 2005 1:32 AM  

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