Monday, November 21, 2005

(13) Shariah banking products set to rise!

By Sarah Butcher
10 Nov 2005

2006 could be a good year for anyone interested in working with Sharia - or Islamic law - compliant banking products on both sides of the Atlantic.

Recruiters in London and New York say investment banks are showing an increasing interest in the fast growing Islamic banking market. "It's definitely a growing area," says Aiden Kennedy, a partner at Armstrong International in London. "All the bulge bracket banks are looking at moving into it right now."

"Islamic banking is still very much in its infancy," confirms Deborah Rivera, president and founder of search firm The Succession Group in New York. "We're expecting growth in the near future."

Much of the interest surrounds products applying derivatives technology to Islamic- approved contracts which avoid the payment or receipt of interest, forbidden under Islamic law. "There are a lot of fairly vanilla Sharia-compliant products," says Kennedy. "But a number of banks are creating more sophisticated products for the Sharia market in the Gulf States, and for institutions in Europe which are looking to invest in the Middle East."

Deutsche Bank, HSBC, Citigroup, and BNP Paribas have an established Islamic banking presence. In March this year, for example, Deutsche Bank claimed to pioneer the first Sharia-compliant foreign exchange option, allowing Islamic investors to hedge foreign currency risk.

However, anyone expecting a flood of Sharia-compliant hiring is likely to be disappointed. Teams tend to be quite small. A spokesperson for Deutsche Bank in London says staff working on Islamic transactions are drawn from other areas of the bank and don't form a dedicated sharia-compliant division. "We work in a matrix organisation and call upon expertise as required," says a banker working in the Sharia-compliant area of another global organisation.

Kennedy says candidates moving into Islamic banking roles typically have a high degree of sophistication with derivatives products: "There are some very talented people in this space, working at the leading edge of product development. It's a small community, and there is a premium to be earned for working there."

Many of those working on Sharia-related products are Muslim, although this is not mandatory. "We have a few dozen nationalities and every religion from Jews to Christians, Muslims and Hindus in our group," says the head of the Sharia-compliant division of an international bank in New York.

Nevertheless, investment banks' growing interest in Islamic banking is likely to appeal particularly to Muslims as a means of combining their religion and career. That said, one banker of Muslim origin says banks make it difficult to observe religious customs: "In Ramadan you can't take a 10 minute break to eat after sunset, and taking two minutes to pray somewhere in the office is unthinkable. Most people are afraid to say they are Muslim."

My Comments:
Here’s another reason for Muslim professionals to have an in-depth and complete Islamic knowledge of their field- I believe that if Muslims working in the field, fully understand what Islam aims to achieve, we can gradually work towards an economic environment that is truly based on Islamic principles, without having to leave our jobs or take drastic steps...

Thursday, November 17, 2005

(12) Absa boosts new Islamic investment offering!

Source: Mail & Guardian
Date published: 10 November 2005
Summary: Absa claims that they are the first major bank in SA to offer investment products specifically designed to comply with Islamic Shariah law. With the launch by Absa Private Bank of Absa's Islamic Investment Account and Islamic Offshore Investment Account, Absa has chosen to focus on ensuring the highest degree of Shariah compliance and maintaining the quality of the investment product and clients.

Absa says it is the first major bank in South Africa to offer investment products specifically designed to comply with Islamic Shariah law.

It said the achievement helps it to realise its strategic intent to provide banking and investment products to meet the needs of its diverse client base.

Islamic banking products are not new to the South African market, but until now equity investment products were not available from any of the major banks.

With the launch by Absa Private Bank of Absa's Islamic Investment Account and Islamic Offshore Investment Account, Absa has chosen to focus on ensuring the highest degree of Shariah compliance and maintaining the quality of the investment product and client service.

"These are not only the first products in Absa's Islamic Wealth Series, but also the first in a series of lifestyle-tailored offerings by Absa Private Bank. We are committed to managing, preserving and growing the wealth of all our clients, taking into account their financial needs as well as their lifestyle needs," says Zarina Bassa, Absa executive director responsible for private banking.

"This entails consideration of the unique cultural and religious dimensions that influence the management of the wealth of the individual, the family and the business," adds Bassa.

Hassen Sheik Ebrahim, general manager of Private Wealth Solutions at Absa Private Bank, adds that the launch is in line with Absa's mission to be the leading financial-services group serving all of its stakeholders.

"This means respecting the values, customs, beliefs and integrity of all our clients. The Muslim community should have the right to select Shariah-compliant wealth-management products at the institution of their choice without compromising on quality. By selecting Absa, clients have the added benefit of dealing with a large, established bank."

My comment:

What are the thoughts of other Muslim professionals that work in the finance and economics field?

How can we ensure that, given the current developments in the field, the system that Islam ultimately aims to achieve can eventually be realised?

Is it even necessary for other Muslim professionals to be concerned?

Will we ever be held accountable for how we used or even refuse to use the knowledge that Allah has allowed us to obtain in His cause?

Looking forward to your response,

Monday, November 07, 2005

(11) Travelling the wrong road patiently!

TAREK EL DIWANY, a writer on Islamic banking and monetary history, addresses some fundamental conflicts of interest.
Source: Banker Middle East

Several years ago, a teacher of mine was invited to Kuwait to provide a consulting service of sorts to the executive committee of a large Islamic financial institution. On an early fact-finding tour he encountered the institution's senior Shariah scholar, an elderly man who was partly deaf, paralysed on one side, and who had little experience of modern banking and finance. The local bankers portrayed this man as a venerated Shariah scholar, but my teacher immediately recognised him as a rubber stamper - shamefully empowered by his employers when he should have been enjoying a quiet retirement.
To understand how this situation came to pass, we need only delve into the recent past. During the late 1970s and early 1980s, a small number of international Islamic banking and finance organisations came to prominence. Understandably, they were characterised by a narrow product range and in some cases a lack of credibility. For some of these companies, commercial survival came in the form of occasional equity injections from a kindly patron and the incentive to improve business efficiency was therefore reduced. Yet it was argued that faults should be tolerated and the financial lifelines maintained in order to shield the new-born industry from a world of harsh competition. The conventional banking system could not be changed overnight, and the road of transition had to be travelled patiently.
As it turns out, patience has been of little use on this particular journey for the simple reason that we have taken the wrong road to begin with. We have arrived at a financial wonderland in which there exists an Islamic equivalent to almost all the major products of the interest-based sector, with quantitative and qualitative features that are frequently indistinguishable from them. Some have explained this situation by arguing that Islamic banking and finance can only function properly within the context of economic and social policies that are themselves Islamic. They propose that governments in the Islamic world should encourage such institutions as Waqf (endowment), mutual associations, and Zakat (the wealth levy), or at least remove the encouragements that presently exist for proscribed activities (the tax deductibility of interest for example). In my view, the most urgent of these tasks is that the Muslim world reforms its monetary system. An Islamic economy cannot be built upon un-Islamic money, and to know why this is so requires a brief digression into monetary history.

The roots of the problem
The European goldsmith bankers of the seventeenth century are widely seen as the forefathers of modern banking. These men took deposits of gold coins from customers and issued paper receipts in return. Each receipt promised repayment of the underlying gold upon presentation at the bank, and the goldsmith would often charge a fee for his service of safe-keeping. In due course, the public began to trust paper receipts to the extent that they would use them in payment for goods and services among one another. The goldsmiths' paper receipts had, for all practical purposes, become "money". This development was the key to the goldsmiths' future wealth. They gradually turned to society not as safe-keepers of coins but as lenders of money, and when borrowers came to take their loans they would be given not gold coins but newly printed paper. The goldsmith had obtained the ability to manufacture money out of nothing, and charge society interest for the privilege of borrowing it. Loans would be secured against property or other assets of the borrower; collateral that could be seized and liquidated if the borrower fell into trouble. The financing of poorer members of society therefore became the exception from the earliest days of banking practice.
The reason for the lack of profit-sharing in commercial banking emerges when we imagine an economy in which the banking system creates all of the money supply. Here, if a total of 400 units of paper money have been advanced to borrowers on a profit sharing basis, the maximum that all borrowers will be able to repay is 400. No opportunity exists under these arrangements for the banking system as a whole to make a profit. By charging 10% interest on the other hand, the banks may stipulate that 440 is to be repaid in one year's time, thus making the system commercially viable. Such a stipulation leads directly to what is probably the most disturbing feature of the modern monetary system. If the repayment amount at the end of year one is 440, but there is still only 400 of money in existence, where will the extra 40 come from? The answer is that it has to be created, either under the authority of the state, or by the banking system. Given that most of the modern money supply is created by the banking system, it becomes immediately obvious why repayment of yesterday's debt tends to leave society in even deeper debt today. If the commercial banks create sufficient money to repay yesterday's debt we enjoy a healthy or inflationary economy. If they don't, recession or deflation will eventually arise. The former scenario is adopted as a policy target by almost all modern governments, but leads inevitably to an increase in both debt and money supply in the long term.
At a time when education, health and housing services are suffering financial stress in many countries of the world, an almost embarrassing bias in resource allocation towards the banking sector is encouraged by the interest-based monetary system. In August of 2002, Fortune magazine ranked the top 500 global corporations of 2001 by revenue. Taking one example, 33 of those companies were in the UK, and among them were six banking organisations. These UK banks made $20.62 billion in profit during the year. All of the other UK corporations on the list, when added together, made a loss of $0.97 billion. 37 companies on the Fortune 500 were head-quartered in France. Here, the five banks made $7.99 billion profit, and the remaining 32 corporations when added together made a loss of $2.41 billion.

"The society that witnesses the change to interest-free money will recognise the new system as a pillar of true freedom"

To the letter of the law
Today, Islamic commercial banks indulge in money creation just as much as conventional commercial banks. This single sin is sufficient on its own to conclude that Islamic banking isn't Islamic but, as the earlier example demonstrates, it is a sin that requires interest-based lending in order to make it profitable. Though Islamic bankers may not realise it, the business model of interest-based banking is forced upon them and it is putting true profit sharing beyond their reach.
The crop of 'Islamic' mortgages that are now appearing in the UK are a clear manifestation of the fixed rate mentality that now predominates in Islamic banking. In not one of those mortgages does the bank contract to take capital risk. Even in the so-called Ijara mortgage, in which the bank is held to own the property and rent it to the client, arrangements have been put in place to pass capital risk to the lessee. Thus, if the client is unable to keep up with rental payments and the property is repossessed by the bank, the bank has recourse to the client if it realises a capital loss when selling the property on the open market.
One Shariah argument used to justify this recourse is that the client has promised to buy the property from the bank at the end of the lease period, and must therefore bear all of the capital risk should he place the bank at a monetary disadvantage by failing to fulfil that promise. This implies that a promise to purchase (given by the client to the bank) can be used to produce the same commercial risks as an actual purchase. No one should underestimate the implication of this legal position. The doors that it opens in a world of sophisticated arbitrageurs will almost certainly lead to the synthesis of many transactions that are presently prohibited by consensus of the Islamic scholars.
The splitting of conventional interest-bearing products into components that can be replaced with 'Islamic' counterparts is an essential skill which the Islamic bankers have perfected in their search for fixed rate returns. At best the combination of such components into one transaction weakens the integrity of the contractual principles involved, and at worst represents a blatant technique for bypassing the Islamic prohibition of usury. For example, while it is unanimously accepted that the giving of gifts, the making of promises and the advancing of interest-free loans are all acceptable in Islam, the combination of these three contracts into one transaction easily produces an interest-bearing loan. Here, Person B promises to give a gift of 10 to Person A if Person A makes an interest-free loan of 100 to Person B.
In their effort to gain approval for such techniques, unscrupulous Islamic bankers may succumb to the temptation of asking questions that elicit the 'correct' answers from their Shariah scholars. Thus the modern scholar must shift some of his focus away from the detailed level of contractual principle and look to the wider impact of what the banker is trying to achieve.
If asked whether it is permitted to pull a string, the scholar must find out whether the string is attached to a gun before giving his judgement. Such efforts require a high degree of both Shariah and technical knowledge. There is a big difference between defining interest (a Shariah matter) and discovering whether or not a particular Islamic banking contract allows the bank to practice interest (a technical issue).
We should not expect Shariah scholars to fulfil both of these roles.

Replacing artifice with value
In time, an entirely new methodology will be adopted in Islamic banking; one based upon a surplus of money, not upon the artificial shortage that is maintained by the modern commercial banking system. Debt will no longer be the pre-requisite to every major act of spending or investment. The time value of money will no longer dominate our view of how to manage the earth's resources, for the money with which we measure value will no longer bear interest as a condition of its creation. I believe that this change will occur either by force or reason, as the world grows weary of perpetual indebtedness. The society that witnesses the change to interest-free money will recognise the new system as a pillar of true freedom. It will enjoy the release into productive employment of human and physical resources that are presently engaged in the value-subtractive processes of the modern financial economy.
There will of course be much resistance to such a change, and the lobby that presently benefits from the interest-based monetary system will spend heavily in order to protect its future. The payment of money by banking organisations to Shariah scholars must be scrutinised for precisely this reason. If a bank asks 100 scholars whether its latest product is Halal, and 98 of them say "no", should we be suspicious if the bank gives a consulting contract to the two who said "yes"? Would some of the 98 become a little more flexible next time round, if they saw the other two earning large incomes from their work?
These are not the questions of a cynic. They are the questions of one who has read a little history and knows the simplest facts of human nature. A scholar should not have his integrity questioned simply for being in a minority, of course, for his views may be honestly held. What matters is that by promoting those scholars who approve of the products it wants to launch, an Islamic bank is in the fortunate position of being able to choose the rules of the game for itself while telling everybody else that it doesn't make up those rules.
In this battle between truth and falsehood, central banks and supranational institutions cannot lead the necessary reforms because they have always been creatures of the system itself. Over many decades they have proven themselves unwilling to delve into the essential issues of money creation, despite the volumes of research that they undertake on every other nuance of monetary policy. The real tragedy is that the Islamic banking movement, which could have exposed the fraud of modern money creation, has become a laughable effort to Islamise that fraud. The Prophet Muhammad, PBUH, said that "Even though usury be much it leads in the end to utter poverty". Our Creator does not want His creation to forget that. But we are slipping, slowly, into a world that thinks it knows better.

Tuesday, November 01, 2005

(10) $60 oil a bonanza for private bankers, Islamic sector included!

26 October 2005

Private bankers are giddy with excitement to the degree that private bankers ever are as they vie for the business of the newly rich and the newly richer resulting from $60 oil. "We're seeing a growth situation in the Middle East that's a once-in-a-lifetime opportunity," said Mark Morgan, chief officer of Citigroup Global Wealth Management for the Middle East, based in Dubai. Morgan compares the current wealth accumulation in the Gulf region to the epic fortunes created by the industrial revolution in Britain and America a century ago. "This is when the dynasties of the next 50 and 100 years are being created," he said by telephone.

Oil wealth has long sought out the services of private bankers in discreet financial centers like Geneva, Luxembourg, and London. Now, the private bankers are coming to their customers.

Despite rules that effectively bar them from participating in the region's booming stock and real estate markets, banks including Citibank, ABN AMRO, and Barclays have recently founded or expanded their private banking offerings across the Gulf region. Dubai is experiencing the greatest influx, while the established banking center in Bahrain, and rapidly internationalizing centers in Qatar and Kuwait, are also eagerly courting banks.

Although still in its infancy, the Islamic banking sector, governed by Shariah law, has also gained from the wealth explosion.

Wealth accumulation has taken on a new intensity worldwide, wealth management reports say.
But oil has pushed the Gulf region to the forefront of private banking growth. ABN AMRO has reported 50 percent revenue growth for the last three years from its private banking Gulf division, and profit growth has been even higher, said Gilles Rollet, ABN AMRO's chief executive for private banking in the Middle East.

According to the latest world wealth report by Merrill Lynch and Capgemini, millionaires in the Gulf region controlled $1 trillion in 2004, up by nearly 30 percent from 2003.

Morgan, of Citigroup, who set up the bank's first private banking office in the region only 18 months ago, is now planning its fourth office there, in Kuwait, after opening in Dubai, Abu Dhabi and Bahrain. Fortis, Julius Baer, and Standard Chartered are all also actively expanding in the region, while LGT Bank, the private bank of the ruling family of Liechtenstein, plans to open an office in Bahrain by the end of this year.

"We've found that wealthy people the world over look the world over," Morgan said. "The best opportunities are now on their doorsteps."

The wealth pool is also spilling over into the bank accounts of a growing number of foreigners living in the region. Ashburton, a South-African-owned offshore financial management company based in the British island tax haven of Jersey, plans to open an office in Dubai early next year to serve expatriates living there, its managing director, Trevor Falle, said.

"The Middle East has always been a happy hunting ground from an offshore point of view," Falle said. His research indicates that it is becoming even happier; tens of thousands of British and South African citizens have flocked to the region to take often high- paying jobs.

The region's stock and real estate markets have absorbed and created much of the wealth. Gulf stock market indices have been among the world's best performers this year, while real estate price gains have made more established markets like London seem tame.

Recent market action has underscored the region's remarkable financial liquidity. In May, a $135 million initial offering of Aabar Petroleum Investments on the Abu Dhabi stock exchange was oversubscribed more than 800 times.

In this exuberant climate, wealth managers are trying to reminding investors of the importance of diversification. A return of "6 to 10 percent doesn't exactly get them excited," Rollet, of ABN AMRO, said. Some of the bank's most popular offerings include high yield fixed-income investments in Pakistan and India, as well as private equity funds with investments in China and Japan. Citigroup has found success with venture capital funds concentrated in China, India, and Eastern Europe.

As Dubai's financial center has grown, banks have moved into smaller regional hubs. A loosening of restrictions for foreign banks in Kuwait has prompted HSBC and BNP Paribas to plan to expand there, in addition to Citigroup. Qatar inaugurated a financial center in May and is now accepting license applications. The first bank to receive a license there was Ansbacher, a British wealth management group that became a wholly owned subsidiary of Qatar National Bank last year.

Meanwhile, the region's original banking capital, Bahrain, is increasingly focusing on Islamic banking. Bahrain has 28 registered Islamic financial institutions, a number that is expected to grow quickly, said Andrew Jeffreys, editor in chief for emerging markets reports published by Oxford Business Group, a consultancy firm. Investors complying with Shariah law outlined in the Koran avoid interest-bearing investments, and companies involved in banned activities, including gambling, and alcohol. To help serve this market, estimated to be growing by about 15 percent annually, Dow Jones is expanding the number of its Islamic indices around the world from the current 44. The company added conventional indices in Kuwait and Bahrain this year, with an eye to building experience in the region in preparation for launching Islamic indices, said Lars Hamich, the managing director of STOXX, the unit that handles Dow Jones's index business in Asia, Europe and the Middle East. Tracking Shariah-compliant investments is not only interesting for Islamic investors, Hamich said, since those investments have often outperformed competing investments in recent years.

"The branding, the name, is sometimes a challenge," Hamich said. But compliance with Shariah debt requirements has helped Islamic- style investors to avoid financial land mines, like Enron and Global Crossing.

Bankers say the trends that are attracting them to the Gulf will continue for the foreseeable future. The Institute of International Finance recently predicted that the countries that make up the Gulf Cooperation Council Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain, and Oman will earn more than $300 billion in revenues in 2006, or about three times the average for the previous decade.

Even for Rollet, of ABN AMRO, living in Dubai, the continuing flow of money and the rise of the stock markets still amazes. "It continues to surprise me every morning when I turn on the radio in the car," he said.