economic crisis - is islamic banking really immune

8/19/2019 Economic Crisis - Is Islamic Banking Really Immune

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Ganesan RamakrishanExecutive Vice President-

Head Special ProjectSharjah Islamic Bank

Octoer !"# !$$%

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G&Ramakrishnan ' (op) Ri*hts


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Technologist who did his Business Management and specialization in Finance Over 35 years of rich and varied experience in all fields of Banking !ast " years in #slamic

Banking and Finance$ and more than %5 years in &enior Management positions in variousBanks

One of the core &enior Management Team mem'er responsi'le for conversion ofconventional 'ank ( )ational Bank of &har*ah into an +,,- #slamic Bank ( &har*ah #slamicBank " years ago

.dvisory Board Mem'er in British /niversity in 0u'ai for Finance and Banking including#slamic Banking and Finance1

Mem'er of .cademic 2ounsel in Mum'ai Business &chool and Management BoardMem'er of !eaders rivate &chool

4isiting Faculty in mirates #nstitute for Banking and Financial &tudies6 &har*ah6 7ollongong/niversity in 0u'ai6 0u'ai #nternational Financial 2entre6 0u'ai and rolific speaker on

Banking and Finance including #slamic Banking 2hartered .ccountancy firms6 #nternational 2onsultants and #nternational events organizers

like Marcas vans6 8aco' Fleming conferences6 etc regularly invite him for speaking ontopics relating to Banking and Finance

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The views and information herein are personal to the&peaker and have 'een gathered from various sources like

internet6 reading materials6 etc1 7hile every effort has 'een made to ensure accuracy6 the

&peaker accepts no lia'ility for any errors or omissions offact or su'stance in the information contained herein1

This presentation does not represent 'usiness solicitationfrom any person within the context of any applica'le laws1

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May 23, 2009 4

Funny videos - Growth and recession.wmv

+inancial crisis 9 aresult of a system thatdid not know when to putan order in theincreasingly rickety creditedifice6 'ecause of risingprofits1#n the time of financialcrisis6 an overdose ofmorality in a financialsystem6 that demandshealthy amorality

xecutive .pril %,,:$

G&Ramakrishnan ' (op) Ri*hts , Pinnacle no.led*e Group# /uai&

http://var/www/apps/conversion/tmp/scratch_1/C:%5CDocuments%20and%20Settings%5CAdministrator%5CDesktop%5Cmr.Ram_17th%5CFunny%20videos%20-%20Growth%20and%20recession.wmvhttp://var/www/apps/conversion/tmp/scratch_1/C:%5CDocuments%20and%20Settings%5CAdministrator%5CDesktop%5Cmr.Ram_17th%5CFunny%20videos%20-%20Growth%20and%20recession.wmv


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7hat has caused this ma*or economic upheaval in the world; 7hat is the cause of falling share markets the world over and

'ankruptcy of ma*or 'anks;

#T .!! &T.


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&ince it was a good time and property prices were soaring6 the only

aim of most lending institutions and mortgage firms was to give loansto as many potential customers as possi'le1

.s a result6 many people with low income A 'ad credit history orthose who come under the )#)8. )o #ncome6 )o 8o'6 )o .ssets$category were given housing loans in disregard to all principles of

financial prudence1 These types of loans were known as sub-primeloans high


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B/BB! T=.T B/


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7=.T 2OM!#2.T0 T= M.TT< &u'(prime loans were excellent investment options for lenders as long as the

housing market was 'ooming 7ith stock markets 'ooming and the system flush with li?uidity6 many 'ig

fund investors like hedge funds and mutual funds saw su'prime loanportfolios as attractive investment opportunities1 =ence6 they 'ought suchportfolios from the original lenders1

Ma*or .merican and uropean$ investment 'anks and institutions heavily'ought these loans known as Mortgage Backed &ecurities6 MB&$ to diversifytheir investment portfolios1

ventually house prices started to decline and many 'orrowers of su'(primeloans started to default on their home loans

The pro'lem got worsened as the Mortgage Backed &ecurities MB&$6 which'y that time had 'ecome parts of 20Os of giant investments 'anks of /& Aurope6 lost their value1 Falling prices of 20Os dented 'anks> investmentportfolios and these losses destroyed 'anks> capital

March 21, 2016 !


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M.D=M #) T= B.)E& lo'al 'anks and 'rokerages have had to write off an estimated G5+% 'illion

in su'prime losses so far6 with the largest hits taken 'y 2itigroup G551+'illion$ and Merrill !ynch G5%1% 'illion$1 . little over half of these losses6 orG%, 'illion6 have 'een suffered 'y /&('ased firms6 G%%" 'illion 'yuropean firms and a relatively modest G%H 'illion 'y .sian ones

0espite efforts 'y the /& Federal


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2urrent growth of #slamic 'anks is estimated at %,(%5- per year stimated market to 'e GH trillion6 achieved /&0 5, 'n

22 countries account for nearly 5- of total #slamic 'anking assets

#slamic 'anking expanding in financial activities including retail 'anking6 insuranceand capital market instruments

The continued growth in the #slamic 'anking industry is attri'uta'le to three factorsIMF)I

#ncreasing demand from a large num'er of Muslims


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The religious teaching underpinning #slamic finance is concerned with *ustice infinancial contracts to ensure that none of the parties is 'eing exploited1

Riba interest or usury$ is one source of exploitation6 especially6 as in the case of su'(prime lending6 the highest rates were charged to lower earners1 #slamic housingfinance involves risk sharing 'etween the 'ank and the client6 rather than transferringall the risk to the latter1

/nder the most commonly used diminishing musharaka partnership$ contract6 the'ank and the client form a partnership6 with the 'ank providing up to :, percent ofthe purchase price6 and the client at least +, percent1

Over a period of usually +, to %5 years6 the client 'uys out the ownership share of the'ank which makes its profit from the rent paid 'y the client for the share the 'ankowns1

#n the event of a rental or repayments default6 the 'ank may advance the clients an

interest(free loan qard hassan in Arabic $ to ena'le them to continue their paymentsduring the recession in anticipation that they will pay in full when the economyre'ounds1

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Of course #slamic 'anks have to appraise credit risk6 and indeed are more cautiousa'out who they should finance than conventional 'anks1

The 'anks in the /nited &tates charged high arrangement fees for su'(prime'orrowers which were used to pay 'onuses for those signing up new clients1

.s the mortgages were sold on to Freddie Mac and Fanny Mae6 the arrangers wereunconcerned that the su'(prime 'orrowers might 'e una'le to meet their financial

o'ligations1 #ndeed6 gifts were provided to entice the feckless to sign up6 and the mortgages often

exceeded the value of the property1 The 'anks in other words 'ecame mere 'ooking agents6 with no long term

commitment to their clients1

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#slamic 'anking had relatively lesser impact due to its 'an on interest andspeculative investments and complex financial instruments that turned toxic forconventional 'anks

.ccording to Moody>s6 #slamic financial institutions in the ulf showed strongresilience during financial turmoil6 'ut are not risk immune due to shortage of li?uidinstruments and #slamic inter'ank market

#ndustry has remained relatively crisis proof due to the asset 'acked nature of ittransactions1 Moody>s expects the growth in #slamic 'anking assets to slow sharply in %,,:6 to

around +,(+5- from %,(3,- last year

/. 'ailed out #slamic mortgage lenders .mlak and Tamweel and mirates #ndustrial'ank and


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#n addition to its strong annual growth record of the past few years6 #slamic finance isthought to 'e in a stronger position to withstand glo'al financial tur'ulence IMF)


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Jatar #nternational #slamic Bank has reported net profits J< +31"m in +st ?uarter of%,,: menafn.com - Apr ! !!9$

.'u 0ha'i 2ommercial Bank .02B$ has set up an #slamic finance company to offera range of &hariah compliant products1 .'u 0ha'i 2ommercial #slamic Finance.02#F$ is a private *oint stock company with an initial capital of 0hs%,,m1 The

founding shareholders are .02B and its su'sidiaries .'u 0ha'i 2ommercialroperties and .l 0ha'i Brokerage "AM# info- 19$%$!!9)

&tandard A oor>s continues to foresee a 'right future for #slamic finance and iscommitted to supporting its expansion 'y providing o'*ective and independentopinions and 'enchmarks for #slamic issuers and investors "!$%$!!9)

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#slamic 'anking and Finance industry has come from almost nowhere 3, years agoto 'e worth over G " 'illion in terms of assets( Ehalee* Times %@"@%,,C$

G%,, Bn 0hs "3H 'n$capital 'ase likely for proposed #slamic 'ank The #O will 'ea'out G3 Bn in the Hth ?uarter to tap interest in &hariah(compliant institutions and will'e listed in Bahrain and 0u'ai 9 ulf news %,@H@%,,:$ and .ra' Banking conference

%,,:

2risis is an opportunity for #slamic Finance 9 mirates Business %HK" %"@H@%,,:$

#n +::"6 a landmark McEinsey A 2ompany study exposed the L.ar 0or talentL as astrategic 'usiness challenge and a critical driver of corporate performance

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1mer (hapra a well known &audi conomist estimates that the derivatives market to'e around G,, trillion6 more than +, times the size of the world economy1 Thederivatives include credit default swaps20&$ worth 5H1 trillion1 #slamic financesystem introduces greater discipline in the economy and links credit expansion to thegrowth of the real economy

#n #slamic &ystem6 credit is primarily for the purchase of real goods and serviceswhich the seller owns and possesses and the 'uyer wishes to take delivery1 #t alsore?uires the creditor to 'ear the risk of default 'y prohi'iting the sale of de't6 there'yensuring that he evaluates the risk more carefully

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(haracteristics Islamic ankin* s)stem (onventional ankin* s)stem

#nterest A speculativetransactions

2harging and any kind of dealing ininterest and gharar is strictly prohi'ited

#nterest is the main source ofincome and deals in derivative6hedging6 etc

!aws and *urisprudence

Based on &haria laws ( &hariascholars guide and ensure adherenceto #slamic laws

&ecular 'anking laws and do notfollow any religious laws orguidelines

/nethical transactions Transactions involved in unlawful'usiness such as casinos6 alchohol6to'acco are not allowed

/tilisation of 'orrowed money istypically unrestricted except moneylaundering and non(financing ofcriminal activities

!ate payment@ penalty enalties are prohi'ited6 'ut if chargedmust 'e rechanneled to charities

Fees are typically charged for latepayments

Mode of financing Transaction, asset, activity and project based

Finance or trade money at interest

Balance 'etween moralA material re?uirement


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Risk ehavior di00erentl) in Islamic and conventional ankin*(onventional Islamic

2redit risk ( )on performance ofcounterparty as per agreed terms

=igher due to non(availa'ility of legalrecourse for defaults

Market risk( Four factors responsi'le 9interest rates6 indices6 commodities and

derivatives

Factors responsi'le excludes interestrates

Operational risk 9


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Bahrain . ma*or regional hu'6 has #slamic


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3atar +, 'anks offer &hariah compliant products1

Jatar Financial 2entre JF2$ esta'lished to attract financial institutions and capitalinto the country with its li'eral regulations

Saudi 4raia

0evelopment of #slamic 'anks is hampered 'y lack of clear laws6 technically &hariahcompliant finance are against the constitution6 discretionary licensing conditions andstrong overnment influence

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March 21, 2016 24

&ourceI Blominvest Bank report Fe'ruary %,,:


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Source: Blominvest


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!arge and young Muslim population glo'ally 9 Muslim accounts for nearly %H- +1 'n$

of the world population and expected to reach nearly 3,- for the world 'y %,%5

!ow penetration in Muslim ma*ority nations for 'oth conventional and #slamic products

#ncreasing wealth of Muslim nations due to higher oil prices1 .ccording to McEinsey6 the22 states currently have appx /&0 % trillion in foreign assets

reater focus on #slamic identity( the emergence of #slamic finance is related to therevival of #slam and desire of Muslims to live in accordance with #slamic law or &hariah

The soundness of #slamic 'anks is accounted for 'y the fact that they use a classical'anking model6 with financing derived from deposits6 rather than 'eing funded 'y

'orrowings from wholesale markets and investments are heavily weighted in sectorssuch as healthcare and utilities

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Source: Blominvest


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overnment and regulatory support for the development and promotion of #slamic'anking ( Malaysia 'eing a stand out example

0emand from non(Muslims6 wider acceptance of #slamic 'anking products due tocertainty of repayments6 appeal of profit(loss sharing and underlying set of values likeprohi'iting deception6 em'racing accounta'ility and transparency

articipation of 2onventional 'anks in #slamic 'anking 9 2onventional 'anks in many

Muslim( ma*ority countries have also 'egun offering #slamic 'anking and are a'le tocross(sell a new range of products to existing customers 'ut also stand to reach outnew clientele

#slamic insurance 9 Takaful and Bancatakaful ie selling #slamic insurance through'anks

#nvestors in e?uities screened for shariah compliance have also suffered6 'ut less

than their conventional counterparts6 'ecause they have not invested in the shares ofri'a('ased 'anks which have fared especially 'adly during the glo'al financial turmoil

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Source: Blominvest


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