Published: Jan 3, 2011 00:42 Updated: Jan 3, 2011 00:42
In an entrenched interdependent world, the global economic recovery and financial sector stability remains fragile with much of the adoption of the new Basel III provisions relating to core capital strength, early warning systems, stress testing, risk management and financial stability still work in progress. Even where some of the above provisions have been adopted and applied, catastrophic bank failures continue to surface, which raises questions about the very validity and efficacy of some of these provisions.
In the case of Ireland, the Bank of Ireland indeed did apply the stress testing to the major Irish banks who incidentally passed the stress tests with flying colors, only to spectacularly fail shortly afterward and precipitating a multinational bail out of the Irish banking system with the help of the International Monetary Fund, the European Central Bank and the UK Treasury, who even had the audacity to borrow money from the markets and lend it to the Irish at a higher margin, albeit over a period of 25 years.
Islamic banking may have been relatively unscathed by the financial crisis but their business has been directly affected by the impact of the crisis on the real economies of the world especially in those countries in which their main business is located. As such, the challenges of the global economy and financial system are just as relevant to the Islamic finance sector both endogenously from a systemic and structural point of view and exogenously in terms of investment and other exposures in the global markets.
The feedback from the market on the prospects is mixed. There are the usual devoted diehard optimists for whom Islamic banking is more a conviction of faith as opposed to an alternative ethical system of financial management with all its attendant rigors.
Then there are the fair weather fellow travelers, whose nauseating platitudes will reverberate as long as the going is good and their renumeration packages stand out.
Finally there are the hard-working pragmatists who believe in Islamic finance not merely because of their faith traditions (not only Islam) but because they believe and have proven that Islamic finance is eminently workable, here to stay and a force for good in economic development, shareholder value and wealth creation and effecting socio-economic justice.
The reality probably will be that the global Islamic finance sector will embrace both scenarios in 2011 consolidating on the fragile recovery that started in 2010 and taking the initial steps in adding new value to the Islamic finance proposition.
At a micro level it will be business as usual with the industry continuing to grow impressively, with banks remaining cautious and concentrating on core business lines, which in turn will continue to put a brake on innovation, partly because innovation costs money and many banks remain cash-strapped or cautious in their lending and financing strategies.
The sukuk market, the flavor of the last three years, is bound to make a come back. Although its is dominated by sovereign and quasi-sovereign issuances, the market is seeing a small number of corporate issuances. "I am confident that we may see the volume of sukuk reaching $30 billion in 2011 - the same size as before the crisis, although the market will continue to be dominated by sovereign and quasi-sovereign issuances. Perhaps in 2012, corporate issuances will start equaling origination activity in the sovereign market. GCC markets suffered the most through defaults. The defaults awakened everybody - the regulators, Shariah boards and the investment bankers - all to do a better job. Whenever there was a sukuk default, the media immediately started to speculate about the future of the sukuk. But in the conventional bond industry there have been tens of defaults and the media never asked about the future of the bond industry. sukuk is a tool and an instrument. It is not a means by itself. It will continue forever as long as people need money and in the Islamic structure this will be the future trend. The sukuk structure is not responsible for the defaults. This was mainly due to the issuers having solvency problems or cash flow problems. It was a credit issue and nothing to do with the Shariah structures," stresses Jamil Jaroudi, CEO of Elaf Bank.
At a macro-level, it is a different story. This is the soft underbelly of global Islamic finance which has been largely ignored over the last 30 years. These are the debates and issues that exist in denial and are not discussed at the surfeit of global forums and conferences. Yes the geographic expansion will continue into markets that are not core because of the ultimate irony. They include Ireland, Luxembourg, the UK, South Africa, Australia, France, Russia, India, Ethiopia, Kenya, Japan, Singapore, Hong Kong, China, South Korea, the US and Canada. These countries are doing so either for financial exclusion policies (which is admirable); or to attract inward investment flows from capital-rich member countries of the Islamic Development Bank (IDB); or to promote their respective domiciles as hubs for Islamic finance or capital market products.
So what is this soft underbelly of the global Islamic finance industry? It is the absence of a systemic and structural approach to Islamic banking and finance - ranging from government policy, Treasury leadership, parliamentary ratification, financial inclusion to consumer education and protection. The notable exclusion is Malaysia and to a much lesser extent countries such as Bahrain, Turkey and perhaps Brunei.
Industry organizations such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have done pioneering work in introducing prudential, supervisory and accounting standards for the global industry, but where they have been wanting is helping to suggest and develop policy, regulatory and legal frameworks for Islamic finance to create a level playing field in this respect.
At the moment these frameworks are at best ad hoc and piecemeal (except in Malaysia) which frankly is an embarrassment to any sector aspiring a role towards contributing to global economic growth and financial stability. How on earth can the sector move to the next level when the government and regulators of one of the most important Islamic finance markets does not see fit to introduce a separate regulatory, supervisory and legal framework for Islamic banking to encompass its special characteristics? This especially when the majority of its peer countries have or are in the process of adopting the dual model of banking where an Islamic system operates side-by-side a conventional one - cooperating but not inter-acting.
Taking Islamic finance to the next level is not merely about adopting policies that create a stake for the Islamic finance market in government and economic transformation programs, economic development programs, government-linked companies, sovereign wealth funds, pension and social security funds. It is also about giving Islamic financial institutions and their shareholders and their customers regulatory and legal certainty, protection and enforcement through recourse to the law of the land, which must not only work but perhaps equally importantly be seen to be working. Currently, only Malaysia and some of the industrialized jurisdictions offer this certainty. This should be the substantive debate in global Islamic finance today rather than reinventing the wheel with debate issues such as: Is riba interest or usury? or Is Islamic banking about equity or debt financing? or Should there be centralized Shariah board at the central bank or ad hoc boards in the industry?
The truth is that Islamic finance despite the impressive growth of the global industry over the last three decades, is still a highly parochial and insular one - still largely engrossed in talking to itself and to its principal immediate stakeholders - the shareholders, investors and its regulators. Outside this limited stakeholder paradigm, there is hardly much interaction with other equally important stakeholder groups - the government policy-makers, national Treasuries or finance ministries, parliamentary finance committees and consumer groups and watchdogs.
Whatever interaction there may be in the Islamic finance space is limited to the memorandum of understanding between regulators; or between governments in a general economic and financial framework; or cooperation between educational and training institutions. When last did a parliamentary delegation from an Islamic Development Bank (IDB) member country, discuss Islamic finance with a sister parliamentary group from another IDB member country, let alone with a non-IDB member country? How often is Islamic finance policy discussed as a banking and finance issue between intra-IDB member country policy makers and Treasuries?
Unfortunately, the sector is not used to thinking outside the black box which reflects its entrenched parochialism.
This parochialism is not confined at the industry level. It is also rampant very often in the manifestation of turf wars at an intra-national organizational level say between finance ministries and regulators; or between finance ministries and national assemblies; or even between governments and religious authorities as in the policy debacle by the unilateral and arbitrary imposition by Shariat Division of the Appellate Court in Pakistan of the Islamization of the banking system in the country a few years ago, which subsequently failed.
"I want to stress that it is not the Central Bank of Kuwait (CBK) that is delaying the introduction of sukuk and trust laws in the emirate. It is our political masters, the Ministry of Finance that can expedite the passing of the legislation," stressed an official of the CBK recently. Whatever the achievements the global Islamic finance industry has notched up in the last three decades - and some of them have been notable if not spectacular - they pale into insignificance compared with the failures of the industry to engage with arguably the four key stakeholders.
These are the heads of government of the member countries of the Islamic Development Bank (IDB); the Ministers of Finance or Treasury in these countries; the parliaments and national assemblies which debate, vote on and ratify any enabling legislation; and the consumer organizations and watchdogs.
This disconnect between policymakers and the Islamic finance industry is breathtaking.
Under-developed consumer awareness and market education reflects the paucity of the marketing policies and strategies of Islamic financial institutions, who unfortunately too seem to have fallen for the hype of the “Mad Men” of advertising and some of whom are not averse to paying for recognition and commercial awards.
The above shortcomings - in reality, government policy framework risk - are the issues that dare not speak their name. One way to start the ball rolling is for the OIC or the IDB or the IFSB to set up an Inter-Parliamentary Islamic Finance Sub-Committee to promote links and cooperation between parliamentary finance committees in both Muslim and non-Muslim countries in the field of socially responsible, ethical and Islamic finance. This could be an important stepping stone to other connectivities both in terms of the development of the global market and in dispelling misconceptions and fears about Islamic finance in both Muslim and non-Muslim countries.
Source : http://arabnews.com/economy/islamicfinance/article228420.ece - Jan 3, 2011
In the case of Ireland, the Bank of Ireland indeed did apply the stress testing to the major Irish banks who incidentally passed the stress tests with flying colors, only to spectacularly fail shortly afterward and precipitating a multinational bail out of the Irish banking system with the help of the International Monetary Fund, the European Central Bank and the UK Treasury, who even had the audacity to borrow money from the markets and lend it to the Irish at a higher margin, albeit over a period of 25 years.
Islamic banking may have been relatively unscathed by the financial crisis but their business has been directly affected by the impact of the crisis on the real economies of the world especially in those countries in which their main business is located. As such, the challenges of the global economy and financial system are just as relevant to the Islamic finance sector both endogenously from a systemic and structural point of view and exogenously in terms of investment and other exposures in the global markets.
The feedback from the market on the prospects is mixed. There are the usual devoted diehard optimists for whom Islamic banking is more a conviction of faith as opposed to an alternative ethical system of financial management with all its attendant rigors.
Then there are the fair weather fellow travelers, whose nauseating platitudes will reverberate as long as the going is good and their renumeration packages stand out.
Finally there are the hard-working pragmatists who believe in Islamic finance not merely because of their faith traditions (not only Islam) but because they believe and have proven that Islamic finance is eminently workable, here to stay and a force for good in economic development, shareholder value and wealth creation and effecting socio-economic justice.
The reality probably will be that the global Islamic finance sector will embrace both scenarios in 2011 consolidating on the fragile recovery that started in 2010 and taking the initial steps in adding new value to the Islamic finance proposition.
At a micro level it will be business as usual with the industry continuing to grow impressively, with banks remaining cautious and concentrating on core business lines, which in turn will continue to put a brake on innovation, partly because innovation costs money and many banks remain cash-strapped or cautious in their lending and financing strategies.
The sukuk market, the flavor of the last three years, is bound to make a come back. Although its is dominated by sovereign and quasi-sovereign issuances, the market is seeing a small number of corporate issuances. "I am confident that we may see the volume of sukuk reaching $30 billion in 2011 - the same size as before the crisis, although the market will continue to be dominated by sovereign and quasi-sovereign issuances. Perhaps in 2012, corporate issuances will start equaling origination activity in the sovereign market. GCC markets suffered the most through defaults. The defaults awakened everybody - the regulators, Shariah boards and the investment bankers - all to do a better job. Whenever there was a sukuk default, the media immediately started to speculate about the future of the sukuk. But in the conventional bond industry there have been tens of defaults and the media never asked about the future of the bond industry. sukuk is a tool and an instrument. It is not a means by itself. It will continue forever as long as people need money and in the Islamic structure this will be the future trend. The sukuk structure is not responsible for the defaults. This was mainly due to the issuers having solvency problems or cash flow problems. It was a credit issue and nothing to do with the Shariah structures," stresses Jamil Jaroudi, CEO of Elaf Bank.
At a macro-level, it is a different story. This is the soft underbelly of global Islamic finance which has been largely ignored over the last 30 years. These are the debates and issues that exist in denial and are not discussed at the surfeit of global forums and conferences. Yes the geographic expansion will continue into markets that are not core because of the ultimate irony. They include Ireland, Luxembourg, the UK, South Africa, Australia, France, Russia, India, Ethiopia, Kenya, Japan, Singapore, Hong Kong, China, South Korea, the US and Canada. These countries are doing so either for financial exclusion policies (which is admirable); or to attract inward investment flows from capital-rich member countries of the Islamic Development Bank (IDB); or to promote their respective domiciles as hubs for Islamic finance or capital market products.
So what is this soft underbelly of the global Islamic finance industry? It is the absence of a systemic and structural approach to Islamic banking and finance - ranging from government policy, Treasury leadership, parliamentary ratification, financial inclusion to consumer education and protection. The notable exclusion is Malaysia and to a much lesser extent countries such as Bahrain, Turkey and perhaps Brunei.
Industry organizations such as the Islamic Financial Services Board (IFSB) and the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) have done pioneering work in introducing prudential, supervisory and accounting standards for the global industry, but where they have been wanting is helping to suggest and develop policy, regulatory and legal frameworks for Islamic finance to create a level playing field in this respect.
At the moment these frameworks are at best ad hoc and piecemeal (except in Malaysia) which frankly is an embarrassment to any sector aspiring a role towards contributing to global economic growth and financial stability. How on earth can the sector move to the next level when the government and regulators of one of the most important Islamic finance markets does not see fit to introduce a separate regulatory, supervisory and legal framework for Islamic banking to encompass its special characteristics? This especially when the majority of its peer countries have or are in the process of adopting the dual model of banking where an Islamic system operates side-by-side a conventional one - cooperating but not inter-acting.
Taking Islamic finance to the next level is not merely about adopting policies that create a stake for the Islamic finance market in government and economic transformation programs, economic development programs, government-linked companies, sovereign wealth funds, pension and social security funds. It is also about giving Islamic financial institutions and their shareholders and their customers regulatory and legal certainty, protection and enforcement through recourse to the law of the land, which must not only work but perhaps equally importantly be seen to be working. Currently, only Malaysia and some of the industrialized jurisdictions offer this certainty. This should be the substantive debate in global Islamic finance today rather than reinventing the wheel with debate issues such as: Is riba interest or usury? or Is Islamic banking about equity or debt financing? or Should there be centralized Shariah board at the central bank or ad hoc boards in the industry?
The truth is that Islamic finance despite the impressive growth of the global industry over the last three decades, is still a highly parochial and insular one - still largely engrossed in talking to itself and to its principal immediate stakeholders - the shareholders, investors and its regulators. Outside this limited stakeholder paradigm, there is hardly much interaction with other equally important stakeholder groups - the government policy-makers, national Treasuries or finance ministries, parliamentary finance committees and consumer groups and watchdogs.
Whatever interaction there may be in the Islamic finance space is limited to the memorandum of understanding between regulators; or between governments in a general economic and financial framework; or cooperation between educational and training institutions. When last did a parliamentary delegation from an Islamic Development Bank (IDB) member country, discuss Islamic finance with a sister parliamentary group from another IDB member country, let alone with a non-IDB member country? How often is Islamic finance policy discussed as a banking and finance issue between intra-IDB member country policy makers and Treasuries?
Unfortunately, the sector is not used to thinking outside the black box which reflects its entrenched parochialism.
This parochialism is not confined at the industry level. It is also rampant very often in the manifestation of turf wars at an intra-national organizational level say between finance ministries and regulators; or between finance ministries and national assemblies; or even between governments and religious authorities as in the policy debacle by the unilateral and arbitrary imposition by Shariat Division of the Appellate Court in Pakistan of the Islamization of the banking system in the country a few years ago, which subsequently failed.
"I want to stress that it is not the Central Bank of Kuwait (CBK) that is delaying the introduction of sukuk and trust laws in the emirate. It is our political masters, the Ministry of Finance that can expedite the passing of the legislation," stressed an official of the CBK recently. Whatever the achievements the global Islamic finance industry has notched up in the last three decades - and some of them have been notable if not spectacular - they pale into insignificance compared with the failures of the industry to engage with arguably the four key stakeholders.
These are the heads of government of the member countries of the Islamic Development Bank (IDB); the Ministers of Finance or Treasury in these countries; the parliaments and national assemblies which debate, vote on and ratify any enabling legislation; and the consumer organizations and watchdogs.
This disconnect between policymakers and the Islamic finance industry is breathtaking.
Under-developed consumer awareness and market education reflects the paucity of the marketing policies and strategies of Islamic financial institutions, who unfortunately too seem to have fallen for the hype of the “Mad Men” of advertising and some of whom are not averse to paying for recognition and commercial awards.
The above shortcomings - in reality, government policy framework risk - are the issues that dare not speak their name. One way to start the ball rolling is for the OIC or the IDB or the IFSB to set up an Inter-Parliamentary Islamic Finance Sub-Committee to promote links and cooperation between parliamentary finance committees in both Muslim and non-Muslim countries in the field of socially responsible, ethical and Islamic finance. This could be an important stepping stone to other connectivities both in terms of the development of the global market and in dispelling misconceptions and fears about Islamic finance in both Muslim and non-Muslim countries.
Source : http://arabnews.com/economy/islamicfinance/article228420.ece - Jan 3, 2011
