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25/12/2007

Oil wealth lifts Islamic banking

Oil wealth lifts Islamic banking  

Banking that adheres to teachings of the Quran is gaining a foothold in world's finance capitals

The Adviser Mag –Wayne Arnold -the New York Times  

KUALA LUMPUR–Rising oil wealth is lifting Islamic banking – banking that adheres to the laws of the Quran and its prohibition against charging interest – into the financial mainstream.

Big banks, including Citigroup, HSBC and Deutsche Bank, as well as financial capitals London, Tokyo and Hong Kong , are going into Islamic banking. An estimated 300 Islamic financial institutions hold at least $500 billion (U.S. ) in assets, and deposits are increasing more than 10 per cent a year.

In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and even Islamic derivatives. Loans and bonds that conform to the Quran are already available in the U.S. And Britain, Japan and Thailand are contemplating issuing Islamic bonds of their own. In Islamic banking, financiers must share borrowers' risks, meaning that depositors are treated more like shareholders, earning a portion of profits. Financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships. "This is an industry on its way from a niche industry to becoming a truly global industry," said Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, the world's second-largest Islamic bank after Al-Rajhi Bank. "In the next three to five years you'll see Islamic banks coming out in Australia, China, Japan and other parts of the world.''  

The stampede into Islamic finance is mostly an effort to tap an estimated $1.5 trillion of funds sloshing around the Middle East , largely from higher oil prices. While a lot of this oil money was parked in the United States, Britain and Switzerland before Sept. 11, 2001, bankers say many wealthy Arabs are investing closer to home, in part to avoid increased scrutiny. At the same time, many Middle Eastern investors are eager to capitalize on Asia 's breakneck growth.

By some estimates, as much as $800 billion of Arab money has moved from the United States and Europe to other regions. Those investments have helped spark an economic revival throughout the Muslim world at a time of increasing religious conservatism among Islam's 1.6 billion faithful.  The result is expanding demand for financial services that adhere to Islamic law, or Shariah.

"The middle class have the luxury of making these Islamic versus non-Islamic decisions," said Nordin Abdullah, who runs KasehDia, a firm in Kuala Lumpur that advises companies on how to comply with Shariah. "They're educated and have money." Last year, Saudi Arabia 's largest lender, National Commercial Bank, overhauled its entire retail business to make it Shariah-compliant. Tunisia and Morocco authorized their first Islamic banks this year. And while the biggest Islamic banks are in the wealthy Gulf states, the most attractive potential markets are in Turkey and North Africa and among Europe 's Muslims. Indonesia , the most populous Muslim nation with more than 190 million Muslims, is the mother lode.  

Malaysia , a predominantly Muslim nation with a secular government and a fast-growing, export-driven economy, has emerged as a centre for the industry's development. Here, even non-Muslims are taking advantage of a growing range of Islamic products offering competitive returns.

For instance, David Ong-Yeoh, 41, a public relations executive tired of fretting over the rising interest rate on his adjustable-rate mortgage, refinanced to a 30-year fixed loan from an Islamic financial institution. Now, he pays regular installments that include a predetermined profit margin for the bank."The terms are better than on conventional loans," Ong-Yeoh said.

Islamic finance also avoids practices prohibited under Shariah: Islamic bankers cannot receive or provide funds for anything involving alcohol, gambling, pornography, tobacco, weapons or pork.Proponents of Islamic banking say these are limits any socially conscious investor can support, Muslim or not. They also envision wider appeal for Islamic banking's ban on interest, which stems from the Quran's usury prohibition.

That's a view that has a long religious and historical tradition. Charging high interest rates to lend money is repeatedly condemned in the Bible. The Greek philosopher Aristotle denounced it, the Romans limited it, and the early Christian church prohibited it. Western theologians eventually distinguished interest from usury, and it was reintroduced to Christians and Muslims around the time of the Renaissance. But when Britain took advantage of Egypt's mounting foreign debt in 1875 to buy Egypt's stake in the Suez Canal and occupy the country, it generated a backlash against traditional banking in the Muslim world. The belief that all interest charges are unjust now underpins Islamic finance. Hoarding is frowned on in the Quran, so savings earn no return unless put to productive use. "Money should be used for creating better value in the country or the economy," Rasheed Mohammed al-Maraj, governor of the central bank of Bahrain , said. "Money cannot generate money.'' Indeed, Islamic banks are supposed to function more like private-equity firms than conventional banks. "Private equity is an Islamic concept," said Rafe Haneef, head of Islamic banking in Asia for Citigroup.  

But because Islamic financial transactions must have an underlying asset, Islamic bankers tend to have high exposure to real estate and construction projects. Source Toronto Star,  Canada  - www.thestar.com

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