Islamic Finance Could Not Avoid Crisis For Long
3 May 2011
The last few years, Islamic banking and financial services evidenced rapid growth across the globe. Middle East and South East Asian countries pioneered Islamic finance. Though estimates vary, there is little dispute that annual global growth is consistently in the double digits and has surpassed conventional banking growth in a few regions. The Islamic banking assets are currently close to USD 1 trillion. Islamic banking got greater attention when conventional banks in western countries collapsed resulting in the subsequent global financial crisis and economic recession. This is when Islamic banking and finance was recognized as an alternative model. While interest income is considered the main source of income in conventional banking, the same interest or Riba is not acceptable in Islamic banking. This played the key role in financial crisis as Islamic banks were shielded from conducting interest bearing activities as per Shariah principles. Islamic financial institutions were also restricted from investing in interest bearing bonds and securities. When Islamic banks were feeling delighted about the practice, the crisis in the Middle East shook their confidence living certain questions unanswered. The global financial crisis finally stuck the Arab Gulf end of 2009, after it managed to avoid this for more than a year. Dubai stunned financial markets when it said it might need to freeze debt payments by its largest conglomerate Dubai World and two of its flagship real estate firms-Nakheel World and Limitless World-for a standstill on debt worth 59 billion dollars. The two subsidiaries are run according to Islamic law through the issuance of billions of dollars worth of sukuk. This led to a wave of aftershocks that struck the global financial markets that were in the process of recovering from the effects of the global financial crisis. While countries like Singapore and Malaysia are unaffected by the crisis neighbouring countries like Saudi Following are some of the latest developments in the Islamic finance Space:
a) As investors flee debt in Dubai, neighboring Bahrain, Qatar and Saudi Arabia are likely to pick up much of its Islamic banking business as the financial hub is expected to bounce back eventually. Since emirate is positioned well and act a financial hub between Asia and Europe. Much of the talent and money flow was directed to neighbouring countries post crisis. b) Singapore and Malaysia are relatively unaffected by the Dubai Crisis and have evidenced more investments as adverse effect of crisis. c) Malaysia, for example, has the world's largest Islamic bond market and is known for more business-friendly interpretations of what is allowed under sharia law than many Gulf countries, this has opened doors for far greater range of financial products. d) The recent Dubai Crisis has prompted several countries in the region to re-look at the regulatory aspects and are re-working on the operational and structural frame of Islamic banking in the country. e) Pakistan, Bangladesh & Indonesia are a good potential for growth for Islamic banking. In all three countries, majority of population being Muslims makes it all the more attractive for Islamic banking. While all these countries are still in the growth stage, various foreign banks operating with in these countries are also targeting at offering Islamic banking either as a window or as a subsidiary. f) India recently got a green signal from the Reserve Bank of India for Islamic banking in the country. This new development was most awaited and is expected to see some exciting progress in the days to come. g) Technology like in any other service offerings is playing a key role in Islamic banking or finance. While some banks are opting for dual offering (Islamic and Conventional banking offering) technology vendors are struggling to accommodate various forms of Shariah-approved financing. Challenges like quicker implementation, support back office functions with straight-through processing capabilities; web-based interface still exists. h) Many countries across the region are promoting Islamic banking under three broad categories
Point of Concern
- Allow foreign banks/ private banks to open new full fledged Islamic banks.
- Allow the conventional banks to set up Islamic banking subsidiaries
- Allow the existing conventional banks to open Stand-alone Islamic banking
a) While need for uniform Shariah regulation with and across the region is a must, the definitation of each Islamic products will avoid dilution of such product offerings. b) Islamic banks will have to appraise credit risk and indeed need to be more cautious about their credit exposure. c) The increasing competition among incumbent and new players presents challenges not only in terms of fighting for market share but also in creating innovative products. d) Dearth for scholars is no more a concern, but dearth for experienced scholars is still worry.