Islamic Finance Solution to Global Financial Crisis

                                            Why Islamic Banking Is Successful?  

 Islamic Banks Are Unscathed Despite of Financial Crisis

By  Prof. Rodney Wilson  Professor-Durham University

The collapse of leading Wall Street institutions, notably Lehman Brothers, and the subsequent global financial crisis and economic recession, are encouraging economists world-wide to consider alternative financial solutions.

Attention has been focused on Islamic banking and finance as an alternative model. What lessons can be learnt, and how resilient have Islamic banks been during the current crisis?

ISLAMIC BANKING PRINCIPLES AND SUB-PRIME LENDING

The religious teaching underpinning Islamic finance is concerned with justice in financial contracts to ensure that none of the parties is being exploited.

The bank may advance the clients a n interest-free loan to enable them to continue their payments during the recession in anticipation that they will pay in full when the economy rebounds.

Riba( interest or usury) is one source of exploitation, especially, as in the case of subprime lending, the highest rates were charged to lower earners. Such discriminatory charging by conventional banks was justified as being a reflection of the risks involved.

Those on lower incomes, with poorer prospects of finding new employment in the event of redundancy, were less likely to be able to service their interest payments. Islamic housing finance involves risk sharing between the bank and the client, rather than transferring all the risk to the latter.

Under the most commonly used diminishing musharaka (partnership) contract, the bank and the client form a partnership, with the bank providing up to 90 percent of the purchase price, and the client at least 10 percent. Over a period of usually 10 to 25 years, the client buys out the ownership share of the bank which makes its profit from the rent paid by the client for the share the bank owns.

In the event of a rental or repayments default, the bank may advance the clients an interest-free loan (qard hassan in Arabic) to enable them to continue their payments during the recession in anticipation that they will pay in full when the economy rebounds.

The client retains their home rather than being faced with eviction— like the victims of the sub-prime crisis. Of course Islamic banks have to appraise credit risk, and indeed are more cautious about who they should finance than conventional banks.

The banks in the United States charged high arrangement fees for sub-prime borrowers which were used to pay bonuses for those signing up new clients.

As the mortgages were sold on to Freddie Mac and Fanny Mae, the arrangers were unconcerned that the sub-prime borrowers might be unable to meet their financial obligations.

Indeed, gifts were provided to entice the feckless to sign up, and the mortgages often exceeded the value of the property. The banks in other words became mere booking agents, with no long term commitment to their clients.

THE ISLAMIC BANKING RECORD

Consequently when the credit crunch came and borrowing from wholesale markets was halted, Islamic banks were not exposed.  In contrast to conventional banks, no Islamic bank has failed and has needed government recapitalization which ultimately becomes a burden on hard pressed taxpayers.

All Islamic banks comply with the Basel II capital adequacy requirements and the Islamic Financial Services Board (IFSB)- the body which advises regulators with respect to Islamic finance- has produced detailed guidelines on compliance. The IFSB has an ongoing relationship with the Bank for International Settlements-the institution which developed the Basel standards- and is certain to be consulted as Basel III guidelines are drafted for capital adequacy which are likely to be implemented globally in the coming decade.

The soundness of Islamic banks is accounted for by the fact that they use a classical banking model, with financing derived from deposits, rather than being funded by borrowings from wholesale markets.

Consequently when the credit crunch came and borrowing from wholesale markets was halted, Islamic banks were not exposed. However, Islamic banks are not immune from the effects of the global recession, and the fall in oil prices will inevitably have a negative impact on 2008 results of Gulf-based Islamic banks. The situation will become clearer from February once the audited financial statements start to appear.

Two Islamic housing financial institutions, Amlak and Tamweel are being merged, as both have faced problems given their exposure to the Dubai property market.

In Iran where all financial operations have been shariah-based since the Law on Usury Free Banking was introduced in 1983, banks have been relatively insulated from the financial crisis, ironically because United States sanctions meant they could not deal with institutions such as Lehman Brothers which were trying to place large amounts of toxic debt with Middle Eastern banks.

The sanctions therefore proved to be a blessing in disguise for Iran— although the Islamic banks there have been adversely affected recently by the fall in gas prices.

Nevertheless being state owned, institutions such as Bank Melli, the largest Islamic bank in the world, are well placed to ride out the global financial storm. With assets of over $50 billion, and 2007 profits exceeding $540 million, it has more than adequate resources to cope.

ISLAMIC FINANCIAL STABILITY

Investors seeking shariah compliance have portfolios which are more heavily weighted in sectors such as healthcare or utilities.

Islamic banks enjoy a built-in stabilizer to help them cope with economic downturns, as instead of paying interest to depositors, those with investment mudaraba accounts share in the banks profits.

Thus, if profitability declines in an economic downturn, depositors receive lower returns, but if profits rise they enjoy higher returns.

This profit sharing reduces risk for the banks and means they are less likely to become insolvent. However as the banks build up a profit equalization reserve, which can be used to finance pay-outs during difficult years, depositors benefit from some protection of their returns during economic downturns.

The last year has been difficult, if not disastrous, for equity investors, given the fall in stock market prices globally.

Investors in equities screened for shariah compliance have also suffered, but less than their conventional counterparts, because they have not invested in the shares of riba based banks which have fared especially badly during the global financial turmoil.

Investors seeking Shariah compliance have portfolios which are more heavily weighted in sectors such as healthcare or utilities where revenue streams are maintained even during cyclical down-turns.

PROSPECTS FOR ISLAMIC FINANCE

There are already five wholly Islamic banks in London, and the first Islamic bank will open in France in 2009.

Islamic banking provides a viable alternative to conventional banking and is less cycle prone. The spread of Islamic finance into western markets demonstrates that it now being treated seriously by regulators and finance ministries.

There are already five wholly Islamic banks in London, and the first Islamic bank will open in France in 2009. According to the conservative estimates of the Banker in October 2008, Islamic financial assets globally exceed $500 billion, a figure that could easily double over the coming decade.

The experience of Islamic banking in the United Kingdom has been extremely positive. Islamic Bank of Britain has been operating as a retail bank for over four years, and has attracted over 40,000 customers. HSBC Amanah, the Islamic finance subsidiary of HSBC, has been operating for ten years in London, focusing mainly on institutional clients and business finance.

Alburaq, the Islamic finance subsidiary of Arab Banking Corporation, has become the market leader for shariah compliant home finance in the United Kingdom.

None of these institutions has been affected by the global financial crisis, and their resilience bodes well for the future.

SUKUK ARE REAL ASSETS

The United Kingdom authorities promoting London as a international centre for sukuk issuance to rival Bahrain, Dubai and Kuala Lumpur.  In addition to banking, Islamic sukuk security issuance has enormous potential. Unlike conventional bonds and notes, sukuk are backed by real assets, which provides assurance to investors.

Although global sukuk markets were adversely affected by the global recession in 2008, longer term prospects look promising, with the United Kingdom authorities promoting London as an international centre for sukuk issuance to rival Bahrain, Dubai and Kuala Lumpur.

The Malaysian ringgit sukuk market has been largely unaffected by the global turmoil in securities markets, and issuers such as the Saudi Arabia Basic Industries Corporation, one of the world’s largest petrochemical producers, view sukuk as a desirable instruments to raise funding for plant expansion.

There can be no doubt that Islamic finance has an exciting future, and the quest for a financial system based on moral values rather than greed and fear, is bound to enhance its position in the global system.

http://www.islamonline.net/servlet/Satellite?c=Article_C&cid=1230650190574&pagename=Zone-English-Muslim_Affairs%2FMAELayout

Can Islamic finance save the banking sector

Islamic finance regulations around the world

Ireland, a country of arguably staunch Catholics, is also making a bid to be a global hub for Islamic finance.

 

Ireland, a country of arguably staunch Catholics, is also making a bid to be a global hub for Islamic finance. The global growth of Islamic finance in recent years is, in part, a response to the demand for a more ethical financial system. But is Islamic finance just an ethical “spin” on “conventional” finance? Or can it offer more tangible solutions beyond the Muslim community?

What is Islamic finance?

Just like ethical investment in the standard financial sector, Islamic finance prohibits the use of funds for certain purposes. For example, no investment in activities that deal with alcohol, pornography, gambling and so forth.

The basis for Islamic finance’s code of ethics comes from religious texts and is less arbitrary than secular ethical investment. Admittedly, these texts have to be interpreted, and this can lead to vigorous debates and disagreements. But compared to standard ethical investment, the religious texts serve as a relatively more permanent anchor to guide behaviour.

Islamic finance goes much further than standard ethical investment. Not only does Islamic finance prohibit funding for “unethical” activities, it also bans transactions where people share risks and uncertainty in a disproportionate manner. This is why the use of interest is prohibited.

As you know, if you borrow money from a “standard” bank to run a business, the bank is guaranteed a return (the interest) while you, the borrower, will bear all the risks of making or losing money from the business operation. Islamic finance prohibits such arrangements. Instead of an interest-based banking system, Islamic finance prefers a system where profits and losses are shared. So, instead of lending money in return for interest payments, Islamic banks would lend money in return for an eventual share of the profits or loss generated from the business.

No speculation

The standard financial system permits speculative activity. In fact, this is encouraged as a way to keep the market “efficient”. Unfortunately, speculative activity can also have unwelcome effects, such as when financial bubbles are created and then burst.

Unlike the standard financial system, Islamic finance prohibits financial transactions that involve speculation. According to Islamic texts, financial transactions must have a clear link to an underlying “real” activity. So, you can buy and sell financial assets if you have a genuine interest in its underlying value, not because you want to gamble on changes in its price. [See the paper (paywalled) by Shahnaz and Tony Naughton for a clear and detailed discussion on this point.]

As such, Islamic finance is about more than just ethical investment. It challenges the increasing “gap” that has emerged since the 1990s between the financial sector and what economists call the “real” economy: the part of the economy that is concerned with producing goods and services, as opposed to the financial sector which is less tangible. It seeks to take us back to the days when the role of the financial sector was to serve the “real” economy.

In emphasising the need for financial transactions to have a link to a “real” activity, Islamic finance limits the amount of debt in the system, creates fewer opportunities for speculation and, as a result, minimises the chances of the financial system becoming unstable. Islamic finance would have prohibited the type of products that contributed to instability in the American financial system in 2007.

By prohibiting the use of interest while encouraging the sharing of profit and loss, the approach adopted by Islamic finance will shift some of the risks shouldered by consumers on to financial institutions. Supporters of Islamic finance argue that it offers a safer and more equitable approach to the organisation of finance than the standard system.

A way to a more equitable financial system?

In practice, Islamic finance has so far not been able to perfectly follow what it preaches. Even though interest is prohibited and banks should share in profits and losses, Islamic banks tend to intentionally structure the products they sell so that they achieve outcomes that are very similar to interest-based products. As a result, Islamic financial institutions get more certain outcomes instead of bearing the risks profit and loss-sharing arrangements.

Until now, supporters of Islamic finance have argued that these choices have been necessary in order to compete with the “standard” sector, and that they would be abandoned once Islamic finance becomes more established and sophisticated. But, in mimicking the “standard” financial sector, Islamic finance risks betraying its roots. Such an approach undermines its claims to offer an important and substantially different system.

Despite these criticisms, Islamic finance can still reframe the debate about the role of the financial sector in modern society. It forces us to question our current relationship with finance: should finance be used for speculation, or should it only be used to fund “real” activities?

Given the global financial crisis and the debate about reforming financial sectors, the approach of Islamic finance offers us one way to think about how the financial sector might be reformed to better serve society’s needs.

Jikon Lai is a Lecturer in International Relations at The University of Melbourne and a Visiting Fellow at the School of Politics and International Relations in the College of Arts and Social Sciences at the Australian National University. This article first appeared on The Conversation.

http://www.smartcompany.com.au/financial-services-and-insurance/052267-can-islamic-finance-save-the-banking-sector/2.html

Tweak laws to allow Islamic banking: RBI

The Reserve Bank of India (RBI) has written to the government to “restructure” or “amend” the laws to allow Islamic banking in India . Speaking at a local event,RBI governor D Subbarao said: “Islamic banking is allowed in many parts of the world, but the Banking Regulation Act of India does not conform to Islamic banking because it allows banks to borrow from and deposit money with the RBI on interest. But we are in correspondence with the government on how our laws can be restructured or amended so that they are in conformity with Islamic banking.”

The RBI governor’s statement comes on the back of a rising clamour to allow Islamic banking in India, which would fetch billions of dollars in investments from countries in the Middle East. Islamic banking is an interest-free system that is allowed in many developed economies, including European markets like France, Germany and the UK.

Law minister Salman Khurshid announced recently that he had written to the Planning Commission and RBI on the issue. RBI’s stand on the matter so far has been that it is not possible within the current statutory and regulatory framework.
The entire RBI top brass — including deputy governors Subir Gokarn, K C Chakrabarty , Anand Sinha and H R Khan — are in Puducherry for a board meeting and were interacting with local students at an interactive event. The RBI team also stressed financial inclusiveness and the role that mobile banking can play in expanding the banking footprint in rural India. “Mobile penetration is large in rural India and we can leverage that technology for financial inclusion,” said deputy governor Khan.
RBI is prioritizing electronic payments to reduce the economy’s dependence on cash. “India is the fifth largest in cash-to-GDP ratio and we are taking a series of steps on both retail and wholesale payment’s side to reduce this,” said deputy governor Chakrabarty . One of the interventions , he said, was the decision to reduce merchant discount rates (MDR) drastically on debit cards to encourage usage. The RBI recently capped MDR in debit card transactions to 0.75% up to Rs 2,000 and 1% beyond Rs 2,000 — a sharp cut given that debit and credit card MDRs have been similar in India so far.

 

http://timesofindia.indiatimes.com/business/india-business/Tweak-laws-to-allow-Islamic-banking-RBI/articleshow/16663710.cms

Islamic banking on radar

The Reserve Bank of India (RBI) is in correspondence with the government to look into ways to bring in new rules to accommodate the concept of Islamic banking, said Governor D Subbarao. Speaking at the Jawaharlal Institute of Postgraduate Medical Education & Research, he said: “The current Banking Regulation Act does not allow the model of Islamic banking.

Under the current Act, banks are required to borrow and deposit (and paying interest) with RBI, and to give interest to depositors.”

One of the basic principles of an Islamic banking system is that there should not be collection or payment of interest.

It also includes risk sharing by banks, rather than the risk-transfer method followed by conventional banks.

According to earlier reports, Union law minister Salman Khurshid had written to RBI for a response on the issue. Prime Minister Manmohan Singh had in 2010 itself asked the central bank to look at Islamic banking practices in Malaysia as a possible model. An attempt by the earlier Left Democratic Front government in Kerala to allow the start of a bank based on Islamic principles had met legal hurdles in 2010.

On foreign direct investment (FDI) in multibrand retailing, Subbarao said it would help consumers get better quality products at reasonable prices. At present, around 40 per cent of farm products perish before reaching the market and FDI could bring in a better supply chain, helping producers get more benefit. The apprehensions on FDI were understandable but in the long term, he added, it would be good for the economy.

On food inflation, he said addressing it was largely the domain of the government and it had initiated some programmes which needed to be expanded. Retail FDI would help reduce wastage, thus increasing the supply.

Food inflation in the long term would harden inflation expectations among people and RBI was trying to break those expectations, he added.

http://www.business-standard.com/india/news/islamic-bankingradar/488582/

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Islamic bonds: then there was light

Islamic bonds: then there was light

It’s no fun being a bond investor these days. You either invest in safe havens like US and German bonds and get a negative return, or go on adventure in countries like Spain and can’t be sure you’ll get your money back.

So the emergence of Shariah compliant sukuk offers an appealing middle way. With the London 2012 Sukuk Summit being held on June 6 and 7, beyondbrics reviews the latest developments in the market.

First to catch the eye is a steady rise in sukuk indices in the last few months. The Dow Jones Sukuk Index, for example, which measures the total return on US dollar denominated Islamic bonds, ended higher in May for the sixth time in as many months. Since 2009, the index has performed twice as well as the Barclays Capital Bond Composite Global Index, a benchmark for bonds.

The amount of sukuk outstanding is at an all-time high. In the first quarter of this year, $40bn was added to the pile, an increase of 48 per cent in new issuance compared with the same period last year.


Islamic bonds: then there was light

 

Demand is strong for both corporate and sovereign sukuk, according to Tariq Al-Rifai, Dow Jones’ director of Islamic market indexes. A recent $4bn issuance by the Kingdom of Saudi Arabia was three times oversubscribed. A $1.75bn issue from the Saudi Electricity Company, the largest corporate sukuk of 2012, was ten times oversubscribed.

What explains this surge in popularity?

Since it was first re-introduced in Malaysia in the early 90s, the Shariah compliant bond type has enjoyed a steady rise in popularity in the Islamic world, both for issuers and for buyers. In the six years since its inception, the HSBC/Nasdaq Dubai US Dollar Sukuk Index has returned on average more than 5 per cent a year, notwithstanding the severe debt crisis in Dubai in 2009 which destroyed the value of many sukuks.

Until recently, the market was dominated by Malaysia. Now, a small sukuk renaissance is taking place in the Middle East. First banks and then companies in the Gulf region have started embracing sukuk issuance, explaining a large chunk of the increase in supply. Saudi Arabia is leading the way.

According to Nick Stadtmiller, head of fixed income research at the Emirates NBD bank, the roots for this remarkable sukuk awakening lie in the financial crisis in the developed world.

“About this time last year, a lot of Gulf-based issuers couldn’t get their traditional bonds sold because the markets in Europe were drying up,” he says.

This led some key institutions to rethink their attitude towards sukuk issuance. Before, the strict rules on sukuk made many of them conclude the game wasn’t worth the candle. Unlike bonds, sukuk have to be based on underlying assets, and they must be approved by Shariah scholars.

But the exceptional market circumstances made some issuers think again. Last year, conventional Arab banks like the First Gulf Bank and the Abu Dhabi Islamic Bank began issuing sukuk with success.

The same became true for some major Arab companies this year, such as Saudi Electricity ($1.75bn), the Saudi General Authority of Civil Aviation ($4bn) and recently the shopping mall operator Majid Al Futtaim ($400m).

The result is that sukuk supply is slowly catching up with demand, which had been increasing at the speed of sound in recent years – or better, at the speed of oil pumped out of Islamic soil.

For Stadtmiller, the fact that sukuk are now used as a replacement for a corporate loans means the market is at a “watershed moment”.

“I think we’ll see a lot more of these corporate sukuk in the future, many with a longer duration,” he says. (Sukuk can run for up to 10 years, whereas bank loans are often restricted to two or three years.)

There is no reason why the sukuk’s rise should stop at the borders of the Islamic world.

“There is also a strong appetite for sukuk among corporates in developed markets, such as GE Capital,” says Al-Rifai at Dow Jones. “If more western companies look to issue sukuk, they are bound to find a lot of interest from investors.”

That’s indeed very likely, as recent oversubscriptions suggest. Many wealthy investors in the Middle East can buy only sukuk as they want to comply with the Islamic ban on receiving interest. Western investors, from their side, don’t mind buying sukuk either. As sukuk are asset-based and many Islamic funds hold them to maturity, they are seen as a relatively safe investment.

But those looks can nevertheless be deceiving. Among all the optimism, you could almost forget that sukuk is a whole class of assets, not a homogenous product like US Treasuries.

Whether the issuers chose sukuk or regular bonds, their own creditworthiness is in the end what makes the difference. Investors who bought Dubai issued sukuk before 2009 will know what that means.

But in these uncertain times, sukuk remain highly valued among investors. With an average yield of 3.8 per cent, it is not hard to see why. Chances are the Sukuk Summit that started on Wednesday in London will only solidify that reputation.

URL: http://blogs.ft.com/beyond-brics/2012/06/06/islamic-bonds-then-there-was-light/#axzz1xCCWMT9n

Panel discussion focuses on Challenges, Developments and future of Islamic Banking and Finance in Oman at the Oman Islamic Banking and Finance Conference 2012

A separate panel discussion covering the Challenges, Developments and future of Islamic Banking and Finance in Oman took place on, 5th  June 2012 at the Oman Islamic Banking and Finance Conference 2012. The panel discussion was moderated by Mr. Noaman Abdul Majid, Country Manager-Oman, Pak Investment Company. vies on the topic he said “Oman is in a   unique position to benefit from thexperiences of Sharing his other regional economies, so Oman should ensure  that whatever mistakes were made in deploying and developing the Islamic Finance framework are  not repeated again and should maintain a focus on Shariah compliance, as well as customer and client  orientation. It is also very important that the regulator, financial institutions and the private sector  put their heads together to develop Islamic Finance as a whole, to make sure that the proportion of Islamic Finance and the overall financial system is significant enough because if everybody works in isolation to each other, it’s not going to happen. So all the stakeholders should try to create a platform to communicate with each other, so that they understand each other well and the products and services are deployed accordingly.”

Panel discussion focuses on Challenges, Developments and future of Islamic Banking and Finance in Oman at the Oman Islamic Banking and Finance Conference 2012

The panel discussion saw panelists Mr. Hussein Soyan, Managing Director, Soyan Financial Consultancy Ltd; Dr. Abdel Gadir Warsama, BBK & Professor of Law, American University, Bahrain; Mr. Adnan Khan, Finance Manager, Gulf International Chemicals and Mr. Arsalan Ahmed Qureshi, AVP-Sr. Manager,Operational Risk-Risk Management Dept, Al Baraka Islamic Bank, highlight various issues related to the sector.

Speaking on the topic of the panel discussion Mr. Adnan Khan said “Banking will not work on its own, it needs infrastructure, communication and mutual understanding between different banks, it needs support of the private organizations because Islamic Banking needs to invest into Islamic Compliant companies and there are certain requirements for that. Unless those companies comply with those requirements, Islamic banking cannot invest into them. Other than that, the other main issue is that although Islamic Banking has been in existence for some time, we don’t have many qualified people in this field, which is one of the things we need here in Oman. These are some of the challenges which if worked upon can lead to a very successful Islamic system in Oman.”

Adding to Mr. Khan and Mr. Majid, Mr Abdel Gadir Warsama said “To start Islamic Banking first we need to have a law. This Islamic Law should highlight basic Islamic products that have to be followed by Islamic Banks and this law is made by the Sharia’h Boards. We must have a Central Shariah Board in the Central Bank to give guidance for Islamic Banks. Also in each bank we require to have a Sharia’h advisor to act as a liaison between the Bank and the Central Bank. There are so many now, we have to benefit from the experience of others, from where they have stopped, rather than start from the beginning. But at the same time we have to be very careful not to commit the same mistakes they made. Islamic Banking now is most rapid and is developing by 25 % every year, for sure in the very near future Islamic Bank will be equal to conventional banks. Here in Oman there is a base for Islamic Banking to grow and to help the economy to grow.”

URL: http://www.zawya.com/story/Panel_discussion_focuses_on_Challenges_Developments_and_future_of_Islamic_Banking_and_Finance_in_Oman_at_the_Oman_Islamic_Banking_and_Finance_Conference_2012-ZAWYA20120607073525/

PM Berisha welcomes participants in International Conference on Foreign Investments in Albania

Prime Minister Sali Berisha hosted a welcome reception today evening at the venues of the Palace of Brigades for the participants in the International Conference on Foreign Investments in Albania that holds its proceedings in Tirana.
PM Berisha welcomes participants in International Conference on Foreign Investments in Albania

The Conference is organized by the Albanian Investment Development Agency (AIDA) in cooperation with Islamic Development Bank- IDB.

Attending the conference were business leaders from 30 member countries of the IDB, 15 Bank managers, the Chief Executive Officer offor Development of the Private Sector Al Aboodi, members of the Cabinet, representatives of the Diplomatic Corps accredited in Tirana, Albanian businessmen and others.

PM Berisha thanked all participants for attending the Conference on Foreign Investments on Wednesday. PM Berisha expressed special thanks for the IDB President Ahmed Mohammed Ali Al-Madani and called him a great friend of Albania as in the course of 20 years he has been managing the IDB has provided support for hundreds of important projects in Albania.

The prime minister brought to the attention of the participants Albania potentials for investments and pointed to the field of renewable energy, tourism, minerals, oil and gas. “I believe that every entrepreneur has good reason to invest in this country and I assure you that my country will make great efforts and support everyone who will bring his dreams in this country to have success stories”, said PM Berisha.

The prime minister highlighted the fact that Albania continued its economic growth irrespective of the hard times of the global crisis. During the recent four years Albania achieved growth four times higher as compared to the average of the region and has succeeded to attract foreign direct investments.

“I believe Albania achieved all this owing to its economic model we have implemented based on low taxes, a flexible labor market, great natural resources, a rapid infrastructure development, modernization of the health system and the fast development of the digital agenda of the country. In addition to all these, Albania NATO membership was of special importance because it provides security to the foreign investors through increasing their trust in my country.”

URL: http://www.emg.rs/en/news/region/180344.html

QIIB mulling sale of its Islamic bank in Britain

IBB confirmed it had received an approach by QIIB, which currently owns a controlling 88.41% stake, to take over the remaining shares with a view to a possible sale as it considers the strategic future of the UK bank.

Masraf Al Rayan, the biggest Islamic bank in Qatar, had said on Monday that it had begun negotiations to acquire a 70% stake in IBB, with the remaining 30% stake to be bought by the Qatar government.

“QIIB has also indicated that it has begun initial, non-binding discussions with certain potential third party purchasers, which include Masraf Al Rayan; there has been no approach by Masraf to IBB,” IBB said in a statement.

QIIB mulling sale of its Islamic bank in Britain

Founded in 2004, IBB was the first standalone Islamic retail bank in the UK with a high street presence with five branches and around 50,000 customers, offering financial services that adhere to Islamic principles such as a ban on interest.

IBB’s founding shareholder QIIB took full control of the bank in 2011, in a deal valued at the time at around 25mn pounds ($38.65mn), as part of a plan to develop an international banking business compliant with sharia laws.
But the Shariah lender has struggled to turn a profit since inception, reporting a full-year loss of £8.9mn in 2011.

Speaking to Reuters in April, Sultan Choudhury, managing director at Islamic Bank of Britain, said he was confident the bank could gain traction and become profitable within the next three years.
QIIB has until July 5 to make an offer under UK financial regulations. IBB said it will make a further announcement on the matter in due course. No details of the size of the possible deal were disclosed.
The UK is the largest Islamic finance centre in Europe, accounting for $19bn of $1.7tn in global assets and is home to five fully sharia-compliant banks, data from the UK Islamic Finance Secretariat (UKIFS) estimates.

The close ties between the Gulf countries and the UK has led to a flurry of activity aimed at capitalising on the two-way traffic.

Britain’s largest standalone Shariah bank, Bank of London and the Middle East (BLME), is awaiting regulatory approval to start operations in the Gulf this year, whilst Abu Dhabi Islamic Bank, the second-largest Islamic lender in the United Arab Emirates, opened its first branch in London in May.

URL: http://www.gulf-times.com/site/topics/article.asp?cu_no=2&item_no=510908&version=1&template_id=48&parent_id=28