Islamic Banking Hits the Web

A jaunt to now-Muslim-majority Bethlehem, in the Palestinian Authority, reveals a thriving city: renovated, bustling, affluent. When I remark on the profusion of late-model European SUVs, my Palestinian host shrugs: “Like in the West — they live beyond their means.”

This was echoed by a report in the Israeli press, which stated that “Palestinian and Arab banks in the West Bank are offering… incentives to draw the average Palestinian into purchasing a car… by paying 10% of the new car’s value and slowly paying off the rest to the bank, with interest…” (my translation, Haaretz, July 16, 2010).

 Islamic Banking Hits the Web

Islamic Banking Hits the Web

With interest?

Strictly speaking, Muslims are forbidden to charge or pay interest — by the Qur’an, the hadith(sayings of the Prophet and his followers), and contemporary rulings based on these. Islamic banking does not in fact permit the charging of interest, but Islamic banking is relatively new. The first Islamic bank appeared in Egypt in 1963, and the sector only began to gather steam in the 1990s.

Unlike conventional banks, Islamic banks use a complex mix of banking and investment vehicles to comply with religious dictates. Examples include home financing through declining rent schedules and offering investments in real estate and other sectors that offer non-interest income.

Several factors have strengthened the Islamic banking sector. Foremost among them is the rapid growth of the world’s Muslim population — by over 235 percent in the past 50 years. Second, this population is increasingly demanding shariah-compliant banking services. Last but hardly least, Islamic financial institutions have weathered the recent credit crisis with relative success.

The result? By 2010, more than 500 institutions worldwide were providing Islamic banking and financial services, solely or alongside conventional ones, managing an estimated $1 trillion in assets.

One might reasonably expect these institutions to have a sizeable presence on the Internet. Yet this is not the case. Those Arab banks that offer online services, such as Arab Bank Palestine, often do so solely for their conventional services. Exceptions are Habib Bank Ltd. and Dubai Islamic Bank, which launched e-banking in 2002.

More notable in a global context is HSBC Amanah’s premier online service, launched this August and aimed at “internationally mobile, affluent consumers.” HSBC Amanah also offers its regular customers Islamic e-banking services.

Yet until quite recently, these banks were the exception, not the rule. One study found that, of 24 institutions offering both Islamic and conventional services, only eight offered Islamic e-banking, while 17 offered conventional e-banking. Among the reasons cited for this, the most plausible is also the most interesting: that e-banking’s advantages — speed, efficacy, convenience — are less valued in a region where “a visit to the bank… might be… an opportunity to socialize.”

However, as Internet access increases in the Middle East and the Muslim middle class expands, so will the presence of Islamic online banking. One sign of this is the online Dow Jones Islamic Market Indexes. Another is Failaka, a research and advisory fund in Islamic financial investment established over a decade ago.

That Failaka’s Website lists more members on its shariah advisory board than it does professional staff may obliquely highlight why there’s a lag in Islamic banking’s online parity with its conventional peers. The imperative that an Islamic financial institution have an advisory board of shariah experts may slow decision-making and, hence, transactions, making them no match for Internet speed. Moreover, until recently, there has been a shortage of professionals who are experts in both Islamic law and economics.

Yet this, too, is bound to change, as institutions and programs such as The Global University of Islamic Finance — which, saliently, offers study online — proliferate. It is their graduates who will provide the innovative products on which the future of Islamic banking depends.

For now, no doubt, some of Bethlehem’s stylish, hijab-clad soccer moms are relying on iPhone4 access to the impressive, successful Palestine Exchange as they squire their children to practice in SUVs.

http://www.internetevolution.com/author.asp?section_id=994&doc_id=200291&f_src=internetevolution_gnews

How to make a bank Islamic

The Islamic finance industry is increasingly turning to buying and converting conventional banks as an alternative to starting green-field operations. Following are some factors investors need to consider.

SCHOLARS
Every Islamic financial institution has a board of Islamic scholars approving banking products and transactions based on their interpretation of Islamic law, or sharia.

The sharia board will guide the bank during its transition period to an Islamic bank

The Islamic finance industry is increasingly turning to buying and converting conventional banks as an alternative to starting green-field operations. Following are some factors investors need to consider.

SCHOLARS
Every Islamic financial institution has a board of Islamic scholars approving banking products and transactions based on their interpretation of Islamic law, or sharia.

The sharia board will guide the bank during its transition period to an Islamic bank

Standards vary between regions and scholars and having a top scholar is seen as crucial for products’ acceptance in the market. The top six scholars hold 31.7% of all surveyed board positions in research by [email protected]

GRACE PERIOD
Scholars will grant the bank a transition period, during which it adapts its operations to be compliant with sharia. This period is usually between 24 and 36 months.

NON-COMPLIANT ASSETS
Islam bans investments in certain sectors such as alcohol, gambling and pork that need to be sold during the grace period. Scholars will decide whether these can be booked as revenues or need to be given away to charities.

Derivative and hedge funds portfolios are also likely to be sold as most scholars oppose these.

OTHER ASSETS AND INSTRUMENTS
Most investments and conventional loan structures can be replaced with Islamic structures, provided the customer agrees.

But most banks prefer to let conventional loans expire to avoid the costly legal process of renegotiating the contracts.

For instance, most banks that converted have opted to sell the converted bank’s credit card portfolio due to the high conversion costs.

ACCOUNTING AND RISK MANAGEMENT
Islam calls for all transactions to be underpinned with physical assets to account for the ban of interest. In many transactions the bank buys a commodity on behalf of a loan customer and sells it onto him on a deferred basis.

In case of a car lease product, the bank actually owns the car, which needs to be reflected in the bank’s accounting.

The risk management of Islamic banks is also considerably different from conventional lenders as Islamic capital providers share in the business risk of loan-takers.

The core liquidity management instruments used by the industry are disputed by scholars who generally only accept them for lack of alternatives.

HUMAN RESOURCES, IT SYSTEMS
Many Islamic loan transactions and products resemble conventional ones, so experts have said little training would be needed to familiarize employees with the work-flows of a sharia-compliant bank.

However, the bank’s core banking IT systems might have to be replaced or at least over-hauled to reflect the changes in work-flows and accounting.