Islamic Banking No Longer Exotic

Islamic banking, once regarded as an exotic but not very practical system and consigned to the outer fringes of the global industry, is now moving steadily into conventional banking and attracting attention from its non-traditional base. The fact that it eschews charging interest on loans has made it appear the perfect antidote to the excessive greed that characterised conventional banking and led to the current financial crisis. In short, Islamic banking, with its emphasis on ethics and its employment of capital solely as a factor of production rather than as a means of gain, is now the politically correct banking system.

It has remained largely insulated from the global credit crisis. It is expanding not only in the Muslim world, but also in other countries where Muslims are a minority, such as Britain, France, the US and even Japan. The industry has grown at the prodigious rate of 15-20% annually over the past decade. This growth is likely to continue, albeit at reduced rates, as more corporates and companies look increasingly to Islamic banks for trade and project finance. Islamic banking has established a firm foothold in Africa but the potential is still enormous. This Special Report examines what Islamic banking is really all about and the role it now plays in Africa.

The ideal model for Africa?
The strong growth of the previous decade was replaced by a mood of uncertainty, worthless assets and tumbling profits but one sector has continued to perform surprisingly well – Islamic banking. Neil Ford reports.

It seems likely that the Islamic banking sector will gain business from customers who believe that an under- regulated global banking industry has helped to precipitate the current global financial crisis. Shariah-compliant investment does not allow speculative activities such as hedging and derivatives, and so could be seen as a safer bet. There is also evidence to suggest that Islamic banks have been less severely affected by the economic downturn than other financial institutions, partly because they invest only in assets and not debt, a fact which allowed them to escape the direct impact of the US housing crash. The global market for Islamic banking certainly enjoyed a good year in 2008. The managing director of UK consultancy Maris Strategies, Joseph DiVanna, says that Islamic banks are not as susceptible to changes in the credit markets as mainstream banks and so continued to be launched in late 2008 and into 2009.

Over the past two years, new banks have been formed in Botswana, South Africa, Sudan and Kenya, as well as across the Middle East and South Asia. Probably the most noteworthy recent development in African Islamic banking is Al Baraka Bank’s decision to seek a listing on the Johannesburg Stock Exchange (JSE). The company is the sole bank in South Africa to offer only Islamic financial products and is currently celebrating its 20th anniversary but has now taken the decision to go public. At present, the bank is owned by the UK’s DCD London & Mutual Plc, Saudi Arabia’s Dallah Al Baraka Group and South African investors – so although it forms the South African leg of the Saudi company’s operations, it is not a mere subsidiary.

Chairman Adnan Ahmed Yousif said: “Listing is on our agenda because it will give us a very good diversity of shareholders and prestige. We also feel that the Reserve Bank in South Africa is beginning to understand Islamic banking very well.” Yousif hopes that the listing, which is expected by the end of this year, will “increase the company’s visibility, attract new customers and grow capital for expansion programmes.” The company’s profits for 2008 increased 19.5% to R21.7m ($2.7m), deposits were 12% higher at R1.6bn ($198m) and advances 7% up at R1.4bn ($173m).

From African Banker

Fashion, Music And Lots Of ‘Moola’

The permutations of 786 on the number plates of hundreds of luxury cars parked in the basement at the Inkosi Albert Luthuli ICC complex on Tuesday night was a telling sign of why in 20 years, Albaraka Bank has achieved assets totalling almost R2- billion.

The bank, which ironically has reflected deposits in excess of R1.6-billion despite the tough economic climate, celebrated its milestone anniversary on Tuesday with clients, staff and shareholders.

And near the top of the kudos for this success was the support and vision of the Muslim community — including some of the country’s wealthiest people — who embraced the principle of the faith-based system of financial management as a viable alternative to the conventional banking model since 1989.

Listening to former judge Aboobaker Mohamed eloquently recount the series of chance events and faith demonstrated by Saudi billionaire and banking visionary Sheikh Saleh Kamel, which led to the establishment of Islamic banking in 1989, was a fascinating story, amplified by the classy ambience of the venue (think middle-eastern flamed torches and beautiful fresh flowers).

Formalities — including an introduction by UK director and former South African Schabir Randaree, long service and special service awards, Mohamed’s 20-year history, political rhetoric from provincial minister of economic development Mike Mabayakhulu and the unveiling of the group’s new corporate identity — did go on a bit but, to be fair, these were facilitated by Albaraka employees Ismail Yuseph and Yunus Paruk, who were effective and entertaining as programme directors.

Judging by the bank’s success (which challenges the stereotype that Muslims hide their money under their mattress) the Islamic community commitment is sure to see Albaraka realise their goal of R5-billion in deposits in the near future.

COUNT ME IN: Mohamed explained that in the bank’s formative years management went on a road show to get clients to buy shares. At a time when they were asking for R100000, one wholesale retailer pledged support with R1-million — a lot of money way back in the 1990s.

MILLIONAIRE’S DREAM: One of the guests, Kamdar Akoo, mentioned that his family’s property development wing is busy with a R100-million development of their hotel, Seaboard (which was damaged in a fire last year). They are building 150 bedroom apartments, designed with students in mind, along with a retail component.

A major retail chain store will occupy the building in November and a pharmacy and a popular fast-food restaurant will move in later.

The group, which also owns residential villas on the north coast and commercial property in Pietermaritzburg, says that the hotel will be ready in time for next year’s kick-off.

FOOD AND ENTERTAINMENT: Mains — including prawn-and-chicken curry, rogan josh, roast lamb and kalta rice — were served in bowls on the table, which made the dining experience similar to eating at home as the bowls were passed around.

During starters and mains, guests — males and females seated separately as per request — were entertained by contemporary a capella Islamic group Waheed, which loosely translated means oneness (think Islamic version of Ladysmith Black Mambazo). The group, sadly, didn’t perform their beatbox repertoire, which has earned them favour with the younger generation, who weren’t the target audience on the night.

On the subject of entertainment, hundreds of music lovers looked like condoms on the lawns of the Durban Country Club as they protected themselves with plastic rain macs provided graciously by hosts First National Bank when the heavens applauded the KwaZulu-Natal Philharmonic Orchestra’s Starlight Pop Opera on Sunday night.

The financial sponsors, who have traditionally supported the initiative now in its 11th year (according to KZNPO chief executive Bongani Tembe), made sure all guest needs were catered for — thanks to a nifty cooler bag containing all sorts of goodies including a cheese board, the handy rain macs, cutlery and crockery necessary for the picnic as well as chairs.

Television personality Tumisho Masha was a fitting host for the outstanding performances from the orchestra and vocalists from classic to movie music and made for a wonderful night out, despite the rain.

And that was exactly what former Gate- way public relations officer, Lisa Sukdhev, promised when she invited me to a huge party last Thursday evening that was thrown by Kevro, a corporate clothing wholesaler.

The company, which I had previously not even heard about, celebrated their new premises in the newly developed industrial area of Riverhorse Valley with clients and selected guests.

A number of guests stuck to the black and white theme on the chilly night which kicked off with music by Idols finalist Lize Heerman, magical platters of food (they kept disappearing within minutes of being brought out) and a fashion show featuring their promotional clothing (of course), coordinated by managing director Eugene Haveman’s wife, Debby, who is a former model.

The success of the company — no mean feat in our current climate — means more jobs and bigger premises and no wonder staff, management and clients were in a jubilant mood.

From The Times

Is Islamic Finance A Solution?

Even the Christian world is embracing Islamic banking and finance as a response to the international economic crisis. The Vatican has endorsed the values of Islamic finance as a solution to the problems in the world of conventional, interest-based finance. It has stated that Western banks should carefully examine Islamic financial regulations in order to restore confidence among their clients.

“They are experiencing divine punishment. We are happy over that. The more they become unhappy, the happier we get,” proclaimed Ahmad Jannati, senior Shia cleric and secretary of the Guardian Council, to a crowd at the Tehran University in Iran.

His Sunni counterpart Yusuf al-Qaradawi was less dramatic: “The collapse of the capitalist system, which is based on usury and securities rather than commodities in markets, shows us that it is undergoing a crisis and that our integrated Islamic philosophy — if properly understood and applied — can replace the Western capitalism.”

The conventional banking system is built on a foundation of “Riba”, usually interpreted as usury or interest, which is firmly forbidden in Islam. The collapse of leading Western financial institutions amid the global financial crises has encouraged economists worldwide to consider alternative financial solutions and new approaches to banking and finance.

According to Joseph DiVanna, finance expert for The Banker publication, sharia-compliant banks were performing better than conventional banks. He said more Islamic banks and financial products have been launched worldwide since late 2008, despite the banking crisis that restricted conventional banks from doing so.

A Financial Times article published early in June 2009 cites evidence that suggests “what happens in the world of conventional finance affects the Islamic financial world with a time lag”. But Daud Vicary Abdullah, expert at consulting firm Deloitte, expects double-digit growth in global Islamic finance over the next few years. “Countries like Japan, South Korea and Singapore are showing more interest in the Islamic finance because of the value of the products offered and also the transparency of the transaction.”

Another finance expert, Professor Rodney Wilson of Durham University, claims that in the current crisis no Islamic bank has failed, and in contrast to conventional banks, none have needed government funds to save them from collapsing.

Some claim that Islamic banking provides a viable alternative to conventional banking. The spread of Islamic finance into Western markets shows that it is being treated seriously by government and finance authorities. While the Islamic financial system is being increasingly sold as the best alternative, it is widely recognised that the Islamic system itself has been largely modelled on its interest-based Western counterpart. Both share the same material goals and adopt the same institutional structures, with the result that the products promoted by the Islamic finance industry are sometimes indistinguishable from those of interest-based institutions. These similarities have led some to claim that the Islamic banking and finance industry has failed to properly implement Islamic ideals.

The soundness of Islamic banks is perhaps accounted for by the fact that they use a classical banking model, with financing derived from customer deposits. Islamic banks are less susceptible to economic downturns, instead of paying interest to depositors, those with investment (mudaraba) accounts share in the bank’s profits. This profit-sharing reduces risk for the banks and means they are less likely to become insolvent.

Muslims scholars are claiming that had the requirements of sharia been properly implemented, a financial crisis of the present kind would not have occurred. For example, if commercial banks were required to share the risks as well as the profits and losses of their clients they would be more careful when choosing which deals to finance.

However, the fact that Islamic finance has copied the Western template of finance raises serious questions around its ability to point to a viable alternative. Besides the fact that Islamic investment funds tend to invest in better performing companies by avoiding investing in companies that are heavily indebted with interest-based loans, a closer look at the industry might explain why the Islamic finance industry is performing better. Islamic banking benefits from oil revenues (primarily in the Gulf where it is predominately based) and is relatively smaller than its interest-based counterpart. These characteristics allow the industry to deal with problems quicker and without huge public-bailout packages.

Leading critics of the Islamic finance industry argue that the Islamic banking and finance industry is partially just a soft version of the secular system. According to them, if the Islamic finance industry continues to develop in the manner that is has, it will suffer from the same systemic problems as the conventional system. They call for a total reconsideration of the objectives, frameworks and methodologies of the modern Islamic banking and finance industry before it is presented as a viable alternative.

Muslims firmly believe that Islam has the solutions to the world’s problems and now is the ideal time to start demonstrating thus.


Mail & Guardian South Africa

Core Banking Replaced With Islamic Banking

Albaraka Bank Limited, the South African subsidiary of Bahrain-based Albaraka Banking Group B.S.C. (ABG) last year initiated an intensive project to replace its core banking system with the Equation Islamic Banking and Branch Automation System from Misys Plc.

The multi-million Rand IT solution is stated to be in line with the bank's holding company's strategic direction.

Commenting on the systems change, Albaraka Bank's Information Technology Manager, Naushaad Khan, said: "The acquisition of the Equation Islamic Banking and Branch Automation System was the result of the existing core banking system, which supported our business requirements, having reached the end of its life-cycle. Importantly, we have identified tremendous opportunities for leveraging the functionalities and systems automation offered by Equation in terms of Islamic banking, which will contribute strategically to the bank's competitive edge."

The bank's equation project was launched towards the end of 2008, with phase one implementation taking place during the second quarter of this year. Phase two will follow later this year once the core systems have been successfully bedded down.

ABG, an Islamic banking group with units in 12 countries and a global branch network of some 300 branches, is rolling it out to select ABG subsidiaries around the world, inclusive of the South African banking operation, shares a latest press update.

Albaraka Bank Limited was established in 1989 and has pioneered Islamic banking in South Africa as an alternative to conventional interest-based financial services provision and is the country's only fully-fledged Islamic bank.