Islamic Banking in Singapore

Reuters reported that DBS, Singapore and south East Asia’s largest bank is scaling down on its Islamic banking operations, signalling the city-state’s efforts to promote Shariah banking are not bearing fruit.

DBS’ Islamic Bank of Asia (IBA), Singapore’s only wholly-owned full licensed Islamic bank, suffered a loss of US$77.1 million (RM256 million) in 2009 after making specific allowances on debt owned by customers in the Gulf region. The bank had US$725 million in assets as at end-2009, including US$453 million in payments due from non-bank customers. A source had earlier told Reuters the Islamic unit of DBS planned to get out of the lending business entirely. (Reuters; May 24, 2010)

What struck me was the statement on “lending business”. I have argued in past and still maintain my stand – Islamic banking is not about lending. Islamic banking is all about putting resources together and sharing risks and rewards in an economically beneficial business venture. Any lending should be kept at a minimum and should only be for exceptional cases and given interest free.

So, given my stand, I’m not surprised that Islamic banking is not making much headway in the non-traditional markets. While the traditional markets (read Muslim countries) have the added advantage of having religious obligation as a marketing tool, the non traditional markets needs more than that to push Islamic banking. Focus has to be on the uniqueness of system, the part that differentiates it from conventional banking. One of it is that it promotes risk and reward sharing instead of just plain borrowing and lending.

It is often lamented that Islamic finance lack knowledgeable practitioners. I want to add that the industry also lacks knowledgeable investors. By knowledgeable investors I mean investors who appreciate what Islamic finance stands for. For as long as investors demand a solution that mimics conventional products, Islamic finance will not take off, even in traditional markets. 

Universities Joining the Islamic Finance Bandwagon

Apparently, the Islamic finance industry was not badly affected by the global financial turmoil. One of the main reasons for this is because they are not exposed to the toxic assets that brought down most of the other banks. The resilience of the Islamic banking industry may not be fully attributed to prudent credit management or exceptional management skills; they were saved by Shariah’s prohibition of speculation, gambling (maisir) and uncertainty (gharar).

This September will see new courses and postgraduate qualifications in Islamic finance springing up throughout the UK and elsewhere in Europe. This development is sort of unusual because a few years ago, Islamic finance was viewed with extreme skepticism, often associated with terrorism and human rights abuses.

In the UK, interest in the sector reflects the government's intention to promote Britain as an Islamic finance centre. The UK already leads Europe not only in the number of locally established Islamic financial institutions but also in the number of Islamic finance training courses it offers, from entry to postgraduate level. Last December, the Treasury published a paper setting out the government's aim for London to be "Europe's gateway to international Islamic finance". This acknowledged that the industry was still young and therefore not yet experiencing skills shortages, but predicted that it soon would be.

The Guardian, (Tuesday 28 July 2009) reports that a few UK Universities have responded positively to this new opportunity. Newcastle University is offering an MSc. in finance and law with Islamic finance from next academic year. Henley Business School at the University of Reading has been offering an MSc in investment banking and Islamic finance since last year, with students spending the second part of the year in Kuala Lumpur. The University of Bangor in Wales has also been running its Islamic finance MA and MSc for a year and is considering introducing a new MBA in the subject, while the first students to take an Islamic finance option as part of an executive MBA offered in Dubai by Cass Business School will graduate this summer. Durham, which has been offering postgraduate research degrees in Islamic finance for some time, is now introducing a taught MA and MSc (the MSc is more quantitative), to respond to demand. Elsewhere in Europe, Reims Management School is offering a new specialist course in Islamic banking and finance for students on its masters in management programme, taught in English.

Strangely, two specialist Islamic Masters programmes running in the UK a few years ago, at the University of Durham and Loughborough University, were cancelled. Durham still offers a summer school and is the world's largest research hub for Islamic finance, with 25 PhDs at work at the university, but Rodney Wilson, professor of economics at Durham, says there was simply not enough demand from the right students.

Stefan Szymanski, professor of economics at Cass says "You just have to measure how many billions of dollars Islamic finance already handles in a year, if that grows over the years; it (Islamic finance) will become a universal part of every business school."

This is a good development, it bodes well for the industry, let’s hope that the universities teaching Islamic finance courses possess the qualified teaching expertise and are not in it just to capitalise on the wave of interest in the subject.

Training Islamic Banking and Finance Professionals

Any discussion on Islamic banking and finance is never complete without lamenting on the shortage of skilled IBF professionals. This lack of expert human resources is due to so much demand chasing so few talents. But before we dwell further on the matter, we should first define what an IBF professional is.

To be an IBF professional as a person must first;

• Appreciate the values promoted by Islam;
• Understands why Islam forbids certain things and/or activities; and
• Must never think/behave/act like a conventional banker.

How do we achieve this? How do we mould such a banker?

We should start form the very basics. These professionals must be told and reminded from the very beginning that Islamic and conventional banking are two distinctly different financial models. They should not in any circumstances apply conventional banking practices into Islamic banking. These professionals must be trained to look at Islamic banking from the Islamic banking angle and not from the perspective of conventional banking.

The Shariah based financial model, as the name suggests, is guided by the rules of Shariah and what can or cannot be done is determined by Islamic law. Therefore, in order to effectively promote Islamic banking and finance, the promoter must understand and acknowledge the governing rules. One need not be a Muslim to understand and appreciate Islamic law; the only thing needed is an open mind.

Understanding Islamic law would also mean understanding the mechanics of Islamic financial transactions, why certain activities are prohibited and why certain things need to be done in a certain way.

For the industry to prosper, all its components must be equipped with the necessary expertise. Therefore, when talking about IBF professionals, we should not be just looking at the bankers. The scope must be expanded to include the solicitors, accountants, rating agencies, trustees, media, investors and the regulators.

Shariah based finance is actually very simple and straight forward. We will complicate things every time we practice Islamic banking the conventional way.

Better Knowledge of Islamic Finance Needed

The Star, Thursday January 8, 2009

Don: Better knowledge of Islamic financing needed

KUALA LUMPUR: The lack of understanding of Islamic financing needs to be addressed so that people are not confused and misguided, says International Centre for Education in Islamic Finance (Inceif) chief academic officer/dean Prof Datuk Dr Syed Othman Alhabshi.He said even some employees who worked at Islamic banks couldn’t fully understand the concept of syariah-compliance.“We need to address this matter so that everyone will fully understand and have a clear picture of Islamic finance,” he told a press conference yesterday.

I couldn't agree more. The thing about Islamic banking is that since it started to make big waves in the last ten years or so, everyone thinks they can become an Islamic banker without formal and proper education in the field. Anyone with a certain number of years in a conventional bank, or insurance company or rating agency or research house or a business publication suddenly assume they are fit to structure and develop Islamic banking products and this is despite not being able to pronounce Mudharabah properly! This is why many of the Islamic financial products in the market today are only differentiated from their conventional counterpart by their Arabic sounding names. The mechanics and modus operandi of the product is almost identical.

Islamic banking and finance is totally different in all respects from the conventional finance and banking the world has seen and grown to love for the past 300 years. It would be disastrous and detrimental to the development and growth of Islamic finance if practitioners continue to develop so-called Islamic products based on the conventional platforms and norms.

What is needed is a paradigm shift in the way we approach and view Islamic finance. We need to accept that although the objectives of Islamic financing are similar to that of conventional finance, the means of achieving it is drastically different. Different here does not mean changing the product name or adding a few clauses in the transaction documents. The difference is in the mechanics, determination of profits (pricing), contractual obligations and relationship of all parties, the risk analysis and management, recovery methods, source of funds, utilisation of proceeds and remedies in the event of default.

In order for Islamic finance to prosper, practitioners must not only be well versed in the laws of Shariah but more importantly understand the objectives of Shariah. The market also needs to be made aware of the uniqueness of Islamic finance. Only then can we see the emergence of the true form of Islamic financing.

Note: Anomaly? According to the laws of Shariah, money is not a commodity and hence not tradable. What is traded at the Islamic Money Market (http://iimm.bnm.gov.my/) then?