Islamic banks: Trouble beneath calm waters?

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IFSB boss Rifaat Abdel Karim.

As Western regulators stress test top banks, Islamic finance wants to tighten its regulatory and disclosure framework amid concerns that unhealthy banks may have slipped under the radar.

Few islamic financial firms have reported headline-grabbing losses so far, but the industry's relatively modest size and opaque framework could mask more trouble than appearances suggest, according to bankers and lawyers.

Rather than stress testing individual banks as in the US, however, Islamic bankers and lawyers say that the Islamic finance sector needs better disclosure rules within stronger regulatory frameworks.

A narrow regulatory approach that examines individual firms rather than the sector and poor disclosure laws could have allowed weak Sharia banks to escape the authorities' attention, potentially sparking an Islamic banking crisis.

"Rather than just looking at one bank and examining the risks there, you need to look at a more macro level of the industry," said Rifaat Ahmed Abdel Karim, who heads Islamic Financial Services Board (IFSB), a top industry body.

"We need to see who's connected with what. It's not only the individual banks, but how they are connected at the macro level because then you can see who's exposed to what."

Since the global economic and property slump, Sharia banks' earnings have dropped by up to 40 percent on year. Firms such as Kuwait's Investment Dar and Dubai's Tamweel and Amlak Finance are trying to restructure.

UBS has forecast Dubai house prices could fall up to 70 percent from a fourth-quarter peak. A Reuters poll predicted prices will drop more than 40 percent in 2009 and 2010 before recovering in 2011.

The slide in property markets could highlight weakness in the regulation of the Islamic banking industry.

"In certain countries where the regulations are not as tight as in some jurisdictions, we may find one or two institutions that may pass through the sieve for a while," said Vaseehar Hassan Abdul Razack, chairman of Unicorn International Islamic Bank Malaysia, adding that Bahrain and Malaysia were well regulated.

"Many of the Islamic banks globally, and especially in the GCC, are real-estate oriented; so this could be one risk factor."

Unlike the US, which recently put 19 top lenders through ‘stress tests' to see which can survive a severe downturn, and Europe which is preparing to do the same, there have been few calls for Islamic banks to be tested to see if they need extra capital to weather heavier losses.

While the US stress test results showed all banks were solvent, regulators ordered them to raise nearly $75bn to build a capital cushion.

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READERS' COMMENTS

Who owns what?
Posted by WHATAN, Dubai on Monday 15 June 2009 at 11:58 UAE time


Do these Islamic banks not technically own all the assets, like lots of real estate purchased on behalf of their customers?

How are these then valued on their balance sheets, certainly keeping them on the books at purchase price distorts everything and some of these banks could thus technically be bankrupt?

We have not seen any losses passed on to depositors, where did the losses go then?

need to maintain perception
Posted by Nuts on Monday 8 June 2009 at 08:59 UAE time


DD's comment highlights the status of depositors as investors in an islamic financial set up and as rightly pointed out they are exposed to both profits and losses from their investments. This translates that if islamic financial institutions are transparent and follow international guidelines on revaluation of collateral and assets, given the current scenario, losses will be visible. These losses will have to be shared with the depositors. Not withstanding the USP of shariah compliant transactions, it will result in flight of investors given that not only the "used to" higher returns are vanishing but the capital is also being eroded will have an impact.

The absence of regulatory activism in this area and the lack of transparency is considered deliberate to sustain the islamic finance movement.......give it a thought

there are bigger culprits than wasta
Posted by DD, Bahrain on Sunday 7 June 2009 at 16:15 UAE time


islamic bank deposits offer higher rates than conventional banks. Most customers of islamic banks do not realise that islamic bank deposits are restricted investment accounts, that can result in losses including principal. Inter-linkages between islamic entities is not bad by itself. It is the complete lack of transparency. Most islamic banks, with the exception of KSA, operate as a group. Investment deals are conveniently marked up and "sold" by offering short term financing to the purchaser. Worked well when liquidity was abundant. Now that end investors refuse to sign up, most of these assets are ticking time bombs on the balance sheets of islamic banks. For now, the depositors at these banks continue to finance these assets....however the day of reckoning is not far off.....

Wasta is one of the culprits
Posted by Geriant, Dubai, UAE on Sunday 7 June 2009 at 09:21 UAE time


Many senior figures in Islamic banking and finance I have spoken to admit that the very term is wrong, misleading and also excluding. Part of the problem is also wasta, which allows a lot of unqualified borrowers to be financed to the hilt by their buddies in the banks. There is no due diligence because that is seen as haram in many cases. You will find the failures of Amlak et al were driven not by fraud, but by foolishness.

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