Islamic banks: Trouble beneath calm waters?

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Unicorn Bank chief Vaseehar Hassan.

"One of the biggest weaknesses in Islamic finance is that too many of the banks have gone into real estate and equities and both of these are underperforming," said Saad Rahman, Islamic banking executive director at investment bank, Calyon.

"The stress test should not be seen by banks as a stick to be beaten under, but should be an honest assessment of where they are."

Islamic banks are usually governed by national authorities and, if they so choose, by industry bodies. The level and nature of the supervision varies across markets, reflecting the Islamic finance industry's infancy and fragmented regulatory framework.

Much depends on the will of the regulators to wield the stick, and the Gulf region needs a stronger push, said Alex Saleh, partner at law firm DLA Piper Middle East.

For example, "a lot of the [Islamic] investment products that are sold by the investment companies are not regulated in Kuwait," he said.

He cited the example of wakala (agency) investments which could be structured so that an agent need not reimburse the investor the entire sum in the case of a loss.

IFSB has disclosure rules on capital adequacy and credit risks but, like other Sharia finance bodies, its regulations are not binding on the sector and compliance is voluntary.

Standard disclosure rules may offer limited protection.

"Quite often you have a lot of mezzanine products; so the banks have a lot of latitude on whether to report those things under one or the other category," said Raj Madha, EFG-Hermes banking analyst, referring to instruments with debt and equity features.

"It allows for opacity which certainly some banks are able to take advantage of, and at least in principle, it creates the opportunity for not disclosing some losses.

"Obviously those listed entities, particularly in the UAE, with good public disclosure policies operate to a much higher standard than that," he added. (Reuters)

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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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