Islamic Banks, Stuffed With Cash, Explore Partnerships in West

December 25, 2013

By Nathaniel Popper

 

A noted Muslim law scholar, Yusuf DeLorenzo, recently pored through the books of Continental Rail, a business that runs freight trains up and down the East Coast.

Along with examining the company’s financial health, Mr. DeLorenzo sought to make sure that the rail cars didn’t transport pork, tobacco or alcohol. He was brought in by American investment bankers who want to take rail cars bought by Continental Rail and package their leases into a security. The investment is being built for banks that are run according to Islamic law, which, among other things, prohibits investments in those three commodities. If the cars are acceptable, or halal, the deal will be one of the first in the United States to be completed in compliance with Islamic law.

“It’s a new territory for all of us,” said John H. Marino Jr., chief executive of Continental Rail.

The deal is a sign of how banks that comply with Islamic law are making inroads into the global banking scene and how Western businesses are working to meet the expectations of those banks. The banks can’t find enough acceptable places to park their money, many industry insiders say, so investment bankers are scurrying to assemble deals.

Over the last 30 years, the Islamic financial sector has grown from virtually nothing to over $1.6 trillion in assets, according to data from the Global Islamic Financial Review, an industry publication. The financial crisis has only encouraged the growth. Industry assets grew 19 percent in 2011 and 20 percent in 2012, in contrast to the less than 10 percent growth at non-Islamic banks in most of the world.

Until recently, Islamic banks have largely put their money to work in the Middle East — or, if they invested in other parts of the world, in real estate. Real estate is among the most popular investments under Islamic law, also known as Shariah, because a deal can be structured that does not require interest payments, which are prohibited by Shariah. But as the banks grow larger they are looking for new, more diverse places to put their money.

The deal with Continental Rail is attractive because the rail cars will spin off lease payments, rather than interest, and can be bought in bulk. The cars are also in the United States, which will help bring geographic diversity to the bank portfolios. The deal was brokered by a newly created team at Taylor-DeJongh, a Washington investment bank, looking to bring money from Islamic banks to the United States.

There are similar pushes around the world. A few non-Muslim African countries, including South Africa, have recently been talking about raising money using the Islamic financial instruments known as sukuk, which function much like bonds. Prime Minister David Cameron of Britain announced in late October that England planned to become the first European country to issue sukuk. The global bank Société Générale is preparing to raise money from Islamic banks in the coming months.

“There is a gap between all the money coming in to Islamic banks and the deployment of that money into real economic assets,” said Sayd Farook, the global head of Islamic finance atThomson Reuters. “A crazy amount of money has gone into their coffers and they need somewhere to invest it.”

The first modern Islamic banks were founded in the 1970s, motivated by the Quran’s ban on riba, which has been interpreted as any fixed payment charged for money lending. Islamic banks have focused instead on putting their money into real assets and property, and sharing any resulting profits from the performance of an asset. Muslim mortgages, for instance, are structured so that the bank buys the house and then sells it to the occupant slowly over time. Stocks are generally considered acceptable as long as the companies issuing the stock adhere to Islamic law; casinos, banks and weapons companies are forbidden.

Islamic banks have religious scholars, like Mr. DeLorenzo, review their operations on a regular basis. Yet some Islamic scholars have criticized the banks for straying too far from the spirit of the Quran into the speculative realms of Wall Street. Sometimes it is hard to tell the difference between a Western investment and a Shariah one. For instance, an Islamic bank’s fixed-deposit account ties up a customer’s money for a set period of time, like a certificate of deposit. Instead of offering interest, the account offers a share of the profit from its investments. The “profit rate” of a one-year deposit currently is 1.9 percent at one major Middle Eastern bank.

There is a debate among Islamic scholars about what qualifies as halal. “The industry is going through soul-searching,” said Ayman A. Khaleq, a lawyer specializing in Islamic finance at the Morgan Lewis law firm in Dubai. “It’s far from settled.”

But these problems have not stopped the flood of deposits into banks like the Sharjah Islamic Bank, which is named for the city in the United Arab Emirates where it is based. The bank has 24 branches, some of which offer separate spaces for female and male customers. From 2006 to 2012, deposits there almost tripled to about $3 billion.

Muhammed Ishaq, the head of the treasury division at Sharjah, said that the bank’s problem was not attracting money, it was figuring out what to do with it. “It’s not very easy when any financing needs to be backed by some kind of asset,” Mr. Ishaq said.

Real estate has been a very popular investment in the Islamic world, but when real estate was hit hard during the 2008 financial crisis, many investors were reminded of the need for more diverse portfolios. For many banks the answer is sukuk. Like bonds, sukuk make regular payments to investors. But unlike a bond, which is a money loan, sukuk are structured as investments in hard assets that generate payments.

The amount of sukuk sold each year has grown sixfold from 2006 to 2012, to some $133 billion, according to Thomson Reuters’s Islamic financial data service, Zawya. A joint venture between Dow Chemical and Saudi Arabia’s national oil company sold a $2 billion sukuk this year to raise money for an oil complex. But this is falling far short of the demand from banks. “There are serious supply-side bottlenecks,” said Ashar Nazim, head of Ernst & Young’s Global Islamic Banking Center.

Now there are several efforts to create more supply. The Bank of London and the Middle East was founded in London with Kuwaiti money to find these new investment opportunities. “They wanted a wider range of Islamic assets that could be originated away from the Middle East,” said Nigel Denison, the bank’s treasurer.

Yavar Moini, the former head of Islamic banking at Morgan Stanley, said he was establishing an operation in Dubai that would gather assets from around the world that can be packaged into sukuk, like Fannie Mae and Freddie Mac do in the United States with mortgages. Mr. Moini said that “it’s the absence of sufficient product or opportunities for Islamic investors that drives them into the conventional arena.”

In the United States there have been a few attempts at sukuk. In 2006, a Texas oil company sold a $166 million sukuk to finance oil exploration, but the company went bankrupt during the financial crisis. Then in 2009, General Electric issued a $500 million sukuk tied to aircraft leases.

Taylor-DeJongh, the 30-year old, energy-focused investment bank, is hoping to take advantage of the shortage. Ibrahim Mardam-Bey, who worked on the 2006 Texas sukuk, joined Taylor-DeJongh at the end of 2012 and has built a team of five bankers working on Islamic finance.

One deal would provide financing for private toll bridges. The other, which is further along, will bundle the rail cars managed by Continental Rail. The team has already signed a deal to buy 1,000 rail cars in Pennsylvania, and is looking to acquire 5,000 more.

Mr. Mardam-Bey said that some American businesses were hesitant to take money from Islamic banks, perhaps a byproduct of negative associations with Shariah since the Sept. 11 attacks. But in the Texas deal, and in many others, that tends to fade as the financial possibilities become clear.

“The borrower was a Texan wildcatter who couldn’t spell ‘sukuk,’ ” Mr. Mardam-Bey said. “But at the end of the day when I brought the check he didn’t care if I prayed to Allah. He just wanted the money.”

 

Dealbook/New York Times: http://dealbook.nytimes.com/2013/12/25/islamic-banks-stuffed-with-cash-explore-partnerships-in-west/?_r=0

Islamic group urges sobriety – and invests in bar chain

An Islamic organisation that has argued sobriety is an “obligation on Muslims” and a “revolutionary duty” has invested in a bar chain offering £1 “shooters’” and £3 cocktails.

 

Accounts filed by the Islamic Human Rights Commission’s charitable trust in 2009 listed as an investment the Baa Bar Group, a Liverpool-based company with eight locations across the North of England, worth £38,250. Accounts for the year ending 30 June 2012 showed continued investment in the chain, which on its website encourages customers to “follow their own deepest of animal instincts”. The message couldn’t be more different from the IHRC’s own publications. Among these is Quest For Unity by Imam Achmad Cassiem. The report says: “The greatest underminer and saboteur of discipline and confidence is alcohol and so-called social drinking.” It goes on to claim that the “oppressor” is “making enormous profits from liquor” and urges Muslims to refrain from producing, distributing and consuming alcohol.

 

The IHRC did not respond to invitations for a response and The Baa Bar Group declined to comment. However Jacob Campbell, research director for Stand for Peace, an interfaith organisation that campaigns against extremism, is quoted as saying: “Although bizarre on the face of it, it actually isn’t all that surprising. Islamist groups tend to take the view that the ends invariably justify the means… Better by far to become morally bankrupt than financially so.”.

A plan to help blighted suburbs meets French resistance due to suspicions over benefactor

News Agencies –November 11, 2012

 

As Europe is engulfed in crisis, Qatar has been on a global spending spree, buying stakes in luxury brands, acquiring soccer club Paris St. Germain and financing London’s “Shard” — the EU’s tallest building. Now, to the consternation of the French, the emirate wants to make a major humanitarian investment in the West. Permeating the hostile response was suspicion that the tiny Muslim state may have a special agenda at a time when fears of terrorism by Islamist extremists and a perceived infiltration of Muslim culture in French life have been on the rise.

 

Far-right leader Marine Le Pen called the Qatari investment an “Islamist Trojan horse” while independent politician Nicolas Dupont-Aignan, who champions national sovereignty, said France would be “prostituting itself” by accepting the money.  Now, a year after their visit to the palaces of Doha, the 10 who bucked a system that has failed the suburbs worry the money may never reach those they hope to help — ordinary people from their neighborhoods with big ideas bereft of any hope of backing.

 

Two French presidents tried to figure out how to deal with the Qatari offer, first conservative Nicolas Sarkozy and now socialist Francois Hollande — who last month confirmed the compromise of spreading the funds across all neglected regions.

Canadian Muslim investors seek Shariah-compliant RRSPs

CBC News – February 27, 2012

The deadline for RRSP contributions is nearing, but there’s another important investment concern for Muslims — ensuring the products they rely on for their retirement income comply with Islamic principles.
With nearly a million Muslims in Canada, forming nearly three per cent of the country’s population, there has been an emphasis over the last decade in investment products that adhere to the strict dictates of Shariah law.
As a devout Muslim, Mohammad Khalid, a retired economist living in Oakville, Ont., says Muslims must be careful about their investments, such as securities and equities. Khalid, who manages his own portfolio, invests in sectors such as mining, forestry and technology, and is helping his older children save for their retirement. He says that unless Muslim investors are careful about where their money is going, they could end up in non-compliant products.
A testament to the growing interest in Shariah-compliant investing is Standard & Poor’s introduction of its Shariah stock index (S&P/TSX 60 Shariah Index) into the Canadian market in 2009. The index recategorizes equities on the S&P/TSX 60 and excludes all equities that do not comply with Islamic law, which is based on the Qur’an.

Demand — and supply — for “halal” financial products on the rise

Saving and investing in line with religious principles is important for many Muslims and an increasing range of financial products is now available to meet Sharia rules. There are 1.8 million Muslims in Britain and surveys show that about three-quarters are interested in the idea of running their savings and investments in keeping with principles laid out in the Koran. While Sharia products are in their infancy in the United Kingdom, the uptake is very rapid.

While trade and investment are encouraged, Sharia rules prohibit involvement in companies whose activities touch on a wide range of industries including alcohol, gambling, pornography, human cloning, arms and many forms of entertainment. Industries associated with pork are also out. However, the biggest difficulty for devout Muslims and those financial groups which aim to serve them is the principle of riba. Riba means that you cannot receive or pay interest, because Islam defines interest as a form of usury.

Interest is hard to remove from any financial transaction. The entire conventional banking industry, with products from mortgages through to credit-cards and deposit accounts, depends on calculating interest. The answer that Sharia-compliant accounts offer is to convert the interest normally paid into a form of profit or loss. Accounts or mortgages will often be marketed as offering competitive rates measured against non-Sharia, interest-based products, but the structure of the financial proposition is different. British banks have come up with a wide range of Islamic financial products such as accounts, mortgages, investment plans and credit cards, adapting to the strong demand among the Muslim population.

UK Islamic banks to double in five years

With the Sharia-compliant market growing by up to 15 per cent a year and estimated to be worth a trillion dollars (Dh3.67tn) by 2010, the number of Islamic investment banks in the UK is predicted to double within five years, said Samer Merhi, the executive director of the Gatehouse Bank, an Islamic finance house based in the UK. “It has the potential to grow because of the high demand and the interest to make the UK the international heart of Islamic finance business,” Mr Merhi said at an Islamic finance forum in Kuala Lumpur last week. Gatehouse, a subsidiary of the Securities House of Kuwait, which started operating in London in April, is one of five Islamic investment banks based in the UK. There is also one fully fledged retail bank, the Islamic Bank of Britain, which became the first independent Islamic bank in Britain to register with the Financial Services Authority (FSA) in 2004.

It was an institution established with considerable input from the Abu Dhabi Islamic Bank to give the two million-plus Muslims in the UK a bank of their own, although now more than 20 other conventional UK banks are offering customers Sharia-compliant products. With active encouragement from the government – and, particularly, then-chancellor Gordon Brown – the UK became the first EU member state to authorise Islamic banks. Though the French are now doing their best to catch up, it has maintained its lead by adopting a level regulatory playing field for both traditional and Sharia-compliant banks. David Sapsted reports.

Full-text article available here. (Some news sites may require registration)

UK Islamic banks to double in five years

With the Sharia-compliant market growing by up to 15 per cent a year and estimated to be worth a trillion dollars (Dh3.67tn) by 2010, the number of Islamic investment banks in the UK is predicted to double within five years, said Samer Merhi, the executive director of the Gatehouse Bank, an Islamic finance house based in the UK. It has the potential to grow because of the high demand and the interest to make the UK the international heart of Islamic finance business, Mr Merhi said at an Islamic finance forum in Kuala Lumpur last week. Gatehouse, a subsidiary of the Securities House of Kuwait, which started operating in London in April, is one of five Islamic investment banks based in the UK. There is also one fully fledged retail bank, the Islamic Bank of Britain, which became the first independent Islamic bank in Britain to register with the Financial Services Authority (FSA) in 2004. It was an institution established with considerable input from the Abu Dhabi Islamic Bank to give the two million-plus Muslims in the UK a bank of their own, although now more than 20 other conventional UK banks are offering customers Sharia-compliant products. With active encouragement from the government – and, particularly, then-chancellor Gordon Brown – the UK became the first EU member state to authorise Islamic banks. Though the French are now doing their best to catch up, it has maintained its lead by adopting a level regulatory playing field for both traditional and Sharia-compliant banks. David Sapsted reports.

Bercy Seeks to Enable the Development of Islamic Financing in France

Christine Lagarde, Minister of the Economy and Finance, wants to facilitate the development of Islamic finances in France, stating she wants follow the model already in place in London. Known as “sukuks”, this kind of loan meets the rules of shari’ah law which prohibits claiming interest and investing in certain sectors like those related to war, alcohol and gaming.

See full-text articles:

Le Figaro

Le Monde

First Islamic equity product launched in UK

The London-based ABC International Bank’s Islamic Asset Management (IAM) entity, both of which are subsidiaries of the Bahrain-based consortium bank Arab Banking Cooperation, has launched the first retail Shariah-compliant capital-protected equity product in the UK under its ‘Alburaq’ brand. The savings product, which has a minimum subscription of just _500 and is a Shariah-compliant alternative to a conventional guaranteed equity bond, adds to an increasing number of retail Islamic financial offerings in the UK market, which now includes mortgages, Takaful (insurance), pensions, current and deposit accounts and even escrow accounts for money transfers. Other Shariah-compliant retail products in the process of being launched include ISAs (investment savings accounts) and child trust accounts. The product was structured by ABC International Bank and is offered in partnership with the Bank of Ireland, which has a long history of providing guaranteed equity bonds to UK consumers. ABC Group is one of the largest banks in the Arab world with assets totaling around $32.7 billion at the end of December 2007. The group announced net profits of $125 million for the year 2007. The government of Prime Minister Gordon Brown has been very supportive of developing the Islamic finance sector under the Labor Party’s social and financial inclusion policies. At the same time, it is the stated policy of the UK to develop London into an international hub for Islamic finance, investment and trade. Only yesterday at the Jeddah oil summit, Brown reiterated that oil producers in the GCC states should divert some of their record liquidity surpluses to investment in the developed countries in renewable energy initiatives and other sectors. These funds could be channeled through sovereign wealth funds; through conventional or Islamic capital flows. Bahrain-based Arcapita Bank, for instance, was one of the first Islamic financial institutions to invest in alternative energy in the UK in a wind farm project developed by Innogy.

Carnegie Corporation Contributes to Deeper Understanding of Islam

The Carnegie Corporation announced an initial $10 million investment to enrich the quality of America’s public dialogue on Muslim societies and Islam. The corporation’s comprehensive strategy focuses in increasing public knowledge about cultures and history of Islam and Muslim communities – both in the US and abroad, and public knowledge about diverse ways of thinking. These grants and allocations constitute the largest commitment by a US foundation toward the development and fostering of understanding among Americans about Muslim communities. There is a disconnection between many of our public conversations about Islam and our knowledge of it […]. We hope that our work will better equip Americans to make informed decisions about, and engage with, various Muslim communities in our midst as well as those abroad, said Carnegie Corporation President Vartan Gregorian.