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 banks will soon begin operations in France

Likely beginning by June 2009, Islamic banks will be authorized to open in France. Experts expect three banks will be shari’ah compliant – the Qatar Islamic Bank already established in London, the Kuwait Finance House, and the Al-Baraka Islamic Bank from Bahreïn. According to a study undertaken in May 2008, 500,000 Muslims in France are extremely interested in doing their banking in shari’ah-compliant banks.

In the recent second French forum on Islamic banking, Christine Lagarde, Minister of the Economy claimed that, “We are determined to make Paris an important site for Islamic finance.”

The first Islamic bank opened in London in September 2004.

See full text articles:

Le Parisien (French)

Le Figaro (French)

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)

Credit Crunch ‘Will Help Islamic Banking’

The religion-based system’s attitude to risk stands it in good stead compared to Western banks.
Islamic finance is set to be a big winner in the current financial crisis, BDO Stoy Hayward said today.
The financial advisor claimed that the religion-based system retains large amounts of money available to borrowers. This is in contrast to mainstream lenders, many of whom depend on inter-bank loans for revenue and have therefore been forced to make cutbacks due to the frozen money markets.

Invented in the mid-20th century by muslims looking for a system of finance that was in-keeping with the tenets of their religion, Islamic finance also has a radically different attitude to risk than other forms of banking. Commonly, the system works on a “risk-sharing” model. For example, Islamic insurance works by policyholders paying into and claiming from a central pool, which is used by all – in contrast to the common Western model. With usury from loans banned by Islam, the leverage – or, more simply, the amount of money owed – by Islamic financial institutions also tends to be lower.
Speaking to FT Advisor Dan Taylor, head of banking at BDO Stoy Hayward, explained: “As the risk profile of Islamic Banks is generally lower than conventional western banks, this presents a more solid option for both retail and institutional investors and suggests that dealings with Islamic financial institutions will grow dramatically as people switch to more secure products in this environment.

Full-text article continues 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.

Lloyds TSB introduces Shariah-compliant money transfer account

UK high street bank Lloyds TSB has launched a Shariah-compliant nostro account that enables customers to transfer money around the world in line with Islamic principles prevents any funds being invested in industries – such as alcohol and gambling – that are prohibited under Islam. Lloyds TSB says the account, which is aimed at the UK’s two million Muslims and 100,000 Muslim firms, is the first of its kind to be offered by a mainstream western bank. Whilst many Muslim customers make and receive international payments through an estimated 250 Islamic banks worldwide, the process of transferring the money between banks has not been in line with Islamic principles, says the UK bank. “We’ve designed this account to help the growing number of Islamic banks across the world, which deal with our customers’ transactions,” says Diana Brightmore-Armour, CEO corporate banking and co-head corporate markets, Lloyds TSB. “We’re providing the missing link in the chain, so now any person or business receiving payments from abroad into their own Islamic account knows the money will be dealt with according to Islamic law, from start to finish.”

As Islamic banking takes off, new courses are being set up in the universities

It’s the fastest-growing sector of the banking industry, yet few City boys know much about it and hardly any finance students are being taught it. But Islamic banking’s mysteries are now beginning to be unveiled and just this last month a business school and an accountancy body have announced new postgraduate programmes specialising in it. There are more than 250 Islamic banks worldwide, with at least _300bn in assets, up from _5bn in 1985. Small fry in the global economy, but growing at an astonishing 15 to 20 per cent a year. Rising oil prices and Europe’s growing Muslim population are driving an extraordinary surge in financial products compliant with Islamic law, eschewing interest and respecting Islamic ethical norms in investment. Just a few years ago, Islamic banks stood accused of funding terrorism. Now Gordon Brown has promoted London as a hub for Islamic finance, three British Islamic banks have been set up, and big players such as HSBC and Lloyds TSB have started offering Islamic financial products and services. To train bankers to develop these products, Bangor University’s business school is starting up a fully fledged Islamic banking Masters this September, the only university so far to offer one. Nick Jackson reports.

Islamic Bank Customers Share Risks And Rewards

MANCHESTER – Two years after its launch, the country’s first fully Islamic retail bank cannot yet offer traditional products like mortgages, but Muslim clients say they feel more at home there. “You feel you’re putting your money in the right place,” said Kuwaiti-born Mona Aabbassi as she walked into the Islamic Bank of Britain ( IBB.L ). Behind the bank’s glass walls, engraved with Arabic calligraphy, the staff can speak Arabic, Urdu, Bengali and Punjabi as well as English. Licensed in August 2004 by the Financial Services Authority (FSA), IBB has its headquarters in Birmingham and opened its seventh branch in Manchester in January. It aims to expand further in northwest England before moving into mainland Europe. According to the most recent census in 2001, around 13 percent of the country’s 1.6 million Muslims live in the northwest. Islam prohibits paying or receiving interest, “riba” in Arabic, considering it immoral to profit from money alone. Islam allows people to make a profit only if they bear the risk of an investment — as with equity in traditional western finance. Aabbassi feels comfortable with the way other customers at IBB share her values. “Some money went missing from my account but I recovered it because the person who got it by mistake phoned the bank,” she said. “It is because people here put Allah before themselves.” IBB aims to compete with conventional banks but to comply with Islamic principles, to ensure Muslims do not break the rules of their religion when they open a bank account. “Muslims want a good return,” said IBB Managing Director Michael Hanlon, who came to the bank after 34 years at Barclays ( BARC.L ). “But their faith might not necessarily drive them down the route of accepting the benefits regardless of what is available.” To offer a return on deposits, Islamic banks must share with customers any profits — and any risks — arising from trades the banks carry out with clients’ cash. “We generate profits from commodity trading activities and then we seek to pay our customers profits that are consistent with market rates generally,” Hanlon said. CLASH OF CONCEPTS To get its licence, IBB worked closely with the FSA as under British law, banks must guarantee that depositors receive their money back in full — a concept which clashes with the Islamic principle of risk-sharing. The solution was to offer a full guarantee for clients’ deposits, but let them choose whether to share any losses the bank may make. While trying hard to rival conventional banks, IBB is counting on its clients’ willingness to accept that returns may be lower for the sake of their faith. It recently launched a young persons’ savings account offering a target return of 3 percent before tax. This compares with a current 4.43 percent gross from Natwest’s ( RBS.L ) children’s savings accounts. “Only retail customers are attached to the religious argument,” said Standard & Poor’s analyst Anouar Hassoune. “Corporate borrowers and depositors usually do not care about religion: they ask for price and service.” Estimates of assets controlled by Islamic banks globally range between $200 billion (106 billion pounds) and $500 billion, growing at a pace of 10 to 15 percent per year, the FSA said. But IBB, which said it had some 14,000 customers at enD-2005, faces competition from conventional banks which are also offering services compliant with Islamic law, or Sharia. HSBC ( HSBA.L ) first introduced Sharia-compliant current accounts and home-finance schemes in July 2003 through its Islamic finance division. HSBC Amanah now has around 2,000 accounts and has financed as many home purchases. Lloyds TSB ( LLOY.L ) followed suit early last year and Lloyds’ Islamic services are now available at around 35 branches with more planned across the country, a spokesman said. Islam also bans investments in industries such as tobacco, alcohol, pornography, gambling and arms, so special committees have been set up to monitor banks’ Islamic products and services. Each bank has its own Sharia Supervisory Committee, employing experts in Islamic finance to ensure that all the bank’s products and transactions comply with Sharia.