by

Islamic Banking Grows, With All Sorts of Rules

May 3 story from the Wall Street
Journal

May 3,
2005

World
News

Islamic Banking
Grows,

With All Sorts of
Rules

By HUGH
POPE

Staff Reporter of THE
WALL STREET
JOURNAL

JIDDA, Saudi
Arabia -- Mishari al-Mishari worked for two decades
at

international banking titan
Citibank before he became chief executive
of

Bank Aljazira. He hired
Western-trained expatriates to fill
management

ranks at Aljazira,
which has been posting significant
gains.

But the key to
Bank Aljazira's recent success is a plaque displayed
near

the elevators at its
headquarters in this Red Sea port city. It is a
brass

copy of a certificate
signed by a board of Muslim scholars, testifying
that

the institution now works
in strict compliance with Islamic religious
laws.

With his profits
soaring in the Arab world's biggest economy, Mr.
Mishari

spotted an early trend
that is reshaping the financial landscape of
the

Middle East and beyond:
Islamic banking.

[Mishari
al-Mishari]

Islam's
Sharia law severely limits the practice of charging or
paying

interest. But a new
generation of Islamic banks have found ways to
make

products mimic the
Western originals, from floating-rate
infrastructure

loans to
Islam-compliant credit cards issued by Visa. The
paperwork,

however, is
Islamic. "Risk," Mr. Mishari says with a smile, "has
no

religion."

In
the past decade, Islamic banking has matured from a tiny,
sometimes

controversial
backwater into an important current of global
finance,

especially as Western
bankers and borrowers compete for the new
funds

gushing into the Persian
Gulf because of higher oil revenue. A
Citigroup

Inc. unit now
operates what is effectively the world's largest Islamic
bank

in terms of transactions.
Some $6 billion of Citibank deals now have
been

structured and marketed
in conformance with Islamic laws since starting
out

in 1996. HSBC Holdings
PLC, Deutsche Bank AG, ABN Amro Holding NV,
SociÂŽtÂŽ

GÂŽnÂŽrale
SA, BNP Paribas and Standard Chartered also have
established

Islamic banking
units in the past few
years.

In 1999, there
were just a dozen Islamic-branded investment funds;
now

there are at least 150
around the world. In pioneering Malaysia,
Islamic

financial instruments
now account for 10% of the country's public
and

private financial
dealings, up from 6% in 2000, according to the
Malaysian

central bank. In
Turkey, the biggest economy in the Muslim world,
market

leader HSBC Turkey
arranged $438 million of loans for companies last
year,

up from $50 million in
2001.

Western borrowers
are tapping the trend. Citibank sold a ?100 million
($129

million) Islamic bond
offering last September for the German state
of

Saxony-Anhalt. The deal
involved investors buying the state's tax
office

buildings and then
leasing them back for a revenue stream. The return
on

investment was thus from
ownership, not interest payments. It was
thus

Islamic and attracted
Middle Eastern
money.

[Aljazira Bank's Jidda
branch]

Buying and Selling:
The Islamic stock-trading salon at Aljazira
Bank's

Jidda
branch.

Even the U.S.
Treasury Department has noted the increasing popularity
of

Islamic mortgages and
investment indexes in the U.S. and Europe.
It

appointed its first Islamic
banking scholar-in-residence last
June.

"Islamic finance is
coming of age," says Mahmoud al-Gamal, chairman
of

Islamic economics at Rice
University in Texas, who filled the Treasury
post

last
year.

Regulation remains
a big concern, partly because so much involved
with

modern Islamic banking is
so new. There isn't any unified Islamic
banking

authority --
comparable, say, with the Bank of International Settlements
in

Switzerland -- and no
universal view of what exactly qualifies as
an

Islamic product. Several
competing bodies in Bahrain and another
in

Malaysia are working on new
rules over Islamic financial accounting,
bank

governance and lending
standards.

Still, in
Saudi Arabia, Islamic banking already is challenging
the

longstanding dominance of
Western-style financial institutions. At
the

National Commercial Bank,
mainly owned by the Saudi state and the
largest

bank in the Arab
world, the lending portfolio shot up last year alone
to

80% compliant with Islamic
law from 16%, according to the bank's
senior

economist Nahed Taher.
The bank now is considering going all-Islamic,
like

Bank Aljazira. "There's
huge demand," she
says.

Bank Aljazira,
while far smaller, already has capitalized on the
trend.

From 2002, when its
all-Islamic strategy gained traction, the bank
has

doubled its profits each
year. Mr. Mishari arrived from Citibank in
1993,

lured by a group of
Saudi financiers who wanted to rebuild
the

then-struggling bank. The
bank operated completely on Western
banking

conventions back then.
"In Saudi Arabia, there was only one
bank

concentrating on
Sharia-compliant products," says Mr. Mishari, a
graduate

of the University of
Oregon. "We saw very little
innovation."

Mr.
Mishari's team decided profit-generating Islamic products would
be

perfect for attracting a
distinct group of potentially lucrative
customers:

middle-class Saudis
who thought Islamic banking meant earning no return
or

dealing with financial
products that were unimaginative, backward
and

designed only for highly
religious Muslims. In Saudi Arabia, in
particular,

Mr. Mishari's team
saw low-hanging fruit: nearly half of Saudi
bank

deposits were kept in
noninterest-bearing savings
accounts.

[Getting
Religion]

In 1998, the
bank decided the best strategy was to brand itself as
a

high-class, all-Islamic
bank. But Mr. Mishari didn't want to jettison
the

suit-and-tie Westerners he
had hired; they still feature prominently in
the

bank's annual report, and
Mr. Mishari, who favors the traditional
Saudi

robe and headdress as
attire, often turns to them to work out the
finer

points of Islamic
finance.

The bank's
first step was setting up a Sharia board -- made up of three
to

five Islamic authorities
who vet the bank's documentation and certify
that

products comply with
Islamic law. This religious approval could be
vital:

One adviser to the
Sharia board took two months to persuade the owner of
a

building in a Saudi
provincial city to accept Bank Aljazira as his
tenant.

Mr. Mishari's
team first pioneered an Islamic leveraged
stock-trading

mechanism to
mimic Western margin-trading accounts. Before other
banks

caught up, Aljazira shot
to the top stock-broker slot in 2000 and
2001.

Then it tapped a British
convert to Islam, Dawood Taylor, to construct
an

Islamic form of life
insurance. It took Mr. Taylor two years to get
it

right, but the Sharia board
finally approved a system based on
mutual

insurance.

The
premiums still have to be invested, and Mr. Taylor couldn't have
moved

on without the
development in the past six years of stock-market
indexes

that screen companies
for compliance with Islamic law. These have
been

developed almost entirely
in the West, and by one measure offer access
to

$9 trillion of the world's
$28 trillion stock-market capitalization.
Most

are oil, technology or
health stocks for which Islamic restrictions
on

pork, alcohol, tobacco,
interest, pornography, gambling and high
debt

ratios don't play a role.
In practice, that means companies like
Microsoft,

ExxonMobil and
Pfizer.

The bank now has
2,500 individual and 12,500 corporate policyholders
for

the insurance plan and Mr.
Taylor is adding 25 staffers a month.
This

breakthrough has caught
the eye of traditional insurance giants
like

France-based AXA SA. "So
far our business in Saudi Arabia is
minuscule.

We'll have to think
about something like that if we want to stay in
the

market," an AXA
spokeswoman said.

Write
to Hugh Pope at
hugh.pope@wsj.com

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