{"id":54,"date":"2005-05-04T03:47:25","date_gmt":"2005-05-04T03:47:25","guid":{"rendered":"http:\/\/alephnaught.wordpress.com\/2005\/05\/04\/islamic-banking-grows-with-all-sorts-of-rules\/"},"modified":"2005-05-04T03:47:25","modified_gmt":"2005-05-04T03:47:25","slug":"islamic-banking-grows-with-all-sorts-of-rules","status":"publish","type":"post","link":"https:\/\/www.alephnaught.com\/Blog\/2005\/05\/04\/islamic-banking-grows-with-all-sorts-of-rules\/","title":{"rendered":"Islamic Banking Grows, With All Sorts of Rules"},"content":{"rendered":"
\n
May 3 story from the Wall Street
\nJournal<\/font><\/div>\n

<\/p>\n

May 3,
\n2005<\/font><\/tt>
World
\nNews<\/font><\/tt>
Islamic Banking
\nGrows,<\/font><\/tt>
With All Sorts of
\nRules<\/font><\/tt><\/p>\n

By HUGH
\nPOPE<\/font><\/tt>
Staff Reporter of THE
\nWALL STREET
\nJOURNAL<\/font><\/tt><\/p>\n

JIDDA, Saudi
\nArabia -- Mishari al-Mishari worked for two decades
\nat<\/font><\/tt>
international banking titan
\nCitibank before he became chief executive
\nof<\/font><\/tt>
Bank Aljazira. He hired
\nWestern-trained expatriates to fill
\nmanagement<\/font><\/tt>
ranks at Aljazira,
\nwhich has been posting significant
\ngains.<\/font><\/tt><\/p>\n

But the key to
\nBank Aljazira's recent success is a plaque displayed
\nnear<\/font><\/tt>
the elevators at its
\nheadquarters in this Red Sea port city. It is a
\nbrass<\/font><\/tt>
copy of a certificate
\nsigned by a board of Muslim scholars, testifying
\nthat<\/font><\/tt>
the institution now works
\nin strict compliance with Islamic religious
\nlaws.<\/font><\/tt><\/p>\n

With his profits
\nsoaring in the Arab world's biggest economy, Mr.
\nMishari<\/font><\/tt>
spotted an early trend
\nthat is reshaping the financial landscape of
\nthe<\/font><\/tt>
Middle East and beyond:
\nIslamic banking.<\/font><\/tt>
[Mishari
\nal-Mishari]<\/font><\/tt><\/p>\n

Islam's
\nSharia law severely limits the practice of charging or
\npaying<\/font><\/tt>
interest. But a new
\ngeneration of Islamic banks have found ways to
\nmake<\/font><\/tt>
products mimic the
\nWestern originals, from floating-rate
\ninfrastructure<\/font><\/tt>
loans to
\nIslam-compliant credit cards issued by Visa. The
\npaperwork,<\/font><\/tt>
however, is
\nIslamic. \"Risk,\" Mr. Mishari says with a smile, \"has
\nno<\/font><\/tt>
religion.\"<\/font><\/tt><\/p>\n

In
\nthe past decade, Islamic banking has matured from a tiny,
\nsometimes<\/font><\/tt>
controversial
\nbackwater into an important current of global
\nfinance,<\/font><\/tt>
especially as Western
\nbankers and borrowers compete for the new
\nfunds<\/font><\/tt>
gushing into the Persian
\nGulf because of higher oil revenue. A
\nCitigroup<\/font><\/tt>
Inc. unit now
\noperates what is effectively the world's largest Islamic
\nbank<\/font><\/tt>
in terms of transactions.
\nSome $6 billion of Citibank deals now have
\nbeen<\/font><\/tt>
structured and marketed
\nin conformance with Islamic laws since starting
\nout<\/font><\/tt>
in 1996. HSBC Holdings
\nPLC, Deutsche Bank AG, ABN Amro Holding NV,
\nSoci\u00c2\u017dt\u00c2\u017d<\/font><\/tt>
G\u00c2\u017dn\u00c2\u017drale
\nSA, BNP Paribas and Standard Chartered also have
\nestablished<\/font><\/tt>
Islamic banking
\nunits in the past few
\nyears.<\/font><\/tt><\/p>\n

In 1999, there
\nwere just a dozen Islamic-branded investment funds;
\nnow<\/font><\/tt>
there are at least 150
\naround the world. In pioneering Malaysia,
\nIslamic<\/font><\/tt>
financial instruments
\nnow account for 10% of the country's public
\nand<\/font><\/tt>
private financial
\ndealings, up from 6% in 2000, according to the
\nMalaysian<\/font><\/tt>
central bank. In
\nTurkey, the biggest economy in the Muslim world,
\nmarket<\/font><\/tt>
leader HSBC Turkey
\narranged $438 million of loans for companies last
\nyear,<\/font><\/tt>
up from $50 million in
\n2001.<\/font><\/tt><\/p>\n

Western borrowers
\nare tapping the trend. Citibank sold a ?100 million
\n($129<\/font><\/tt>
million) Islamic bond
\noffering last September for the German state
\nof<\/font><\/tt>
Saxony-Anhalt. The deal
\ninvolved investors buying the state's tax
\noffice<\/font><\/tt>
buildings and then
\nleasing them back for a revenue stream. The return
\non<\/font><\/tt>
investment was thus from
\nownership, not interest payments. It was
\nthus<\/font><\/tt>
Islamic and attracted
\nMiddle Eastern
\nmoney.<\/font><\/tt>
[Aljazira Bank's Jidda
\nbranch]<\/font><\/tt>
Buying and Selling:
\nThe Islamic stock-trading salon at Aljazira
\nBank's<\/font><\/tt>
Jidda
\nbranch.<\/font><\/tt><\/p>\n

Even the U.S.
\nTreasury Department has noted the increasing popularity
\nof<\/font><\/tt>
Islamic mortgages and
\ninvestment indexes in the U.S. and Europe.
\nIt<\/font><\/tt>
appointed its first Islamic
\nbanking scholar-in-residence last
\nJune.<\/font><\/tt>
\"Islamic finance is
\ncoming of age,\" says Mahmoud al-Gamal, chairman
\nof<\/font><\/tt>
Islamic economics at Rice
\nUniversity in Texas, who filled the Treasury
\npost<\/font><\/tt>
last
\nyear.<\/font><\/tt><\/p>\n

Regulation remains
\na big concern, partly because so much involved
\nwith<\/font><\/tt>
modern Islamic banking is
\nso new. There isn't any unified Islamic
\nbanking<\/font><\/tt>
authority --
\ncomparable, say, with the Bank of International Settlements
\nin<\/font><\/tt>
Switzerland -- and no
\nuniversal view of what exactly qualifies as
\nan<\/font><\/tt>
Islamic product. Several
\ncompeting bodies in Bahrain and another
\nin<\/font><\/tt>
Malaysia are working on new
\nrules over Islamic financial accounting,
\nbank<\/font><\/tt>
governance and lending
\nstandards.<\/font><\/tt><\/p>\n

Still, in
\nSaudi Arabia, Islamic banking already is challenging
\nthe<\/font><\/tt>
longstanding dominance of
\nWestern-style financial institutions. At
\nthe<\/font><\/tt>
National Commercial Bank,
\nmainly owned by the Saudi state and the
\nlargest<\/font><\/tt>
bank in the Arab
\nworld, the lending portfolio shot up last year alone
\nto<\/font><\/tt>
80% compliant with Islamic
\nlaw from 16%, according to the bank's
\nsenior<\/font><\/tt>
economist Nahed Taher.
\nThe bank now is considering going all-Islamic,
\nlike<\/font><\/tt>
Bank Aljazira. \"There's
\nhuge demand,\" she
\nsays.<\/font><\/tt><\/p>\n

Bank Aljazira,
\nwhile far smaller, already has capitalized on the
\ntrend.<\/font><\/tt>
From 2002, when its
\nall-Islamic strategy gained traction, the bank
\nhas<\/font><\/tt>
doubled its profits each
\nyear. Mr. Mishari arrived from Citibank in
\n1993,<\/font><\/tt>
lured by a group of
\nSaudi financiers who wanted to rebuild
\nthe<\/font><\/tt>
then-struggling bank. The
\nbank operated completely on Western
\nbanking<\/font><\/tt>
conventions back then.
\n\"In Saudi Arabia, there was only one
\nbank<\/font><\/tt>
concentrating on
\nSharia-compliant products,\" says Mr. Mishari, a
\ngraduate<\/font><\/tt>
of the University of
\nOregon. \"We saw very little
\ninnovation.\"<\/font><\/tt><\/p>\n

Mr.
\nMishari's team decided profit-generating Islamic products would
\nbe<\/font><\/tt>
perfect for attracting a
\ndistinct group of potentially lucrative
\ncustomers:<\/font><\/tt>
middle-class Saudis
\nwho thought Islamic banking meant earning no return
\nor<\/font><\/tt>
dealing with financial
\nproducts that were unimaginative, backward
\nand<\/font><\/tt>
designed only for highly
\nreligious Muslims. In Saudi Arabia, in
\nparticular,<\/font><\/tt>
Mr. Mishari's team
\nsaw low-hanging fruit: nearly half of Saudi
\nbank<\/font><\/tt>
deposits were kept in
\nnoninterest-bearing savings
\naccounts.<\/font><\/tt>
[Getting
\nReligion]<\/font><\/tt><\/p>\n

In 1998, the
\nbank decided the best strategy was to brand itself as
\na<\/font><\/tt>
high-class, all-Islamic
\nbank. But Mr. Mishari didn't want to jettison
\nthe<\/font><\/tt>
suit-and-tie Westerners he
\nhad hired; they still feature prominently in
\nthe<\/font><\/tt>
bank's annual report, and
\nMr. Mishari, who favors the traditional
\nSaudi<\/font><\/tt>
robe and headdress as
\nattire, often turns to them to work out the
\nfiner<\/font><\/tt>
points of Islamic
\nfinance.<\/font><\/tt><\/p>\n

The bank's
\nfirst step was setting up a Sharia board -- made up of three
\nto<\/font><\/tt>
five Islamic authorities
\nwho vet the bank's documentation and certify
\nthat<\/font><\/tt>
products comply with
\nIslamic law. This religious approval could be
\nvital:<\/font><\/tt>
One adviser to the
\nSharia board took two months to persuade the owner of
\na<\/font><\/tt>
building in a Saudi
\nprovincial city to accept Bank Aljazira as his
\ntenant.<\/font><\/tt><\/p>\n

Mr. Mishari's
\nteam first pioneered an Islamic leveraged
\nstock-trading<\/font><\/tt>
mechanism to
\nmimic Western margin-trading accounts. Before other
\nbanks<\/font><\/tt>
caught up, Aljazira shot
\nto the top stock-broker slot in 2000 and
\n2001.<\/font><\/tt>
Then it tapped a British
\nconvert to Islam, Dawood Taylor, to construct
\nan<\/font><\/tt>
Islamic form of life
\ninsurance. It took Mr. Taylor two years to get
\nit<\/font><\/tt>
right, but the Sharia board
\nfinally approved a system based on
\nmutual<\/font><\/tt>
insurance.<\/font><\/tt><\/p>\n

The
\npremiums still have to be invested, and Mr. Taylor couldn't have
\nmoved<\/font><\/tt>
on without the
\ndevelopment in the past six years of stock-market
\nindexes<\/font><\/tt>
that screen companies
\nfor compliance with Islamic law. These have
\nbeen<\/font><\/tt>
developed almost entirely
\nin the West, and by one measure offer access
\nto<\/font><\/tt>
$9 trillion of the world's
\n$28 trillion stock-market capitalization.
\nMost<\/font><\/tt>
are oil, technology or
\nhealth stocks for which Islamic restrictions
\non<\/font><\/tt>
pork, alcohol, tobacco,
\ninterest, pornography, gambling and high
\ndebt<\/font><\/tt>
ratios don't play a role.
\nIn practice, that means companies like
\nMicrosoft,<\/font><\/tt>
ExxonMobil and
\nPfizer.<\/font><\/tt><\/p>\n

The bank now has
\n2,500 individual and 12,500 corporate policyholders
\nfor<\/font><\/tt>
the insurance plan and Mr.
\nTaylor is adding 25 staffers a month.
\nThis<\/font><\/tt>
breakthrough has caught
\nthe eye of traditional insurance giants
\nlike<\/font><\/tt>
France-based AXA SA. \"So
\nfar our business in Saudi Arabia is
\nminuscule.<\/font><\/tt>
We'll have to think
\nabout something like that if we want to stay in
\nthe<\/font><\/tt>
market,\" an AXA
\nspokeswoman said.<\/font><\/tt><\/p>\n

Write
\nto Hugh Pope at
\n<\/font>hugh.pope@wsj.com<\/u><\/font><\/tt><\/div>\n<\/div>\n

\n
\nTranslate<\/span><\/a>\"\"\n<\/div>\n","protected":false},"excerpt":{"rendered":"

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