How Islamic Banking Becomes Safe in International Financial Crises

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How Islamic Banking Becomes Safe in International
Financial Crises
Presented By Faraaz Shaul Hameed
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Thrust of the Presentation

• First Global at a glance
• Sri Lanka as business center
• Introduction
• Issues Challenges in the Islamic Finance World?
• Basics of islamic finance (IF)
• The financial crisis what caused it?
• Why did the financial systems crumble?
• Islamic finance An alternative

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First Global at a glance

• Recognized contributor to Islamic finance locally
  and globally
• First Global incorporated as public limited
  liability company in November 2007 in Colombo,
  Sri Lanka
• Received Aspiring Leader award in the global
  Islamic finance industry
• Instrumental in Abu Dhabi Commercial Banks
  venture into Islamic Banking, branded Meethaq
• Silver Award for Financial Related Services at
  Sri Lanka Malaysia Business Awards 2008,
• First Global with Investec Capital were joint
  lead arrangers for the first-ever Sri Lankan
  Sukuk
• In the Islamic Business Finance Awards 2008
  conducted by CPI Financial, First Global was a
  finalist in the categories Best Advisory Services
  and Best Investment House along with prominent
  players like Ernst Young, McKenzie, and Unicorn
  Investment Bank

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Our business lines
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Sri Lanka as business center

• Strategically located at crossroads of East and
  West
• Business-friendly open economy with attractive
  and transparent investment laws offering the most
  business-friendly climate in South Asia
• Highly literate labour force with high quality of
  life
• Peace dividend as end of almost three decades
  of ethnic war enables public spending on
  infrastructure projects
• Reawakening Programme aims to restore livelihoods
  through agriculture and irrigation projects

Size 65,610 sq. km Population 20.2
million Per Capita GNP USD 1,969 Languages Sinha
la, Tamil, English Ethnic Groups Buddhists
77 Hindus 8 Muslims
9 Christians 6
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Issues Challenges in the Islamic Finance World?
No Lender of Last Resort?
No International Islamic Money Market
No secondary market for global Issues?
No Common Agreement on Shari'ah Issues?
Absence of/Underdeveloped Islamic Capital Market?
Non-acceptance of standards, accounting practices
by the industry players?
No Harmonization of Islamic products or
instruments?
Integration of Islamic and International
financial markets.
Innovation on Islamic Funds, still very slow
No uniform regulatory and legal framework
Emerging Stock Markets not fully compatible with
Shari'ah
Educating the masses lack of awareness
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Islamic Banking Finance is safe, given the
global crisis- beyond economic and financial
benefits
Moral
Ethical
Social
Religious
and more.
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Basics of islamic finance (IF)

• The following is the Fundamental Difference
  between Islamic Finance and its conventional
  counterparts

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The financial crisis what caused it?

• Reckless lending fuelled by greed and
  irresponsible and excessive risk taking to
  achieve higher profits
• Banks losing their vocation traders rather than
  lenders
• Very fancy instruments developed with no
  substance other than a lot of hype and lack of
  transparency of its underlying value

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The financial crisis what caused it?

• Rising defaults among mortgage borrowers
• Low interest rates causing a housing bubble that
  was bound to eventually burst
• Insufficient regulations of sub prime mortgage
  lending practices
• Insufficient monitoring of complex financial
  products and services,
• Rating agencies and derivatives markets
• Short selling
• Selling assets that one does not own
• Rating Agencies giving very liberal ratings to
  instruments

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Why did the financial systems crumble?

• Over supply of houses in US housing market
• Speculative purchases of real estate
• Indiscriminate mortgage lending
• Rising Interest rates leading to resetting of
  mortgage loans together with oil price hikes in
  turn high default rates
• Unprecedented financial leverage which gave high
  profits during the good times now led to very
  large losses
• Banks holding such paper had to raise additional
  capital

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Islamic finance An alternative

• Basic principles
• Prohibitions
• How could Islamic finance have prevented the
  crisis
• Can Islamic finance come out of the mess?
• Islamic Finance Infrastructure Institutions
  (IFIIs)
• Successes of Islamic finance

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Basic principles

• Islamic economics and financial system is based
  on values, ideals and morals
• Ethical practices and fairness in all endeavors
• Prohibits economic and financial transactions
  that engage lying, gambling, cheating, monopoly,
  exploitation, greed, unfairness and unjustly
  taking peoples money
• Promotes participation in profit, loss and actual
  exchanges of money and assets
• No constant winner or loser yet profit and loss
  is mutually shared
• In a nutshell- Islamic Finance centers around
  Justice!!

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Prohibitions Riba/Usury (Interest)

• Money is only a means of exchange no intrinsic
  value
• Trading of debts/receivables prohibited
• Payment and receipt of interest is totally
  prohibited
• Interest bearing investments are prohibited
• Earnings must be by profit sharing investments
  or fee based returns
• Risk sharing - the risk taker is justly rewarded
• Interest rate may be used as a means of
  calculating profit element or quantum of rent

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Prohibitions Maisir (Speculation)

• Gambling or any form of speculation akin to
  gambling
• Swaps, futures, options and other derivatives
• Contracts that insure for a profit
• Speculation is taboo under Islamic law
• Money proffered must be backed by collateral
• Islamic Financial instruments must always carry a
  face value
• Prohibition of selling that which you dont own
• Selling anothers debt and engaging in high risk
  investments

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Prohibitions Gharar (Uncertainty)

• Uncertainty as to fundamental terms in a contract
• Subject matter, price or time of delivery must be
  fixed in advance
• Conventional insurance prohibited

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How could Islamic finance have prevented the
crisis

• No lending on interest
• No selling on of mortgages or debts such as
  discounting promissory notes and cheques with
  postponed payments
• Financial derivatives are not permitted in
  Islamic finance
• Prohibits short selling - identified as a
  significant contributor to the global crisis

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Can Islamic finance come out of the mess?

• It is believed that Islamic finance could emerge
  as a strong contender provided it overcomes the
  following challenges
• Work towards eliminating the perception that
  Islamic finance is merely a interest bearing debt
  in disguise
• Aim for commonality in the application of
  Shariah to all Islamic finance products offered
• Currently many differences in the application of
  Shariah in different parts of the world
• Standardize Islamic finance products such that
  they look and feel the same wherever offered

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Islamic Finance Infrastructure Institutions
(IFIIs)
General Council for Islamic Banks and Financial
Institutions
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Islamic Finance Infrastructure Institutions
(IFIIs)

• Must have common thread to work together,
  whilst having diversity in their mandates.
• Some of the areas looked into by these IFIIs
  are
• Regulations
• Corporate Governance
• Capital Adequacy
• Risk Liquidity Management
• Islamic Capital Market
• Accounting Auditing Standards
• Rating
• Guidelines Recommendations
• Awareness Programs

• Otherwise
• Loss of talents, skills, resources, etc.
• Overlapping goals and objectives
• Duplications and Repetitions
• Deviation from the common goal

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Successes of Islamic finance

• Rapid growth of 15 - 20 annually
• US 4 Trillion worth market sector
• Crossed boundaries of Islamic world and spreading
  in non-Islamic countries
• UK, Germany, USA, France, Japan, Hong Kong,
  Thailand, etc.
• Dow Jones Islamic Market Indexes Benchmarks for
  Islamic investment related categories have
  outperformed their non-Shariah compliant
  counterparts by 3 to 4 in key indexes
• Osservatore Romano, Vaticans official newspaper
  The ethical principles on which Islamic
  finance is based may bring banks closer to their
  clients and to the true spirit which should mark
  every financial service

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Thank You Jazaka Allah Khair
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Mohamed Faraaz Shaul Hameed MBA(USA)
BBA,PGDIBM-UK,AMABE-UK,DIBF-SL,DHRM-UK,DIBM-UK,DIM
-UK
Mr. Faraaz is a Professional Banker for more than
20 years locally and internationally and embarked
into Islamic Banking in 2007, and to date, he has
gained a wealth of knowledge and experience,
through his diverse positions held in various
organizations in Banking Operations, Management
Consultancy, Business Management, Strategic
Planning Budgeting, Islamic Banking Finance,
Retail, Commercial and Investment Banking,
Business Development, Compliance, Treasury
training and career development etc.

• Organizations
• Commercial Bank Ltd, Sri Lanka (Best bank for
  last 11yeras-in Sri Lanka)
• Al - Rajhi Bank, Saudi Arabia
• Seylan Bank, Sri lanka
• Thomas Cook Ltd, India
• Standard Chartered Bank , Sri Lanka
• Habib Bank Ltd- Pakistan
• Amana Bank , Sri Lanka
• First Global Investments Holdings Limited, Sri
  Lanka

Deputy CEO/Acting CEO First Global Investments
(Holdings) Sri Lanka faraaz_at_firstglobal-group.com