Sunday, May 31, 2009
by Habhajan Singh
The issue of tawarruq featured widely at a key meeting of regional scholars of Islamic finance in Jakarta, almost a month after the International Council of Fiqh Academy issued a ruling banning the mechanical use of the Shariah concept employed to raise cash financing.
It is understood that the issue of tawarruq was keenly discussed by the Islamic finance scholars from Malaysia, Indonesia, Singapore and Brunei, at the two-day regional meeting that aimed to bring about better understanding and coordination amongst Shariah scholars in this region.
"One common consensus of Shariah scholars at the muzakarah was to wait for guidance from AAOIFI," one Islamic finance scholar from a local Islamic bank told The Malaysian Reserve.
Unlike the Fiqh Academy whose Shariah board comprises experts from various fields, the Bahrain-based Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) is better regarded when it comes to matters concering Islamic finance as its board of experts comprise people with expertise relevant to finance.
"AAOIFI is more specialised in Islamic finance," the scholar said.
The scholar, who declined to be named, was one of the participants at the two-day regional Islamic finance Shariah scholars meeting "Muzakarah Cendekiawan Syariah Nusantara ke-3".
In 2008, he said AAOIFI had issued a standard on tawarruq in which it permitted its use only as a tool of last resort. "This tawarruq issue is not new. It had been discussed a number of times before,” said another Shariah scholar.
On May 11, The Malaysian Reserve reported that the decision by the Fiqh Academy, which wields authority on Shariah-related matters including Islamic finance, may put a damper on move by local Islamic banks. Banks had recently begun structuring new products, with tawarruq as its Shariah enabler, in order to make them acceptable beyond Malaysian shores.
In March, Bank Negara Malaysia introduced the Commodity Murabahah Programme, known as tawarruq in some jurisdictions, to provide a more diverse range of policy instruments in managing short-term liquidity in the Malaysian Islamic interbank money market.
On the commercial front, outfits like Bank Islam Malaysia Bhd and Bank Rakyat Bhd were understood to have been studying the tawarruq concept to replace Shariah contracts like bai inah and qardh when offering credit card facilities.
The decision will likely force Islamic bankers to go back to the drawing board before deciding on their next course of action.
At a five-day session which ended on April 30 in Sharjah, the United Arab Emirates, the Fiqh Academy said it has resolved that it is not permissible to execute both tawarruq (organised and reversed) because simultaneous transactions occur between the financier and the mustawriq, whether it is done explicitly or implicitly or based on common practice, in exchange for a financial obligation.
This was done after the council reviewed research papers on tawarruq, its meaning and its type (classical applications and organised tawarruq).
"This is considered a deception, i.e. in order to get the additional quick cash from the contract. Hence, the transaction is considered to contain the element of riba," the council ruled, according to an English translation of the ruling made available by the Kuala Lumpur-based International Shariah Research Academy for Islamic Finance (Isra).
(This story appeared in The Malaysian Reserve on June 1, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh) Any source
HSBC Amanah Takaful (Malaysia) Sdn Bhd is bullish on the local takaful sector both locally and internationally, said its executive director and chief executive officer Zainudin Ishak.
He said the players in the local Islamic insurance sector should count themselves lucky to be in Malaysia at this stage in the development of the takaful industry overall.
"The takaful industry is set to boom and the local industry is fortunate enough that we are here to witness what is probably the industry of the future. We're still at the infancy stage but we have the brain power to lead," he told The Malaysian Reserve in an interview yesterday [May 28, 2009].
Formed in 2006, HSBC Takaful is a joint venture (JV) that is 49%-owned by HSBC Insurance (Asia Pacific) Holdings Ltd, 31% owned by Jerneh Asia Bhd and 20% owned by the Employees Provident Fund (EPF).
Zainuddin said initiatives from Bank Negara Malaysia and the government, like the MIFC (Malaysia International Islamic Financial Centre) and changes to the framework of how Islamic finance, Islamic insurance and the Islamic capital markets work and work together, had created a platform for Malaysia to reach its target of becoming a global Islamic financial hub.
MIFC was launched in 2006 by the government to strengthen the country's position as a centre of excellence in Islamic finance by creating a vibrant, innovative and competitive Islamic financial services industry.
Such vibrancy, Zainudin said, was important for the country as it would be difficult for Malaysia to be a centre for conventional finance and insurance when there were more established rivals out there.
"If you want to compete on conventional, a country like Singapore has been a conventional financial leader many years before us. They have superb infrastructure and regulation and self-regulation. Then there are financial super markets like Tokyo and Hong Kong. We can't compete on conventional," he said. "So, if you want to be a leader, you need a niche market. This means that the Islamic insurance industry here has huge potential. The journey will be a long journey but based on the aspirations and direction of the government, Malaysia will be a centre for takaful." he added.
Zainudin said one challenge that the industry here faced was talent. "You need enough talent. Take London for example. As a centre for insurance, you have talents that are attracted to it," he said.
However, short, medium and long term programmes being implemented by the government, he said, would help as it was the new frame work by the central bank that made it easier to bring in expatriate talent.
"Under the new framework, it's easier to import foreign talent if there are any. Bank Negara is doing the right thing. Previously you had to move Heaven and Earth to bring in expatriate talent," he added.
For HSBC Amanah Takaful, aside from wanting to maximise its bancassurance relationship with HSBC Bank Malaysia, Zainudin said there were bigger plans afoot that could only be a benefit to both the HSBC group as well as the takaful industry as a whole.
"This is all hypothetical and I'm not saying that this will happen but what can happen is that we can expand the same model here to any other part of HSBC's world. Malaysia can be a pioneer and then bring some of the business from the world back here," he added.
(This story appeared in The Malaysian Reserve on May 29, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh) Any source
L'idée de faire le G20 à New-York s'est vite perdue dans les cartons de la Maison Blanche. En effet New-York va devoir déjà encadrer l'organisation de l'assemblée générale des Nations Unies, une des plus importantes sessions de l'organisation depuis sa création et donc des dispositifs lourds pour éviter de s' ajouter en plus l'organisation d'un sommet du G20. Après réflexion, le prochain sommet du G20 se tiendra le 24 septembre prochain dans la ville américaine de Pittsburgh (photographie), en Pennsylvanie, a indiqué la Maison blanche dans son point presse quotidien. Un porte-parole de la Maison blanche, M. Gibbs, a indiqué que ce sommet serait l'occasion de faire le point sur les progrès réalisés depuis les précédentes rencontres de Washington et de Londres, ainsi que de "débattre des mesures qui pourront assurer un redressement durable de l'économie après la crise". Ce sommet aura lieu peu de temps après l'assemblée générale des Nations Unies en leur siège de New York. La ville de Pittsburgh a été désignée, sur proposition des Etats-Unis, par les participants au G20 lors de sa dernière réunion, à Londres, a indiqué le porte-parole. Ce sommet devrait voir aboutir le volet sanction sur les paradis fiscaux et l'annonce d'un plan international pour relancer les échanges et investissements pour l'économie. On parle d'une possible intégration des fameuses questions éthiques sur la transparence dans la finance et du nouveau rôle que nombreux états contributeurs souhaitent donner au F.M.I. Il faut s'attendre à un bilan social très négatif, les principaux indicateurs font l'objet d'une aggravation sans précèdent. Il se perd par jour en zone Euro plus de 4000 emplois... Et plus de 12 000 emplois par jour dans le reste du monde. De quoi rester pessimistes pour un bon nombre d'états qui ne maîtrisent plus leurs dépenses et vont jusqu'à s'enfoncer dans une récession toujours plus forte, dont l'effet boomerang risque de se faire sentir au plus haut point. "Le prochain G20 sera plus l'occasion de faire le point, les chiffres vertigineux de la crise sociale qui s'installe vont asseoir une certaine incapacité des états qui ne savent plus ou donner de la tête... Aux Etats-Unis et en Europe on commence à sentir une lassitude dans l'opinion publique pour qui les solutions proposées semblent clairement dépassées par la réalité criante du quotidien de populations à bout! Le décalage des sommes injectées dans le secteur financier par rapport au secteur industriel en pleine déconfiture est de nature troublante pour ceux qui perdent tout du jour au lendemain..." Souffle un expert qui pense que "Le G20 va devoir monter en gamme son plan de sauvetage, il y a une escalade dangereuse pour le système démocratique en tant que tel, les vieux réflexes protectionnistes sont en embuscade!" Le prochain G20 sera une occasion de vérité comme le souligne la plus grande majorité des observateurs...
In our mechanism, when the CDS [Credit Default Swap] price rises above a critical value (indicating that the institution has reached an unacceptable threshold of weakness), the regulator would force the LFI [Large Financial Institution] to issue equity until the CDS price and risk of failure back down. If the LFI fails to do this within a predetermined period of time, the regulator will take over.But what about this criticism:
The CDS may be a poor measure of the large financial institution's probability of failure absent government assistance, because the market will price the CDS to include the substantial likelihood that the government will pump in taxpayer money if the large financial institution (LFI) would otherwise go under.
Even if the LFI were being run in an extremely risky way (because management was taking advantage of the "heads I win, tails you lose" taxpayer backup likelihood), the CDS could still be very low priced, if the market knows the government is likely to bail the LFI out.
Even if the LFI would almost surely go bankrupt without government assistance, the CDS might not be particularly low priced if investors think it hardly matters; the tax payers will almost surely give the LFI billions to keep it from bankruptcy.
If instead you had a highly skilled
I've looked through Hart and Zingales' working paper on this. Although I haven't read it very patiently and carefully, word for word, as I like to for academic papers, what I found that responds to my criticism is this:
Our mechanism is similar in spirit to the “market-based” regulation underlying Basel 2. The main difference, however, is that we rely on market prices and not on credit rating agencies...Would our mechanism have worked better?...In answering this question, it is important to appreciate that the CDS prices are endogenous with respect to the default rule we choose. On the one hand, this endogeneity implies that there is no guarantee that CDS prices will perform in the same way as in the past under our proposed rule. On the other hand, the continuous government interventions, which led to the rescue ofBut this appears suspect, at least in claims (or implied claims) about how well their idea would work in the short run (as well as perhaps the medium run, and perhaps for decades). Because their idea would be put into effect after the information in the CDS became less reliable due to the government bailouts of
Bear Stearns, AIG, Citigroup, and Bank of America, have certainly affected the reliability of CDS prices as an indicator of the probability of financial insolvency. To minimize this latter effect we look at CDS prices before 10/14/2008 (i.e., the Paulson rescue of all the major US Banks). (pages 17-18)
The authors claim that their CDS idea would work well only by looking at CDS prices in the world before the recent spate of hundreds of billions of dollars of bailouts.
So, I have my doubts about this. I'm not sure how accurate CDS's will be, and how overfitted the rule for using them that Hart and Zingales devised might be to past data, especially pre-recent-crisis past data. If their rule is used at all, it might be best to use it as a guide for flexible, intelligent, skilled regulators, who would have the final say, on a case by case basis, after going deep into the books of the LFI. In addition, it may easily be best to greatly limit the choices of LFIs of the kind of difficult to price, complicated assets and liabilities that H&Z say are a reason for using the CDS as a measure of default probability.
Update, 4/15/10: I added the line in the sixth paragraph, 'I should make clear, though, that I do support having some strong
First of all, investors must know the first-mover in-case market rebound. First-mover here refer to those companies which benefit when economy recovered. Blue-chips stocks are what you should focusing on because of the following reasons:
- High Liquidity, where foreign or institutional investors can buy or sell their shares easily, without controlling too much of the share price.
- Good Reputation, like Genting and IOI, are well-known in the market, which always fall into the radar of investors globally.
- Industry's Icon, like Sime Darby which is an iconic company of Plantation sector. Should plantation sector revive, you can't deny it.
Hints: Which sector will benefit most from a series of measures taken by Central Banks and Government?
The report highlights some of the positive work being done in EU member states with CAP funding which is helping farmers create and protect habitants for wildlife. 'In principle this European funding is great news for wildlife because it supports agri-environment schemes which protect biodiversity - but the truth is that implementation of the policy by many member states is weak,' warned RSPB's head of agriculture policy Gareth Morgan.
'In compiling this report we found examples of agricultural schemes receiving large amounts of public subsidy from the EU which had no environmental benefit at all, in fact some were causing the degradation of the environment.'
Farmland bird species are in decline across Europe and this is often linked to changes in agricultual activities. Many of these threatened species are extremely senistive to changes in their habitat caused by intensification of farming. For example, the Spanish imperial eagle requires large areas of sparse wood picture rich in rabbit and the eastern European red-footed falcon requires traditional farmland with ponds rich in dragonflies.
'The findings of this report make it clear that the CAP is still not functioning properly and requires radical reform,' Gareth added. 'Agri-environmental schemes can and do deliver great results for farming and wildlife, but only if member states commit to them properly - otherwise it is simply an exercise in handing out money for nothing.'
'Some EU governments are clearly unprepared to stand up to the vigorous lobbying of their agricultural sector. If they continue to put forward dodgy agri-environmental schemes which have no positive impact on biodiversity then Brussels should have the backbone to kick them out.'
Examples of money down the drain included €790m in Portugal that has been invested in irrigation projects which will destroy wildlife habitats and increase water over-abstraction. In Cyprus conservation money is being spent on opening forestry roads and creating forest firebreaks which fragment bird habitats and disturb populations. Italy, France and Ireland also get the thumbs down for spending money on agri-environmental schemes that have no impact on normal farming practice and no benefit for the environment.
However, in England agri-environment schemes are judged to have been well designed and to be delivering benefits for biodiversity.
The full report can be downloaded here: Birdlife Any source
Saturday, May 30, 2009
El solc fred en alçada, humitat saturada en tots els nivells de la troposfera, alts índexs d’inestabilitat que amb la calor acumulada dels darrers dies i l’aportació humida de vents de mar cap a terra, afavorirà i molt la convecció diürna. El creixement de nuvolades serà continu al llarg de tot el dia i a partir de la tarda els ruixats i les tempestes sovintejaran en tot el nord-est de forma irregular però que podran caure en molts punts, també s’estendran a altres punts del Principat. Els ruixats aniran acompanyats de tempesta i que em punts interiors del nord-est i interior de Barcelona podran ser fortes i localment amb calamarsa. A partir del vespre aniran desapareixent per deixar de nou un dilluns assolellat amb algun intervals de núvols.
A Tossa, per tant, s’espera un mati variable, on els núvols s’aniran fent cada cop més importants i el creixement de nuvolades serà important. Sembla que a partir de migdia, els ruixats podrien afectar la nostra vila, localment amb tempesta i algun ruixat d’alguna certa intensitat. Com sempre passa, és molt difícil de preveure on acabarà caient els ruixats més forts i, fins i tot, si ens arribarà, però aquesta vegada, els diferents elements concorden com per poder tenir a Tossa un petit festival de pluja. A seguir-ho!
At the Southampton University seminar (see Blogs from 19 May onwards), following questions from the floor, the academics had no disagreement about taxing land values. But they seemed to consider the idea as not really affecting economic growth compared with the effect of credit creation. But the auspices of the Centre holding the seminar includes the term ‘sustainable development’. Introducing a tax shift from that on work, business and goods whilst taxing land would remove disincentives to enterprise and incentivize owners of land to use it more efficiently. Richard Werner’s method of using Japanese ‘window guidance’ by the central bank towards productive investment, in the credit creation process, restricts freedom and choice for citizens and assumes that the central bank has perfect wisdom, is without corruption and is properly directed by Parliament. Besides, people will still be able to put ‘existing money’ (or mis-directed ‘new money’) to use in speculative property deals. So why not introduce land value tax as a tool to dampen property bubbles as they gather pace, or to promote property investment when needed and, incidentally, to help to reform tax in the direction Mervyn King wants?
The Japanese experience shows that a fair society needs checks and balances. The current global financial fiasco and the UK Parliamentary expenses scandal reinforces this view. Tax reform and monetary reform are not incompatible – together they would give rise to a more sustainable economic system and a fairer society.Any source
Friday, May 29, 2009
Tot i que aquest mes de Maig s’està mostrant sec a Tossa i també a molts punts de Catalunya, sembla que el mes es vol acomiadar amb ruixats i tempestes de tarda amb moltes possibilitats que afectin de forma irregular a Tossa.
L’entrada d’una petit solc fred en alçada amb vents humits del sector de mar en superfície, la calor acumulada d’aquests darrers dies, l¡arribada d’humitat en diferents nivells i juntament amb l’elevada vorticitat i uns índexs d’inestabilitat elevats originarà un diumenge de creixement de nuvolades especialment en tot el sector nord-est, donant lloc a ruixats i tempestes que puntualment podran ser fortes. Al llarg de la tarda i sobretot al vespre és quan hi ha més possibilitats que afectin a Tossa. Ho anirem seguint.Any source
Premier Ralph O'Neal said that BVI has been playing a very important role in the OECS, and referred to the Commercial Division of the Eastern Caribbean Supreme Court headquartered in Tortola, and to the fact that the territory has committed US$3.76 million to the Commercial Court project. He said that BVI is pleased to be part of the restructuring of the Eastern Caribbean Supreme Court, which will deal with major commercial cases, and that a Halls of Justice will be located in Tortola.
Article any source
If you're out and about, you can call GOOG-411 and get local information about businesses. Now we've made it even easier to orient yourself without a map in front of you: call GOOG-411, ask for 'details', and in addition to the address and phone number of the business, we'll also point you to the nearest street intersection or adjacent streets.
You can try it now: call 1-800-466-4411, look up 'Google in New York', ask us for more 'details', and we'll tell you that our Chelsea office is 'near the intersection with West 16th Street'. Unless you're a seasoned New Yorker, this might very well save you from walking up or down a few blocks.
The nearby intersections are available for most businesses in the US and Canada. They are derived automatically by an algorithm written on 20% time by Googlers in New York and London. Tell us other ways you would want to use this new feature -- we hope to expand it to other products soon!
Posted by Vincent Vanhoucke, Research Scientist and Arnaud Sahuguet, Geo Product ManagerAny source
Market Folly has more on Paulson & Co.'s investments in gold and the gold mining shares in, "Paulson & Co. buys tons of gold":
"The first major move that everyone will be talking about is Paulson's big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio.
Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros).
Still though, that's quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio... And, such a massive position in gold and gold miners has to be for more than merely a hedge.
One other thing to consider with Paulson's portfolio is that these holdings listed above are only his long equity holdings. The main reason why we bring this up is because the holdings above represent only a piece of his overall portfolio pie. Many of the positions above are merger arbitrage and event driven positions. While his gold stakes may be a large part of the assets disclosed in this filing, they are not quite as big when you compare them to his total assets under management. So, keep that in mind..."
Jay at Market Folly also notes that other prominent hedge funds, including David Einhorn's Greenlight Capital and Stephen Mandel's Lone Pine Capital, have also recently made notable forays into the gold sector. So should we follow the hedge fund crowd into their recent gold trade?
Andrew Mickey offers an interesting take on this very issue in, "Why Gold Enthusiasm is 'Cool' Again". As he notes in the article, Paulson's Midas touch has made gold the new "cool" investment on Wall Street, which is enough to leave Mickey skeptical on the timing of this particular speculation.
"Right now, gold is the hot sector. Expectations are soaring and it is only a matter of time until the “hot money” finds something new. Gold is glittering now and it will do so in the future, but it’s best to buy it when it’s not being watched so closely.
Yes, I’ve bought gold and gold stocks in the past. I will be buying gold stocks again in the future. It’s all part of my personal investment plan which I’m sticking too.
Inflation is coming. Real assets and shares of producers of real assets will do exceptionally well in the years ahead. For now though, it’s best to look for value in the real asset sectors."
Check out the full piece at the link above (Hat tip to Richard Russell), and see why this writer thinks the recent gold chase has left some hard asset sectors overlooked and relatively undervalued.
Related articles and posts:
1. John Paulson in Bloomberg Markets - Finance Trends.
2. Video: John Paulson & Joseph Stiglitz - Finance Trends.
Thursday, May 28, 2009
This is the third part in a series of posts on reification. In Part 1, I tried to explain what reification is; in my second post I gave some examples of how to use reification using RDFa. In a philosophical interlude on truth on the internet, I made it pretty clear why I think it's really important to include and retain sourcing and provenance information whenever you try to collect information from the internet. In this part 3, I promised to discuss the pros and cons of reification. I lied. RDF Reification has been nothing but disastrous for the semantic web. The problem is that RDF tries to lead implementers along a strangely curved path if they want to do the "right" thing and keep track of sourcing and provenance of the knowledge loaded into a triple-store. I have a strong suspicion that no one, anywhere, ever in the history of RDF, has made significant use of the reification machinery. I have asked a fair number of semantic web implementers and none of them have ever used reification.
Semantic Web implementers certainly don't ignore the imperatives of sourcing and provenance, but what they do instead of using reification is to make the equivalent of straight worn dirt paths. Typically they won't use pure triple stores, instead treating triples as first class data objects that can be joined to separate tables with provenance information, or else they build knowledge models which make the provenance and source explicit, as do Google's models for reviews that they are supporting in RDFa.
Alternatively, Semantic Web implementers may choose to ignore the retention of provenance and sourcing and treat their RDF triple-store as a pristine, never-changing, collection of truth. For many applications, this works quite well. It rapidly becomes unworkable if it is required to merge many sources of information. RDF works great for the collection, transmission and processing of unchanging, unpolluted, uncontroversial knowledge; on this blog, I will from now on refer to this sort of information as UnKnowledge.
To my mind, there is a deeper problem with reification. and that relates to what an RDF triple really means. My view is that an RDF triple means absolutely nothing, and that it is only the action of asserting a triple that has meaning. The deep problem with reification is that it's hard to do, and thus nobody does it. It also forces implementers to think too much about semantics, and thinking too much about semantics is always a bad thing. Too often you end up dizzy like a dog chasing its tail.
The RDF working group has produced an entire document trying to clarify what the semantics of RDF are. Here is an example paragraph to study:
The semantic extension described here requires the reified triple that the reification describes - I(_:xxx) in the above example - to be a particular token or instance of a triple in a (real or notional) RDF document, rather than an 'abstract' triple considered as a grammatical form. There could be several such entities which have the same subject, predicate and object properties. Although a graph is defined as a set of triples, several such tokens with the same triple structure might occur in different documents. Thus, it would be meaningful to claim that the blank node in the second graph above does not refer to the triple in the first graph, but to some other triple with the same structure. This particular interpretation of reification was chosen on the basis of use cases where properties such as dates of composition or provenance information have been applied to the reified triple, which are meaningful only when thought of as referring to a particular instance or token of a triple.I've read that sentence over and over again; I've finally concluded that it is an example of steganography. Here is how I have decoded it:
the semantic extension described HEre requires the reified tripLe that the reification describes - i(_:xxx) in the above example - to be a Particular token or InstAnce of a triple in a (real or notional) rdf docuMent, rAther than an 'abstract' triPle consideRed as a grammatIcal form. there could be Several such entities which have the same subject, predicate and Object properties. although a graph is defiNed as a set Of tRiples, several such tokens wIth the same triple structure might occur i different documents. thus, it would be meNAningful to Claim thAt the blank node in the second Graph abovE does not refer to the triPLE in the first grAph, but to Som other tERiplE with the Same struCtUrE. THIS Particular interpretatiOn Of Reification was choSen On the basis of Use cases where properties such as dates of composition or provenance information have been appLied to the reified triple, whicH are mEaningfuL only when thought of as referring to a Particular instance or token of a triple.I'll try to suggest some ways that we might rescue RDF and the Semantic Web in a future post.
Article any source
On paper, banks and investment firms no doubt have an advantage. Countless people are looking for fewer open spots--particularly at mid-level and senior positions. In some instances, firms have received over 1,000 resumes' for a single role. With these numbers, they can pick, choose and select whom they want--and when they want and how they want. They can rush the process, or they can (as many in the market will tell you) take their time, be deliberate and choose on the basis of odd, unusual criteria. (The demise of Lehman and Bear Stearns and the troubles of others enhanced that upper hand.)
But the dynamics might be slightly different for BA's and MBA's in the first stages of a career.
The number of first-year spots have declined at banks and funds, as these firms have restructured and pared down because of less activity, a slowdown in deal flow, or the outright shutdown of certain busineses (mortgage securitization? new derivatives products?). But the same firms worry that the number of people pursuing finance might have declined since last year and may continue to decline in the year or two ahead.
More important, they worry that the number of extraordinarily talented people will go elsewhere. They are comforted by large numbers from which they can choose, but will be concerned that exceptional people might not bother. It wasn't long ago when a fifth of students in Ivy League colleges were interested in Wall Street or when 20-25% of students at top business schools had an eye on a career at a Morgan Stanley, Blackstone, Goldman Sachs, Citadel, D.E. Shaw, Lehman, Merrill or KKR.
Big banks always prized themselves on hiring exceptional talent, because they contribute immediately and are productive right away. Top talent can:
(a) hit the ground running and get immersed in live deals or transactions in no time,
(b) learn new material and master it in days, no matter how little experience or exposure they may have had beforehand,
(c) do in-depth, useful research almost overnight on any relevant finance topic,
(d) produce astounding models, analyses, and presentations in a short period of time--material that will be stimulating, penetrating, profitable (of course) and immediately beneficial to clients,
(e) add creativity and special insight to new products, new transactions, new clients, new industry groups, etc.,
(f) execute and be productive with an uncanny ability to get things done swiftly and with unusual levels of energy, and
(g) be role models and astute tutors for those who follow behind them.
Firms have always "catered" to the exceptionals by giving them responsibility and compensation (and of course an unrelenting heavy workload). (Unfortunately sometimes how a fraction of new talent gets classified as "exceptional" or "extraordinary" might be subjective and political, especially when for years almost all entry-level talent was excellent.)
In essence, young MBA's can and did make a difference in getting the business, executing a deal in a creative way, making ground-breaking presentations to clients or executing a unique trade.
In years past, Goldman felt comfortable it could attract the top students in finance from, say, Darden, Ross or Tuck. Or Morgan Stanley felt it could convince a top student from Stern to accept its offer over one from the Federal Reserve. Lazard and Blackstone knew they would get the best and brightest from Wharton or Harvard. The same firms will want to continue the pipeline of top talent.
Today, that top student may have second thoughts, as he/she first tries to scope out the finance landscape in the years to come (Will the firm still be around in five years? Will new bureaucracy at banks stifle creativity?), tries to assess work-life balance, and wonders whether he/she will be able to contribute in a different financial environment.
Also, that top student may be wooed away by a more attractive and just-as-intellectual experience by the U.S. Treasury, Federal Reserve Bank, the SEC, or by a more interesting (and less stressful) entrepreneurial experience on the West Coast.
They worry this group might be lured to other professions with nothing to do with finance. A decade ago, dot-coms lured them away. Now even the arts, sciences, or government service could lure them away.
Thus in the coming year, banks and investment firms won't bask in the glory of being able to pick and choose as they please. They will revise, update and spice up how they present the "attractions" of financial services, corporate finance, sales and trading, and private equity. They will fill their quota in hiring easily, but want to be assured they still get their fair share of exceptional talent--talent that made a big difference in deals, transactions, analyses and client presentations in the years before.
Tracy WilliamsAny source
Some days later, BVI FSC issued several new advisory warnings concerning the following companies:
- Reality Funds Ltd.
- MoneyForex Financial Ltd.
- Golden Forex
- IFC Markets Corp.
The Commission informed that these companies are not licensed to conduct any financial services business in or from within the British Virgin Islands. Concerning the companies Reality Funds Ltd. and Golden Forex, they are NOT incorporated or registered in the territory.
The documents were signed on May 26, 2009 by Robert Mathavious, the Managing Director and CEO of the Financial Services Commission.
Article any source
書刊名：維梅爾的帽子～從一幅畫看17世紀全球貿易（Vermeer's Hat ~The Seventeenth Century and the Dawn of the Global World~）
作 者：卜正民（Timothy Brook）
卜教授看畫的方式相當新鮮，像我們那一屆科班出身的教學法會先大略瞭解畫家生平，他屬於那一派畫風，是先驅或者跟隨者，影響性為何，他的畫技、光影變化與色彩運用的特色之處，接著開始臨摹、學習，就是很正統的方式。卜教授卻是從畫裡的各樣物品看見了背景時代的關連性，他藉由「約翰內斯‧維梅爾（Johannes Vermeer）」和「亨德里克‧范德布赫（Hendrik Van der Burch）」的畫作、與無名氏的仿中國風瓷盤，從畫中擷取關鍵物品、成為一道窺探當代時空的門扉，首先帶領讀者瞭解畫者與畫作本身的故事，再進而瞭解十七世紀、那一個海洋貿易蓬勃發展的壯濶年代。
英國牛津大學邵逸夫漢學講座教授，加拿大英屬哥倫比亞大學的聖約翰學院院長，撰寫或編纂了十二部書，包括已翻譯成數種語言的得獎作品《縱樂的困惑：明代的商業與文化》。他還主編了一套六冊探討中國史的書籍，由哈佛大學出版社出版。2005年獲加拿大歷史協會頒予該會每五年評選一次的最高歷史學獎項 Francois-Xavier Garneau Medal，2006年獲頒古根漢學術獎（Guggenheim Fellowship）。
(THIS STORY APPEARED EXACTLY 2 YEARS AGO, IN THE INAUGURAL ISSUE OF THE MALAYSIAN RESERVE)
By Habhajan Singh
Of late, Islamic finance has figured prominently in most of speeches by Bank Negara Malaysia (BNM) governor Tan Sri Dr Zeti Akhtar Aziz. In fact, 10 out of 12 Zeti's speeches on the central bank's website are on Islamic finance, the latest being her address intended for the 4th Islamic Financial Services Board (IFSB) Summit in Dubai, UAE.
"She is without doubt the main driving force behind Malaysia's foray into Islamic finance. There is a feeling that, being a Muslim majority country, Malaysia needs to get a handle on Islamic finance," says one banker involved in Islamic finance.
HSBC Amanah's Managing Director Mohamed Ross Mohd Din agrees, noting a predominantly Muslim population and the country’s comprehensive regulatory framework and infrastructure, Islamic finance has demonstrated its viability and robustness.
"More importantly, with BNM as the driving force behind the industry’s growth, and the personal commitment of the Governor, we are undeniably well-positioned to succeed as the global hub of Islamic finance," he said.
Another banker observed that Zeti's new mantra is the 'New Silk Road' in reference to the emergence of Islamic finance. She had first used the term in her address to the second World Islamic Economic Forum (WIEF) in Pakistan last year.
The enthusiasm and conviction in Zeti's talks about Islamic finance, a topic expected to feature prominently at the third WIEF, comes from the sector's future potential.
"Just as historical Malacca was a key port along the ancient trade routes between Asia and the Middle East, it is envisaged that Malaysia would serve as a key destination along the New Silk Road," she told a gathering during the recent Global Islamic Financial Forum (GIFF).
Indeed, the nation's Islamic finance sector has made some great strides, both in terms of statistics and the growing number of players. According to central bank figures, Malaysia's Islamic banking assets amounted to about RM115 billion (US$34 billion) or 13% in terms of market share while the takaful sector stands at RM5.8 billion.
"The Malaysian Islamic banking system a strong performance, saw in particularly in 2006, with higher profitability. It has remained well capitalised," said BNM deputy governor Datuk Mohd Razif Abd Kadir in a recent speech. Malaysian regulators have kept themselves busy putting in place the necessary infrastructure and regulatory framework for the development of Islamic finance.
Among recent initiatives was the launching of the Malaysia International Islamic Financial Centre (MIFC) in August 2006. he centre provides an environment to conduct Islamic financial services in foreign currencies from anywhere in Malaysia. In the country's national budget for 2007, Malaysia announced substantial tax incentives as a boost to the Islamic banking and takaful industry.
A key element was a 10 year tax exemption for the income of Islamic banks and takaful companies derived in international currencies. There has also been tremendous growth in the nation's Islamic capital market front with Islamic corporate bonds now valued at about US$36 billion, or 48% of the total corporate bond issuance in Malaysia.
Malaysia is home to Asia's second largest private debt securities market, including the conventional.
"Sukuk, the Islamic finance world's equivalent of a traditional bond, has taken the Islamic finance industry by storm over the past two years, with most of the origination in Malaysia and the GCC [Gulf Cooperation Council] countries," noted a recent KPMG report entitled 'Growth and Diversification in Islamic Finance'.
In 2006, the report, quoting London law firm Trowers & Hamlins, said some 80% of the 'burgeoning GCC bond market' was accounted for by sukuk, up from just 26% in 2005.
With regards to Malaysia corporate watchers feel that Singapore is certainly a threat to Malaysia's desire to become the region's Islamic finance hub. "We need to be able to move fairly quickly to move ahead. The policies are already in place.
However, sometimes, the implementation may not be as smooth as one hopes," says John Lee Hin Hock, KPMG's executive director for financial risk management.
BNM's Mohd Razif noted that the domestic bond market plays a crucial role in ensuring that the financing needs of the economy are being fulfilled.
"The multinationals and multi-lateral institutions such as the International Finance Corporation and the International Bank for Reconstruction and Development have begun to tap the fund from the Malaysian capital market by issuing ringgit sukuks, thus increasing its depth and diversity," he said.
In Malaysia, the overall management of the Islamic financial services sector falls under the supervision of BNM, which oversees the nation's monetary policy and financial stability of the financial system.
More issuance will be one of the keys to the growth of a global Islamic capital market, observed Badlisyah Abdul Ghani, head of Islamic finance at Malaysia's CIMB Group and chief executive of CIMB Islamic Bank.
"The development of a global Islamic market has been slow because people are unwilling to take the necessary steps. The more players that arrange issuance in the market, the better. You cannot have an active secondary market until you have well in excess of 100 issuances," he said. -- The Malaysian Reserve, May 28, 2006Any source
He said that the robust progress achieved by the Islamic financial system in Malaysia had shown the way for its integration in the global market.
He also said that efforts undertaken at the international level to place the Islamic financial system as a credible component would further help strengthen the development of Malaysia's financial system.
"As an example, the establishment of the Islamic Financial Services Board and the International Islamic Financial Market in Kuala Lumpur to draft international regulatory standards based on the unique features and risks of Islamic banking institutions, will contribute towards ensuring the strength and stablity of the Islamic financial system," Mohamed Khaled said his speech at the International Conference on Islamic Economy at the Kolej Universiti Islam Antarabangsa Selangor (KUIS) in Bangi yesterday [May 26, 20089].
The text of his speech was read by the Deputy Director-General of the Higher Education Department, Prof Dr Reyhan Mustafa.
Meanwhile, at the same function, KUIS signed a memorandum of understanding (MoU) with a number of educational institutions from Indonesia, Turkey and Kazakhstan. The educational institutions are the Academy of Banking (Kazakhstan), the Islamic University of Europe (Turkey) and the Institut Studi Islam Darussalam Gontor, Universitas Andalas, Universitas Yarsi, UIN Syarif Hidayatullah, Jakarta, (Indonesia). KUIS Rector Datuk Mohd Adanan Isman in his speech said the MoU created a network of smart cooperation in the educational field, the exchange of students and lecturers as well as knowledge growth. — Bernama (May 26, 2009)Any source
The Islamic financial industry needs a corresponding alternative set of accounting standards which can best be harmonised, not standardised due to the different nature and activities of the Islamic banks and financial institutions, says an accounting expert.
"These standards already exist, developed by AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions). The International Accounting Standards Board (IASB) should reconsider its position and allow alternatives live and let live, just as there is a need for differential reporting requirements for small and medium businesses," says Associate Professor Dr Shahul Hameed Mohamed Ibrahim of International Centre for Education in Islamic Finance (Inceif).
Dr Shahul, a qualified accountant now with Inceif's department of finance and accounting, moderated an Inceif discussion series on Friday. Malaysian Institute of Accountants (MIA) Nik Mohd Hasyudeen Yusoff, who was the key speaker at the series, said International Financial Reporting Standards (IFRS) were developed by IASB as a single set of high quality, understandable and internationally-recognised financial reporting standards.
"The IFRS concept and operational model demonstrates the ability of Shariah-compliant structures to co-exist with the conventional framework," he said, according to an Inceif statement.
PricewaterhouseCoopers partner Mohammad Faiz Azmi and Amanie Business Solutions Sdn Bhd principal consultant Dr Syed Musa Alhabshi were the two commentators at the discussion series.
Nik Hasyudeen added that as Islamic finance transactions are backed by productive assets, structured through contracts within the same legal framework with conventional transactions, there is no likelihood that such transactions cannot be accounted for using the IFRS.
In any occasion, he said the contracts entered into by the parties should ensure that the principles of Shariah are complied with. Commending the efforts of AAOIFI, Nik Hasyudeen suggests the Bahrain-based organisation to consider working with and compliments IASB in ensuring the convergence incorporates the Islamic finance agenda.
"This does not mean that IFRS is perfect and the accounting standards developed by AAOIFI are inferior," he said, adding that serious participation in the development and enhancement of the IFRS by promoters of Islamic finance could influence the acceptance of the values and principles promoted by Islamic finance into the IFRS.
The AAOIFI standards are not intended to fully replace the IFRS but merely cover those standards and transactions that IFRS does not.
In most cases the differences between the IFRS and AAOIFI's standards are more apparent than real, the statement said. IASB's refusal to recognise the AAOIFI standards has resulted in Islamic financial institutions in countries such as Bahrain which adopts the latter's standards, having to have their financial statements qualified by auditors who are affiliated to IASB.
Auditors affiliated to IASB through the International Federation of Accountants (IFAC) are obligated to enforce IFRS, it added.
IFRS is currently mandatory for all domestic listed entities in 85 countries and encouraged in 113 countries including Malaysia. The AAOIFI's standards, which have yet to be widely accepted, are seriously being considered by countries in the Gulf and Malaysia.
(This story appeared in The Malaysian Reserve on May 26, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh) Any source
This special comment is based on a speech delivered by Christine Kuo , a Moody's VP/Senior Analyst, at the 6th IFSB Summit on 7 May 2009 in Singapore.
Professionals in the Islamic banking sector are often asked whether the current strategies adopted by Islamic financial institutions will prove effective at competing at the global level in the long run. Since a strategy is a plan of action designed to achieve certain goals, its effectiveness can be assessed only in relation to these well-defined goals.
From the rating perspective, an effective strategy is one that allows a particular Islamic bank to grow its business while delivering a stable and good financial performance, thereby making it stand out against credit ratings of other global banks.
While Islamic banks in different countries operate under different environments and are at different stages of development (and therefore require different strategies), we can still find a set of common characteristics among their various strategies that benefit their long-term ratings.
To address this topic and related issues, this report is organised into the following five sections:
(1) summary of those characteristics in strategies that benefit ratings;
(2) specific strategies adopted by various Islamic banks;
(3) rating implications of these strategies;
(4) selective rating issues concerning Islamic banks; and
(5) how relevant stakeholders could affect strategies and ratings of Islamic banks.
Characteristics in strategies that benefit ratings
Moody's assigns ratings to banks globally, irrespective of their form or nature, and that includes Islamic banks. In assigning ratings to banks, Moody's first evaluates a bank's intrinsic safety and soundness thereby arriving at a Bank Financial Strength Rating (BFSR), and then factors in potential support from the relevant providers to derive the bank's ratings for deposits and debt. This analytical framework is common to all types of banks, so the ratings of Islamic banks are comparable to those of conventional banks globally.
It is worth noting that an Islamic Financial Institution (IFI) is an institution that limits the scope of its business to comply with a set of ethical and moral guidelines derived from the teachings of Islam. It should be noted that there is nothing that stops a 'conventional' bank from operating the same ethically-driven model. It would still be Shari'ah compliant despite not being 'branded' as such. IFIs focus on a subset of global finance consistent with Shari'ah, thus the skills and experience applied to rating broader and more universal institutions is equally applicable and valuable in the Islamic context.
In accessing a bank's financial strength, Moody's considers factors such as franchise value, risk positioning, regulatory environment, operating environment and financial fundamentals. Of these factors, regulatory and operating environments are outside of a bank's control, but bank strategies can definitely affect the other factors in the long term.
Strategies that improve franchise value
Franchise value is about the solidity of a bank's market standing in a given geographical market or business niche. A solid and defensible franchise is a key element underpinning a bank's ability to generate and sustain recurring earnings, to create economic value and, thus, to preserve or improve risk protection in its chosen markets.
The Islamic brand is economically valuable; in many instances Muslim depositors will happily pay a small premium for conducting their finances in what they perceive to be an ethical way. With a large addressable population and relative immaturity there is still scope for solid long-term growth.
Moody's believes strategies leading to sustainable entrenched market position, improved geographical and earnings diversification, and increased earnings stability can enhance a bank's long-term franchise value.
Size is important because diversification is harder to achieve when an institution is small. It should be noted, however, that a bank dominant in smaller but more favourable markets may have a higher franchise value (which could translate into greater earnings stability) than a bigger bank with a highly price-sensitive customer base in a competitive market.
It follows that it is better for Islamic banks to have a strategy that helps achieve a stronger position in a few selective markets than one which results in marginal positions in many competitive markets.
Strategies that improve risk positioning
A bank's risk positioning is a fundamental qualitative factor in Moody's credit analysis; the current credit woes apparent in the global market once again highlight its importance. In this regard, we view positively strategies that improve corporate governance, controls and risk management, financial reporting transparency, credit risk concentration and liquidity management. Strategies that set a conservative market risk appetite are also considered favourably.
Improving risk positioning is particularly relevant. Although Islamic banks are able to pass through a negative shock on the assets side to the investment depositors, displaced commercial risk is at stake.
Islamic banks have a number of buffers to manage displaced commercial risks. These are profit equalisation reserves which contribute to smooth earnings across the cycle; investment risk reserves which absorb negative shocks on asset values; Mudarib fees which can always be decreased in a discretionary manner to avoid penalising the depositing Rab al Maal; and shareholders who can always provide Qardh Hasan to profit-sharing depositors. In a stress situation, those IFIs sufficiently equipped with such mitigating instruments would be considered more resilient to downturns.
Nonetheless, to date few, if any, Islamic banks have passed on losses to their depositors. If the buffers mentioned above are inadequate, the IFIs could experience funding pressure as deposits are moved to other financial institutions.
Additionally, Islamic banks tend to have greater concentration in assets and liabilities compared with conventional banks. They also face challenges in managing liquidity and risk due to the limited range of instruments available.
Moreover, Islamic products are less commoditised and require more tailoring and oversight, and this leads to substantial overheads and operation risk.
Strategies that improve financial fundamentals
We break down our analysis of a bank's financial fundamentals into five sub-factors, namely profitability, liquidity, capital adequacy, efficiency and asset quality. Some financial metrics necessarily reflect a bank's franchise value and risk positioning, but a prudent financial policy also plays an important role in shaping these numbers.
For instance, a bank with a strategy to maintain a conservative financial policy is likely to keep its capital and liquidity ratios higher then most of its peers. The result is a stronger balance sheet and which can better withstand adverse economic cycles. For Islamic banks with significant exposures to equities and properties, conservative financial leverage is particularly important in view of the volatility in the values of these investments.
Most of the strategies of Islamic banks try to achieve profitable asset growth. The differences in their strategies mainly reflect the state of development of Islamic banking and their positions in their respective home markets, their aspirations for the medium and long term, and the resources they have.
Organic growth in home market
This is the main strategy adopted by almost all Islamic banks across different countries since decent growth potential still exists at home. While organic growth does not allow for quantum leaps in assets and earnings, this strategy is of lower risk.
Market with low penetration: strategic focus is on increasing awareness
For markets where Islamic banking has low penetration, such as Indonesia, North Africa, Turkey, Jordan and (probably) the Sultanate of Oman (where Shari'ah-compliant finance is expected to pick up), there is plenty of room for growth and the level of competition is relatively low. Moreover, Islamic banks in these markets are mostly still small in size. Therefore, they are not keen on acquisitions or venturing overseas. Instead, they focus on growing customers and businesses at home. Their major competitors are conventional banks in the same markets and their strategies involve conversion of conventional banking assets into Shari'ah-compliant assets. Increasing awareness of Islamic banking services is essential at this stage.
More mature market: strategic focus is on providing competitive products and services
In the more mature markets, such as Malaysia, Sudan and most countries within the Gulf Cooperation Council (GCC), low-hanging fruit have already been picked. Therefore, Islamic banks need to set their strategies to compete not only with the conventional banks but also with their Islamic banking peers. The target is to increase the wallet share of existing customers, to attract Muslim customers who still bank with conventional banks, and to attract non-Muslim customers if the markets have significant non-Muslim populations. Being able to offer competitive products and services is the critical factor to success.
A few larger Islamic banks have been expanding outside of their home markets to tap other Muslim populations as there is a natural brand affinity. Kuwait Finance House (KFH) is one such example. It has established subsidiaries and associate companies in the Gulf and wider Middle East and North Africa region (MENA), as well as in Asia. Its subsidiaries in Bahrain, Malaysia and Turkey are key to the group's regional expansion strategy.
Its foreign expansion is expected to continue, especially in North Africa (including Morocco), the Gulf region (including Saudi Arabia) and Muslim Asia.Other examples are Al Rajhi Bank and Dubai Islamic Bank. The former ventured into Malaysia in 2006, while the latter launched its operation in Pakistan in the same year. Finally, most Islamic banks established in the UK have majority or strategic bank shareholders headquartered in the Gulf region.
Mergers and acquisitions
This option is adopted by only a very small number of Islamic banks as the potential for organic growth is still great. However, as business and the number of Islamic banks grow, the markets will become more mature and competitive. At that time, Islamic banks operating in fragmented markets would likely pursue M&A strategies for asset and earnings growth.
For example, there are 17 Islamic banks in Malaysia, a mid-size economy with GDP of approximately $200 billion. Islamic banking assets account for less than 20 per cent of total banking system assets. Since the largest Islamic bank (Maybank Islamic Berhad) accounted for only about 2.2 per cent of these assets, this implies that all Islamic banks are small and the market is fragmented. The market is currently growing and profitable, but competition is rising which will drive down margins gradually. This development could lead to market consolidation over the medium term.
In some cases, depending on conditions and regulations, Islamic banks with entrenched positions in their home markets may also consider using M&As to establish their presence overseas. For example, Dubai Islamic Bank has acquired a majority stake in the Bank of Khartoum, the largest bank in Sudan, whereas Abu Dhabi Islamic Bank has acquired Egypt's National Bank for Development with a view to converting it into a fully fledged Shari'ah-compliant bank within two years.
Under current market conditions, M&A activity may be driven by necessity rather than by choice. In the UAE for instance, there are two troubled Islamic mortgage lenders or "home finance companies" facing difficulties due to liquidity issues, and are effectively in the process of being nationalised (although their status is still unclear as the Federal government has yet to announce its final decision on the matter). The two companies together -- Tamweel PJSC (Tamweel) and Amlak Finance PJSC (Amlak) -- have about 60 per cent of the market, but have shown themselves to be just as vulnerable as any other wholesale-funded conventional counterparts.
Per se, a merger would not solve the issue; however, it would give birth to one large systemically important institution that would be easier to regulate, control, fund and strengthen from the perspective of its public-sector shareholder.
Strategic partnerships and joint-ventures
This strategy is popular among Islamic banks which want to build presences overseas. It is also used by banks seeking technical expertise in markets and/or products from other institutions. To facilitate the formation of partnerships and joint ventures, the Islamic banking businesses of conventional banks often need to be incorporated.
For example, Abu Dhabi Commercial Bank of the UAE and RHB Bank of Malaysia have entered into a strategic alliance. While both also operate conventional banking businesses, two reasons given for the partnership involve the ability to leverage each other's strengths in Islamic banking, while they also share the goal of developing a global Islamic banking platform.
Reacting to a crisis scenario
As is often the case in the field of Islamic banking, larger banks and smaller contenders tend to react differently in a situation of stress, which the overall market has been experiencing for several months. While larger Islamic financial institutions, like Saudi Arabia's Al Rajhi Bank or Kuwait's KFH, prefer to protect asset liquidity, capitalisation and their reputation at the expense of growth and profitability, smaller banks –- when they can afford to adopt such an opportunistic view -- are keen to quickly gain market share.
Such a strategy is apparent in the competitive UAE market. At a time when market liquidity has been scarce, most banking players tend to refrain from lending, leaving room for those competitors with ample asset liquidity to use their own balance sheets to capture extra shares of the lending market. For instance, Dubai Bank, one of the UAE's smaller Islamic banks, pursued such tactics: prior to the crisis, the bank managed to accumulate sizeable asset liquidity on its balance sheet, which it extensively used across 2008, resulting in a doubling of its size despite the worsening global credit woes.
Funding was less of a constraint for IFIs, because of market perception that these players will be more resilient than conventional peers amid global credit turmoil. The market acknowledged that Islamic banks could not carry on their balance sheets any toxic assets (in the form of highly-leveraged structured instruments or global investment banks' shares) simply because these are considered "haram" and therefore not eligible for investment as per Shari'ah Boards' fatwas.
In practice, a phenomenon of customers switching savings from conventional banks (perceived as riskier), to Islamic banks (perceived as less directly and indirectly exposed to 'subprime') has been recorded across a number of countries, especially in the UAE, Kuwait and Bahrain.
Rating implications of these strategies
The rating implications of different business strategies need to be considered in relation to individual institutions and the likely impact on their business and financial profiles.
Organic growth in home market
Good for long-term ratings, as long as not too aggressive
This strategy is usually good for long-term ratings since the expansion of market positions could improve franchise value. To the extent that growth is a result of tapping new customers, the strategy would also serve to reduce concentration risk and increase earnings diversification. Moreover, organic growth in home markets involves tapping business in a familiar operating environment. And since strategy is implemented by the existing management team, it has lower execution risk.
But overly aggressive growth could still harm bank credit profiles. An institution's risk management system and infrastructure often cannot keep pace with strong business growth. This may be indicated by the experiences of Tamweel and Amlak which became exposed to construction risk by funding under-construction properties. As a result, asset quality problems could surface later. Worse still, if growth is supported by debt-like hybrid capital instruments, any capital buffer utilised to support potential loss from the risk assets will thin
Example: Al Rajhi Bank
In September 2006, Moody's upgraded Al Rajhi Bank's financial strength rating to C- from D+. The rating action was to recognise the bank's strengthened franchise, improved financial fundamentals and strong capital base. Organic growth outside of home market
Potential higher diversification benefits, but with higher short-term risk
The small size and/or a maturing nature of home markets often drive financial institutions to seek long-term and sustainable growth abroad. Such an expansion strategy is inevitable and, in the long term, beneficial. However, growing the business in less familiar markets, and sometimes in more volatile and often constrained environments, brings near-term challenges.
Until Islamic banks have seasoned their overseas operations and demonstrated that they are able to deliver stable earnings, increased risk profiles may outweigh any benefits. However, once seasoned, the income and risk diversifications benefits would be more evident since assets in overseas markets generally have a lower risk and earnings correlation than have risk assets in the same market. The less correlated and better diversified the new markets, the higher the diversification benefits.
KFH's international operations are growing in importance, and have started to confer visible diversification benefits to the group as well as brand credibility overseas. The performance of foreign subsidiaries has improved over the past few years. This development has somewhat altered its culture in a positive way, forcing it to more efficiently allocate resources across the organisation and experience more intense competition.
Mergers and acquisitions
High execution and integration risk, and financial leverage often rise
M&As of material sizes always trigger rating reviews. While the reviews do not always lead to rating actions, when the latter do take place they are often negative for acquirers. The possible results include changing an institution's rating outlook to negative, placing ratings under review for possible downgrade, or simply rating downgrades.
Negative rating actions are more common, and mainly reflect the many risks involved in such a strategy, including execution risk, integration risk, regulation risk and financing risk. With M&As involving targets outside of home markets, the risk is still higher.
Until now, Moody's has not taken any negative rating actions on any Islamic banks as a result of their M&A initiatives, mainly because the acquirers have been able to absorb the added risks without creating too much pressure on their own balance sheets. This has in turn been due to the relatively small sizes of the transactions.
Strategic partnerships and joint ventures
Rating neutral in most cases
Moody's recognises that strategic partnerships and joint ventures could be a lower risk strategy for tapping into less familiar business lines or markets. And this strategy sometimes results in an increase in capital, which is good from a rating perspective.
Nonetheless, it is not uncommon to hear of disagreements among partners in terms of the formulation and execution of business strategies. And since each partner emphasises its own primary businesses, and it takes time to form a consensus and resolve any potential conflicts of interest, slow action or inaction could prevent the realisation of full possible benefits.
Moreover, not many strategic partnerships or JVs have brought big enough benefits to transform the business and financial profiles of its investors.
Selective rating issues concerning Islamic banks
While the underlying operations and economics of Islamic banks are substantially similar to those of conventional banks, we see some risk issues that could affect the ratings of Islamic banks.
The limited scope of eligible asset creates asset concentration risk. Non-deposit liabilities could have concentration risk as well due to the relatively small number of Islamic financial institutions available to participate in the inter-bank market. There is also only a small range of Shari'ah-compliant instruments available for managing or transferring risks.
For example, Al Rajhi Bank is highly exposed to the sovereign, primarily through murabaha placements with the government and balances with the Saudi Arabian Monetary Agency. This is in line with other Saudi Arabian banks. If we were to add to this situation the bank's top 19 group exposures and come up with an estimate of its top 20 exposures relative to Tier 1, then the amount could be quite sizeable. This is a common feature for rated Saudi banks and which significantly constrains their BFSRs.
In the case of KFH, the institution has some industry concentration in the property sector, with direct and indirect real estate exposures in Kuwait and internationally (exposure to the US real estate market appears negligible). In its loan portfolio alone, real estate and construction represented 12 per cent of exposures, whereas direct investments in properties accounted for 2.8 per cent of total assets at end-2007. At the same time, like most other GCC banks, single-borrower concentration is rather high.
KFH is also more exposed to market risk since direct investments are a key component of its business model and it has a marked preference for equities (in addition to Sukuk and property).
Focus on tangibles had led to increased property-related financings at IFIs, affected by relatively undiversified nature of the economies. As the real estate markets are highly volatile in the GCC, the concentration risk is magnified.
Challenges in liquidity management
Liquidity management is structurally more challenging at Islamic banks because there is still a significant shortage of liquid instruments, despite the efforts of the various central banks to provide a variety in which Islamic banks can place their surplus cash. In fact, Tamweel and Amlak would have gone insolvent if not for the government with liquidity being the issue.
Moreover, displaced commercial risk is always possible should an Islamic financial institution's assets yield returns for profit-sharing investment account (PSIA) holders that are lower than expected, or worse still, show negative rates of profits. While PSIAs are supposed to absorb losses -- other than those triggered by misconduct or negligence -- it remains to be seen how such account holders would react to losses on their accounts.
Historically, Islamic banks in the GCC have kept very large proportions of core liquidity on their balance sheets in the form of short-term international Murabaha and central bank deposits, at the expense of extra revenue. This approach has proved to be a wise choice in a region prone to numerous cycles and recurring shocks, and given that their investment portfolios tend to be more illiquid as stress situations worsen.
How the relevant stakeholders could affect the strategies and ratings of Islamic banks
Of the various stakeholders in Islamic banks, it is the regulators, shareholders, company management and employees, and customers which have key roles in shaping an Islamic bank's business strategy and performance and so affect its intrinsic financial strength. Additionally, regulators could influence an Islamic bank's deposit and debt ratings according to their capacity and willingness to provide systemic support in time of stress.
Regulators can affect a bank's strategy and ratings through their influence on the regulatory environment and systemic support. A more favourable regulatory environment could contribute to better BFSRs, while systemic support could further lift deposit and issue ratings as the joint-default probability is lower.
A bank regulator's principal objectives are usually focused on protecting depositors and promoting a healthy banking system. As such, the interests of a bank regulator are often aligned with the interests of depositors, bond holders and other creditors.
Through a combination of effective regulations, active supervision, and aggressive and prompt enforcement, a strong regulatory environment can promote sound banking practices and limit excessive risk taking. As a result, a bank's financial strength is often improved.
The level of systemic support is a result of the capacity and willingness of the national government to support troubled banks. Moody's firstly determines whether the countries in which the Islamic banks are domiciled are high, medium or low support countries. We then apply the appropriate level of support based on the importance of the respective bank to the system.
Tamweel and Amlak are examples of systemic support prevalent in jurisdictions where IFIs have been growing (i.e., the GCC).
Balance of growth and returns
The presence of active shareholders often pressures financial institutions to report higher returns on equity (RoE). To the extent that this is achieved by improving franchise and other business fundamentals, which lead to better financial metrics, the bank's long-term ratings will benefit.
However, if a higher RoE is achieved mainly by a more aggressive use of financial leverage, e.g., to make sizeable acquisitions financed by debt and other lower-quality capital instruments, or to conduct a large number of share buybacks, the bank's ratings would be pressured.
Many equity investors have under-estimated the risk of financial leverage in the past. However, we are now seeing that change in light of the prevailing global crisis.
Management and employees
Financial institutions, including Islamic banks, need to solve the most fundamental incentive problems so that strategies that involve excessive risk taking or a focus on short-term gains are discouraged. Staff tend to act based on how they are evaluated and compensated. Ill-devised performance metrics and compensation systems inevitably lead to a weak corporate culture and problems that undermine an institution's long-term prospects.
Client characteristics matters
Client characteristics could affect bank business profiles and financial results. For example, some Islamic mortgage originators in the UK note that the prepayment rate is higher, and the delinquency rate lower, than for conventional customers of similar income. Another example is that the customers in the GCC countries are willing to accept low or no returns on their deposits.
We note that the difference between Muslim and non-Muslim customers, in terms of credit quality and cost of deposits, is not significant across all markets. The point is that customer behaviour does have implications onbank performance; therefore, a selection of target clienteles could affect bank financial strength when distinctions do exist among different classes of customers.
To sum up, it is impossible to lay out one best strategy for all institutions, but Moody's believes those strategies that improve franchise value, risk positioning and financial fundamentals will benefit an Islamic bank's financial strength rating, which is comparable on a global basis.
Various strategies can be adopted by Islamic banks to achieve profitable growth and enhance their competitiveness, but the resulting immediate and long-term risks and benefits differ. It is worthwhile to point out that while asset growth is important, appropriate systems and infrastructure to address risk issues need to be in place to support sustainable growth. Therefore, strategic focus needs to be timed, with risk management being implemented first followed by growth.
Finally, regulators, shareholders, management and employees, and customers all have roles in shaping an organisation's strategy and could influence ratings. When it comes to global comparisons, Moody's believes it is more important for Islamic banks to build strong franchises in selective markets and businesses, and to maintain sound financial profiles as opposed to big balance sheets