Leading journalist on Islamic finance tells why he is often ‘harsh’ on the industry and his other views

“To be persuasive we must be believable; to be believable we must be credible; (to be) credible we must be truthful.” Edward Murrow.
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By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

Dear Dr. Ahmad Mohamed Ali, President, Islamic Development Bank (IDB) Group:

Asalaam Alaikum:

The Islamic finance world welcomes your comments on the ‘Mega’ Islamic Bank to effectively compete against well capitalized conventional financial institutions.

“…The ‘Mega Islamic Bank’ comes as an initiative of the Islamic Development Bank in its efforts to address the dearth of senior financiers, the absence of the Islamic tools of stock exchange and the absence of market liquidity between Islamic banks.”

However, $1 billion, with $500 million in paid capital by the three founders (IDB, Dallah Albaraka and Qatar Government), is smaller than three existing Islamic banks, which have never addressed themselves as ‘mega.’ The three include Saudi Arabia’s Al Rajhi, Qatar’s Mashraf Al Rayan and Kuwait’s Kuwait Finance House (KFH). Furthermore, it seems the ‘mega’ story may be incomplete without Malaysia’s participation.

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By Rushdi Siddiqui

Daud Vicary Abdullah is an authority on Islamic banking and has contributed to a number of books on the subject.

He has been in the finance and consulting industry for more than 38 years, with significant experience in Asia, Europe, Latin America and the Middle East. Meet Daud Vicary Abdullah, the president and CEO of International Centre of Education in Islamic Finance (Inceif), the global university of Islamic finance.
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January 17, 2012

By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

“The proper man understands equity, the small man profits.” Confucius.

The year 2011 was the year for [Malaysia] Shariah compliant index out-performance against all conventional developed and emerging market country indicies and almost all frontier countries.

The Islamic finance industry has not talked up the Islamic equity capital market story, as the Islamic debt capital market poster child, ‘Sukuk,’ has become the alter-ego of Islamic finance. But, does that amount to concentration brand and business risk for a $1 trillion, where Sukuk are, at best, 20% of Islamic finance?
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Will 2012 be the year of “come together” consolidation for Islamic banks?

Size is often the justification for achieving economies of scale, used to access deals for league table prominence, used as a buffer in a challenging environment, used as defensive measure to ward off unwanted suitors, and so on.

Islamic banks are very much like Islamic (equity) funds. There are hundreds of Islamic banks and funds, but the paid-up capital and assets under management, respectively, is too small to be meaningful. Yet, both, more so Islamic banks, present a unique situation (of an industry risk) of “too small to fail”.

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By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

‘Don’t cheat the world of your contribution. Give it what you’ve got.’ - Steven Pressfield

On November 22, 2011, the world’s first Islamic interbank benchmark rate (IIBR) was launched. It is the result of a collaborative approach taken by many Islamic financial institution, industry associations, and Shariah scholars, over the course of 24 months, to a decades-old industry challenge: how to decouple Islamic finance from a conventional Western pricing benchmark (LIBOR) and the law of necessity when an ‘Islamic’ alternative was not available. The objective was to support and preserve Islamic finance authenticity.
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“Angel investors don’t come with a halo and wings, but they can seem heaven-sent to an entrepreneur struggling to find financing.” - Cathie Gandel.

By Rushdi Siddiqui, Global Head Of Islamic Finance, Thomson Reuters

Malaysia has raised the profile of Islamic finance, Takaful and Halal industry, and, now, she must do the same to venture capital (VC). VC is an important emerging asset class that should contribute to government’s objective of building a knowledge based economy by 2020.
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By Rushdi Siddiqui, head of Islamic Finance, Thomson Reuters

Nigeria has become a ‘battleground’ for Islamic finance, unfortunately further dividing Africa’s most populated country.

Some recent newspaper headlines include:

Islamic Banking: Muslims Ready to go to War

Islamic Banking: Insult to Nigeria - Cleric

Stop Islamic Banking in Nigeria

Islamic or Shariah banking: Any Benenfit for a Pluralistic & Secular nation

Islamic Banking only for North- Mutallab

Christian groups oppose establishment of Islamic Banking

Islamic Banking: Christian groups may apply for own license

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By Rushdi Siddiqui, head of Islamic Finance at Thomson Reuters

If Islamic finance is about inclusion, where are the sisters?

Someone once said, ‘50% of the world’s population is women, and the other half, have mothers.’ Recently, two major articles were widely carried on women in Islamic finance, and highlighted the often heard issues: underrepresentation, interaction with male bankers, travel for meetings in conservative countries, from women scholars to women’s branches, and so on.

If Islamic finance (IF) is about inclusion, where are the sisters?

Stage one of IF has been male dominated industry. Stage two, march towards $2 Trillion, will require addressing a major bottleneck, lack of qualified people, and, its here, women can an important role.

There are numerous studies on poverty reduction in the third world, comprising of almost all of 57 Muslim majority countries, emphasizing the role of women as effective ‘managers’ in raising and educating children, household finances, dealing with stakeholders (extended families), etc., if they are empowered with the right ‘opportunity tools.’

It’s also important to separate cultural (mis)influence versus references to women in Holy Koran, Sunnah of Prophet (PBUH), and leading roles Prophet Mohammad’s (PBUH) wives, Khadija and Ayesha.
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At the Joint High Level Conference on Islamic Finance in Jakarta, Indonesia, co- organized by Bank Negara Malaysia and Bank Indonesia, the question I wanted to address was:

Does Islamic Finance have A.I.R. (Authenticity, Innovation & Reach) or is it just hot air?
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Next year will be a crucial one for Dubai Inc. as a significant amount of debt matures in the year. Analysts expect the emirate to service these maturities, but they expect external support. Here’s a look at Dubai’s options.Next year will be a crucial one for Dubai Inc. as a significant amount of debt
matures in the year. Analysts expect the emirate to service these maturities,
but they expect external support. Here’s a look at Dubai’s options. READ MORE HERE

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Questions for Islamic Finance

“We don’t see things as they are, we see them as we are” - Anais Nin

I used this quote as I wanted to share with the readers a sample of questions posed to me during the last few years of travel in Europe, GCC and ASEAN countries. These questions originate from people from all walks of life, whom in one way or another form opinions of their own and see Islamic finance from their own lenses.
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By Rushdi Siddiqui, Global Head of Islamic Finance, Thomson Reuters

I was watching highlights of the Royal wedding, when I heard the news of the death of Osama Bin Laden. In the last 10 years, most informed people of the world can tell you where they were and what they were doing during three major events: 9/11, Barack Obama being elected President of the United States, and now the death of Bin Laden.
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By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Has Islamic finance passed the ‘public good’ test?

HRH Dr Raja Nazrin Shah, the charismatic Crown Prince of Perak and Financial Ambassador of Malaysia Islamic Finance Center (MIFC), made reference to the public good concept during a recent event held by Securities Commission and Oxford Center of Islamic Studies. He said, ‘…If every aspect of Islamic finance were to be subject to a public good test, arguably no negative repercussion could ever arise.’

The Crown Prince is on point, but Islamic finance today is still far away from the ideal or lofty objectives of this niche market. Today’s Islamic finance has not reached the critical mass and penetration even among Muslim countries to be considered for a ‘public good’ test!

In about 40 years, it remains about 1% of global banking assets with varying presence in about 30 of 57 Muslim countries, and has reached about 2 to 3% of 1.6 billion Muslims. The conversation in Islamic finance during the decade has been, and continues to be, about lack of standardization, lack of enough scholars and qualified people, and level regulatory playing field.

Islamic fund assets under management are about the size of the paid up capital of Islamic banks, $50-70 billion, and Takaful premiums are still in the single billion dollar digits. Sukuk has inadvertently become the alter-ego of Islamic finance, hence, Islamic finance health pulse is the sukuk, but its only 13% of this niche market.

The Muslims at the ‘bottom of the pyramid’ are financially disenfranchised as they are not within the traditional deposit-taking community. The bulk of Muslims, living on less than $2/day, are not interested in sukuk, capital protected funds, Islamic hedge funds, AAOIFI standards or IFSB prudential regulations, but want access to Islamic micro-finance/funds, SME financing, venture capital, and so on.

They, the non-bankable, want the dignity to financially provide and take care of their families. This is the stress test of ‘public good,’ as Islamic finance is about social justice, equity, and inclusion.

Islamic Business Models

The Shariah prohibitions against interest, uncertainty and leverage plus the embryonic nature of Islamic finance saved it from ‘replicating’ toxic assets on their balance sheet in stage one of the post crisis-period. Yet, Islamic banks in Bahrain, UAE, and elsewhere continue to report non-performing loans (NPLs) and provisioning as exposure to the vertical chain of real estate institutions at commercial, retail and personal continue to impact performance adversely.

The six-month index performance for financial sector shows S&P Global BMI Financial Index up nearly 5%, S&P Bahrain financial up 0.57%, S&P UAE Financial down 12% and S&P GCC Composite financial down 5%.

The question is: where are the poster children of Islamic finance today? Gulf Finance House (Bahrain) and Investment Dar (Kuwait) were winning numerous industry awards, including Islamic Banker of the Year, until two years ago. Now they are case studies for dubious business models, and consequences of concentration risks (real estate) and Islamic ‘over-leverage.’

Another question: Will the risk-sharing nature of Islamic finance allow ‘claw back lawsuits’ against certain self-enriched Islamic investment bank CEOs while the bank is presently on life-support restructuring? Where was the governance that is closely linked to the ‘public good?’

The credit crisis was a wake-up call for Islamic finance, as it was following the conventional path of ‘financializing’ the real economy with many conventional instruments ‘Islamisized.’ The end result would have been a public perception similar to the conventional financial sector: loss of trust. For example, according to a recent survey, Business for Social Responsibility Globe Scan of Sustainable Business poll, the financial sector was considered as the least socially responsible sector.

PR For Public Good

Finally, extending the present partial ‘public good’ associated with Islamic finance, how is Islamic finance perceived in non-Muslim countries interested in this niche market? If it’s partially passing the public good test, assuming public good cuts across geographies and religion, then why the hostility against Islamic/Shariah finance in the world’s largest democracy, India, or world’s largest economy, US?

According to recent Wikileaks cable, former US Secretary of State, Condilezza Rice, inquired about the possibility of Islamic finance funding extremists. Another example from a prominent blogger in the space, Blade Goud, discusses the recently published U.S. Department of Defense funded study of ‘… a hypothetical three stage economic war on the U.S. economy where Islamic finance plays a role in facilitating what the report refers to as ‘economic jihad’.’

Finally, in Korea, certain religious quarters, ‘men of the cloth,’ have raised the issue of extremist financing associated with Islamic finance, hence, putting on hold parliamentary discussions/voting on the leveling of the taxes for sukuk issue.

Islamic finance in Muslim countries is often a Friday khuutba, where it’s preaching to the converts. The real ‘test’ is actually two-fold: (1) merits of Islamic banking in a Muslim country (answering the question, ‘whats the difference?’) as a business proposition, and (2) convincing the non-Muslim country financial stakeholders of the ethical and social nature of Islamic finance from end to end.

The question often asked by non-Muslims is: which Muslim country has ‘Islamized’ its economy in the past 40 years? Eventually, this question has to be answered and supported with actual data!

May be, a more precise wording for a test for Islamic finance is the ‘public reach and awareness’ test before it can be considered a ‘public good.’