Gulf FIs invited to set up Islamic banks

MUSCAT � As part of its long-standing policies to liberalise Islamic banking, the Malaysian central bank Bank Negara Malaysia (BNM)will issue three new Islamic banking licences to qualified foreign players.

Sources said financial institutions (FIs) and Islamic banking institutions in the Gulf are also invited to set up Islamic banks in Malaysia. The Gulf region has more than a dozen Islamic banks with major markets being Bahrain, Saudi Arabia, the UAE, Kuwait, Qatar, etc.

Some banks in Oman are also offering Islamic financial services, and Oman had been a shareholder of Islamic Development Bank (IDB) since 1975. Besides a full range of commercial, retail and wholesale banks, Bahrain has more than 20 local, regional and international institutions offering Islamic financial services.

Speaking to Times Business from Kuala Lumpur yesterday, BNM sources said this move will bring forward the liberalisation of the Islamic banking industry to 2004 with respect to issuance of new licences, three years earlier than the envisaged recommendation of the financial sector master-plan.

The new Islamic banks must be locally incorporated and licensed under the Islamic Banking Act 1983 as full-fledged Islamic banks. The new Islamic bank will be required to have a minimum capital of $78.95 million (RM300 million).

Malaysian central bank said the following criteria will be adopted in assessing the merits of applicants:

Applicant must be a financially sound licensed foreign Islamic banking institution or a foreign financial institution with experience in Islamic banking business.

Applicant must be regulated and supervised by a competent home regulatory authority and preferably, with a strong reputation in own national jurisdictions.

Applicant must be able to demonstrate, through its business plans, that the new Islamic bank in Malaysia will have the expertise and resources that can contribute constructively to the development of the domestic Islamic financial sector and the economy of Malaysia.

The business plan should include, among others: details on the competency, integrity, qualifications and experience of the proposed senior management team (including the board of directors); the proposed operating plan and internal controls (including the corporate governance structure and risk management framework); and the projected financial condition and proforma financial statements for the new Islamic bank for the first three years (including its capital adequacy status).

Apart from the above criteria, the applicant must submit the proposed ownership structure of the new Islamic bank, including the source of capital, its direct and indirect controlling and major shareholders (shareholders with a minimum equity interest of 10 per cent), their financial strength, the review of their previous banking and non-banking business ventures, their integrity and reputation, the central bank told Times.

Similar to the incumbent locally incorporated licensed foreign banks in the conventional banking system in Malaysia, the new Islamic bank may have a foreign equity interest of up to 100 per cent. This can take the form of a wholly owned subsidiary or a joint venture with domestic investors or other foreign financial institutions that fulfil the BNM criteria, the central bank added.

The move is part of the overall efforts to strengthen the global integration of the domestic Islamic banking system and increase the potential to tap new growth opportunities as well as facilitate international trade and investment flows between Malaysia and the rest of the world. It is also a step forward in the development of Malaysia as a regional financial centre for Islamic banking and finance. Submission of applications to BNM should be made by March 31, 2004.

It is said that Malaysia and Turkey are the strongest markets for Islamic banking. In two countries with Islamic regimes, Iran and Sudan, all domestic transactions are governed by Islamic banking rules.

Today, more than 250 Islamic banks are operating from China to USA, managing funds to the tune of $200 billion. Banks in the West through their Islamic units in UK, Germany, Switzerland, Luxembourg, etc. also practice Islamic banking. Moreover, Islamic funds have found a flourishing market in USA and Europe.

The revival of Islamic banking coincided with the worldwide celebration of the advent of the 15th century of Islamic calendar (Hijra) in 1976.

At the same time financial resources of Muslims particularly those of the oil producing countries, received a boost due to rationalisztion of the oil prices, which had hitherto been under the control of foreign oil corporations. These events led Muslims to strive to model their lives in accordance with the ethics and philosophy of Islam.

Islamic banks appeared on the world scene as active players over two decades ago. But many of the principles upon which Islamic banking is based have been commonly accepted all over the world, for centuries rather than decades. According to the Institute of Islamic Banking and Insurance, the basic principle of Islamic banking is the prohibition of Riba(interest).

While a basic tenant of Islamic banking the outlawing of Riba, a term that encompasses not only the concept of usury, but also that of interest � has seldom been recognised as applicable beyond the Islamic world, many of its guiding principles have. The majority of these principles are based on simple morality and common sense, which form the bases of many religions, including Islam.

The universal nature of these principles is immediately apparent even at a cursory glance of non-Muslim literature. It is claimed that Islamic finance was practised predominantly in the Muslim world throughout the Middle Ages, fostering trade and business activities.

In Spain and the Mediterranean and Baltic States, Islamic merchants became indispensable middlemen for trading activities. It is also claimed that European financiers and businessmen later adopted many concepts, techniques, and instruments of Islamic finance.

The Islamic financial system employs the concept of participation in the enterprise, utilising the funds at risk on a profit-and-loss-sharing basis. This by no means implies that investments with financial institutions are necessarily speculative. This can be excluded by careful investment policy, diversification of risk and prudent management by Islamic financial institutions.

The concept of profit-and-loss sharing, as a basis of financial transactions is a progressive one as it distinguishes good performance from the bad and the mediocre.

This concept therefore encourages better resource management. Islamic banks are structured to retain a clearly differentiated status between shareholders' capital and clients' deposits in order to ensure correct profit-sharing according to Islamic Law.