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From Wall Street to Dubai – The Lucrative Idiosyncrasies of Islamic Banking
Religious limitations within Islamic jurisprudence have kept Islamic banks more cash awash than their risk-taking Western counterparts after the recent economic hubbub, but gradual reforms need to take place for the industry as a whole to experience a structurally sustained positive growth in the future.
By Marquis Codjia
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A supranational symposium of key financial players took place recently (March 2nd and 3rd, 2010) at the posh King Hussein Bin Talal Convention Center on the shores of the Dead Sea, circa 25 miles southwest from Amman, Jordan.
The event received trifling media interest from major western news outlets; however, behemoths in the global banking industry were closely eyeing pivotal decisions that may be announced in the final communiqué.
They were right to do so.
The gathering, the first Islamic Finance and Investment Forum for the Middle East, occurred in economically healthy and politically stable Jordan – a prominent ally of the West in a geostrategically susceptible region, – which enjoys the highest quality of life in the Middle East and North Africa Region, according to the 2010 Quality of Life Index prepared by International Living Magazine.
Another essential factor to heed lies in the fact that participants were among the crème de la crème of the Islamic financial marketplace, a group of over 350 bankers and experts from 15 countries that are spearheading transformational shifts in an economic sector likely to experience solid growth in the foreseeable future.
A bird’s eye view of Islamic banking is utile to fathom the industry’s core dynamics.
Islamic banking – and to a larger extent, Islamic finance – is deeply rooted in Islamic economics and quintessentially governed by Sharia, a legislative corpus that encapsulates the religious precepts of Islam.
Sharia – or its financial section known as Fiqh al-Muamalat (Islamic rules on transactions) – allows financial intermediaries to engage in any form of economic activity so long as they don’t charge interest (Riba) and shun businesses implicated in forbidden (Haraam) undertakings.
Sharia strongly furthers risk sharing among investors and economic transactions collateralized by tangible assets such as land or machinery but outlaw derivative financial instruments.
A derivative instrument is a product that derives its value from other financial instruments (known as the underlying), events or conditions. It is mostly utilized for hedging risk or speculating for profit. The recent turmoil in global capital markets and the ensuing socio-economic pandemonium owe much of their existence to a type of derivative called Credit Default Swap (CDS).
Viewpoints alien to the Muslim world may find Sharia restrictions deleterious for sustained economic development because what Muslim jurisprudence defines as vice (gambling, adult filmography, alcohol, etc.) not only plays a vital role in many countries’ GDPs but is also an arguable social and temporal concept.
Notwithstanding, a plethora of observers now contend that constraints within Islamic finance have successfully shielded Sharia-compliant institutions from the recent economic meltdown while keeping their coffers cash awash.
Several factors support a potential Islamic finance boom, including skyrocketing deposits from denizens of oil-rich populated countries, numerous infrastructure projects and the emergence of a large middle class.
UK-based International Financial Services London estimates that Sharia-abiding assets have grown by 35% to $951 billion between 2007 and 2008, even though the industry “paused for breath” in 2009 amid the ongoing economic lethargy.
According to Mohammad Abu Hammour, Jordan’s minister of finance, the Islamic banking sector witnesses an annual growth rate of 10-15 % and there are currently over 300 Islamic banks in more than 50 countries, with large concentrations noted in Iran, Saudi Arabia and Malaysia.
Most of those banks and financial intermediaries are owned by native shareholders but growing swaths of the Islamic banking sphere are being populated by specialized sections of “ordinary” full-service Western banks.
HSBC Amanah, the Islamic finance arm of HSBC, is an illustration of that trend.
Islamic banking is highly profitable and the heightened foreign interest conspicuously corroborates the notion that the industry is bound to expand once emerging nations within the Muslim world are willing and able to use their gigantic cash reserves to structurally develop core sectors of their economies.
Nonetheless, many pending issues are still crippling the Islamic finance sector and prevent it from exceeding the 1% share it currently holds in global banking business.
The first relates to the need for Islamic banks to devise risk-hedging strategies – especially those engaging in cross-currency transactions – and instruments that are compliant with regulatory precepts. Specialists within the industry have to be creative because derivatives, a major hedging tool, are prohibited by Sharia. Progress in that area is still timid.
Second, Islamic scholars need to devise and inculcate a homogenous body of legislation to financial agents to avoid asymmetric disadvantage in the marketplace. The immensity of such a task cannot be underrated because Islam has multiple schools of thought and divergent interpretations of certain religious precepts can often turn out to be insurmountable stumbling blocks.
Sunni Islam is the largest branch of Islam with at least 85% of the world’s 1.5 billion Muslims although the endogenous variety of schools of thoughts often creates a diversity of views.
If a bank located in Sunni Saudi Arabia finds itself at a regulatory disadvantage versus an Iranian bank ruled by the precepts of Shiite Islam or a financial institution in Kharijite Oman, then evidently fundamental market disequilibria will emerge.
Third, the sector needs to harmonize practices to grow. Uniformity is needed not only in regulatory oversight but also in accounting and risk standards, both internally (within the Islamic world) and externally (vis-à-vis Western or other regional financial zones). A practical example will be to seek compliance with I.F.R.S. (International Financial Reporting Standards) and Basel II Banking Accords.
Finally, Islamic banks will need to engage in a sophisticated, well-targeted communication campaign aimed at educating skeptical U.S. and E.U. regulators (primarily), as well as prospective clients in the Western hemisphere. This effort will be pivotal in shifting public perception of the quality and positioning of their products and services and in expunging the stigma that erstwhile (and current) geopolitical happenings may have placed on the “Islamic brand”.
Dr. Abu Ameenah Bilal Philips on Interest and Islamic Banking
Competitive Asymmetry vs. Corporate Strategy: The Perilous Nexus in a Treacherous Chasm
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by Marquis Codjia
In the past, corporate strategists sought to maximize overall firm profitability by devising the best modus operandi that will help achieve results efficiently and effectively. Such a strategy routinely took advantage of the endogenous analogies of a homogenous market or geographic zone, such as culture, regulatory landscape, uniformity in fiscal or monetary policies, and socio-political affinity.
This system of similarities was observed in North America between Canada and the United States, in Western Europe prior to the Schengen Accords that led to higher economic integration within the European federation, and Japan within its Asian economic and geopolitical fiefdom. It has proven very fruitful for many a company because the strategic proximity afforded them lower implementation costs and higher profitability.
Nowadays, globalization along with its cohort of uncertainties is rebalancing the economic landscape and swinging the strategic pendulum in unlikely whereabouts. Globalization forces companies to review their tactical practices because of inherent execution difficulties in cross-cultural environments.
Tactics ought not to be mixed up with strategy. The former deals with detailed maneuvers to achieve aims set by the latter.
The need to control and instill a grain of homogeneity in the global marketplace has forced Western governments – mainly – to found organizations that will promote anti-protectionist measures and greater legislative coordination in world’s business. World Trade Organizations (WTC), North American Free Trade Agreement (NAFTA), and Eurozone are examples of such institutions or zones.
Though these international bodies have help catapult capitalistic free-trade as the preferred ethos, they have proven ineffective at creating a common economic environment in which corporations can engineer the same strategy to achieve their goals across geographical zones or markets.
This failure is due to the complex continuum of events taking place daily in the global arena that forces corporate leaders to include new factors in their strategy matrices.
A strategy matrix indicates how effectively a business entity can achieve profitability by juxtaposing such factors as store location, operating procedures, goods/services offered, pricing tactics, store atmosphere and customer services, and promotional methods.
New factors to be added to the mix are diverse and intricate; hence, an exhaustive analytical list cannot be within the purview of this paper. Some emerging trends relate to online marketing, higher government intervention, shareholder activism, military deals with domestic or foreign vendors, terrorism and war effects, and intellectual property theft.
Business leaders usually lump some of these issues in several corporate functions: risk management, government relations, regulatory, marketing, human resources, etc., and address them at higher echelons only when their magnitude dictates executive decision-making.
This approach is erroneous because it fails to recognize the systemic pedigree of corporate strategy and the notion that it must include all risks and objectives across the organization to be successful. The threats cited earlier are complex and diverse, and they usually change market equilibria by permitting, for instance, small firms to compete against larger rivals in markets they once couldn’t have penetrated.
This is the reason why I ascribe the concept of “competitive asymmetry” to this new phenomenon.
Numerous news headlines illustrate competitive asymmetry in the market. Western luxury brands are nowadays faced with fierce competition from “made in China” faked items, while American pharmaceutical mammoths like Pfizer and Johnson & Johnson observe powerlessly patent-protected pills being fraudulently transformed into generics in India. Another example is activist investor Carl Icahn confronting Time Warner’s management and demanding a change in corporate strategy or organizational structure (segment divestiture, merger, acquisition, etc.).
Other instances include Boeing filing a contract protest with the US Government Accountability Office after it lost a military deal to Northrop Grumman Corp and Europe’s EADS or fast-food giant McDonald losing an eight-year trademark battle to stop Malaysian Indian McCurry Restaurant from using the “Mc” trademark.
These trends are obviously deleterious for most firms within the western hemisphere because that asymmetric rivalry deprives them of the profits their R&D investment must have normally secured over a large time span. The threat is coming principally from emerging and underdeveloped countries because now mature European, American and Japanese markets no longer offer maximal growth prospects and enjoy a legal environment that disincentivizes intellectual property malpractice.
Major companies cannot underestimate the criticality of these emerging trends because they not only stand to lose market share at home but also see their profits eroded in those international markets where growth rates are healthier.
I’ll end with some geoeconomics questions: how will Google’s recent infuriation at China affect the firm’s country strategy given that the current 300 million Chinese computer users constitute a less ignorable niche? What about its overall Asia strategy? Will business prevail over politics? Will Google’s potential exit from the Chinese market propel rival Baidu to domestic and global supremacy? How will that affect the firm strategy with respect to launching other products in a country with 1.3 billion customers? How will this affect Google’s overall profit line?
My Special Letter to Nelson Rolihlahla Mandela
Dear Madiba,
Prayfully this missive will find you in good spirits.
Today, February 11th 2010 marks the 20th year of liberty.
Liberty for you from 27 years in jail,
Liberty for the millions of your brothers and sisters,
The millions of your sons and daughters,
The millions of your grandsons and granddaughters,
The millions of your grand-grandsons and grand-granddaughters,
Who were enslaved in poverty only because of the melanin in their blood.
Baba, how are you? Where are you these days? What are you doing?
Contemplating the slow evolution of your country?
The world we live in?
Is this what you envisioned for modern South Africa?
Is Apartheid over?
20 years later, your country is governed by black elites,
The intelligentsia you groomed so painstakingly,
They are doing their best to rule a aching nation,
Fighting social evils wherever they can.
Madiba, is this what you foresaw?
The country is torn and needs healing.
Large swaths of the populace are still hurting.
A villain named AIDS is killing everyday,
Sons and daughters are being lost to oblivion,
While some of your political heirs are squandering huge time irrelevantly
Violence is rampant and it murders the very core of our societies.
Madiba, is this what your imagined?
South Africa is growing slowly, steadily and surely.
But the economy is still in the hands of a few,
The same few that held it before you were jailed,
The same few that held it before you were released,
While the mass is suffering from human greed and slow decimation
A new few also became wealthier than you can think,
And will be next generation power brokers.
Madiba, your country is crying,
Your continent is suffering from forces within and outer
Would you give them a bit of your rare wisdom?
Would you tell the world, so laudatory to you, that time has come for action?
Would you tell your African counterparts to let go of their massive military ego?
Would you please do that?
Would you…?
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