Ganesan Ramakrishan

Executive Vice PresidentHead Special Project

Sharjah Islamic Bank
October 28, 2009

G.Ramakrishnan Copy Rights

March 21, 2016

Technologist who did his Business Management and specialization in Finance

Over 35 years of rich and varied experience in all fields of Banking ( Last 7 years in Islamic
Banking and Finance) and more than 25 years in Senior Management positions in various
Banks
One of the core Senior Management Team member responsible for conversion of
conventional bank - National Bank of Sharjah into an 100% Islamic Bank - Sharjah Islamic
Bank 7 years ago
Advisory Board Member in British University in Dubai for Finance and Banking including
Islamic Banking and Finance.
Member of Academic Counsel in Mumbai Business School and Management Board
Member of Leaders Private School
Visiting Faculty in Emirates Institute for Banking and Financial Studies, Sharjah, Wollongong
University in Dubai, Dubai International Financial Centre, Dubai and Prolific speaker on
Banking and Finance including Islamic Banking
Chartered Accountancy firms, International Consultants and International events organizers
like Marcas Evans, Jacob Fleming conferences, etc regularly invite him for speaking on
topics relating to Banking and Finance

March 21, 2016

The views and information herein are personal to the

Speaker and have been gathered from various sources like
internet, reading materials, etc.
While every effort has been made to ensure accuracy, the
Speaker accepts no liability for any errors or omissions of
fact or substance in the information contained herein.
This presentation does not represent business solicitation
from any person within the context of any applicable laws.

March 21, 2016

Funny videos - Growth and reces s ion.wmv

Financial crisis a
result of a system that
did not know when to put
an order in the
increasingly rickety credit
edifice, because of rising
profits.
In the time of financial
crisis, an overdose of
morality in a financial
system, that demands
healthy amorality
(Executive April 2009)

G.Ramakrishnan Copy Rights Pinnacle Knowledge Group, Dubai.

May 23, 2009

What has caused this major economic upheaval in the world?

What is the cause of falling share markets the world over and
bankruptcy of major banks?
IT ALL STARTED IN THE US

In US, a boom in the housing sector was driving the economy to a new
level.
A combination of low interest rates and large inflows of foreign funds
(Supply of Capital courtesy of the U.S. Federal Reserves easy money
pollicy) helped to create easy credit conditions where it became quite easy
for people to take home loans
As more and more people took home loans, the demands for property
increased and fueled the home prices further.
As there was enough money to lend to potential borrowers, the loan
agencies started to widen their loan disbursement reach and relaxed the
loan conditions by ignoring customers repaying capacity
www.theindianblogger.com/problems/reasons-for-global-recession

March 21, 2016

Since it was a good time and property prices were soaring, the only
aim of most lending institutions and mortgage firms was to give loans
to as many potential customers as possible.
As a result, many people with low income & bad credit history or
those who come under the NINJA (No Income, No Job, No Assets)
category were given housing loans in disregard to all principles of
financial prudence. These types of loans were known as sub-prime
loans (high ROI than prime loans) as those were are not part of
prime loan market (as the repaying capacity of the borrowers was
doubtful).
Since the demands for homes were at an all time high, many
homeowners used the increased property value to refinance their
homes with lower interest rates and take out second mortgages
against the added value (of home) to use the funds for consumer
spending.

March 21, 2016

BUBBLE THAT BURST

Overbuilding of houses during the boom period finally led to a
surplus inventory of homes, causing home prices to decline
beginning from the summer of 2006
Home owners, who were expecting to get a refinance on the basis
of increased home prices, found themselves unable to re-finance
and began to default on loans as their loans reset to higher interest
rates and payment amounts
In the US, an estimated 8.8 million homeowners - nearly 10.8% of
total homeowners - had zero or negative equity as of March 2008,
meaning their homes are worth less than their mortgage
In the US, an estimated 8.8 million homeowners - nearly 10.8% of
total homeowners - had zero or negative equity as of March 2008,
meaning their homes are worth less than their mortgage

March 21, 2016

WHAT COMPLICATED THE MATTER

Sub-prime loans were excellent investment options for lenders as long as the
housing market was booming
With stock markets booming and the system flush with liquidity, many big
fund investors like hedge funds and mutual funds saw subprime loan
portfolios as attractive investment opportunities. Hence, they bought such
portfolios from the original lenders.
Major (American and European) investment banks and institutions heavily
bought these loans (known as Mortgage Backed Securities, MBS) to diversify
their investment portfolios.
Eventually house prices started to decline and many borrowers of sub-prime
loans started to default on their home loans
The problem got worsened as the Mortgage Backed Securities (MBS), which
by that time had become parts of CDOs of giant investments banks of US &
Europe, lost their value. Falling prices of CDOs dented banks investment
portfolios and these losses destroyed banks capital

March 21, 2016

MAYHEM IN THE BANKS

Global banks and brokerages have had to write off an estimated $512 billion
in subprime losses so far, with the largest hits taken by Citigroup ($55.1
billion) and Merrill Lynch ($52.2 billion). A little over half of these losses, or
$260 billion, have been suffered by US-based firms, $227 billion by
European firms and a relatively modest $24 billion by Asian ones
Despite efforts by the US Federal Reserve to offer some financial
assistance to the beleaguered financial sector, it has led to the collapse of
Bear Sterns, one of the worlds largest investment banks and securities
trading firm and crisis has also seen Lehman Brothers - the fourth largest
investment bank in the US and the one which had survived every major
upheaval for the past 158 years - file for bankruptcy
Governments and central banks (like Fed in US) are trying every trick in the
book to stabilize the markets. They have pumped hundreds of billions of
dollars into their money markets to try and unfreeze their inter-bank and
credit markets.

March 21, 2016

Current growth of Islamic banks is estimated at 20-25% per year

Estimated market to be $4 trillion, achieved USD 650 bn
GCC countries account for nearly 56% of total Islamic banking assets
Islamic banking expanding in financial activities including retail banking, insurance
and capital market instruments
The continued growth in the Islamic banking industry is attributable to three factors
(IMF):
Increasing demand from a large number of Muslims
Rising oil wealth in Dubai and other UAE countries
Growing attractiveness of Shariah-compliant financial services to non-Muslim
investors seeking ethical investments and banking practices

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The religious teaching underpinning Islamic finance is concerned with justice in

financial contracts to ensure that none of the parties is being exploited.
Riba( interest or usury) is one source of exploitation, especially, as in the case of subprime lending, the highest rates were charged to lower earners. Islamic housing
finance involves risk sharing between the bank and the client, rather than transferring
all the risk to the latter.
Under the most commonly used diminishing musharaka (partnership) contract, the
bank and the client form a partnership, with the bank providing up to 90 percent of
the purchase price, and the client at least 10 percent.
Over a period of usually 10 to 25 years, the client buys out the ownership share of the
bank which makes its profit from the rent paid by the client for the share the bank
owns.
In the event of a rental or repayments default, the bank may advance the clients an
interest-free loan (qard hassan in Arabic) to enable them to continue their payments
during the recession in anticipation that they will pay in full when the economy
rebounds.

Prof Rodney Wilson - Durham University

March 21, 2016

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Of course Islamic banks have to appraise credit risk, and indeed are more cautious
about who they should finance than conventional banks.
The banks in the United States charged high arrangement fees for sub-prime
borrowers which were used to pay bonuses for those signing up new clients.
As the mortgages were sold on to Freddie Mac and Fanny Mae, the arrangers were
unconcerned that the sub-prime borrowers might be unable to meet their financial
obligations.
Indeed, gifts were provided to entice the feckless to sign up, and the mortgages often
exceeded the value of the property.
The banks in other words became mere booking agents, with no long term
commitment to their clients.

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Islamic banking had relatively lesser impact due to its ban on interest and
speculative investments and complex financial instruments that turned toxic for
conventional banks
According to Moodys, Islamic financial institutions in the Gulf showed strong
resilience during financial turmoil, but are not risk immune due to shortage of liquid
instruments and Islamic interbank market
Industry has remained relatively crisis proof due to the asset backed nature of it
transactions.
Moodys expects the growth in Islamic banking assets to slow sharply in 2009, to
around 10-15% from 20-30% last year
UAE bailed out Islamic mortgage lenders Amlak and Tamweel and Emirates Industrial
bank and Real Estate bank will consolidate to form Emirate Development Bank,
acting as Rescue vehicle.
GCC Islamic banks are heavily exposed to real estate in form of direct investment
and/ or mortgages
Current surge on liquidity has put pressure to enhance ROI for account holders

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In addition to its strong annual growth record of the past few years, Islamic finance is
thought to be in a stronger position to withstand global financial turbulence (IMF)

Recent market difficulties, most notably the credit crunch, could act as yet another
incentive for investors to flock to Islamic banking. - bankingtimings.co.uk

Bahrain Islamic Bank realized net profits of $16m in 1st quarter of 2009 (ameinfo.com
Apr 19 2009)

Sharjah Islamic Bank realized net profits of Dhs 85m in 1st quarter of 2009, with a
7% increase from last year (ameinfo.com- Apr 19 2009)

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Qatar International Islamic Bank has reported net profits QR 136.7m in 1st quarter of
2009 (menafn.com - Apr 20 2009)

Abu Dhabi Commercial Bank (ADCB) has set up an Islamic finance company to offer
a range of Shariah compliant products. Abu Dhabi Commercial Islamic Finance
(ADCIF) is a private joint stock company with an initial capital of Dhs200m. The
founding shareholders are ADCB and its subsidiaries Abu Dhabi Commercial
Properties and Al Dhabi Brokerage (AME info- 19/5/2009)

Standard & Poors continues to foresee a bright future for Islamic finance and is
committed to supporting its expansion by providing objective and independent
opinions and benchmarks for Islamic issuers and investors (20/5/2009)

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Islamic banking and Finance industry has come from almost nowhere 30 years ago
to be worth over $ 7 billion in terms of assets- Khaleej Times (2/7/2008)

$200 Bn (Dhs 734 bn)capital base likely for proposed Islamic bank The IPO will be
about $3 Bn in the 4th quarter to tap interest in Shariah-compliant institutions and will
be listed in Bahrain and Dubai Gulf news (20/4/2009) and Arab Banking conference
2009

Crisis is an opportunity for Islamic Finance Emirates Business 24*7 (27/4/2009)

In 1997, a landmark McKinsey & Company study exposed the 'war for talent' as a
strategic business challenge and a critical driver of corporate performance

March 21, 2016

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Umer Chapra a well known Saudi Economist estimates that the derivatives market to
be around $600 trillion, more than 10 times the size of the world economy. The
derivatives include credit default swaps(CDS) worth 54.6 trillion. Islamic finance
system introduces greater discipline in the economy and links credit expansion to the
growth of the real economy

In Islamic System, credit is primarily for the purchase of real goods and services
which the seller owns and possesses and the buyer wishes to take delivery. It also
requires the creditor to bear the risk of default by prohibiting the sale of debt, thereby
ensuring that he evaluates the risk more carefully

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Characteristics

Islamic banking system

Conventional banking system

Interest & speculative

transactions

Charging and any kind of dealing in

interest and gharar is strictly prohibited

Interest is the main source of

income and deals in derivative,
hedging, etc

Laws and
jurisprudence

Based on Sharia laws - Sharia

scholars guide and ensure adherence
to Islamic laws

Secular banking laws and do not

follow any religious laws or
guidelines

Unethical transactions

Transactions involved in unlawful

business such as casinos, alchohol,
tobacco are not allowed

Utilisation of borrowed money is

typically unrestricted except money
laundering and non-financing of
criminal activities

Late payment/ penalty

Penalties are prohibited, but if charged

must be rechanneled to charities

Fees are typically charged for late

payments

Mode of financing

Transaction, asset, activity and

project based

Finance or trade money at interest

Balance between moral

& material requirement

Reduction in over extension of credit

as bank have ownership before resale

Excessive debit and credit

financing could lead to financial
problems

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Risk behavior differently in Islamic and conventional banking

Conventional
Credit risk - Non performance
counterparty as per agreed terms

Islamic
of Higher due to non-availability of legal
recourse for defaults

Market risk- Four factors responsible Factors responsible excludes interest

interest rates, indices, commodities and rates
derivatives
Operational risk Relates to systems, Additional reason being Shariah risk
processes and people
Liquidity risk Banks inability to meet
its obligations, manage unplanned
decreases or changes in funding
sources

Higher due to non availability of money

markets, limited recourse to overnight
borrowing and higher sensitivity of
market and clients

Universal standards, procedures, qualified manpower and regulation,

supervision and co-operation among policy makers

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Bahrain
A major regional hub, has 6 Islamic Retail banks and 20 Islamic wholesale banks.
Prudential Information and Regulatory Framework is the first framework especially
designed for Islamic Finance
Kuwait
Limited Islamic banks, currently only 3 licensed institutions
Conventional banks are not allowed to run Islamic windows
Conversion of Commercial Bank of Kuwait into a fully Islamic bank , announced in
early 2008, is still not completed
Oman
Does not have Islamic banking sector (Shariah compliant)
All banks should be international and do not deal with specific operations and
regulations
Source: Blominvest

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Qatar
10 banks offer Shariah compliant products.
Qatar Financial Centre (QFC) established to attract financial institutions and capital
into the country with its liberal regulations
Saudi Arabia
Development of Islamic banks is hampered by lack of clear laws, technically Shariah
compliant finance are against the constitution, discretionary licensing conditions and
strong Government influence
UAE
Relatively competitive
International institutions such as HSBC Amanah or Citibank have established their
operations in Dubai International Financial centre (DIFC), major onshore financial
hub
Full fledged Islamic banks -8, Islamic finance companies 12, Islamic banking
windows 16, Islamic insurance 3 and National bonds - 1
Source: Blominvest

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Source: Blominvest Bank report February 2009

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Key Sukuks announced in 2008

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Source: Blominvest

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Large and young Muslim population globally Muslim accounts for nearly 24% (1.6 bn)
of the world population and expected to reach nearly 30% for the world by 2025

Low penetration in Muslim majority nations for both conventional and Islamic products

Increasing wealth of Muslim nations due to higher oil prices. According to McKinsey, the
GCC states currently have appx USD 2 trillion in foreign assets

Greater focus on Islamic identity- the emergence of Islamic finance is related to the
revival of Islam and desire of Muslims to live in accordance with Islamic law or Shariah

The soundness of Islamic banks is accounted for by the fact that they use a classical
banking model, with financing derived from deposits, rather than being funded by
borrowings from wholesale markets and investments are heavily weighted in sectors
such as healthcare and utilities

Source: Blominvest

March 21, 2016

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Government and regulatory support for the development and promotion of Islamic
banking - Malaysia being a stand out example
Demand from non-Muslims, wider acceptance of Islamic banking products due to
certainty of repayments, appeal of profit-loss sharing and underlying set of values like
prohibiting deception, embracing accountability and transparency
Participation of Conventional banks in Islamic banking Conventional banks in many
Muslim- majority countries have also begun offering Islamic banking and are able to
cross-sell a new range of products to existing customers but also stand to reach out
new clientele
Islamic insurance Takaful and Bancatakaful ie selling Islamic insurance through
banks
Investors in equities screened for shariah compliance have also suffered, but less
than their conventional counterparts, because they have not invested in the shares of
riba-based banks which have fared especially badly during the global financial turmoil

Source: Blominvest

March 21, 2016

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Regulatory issues Basel II for all conventional banks and Islamic banks following
risk management / Basel II based on Country specific regulations

Gap between the growth of Islamic banks and talent / human capital

Piecemeal Financial and legal architecture

Standard required for proper financial reporting and transparency

Unstandardized Shariah rules - Shariah interpretation among countries and regions

and also in products from one bank to another differ and measuring performance

Lower volumes and limited scale benefits due to shortage of product innovation and
lack of liquid management instruments

Competition between Islamic banks and Conventional banks operating Islamic

windows

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Bank

Islamic Products offered

Al Rajhi, Riyadh

Deposit accounts, financing and online share trading service and also
offers mutual funds based on commodities, local and global equity, real
estate, shares

Kuwait Finance House

Deposit accounts, debit & credit cards, aircraft leasing, vehicle

financing & leasing, trade financing, project financing, asset
management, FX trading, etc

Dubai Islamic bank

Bank co-managed with Barclays the USD 3.5 Bn Sukuk issued by

PCFC/ It covers term deposits, cards, corporate finance, investment
banking, project finance, trade and commodity finance, capital and
debt market products, treasury & corporate banking, international
banking services and securities

Qatar Islamic Bank

Bank is among the 5th largest Islamic banks. Apart from the above
products, is also manages portfolio and investment funds in France,
Germany, USA and UK

Source: Annual reports, Banks website, Zawya, Bloomberg

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