Tutorial 4

BAF3009 Financial Institutions & Markets

TUTORIAL 4:

ISLAMIC FINANCE, BANKING & CAPITAL MARKETS

Question 1 Refer to the article: “Islamic banking on a roll” – Business Times dated 19 November 2004. Summarize the key points of the article. • •

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IBF is one of the banking’s hottest sectors. Growth rate of 10% - 15% (i.e. higher than that of conventional banking) IBF services must adhere to Shariah Law o Ban on charging interest on loans o Prohibits client’s money from being invested in companies linked to alcohol, pork, weapons and pornography. Great potential for growth as most assets are invested in conventional products or kept in hard cash. MAS aims for a bigger share as it feel that Singapore as an IFC, should have the capability to provide the whole range of financial activities, including IBF. To operate IBF, need: o A separate legal and regulatory framework because conventional banking is a relationship between debtor(bank) and creditor (depositor) and o In IBF, it is a relationship between investor (depositor) and manager (bank acting as custodian of funds) o To replicate banking infrastructure like the clearing systems as Islamic funds and cheque cannot mixed with non-halal funds o To amend banking law for Islamic banking or enact a separate Islamic Banking Act o To have critical mass for banks to operate IBF viably due to need for separate infrastructure. Singapore may be better offering wholesale banking services than retail banking services in IBF. IBF need not necessarily cater too only in the Muslim population o Just one of the channels to deliver products and services o Banks decide how best to serve the needs of clients – structure price and yield.

Question 2 Refer to the article: “Will the twain ever meet” – Business Times dated 8 October 2004. (a)

What is meant by 'riba'? What are the opposing views held regarding its meaning? •

(b)

Riba – an outlined in the article refers to the payment and receipt of interest which is forbidden in Islamic banking

What are some practical problems faced by a bank in developing and marketing Islamic financial products? •

Practical problem Divergent views and interpretation makes it impossible to set up a benchmark for international reference (which in turn, slows innovation, because stunted markets and increases business costs.) For example: 1

BAF3009 Financial Institutions & Markets

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(c)

Malaysia is a leading player in issuing sukuks (essentially bonds) which are supposedly Shariah-compliant by Malaysian standards. However, these are not recognized to be so by the Middle Eastern countries and such bond issues are largely/actively traded but only among domestic investors.

Briefly explain the following terms: 

Murabahah: Cost plus contract where the customer requests the bank to buy an asset on its behalf & in turn, sells it to him at cost plus a declared profit.

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Mudarabah: Silent partnership where one provides the money and the other (the mudarib) manages the business in exchange for a fee or share of its profit.

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Musharakah: Full partnership where profits and losses are shared by all parties equitably.

Question 3 Refer to the article: “Singapore playing catch up in Islamic banking” – Reuters News dated 1 December 2006. (a)

Discuss the factors hindering Singapore's efforts to develop Islamic banking. • • • •

(b)

Slow/late entry into Islamic compared to Malaysia. Has traditionally focused on business opportunities in the Asia Pacific region rather than the Middle East and the GCC) Gulf Cooperation Council) states. Offers few taxes incentives on Islamic products to attract investors. Lacks a Shariah regulatory board to say if products comply with Islamic law or not. Has yet to issue a single sukuk or Islamic bond.

What are some major advantages Singapore has in its bid to attract Islamic funds? •

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Already a major centre for wealth management/world’s 4 th biggest FX centre – high credibility as an IFC Neighbors to Indonesia & Malaysia – both populous Muslim countries – huge potential market among the wealthy? Already a centre for offshore funds and is a base for all major banks. Strong legal framework and a relatively widely traded currency. (Note: possible conflicts between Western law vs. Shariah law in the event of disputes?)

Recommend Articles: 1. 2. 3.

“Islamic finance needs more players: MAS” – The Business Times dated 24 June 2008 “A growing force in banking” – The Business Times dated 26 May 2008 “No sub-prime mess with Islamic banking” – The Business Times dated 9 October 2008 - End –

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