Monday, December 10, 2007
Islamic Banking Law in Kuwait
http://tyo.ca/islambank.community/modules.php?op=modload&name=News&file=article&sid=1207
By MUSHTAK PARKER
LONDON, ENGLAND, UNITED KINGDOM — The passing of Kuwait’s long-awaited Islamic banking law, following its recent approval by the National Assembly, leaves Saudi Arabia and Oman the only two Gulf Cooperation Council (GCC) states which do not have an Islamic banking law in place.
The law is actually an amendment of Law No. 32 of 1968 concerning currency, The Central Bank of Kuwait, and the Organization of Banking Business Profession.
A new Part 10 in Chapter 3 (Articles 86 to 100) relates to Islamic banks.
Under the provisions of the law, existing companies that carry out Islamic banking business in Kuwait “shall be registered in the register of Islamic banks as of the date of implementation of the law, and they should undertake to amend their positions in accordance with the provisions of this law within a maximum of three years.”
The Central Bank of Kuwait in addition can extend this period by one more year. Failure to do so will result in the liquidation of the company.
To put this in a Saudi context, Al-Rajhi Banking and Investment Corporation (ARABIC) has an average market capitalization of about $7. 5billion.
At the same time, the National Commercial Bank (NCB) has $4.27 billion of Islamic mutual funds under management.
Of NCB’s 24 mutual funds, 18 are Shariah-compliant. Kingdomwide, there are 125 mutual funds, of which 75 are Shariah-compliant.
NCB’s Al-Ahli Saudi Riyal Trading Fund is the single largest Islamic investment fund in the world. Not surprisingly, NCB is “the largest Islamic banking in the world”.
Another Saudi bank, Bank Al-Jazira has plans but the irony is that none of these banks are incorporated under an Islamic banking law. Simply because the Kingdom does not have an Islamic banking law.
According to Nizar Al-Shubaily, head of asset management at NCB, “There is no Islamic banking law in Saudi Arabia. Unlike some of the other countries in the region which have both conventional and Islamic banking laws in place. In the Kingdom we have only one banking law in place, but within that nothing stops you from doing Islamic banking. SAMA (the Saudi Arabian Monetary Agency) is fully supportive of Islamic products and services. We have an excellent relationship with SAMA, and we have never had any issues related to Islamic banking.”
Indeed, NCB chairman and managing director, Abdulla Bahamdan says that the bank “is considered to be one of the top innovators in Islamic banking in the world. Some of the more important innovations include the introduction of the Tayseer personal finance product, the Al-Ahli International Trading Equity Fund, and the Al-Ahli Saudi Riyal Trading Fund (all market leaders in their segments). The number of branches has grown to 248, of which 72 are dedicated to Islamic banking.”
With NCB back on the road to profitability (SR2.433 billion in 2002), having the highest shareholders’ equity in the GCC at SR8.817 billion and providing banking services to over a million customers, its pre-eminence in Saudi and GCC banking is proven.
ARABIC (Al-Rajhi Banking and Investment Corporation) on the other hand, remains a major player also.
According to unconfirmed reports, ARABIC is to underwrite a multi-billion riyal Saudi government Islamic bond program — if it does materialize it would be Riyadh’s debut Islamic bond program, following in the footsteps of Bahrain, which has issued six sovereign Islamic leasing bonds (Sukuk Al-Ijara) in the space of one year totaling $450 million, and all of which have been oversubscribed.
There are of course two pioneers of the Islamic banking movement — the Geneva-based Dar Al-Maal Al-Islami (DMI) Group, headed by Muhammed Al-Faisal, and the Dallah AlBaraka Group headed by Saleh Kamel — both of which run several Islamic banks in foreign countries, but which do not have banking licenses in the country of domicile of the main shareholders — in other words Saudi Arabia.
With Islamic banks coming under such intense scrutiny and such unfair criticism from the international media post 9/11 for alleged and unproven involvement in terrorist money laundering, regulating Islamic banks under a clearly defined and inclusive legal and regulatory framework consistent with international best practice, could go a long way in helping to deflect these malicious attacks against Islamic banking.
The banking case is also proven. Islamic banking by its very nature has certain crucial differences compared to conventional banks.
These include the nature of deposits; and the treatment of funds under management (whether off or on balance sheet items), which have implications for capital adequacy ratios and risk weightings.
As such it would be more appropriate to regulate and supervise Islamic banks according to a stand-alone banking law which incorporates both Basle I & II requirements and those that are peculiar to Islamic banking.
The market case is there. The sector is essentially demand driven. Islamic banks deposits and financing in the Kingdom continues to grow faster than their conventional counterparts.
Several surveys have shown that their is a much greater emotional attachment to Islamic finance by consumers in the Kingdom — both local and Muslim expatriates — even though this attachment is not necessarily translated into the actual opening of Islamic banking accounts with local banks.
This leaves us with the political case. Like other reforms in most other economic and social sectors, politics can often be the Achilles heel of change.
In the Kingdom, this can be painstakingly slow. But judging by the recent progress of the Shoura Council, the political culture of reform is changing.
New foreign investment, telecoms, and insurance laws have recently been adopted and passed.
There is no more need for the Kingdom to shy away from the reform of its banking laws, to accommodate probably the fastest-growing alternative form of financial management the world is currently witnessing.
It is time that the Saudi political establishment grows up.
