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December 2005
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Islam & Economy

Islamic Banks in the West
By Owen Matthews


You are a pious Muslim with a few million in oil dollars to invest. So would the perfect Islamic bank for you be Citigroup, perhaps, HSBC?


Actually, yes. Giant Western banks,or rather, their Islamic subsidiaries—are leading the market for financing that complies with Qur’anic laws forbidding lending money for profit, or sponsoring un-Islamic activities such as gambling or smoking. Citigroup’s Bahrain-based Citi Islamic subsidiary was first into the market in 1996, and now leads the pack with deposits of more than $6 billion. Citi and at least 10 other Western majors dwarf the biggest locally owned rival, Al Baraka of Bahrain, worth a little more than half a billion.


Westerners are drawn in by oil money. The Middle East is enjoying its fastest growth in a generation. According to Islamic Banking and Finance magazine, there are $265 billion in deposits that comply with Shariah. That’s up 17 per cent in the past year, and by almost 10 times in the past decade, according to the U.A.E.’s Sharjah Islamic Bank. Since 1996, Dow Jones has offered indexes of stocks vetted by Shariah scholars. Now there are more than 40 Islamic indexes, and last year Islamic stocks on average out-performed the market by 5 per cent.


How did Western banks come to dominate a market predicated on Islamic purity? A generation ago, an Islamic bank was just a simple investment house that, instead of paying interest on deposits, created dividends by buying and renting out property. “Islam forbids making money on money,” says Alun Williams, marketing director of the new Islamic Bank of Britain. “But it does allow you to rent, and to trade.” Now Western banks are using that template to pioneer Islamic credit cards, Islamic mortgages and Islamic bonds (known as sukuks) that during the past year have financed everything from a $1 billion upgrade of Dubai airport to Pakistani government debt. As growth picks up in the Middle East, more and more Muslim-run corporations find they need sophisticated services, from bond issues to derivatives, that so far only Western banks provide.


The Western banks gain Islamic credibility by hiring top-drawer Shariah scholars to sit on their boards. “The calibre of your scholars is the basis on which these financial products are marketed,” says Majid Dawood, a London-based consultant on Shariah compliance. Because there are just a handful of financially literate Islamic scholars in the market, most sit on the boards of many institutions and can, says Dawood, command salaries of as much as $88,500 per year per bank. Sheikh Mohammed Taqi Usmani, a former Shariah judge on the Supreme Court of Pakistan, sits on the board of Citi Islamic, HSBC, Al Baraka and eight others, and is chairman of the Dow Jones Islamic indexes’ Shariah panel.


But the trend towards investing in Islamic funds really took off after 9/11, when many Muslims began bringing their money home from America. Since then, international banks like Societe Generale, BNP Paribas, Deutsche Bank and Standard Chartered have all entered the Islamic banking business. Accounting and consulting firms like Ernst Young are now offering Islamic financial services. The recently opened Islamic Bank of Britain and other institutions from the Middle East, plan to create a retail-banking chain for “average income” Muslim Britons, says Williams.


Customers in Muslim nations are driven to Western banks in part by distrust of their own banks. Prominent failures, such as the 2001 collapse of Turkey’s Ilhas Finance dented depositors’ faith. In Turkey, the Islamic world’s largest economy, the Islamic-banking sector is lobbying the state to guarantee deposits of up to $36,000, which could in time make Turkey a major player. In Malaysia, where more than 11 per cent of deposits are now Shariah-compliant, local houses like Bank Muamalat are working to gain on the multi-nationals. “Local Islamic banks lack sophistication,” says Humayun Dar, an Islamic economist. Customers are still more comfortable with an international name.

(Source: Newsweek)

Health Insurance Mandatory in Saudi Arabia
By P.K. Abdul Ghafour
Jeddah


The Law has clearly stated the employer pay the health insurance premiums of his employees.


The Cooperative Health Insurance Council (CHIC) has given preliminary approval to 14 companies to provide health insurance service in the Kingdom, ahead of making health insurance mandatory from January 2006. In the first stage, companies having 500 or more workers will have to provide health cover to their employees.


“This is the beginning of a big change,” said Dr. Abdalelah Saaty, chairman of the insurance council at Jeddah Chamber of Commerce and Industry. “The law has clearly stated the employer pay the health insurance premiums of his employees,” he said, adding that the CHIC would review implementation of the scheme after six months.


Insurance companies have already started issuing health cards to four groups of clients. The first group, paying a premium of SR2,500, will be covered for a total of SR500,000 annually. The second group will get SR300,000 coverage on a premium of SR2,000 while the third group will get SR100,000 coverage for SR1,000. Owners of the companies will get coverage of up to more than SR1 million for SR5,000 annual premium.


In the first phase, the cooperative health insurance scheme would be implemented on expatriate workers in companies having 500 or more employees. The council has urged these companies to implement the scheme by January 1, 2006, or face punishment including fines and recruitment ban.


Article 14 of the Cooperative Health Insurance Law says, “If an employer did not subscribe to the service or did not pay premiums for the employees and their families, he should pay all the unpaid premiums in addition to a fine of not more than the annual premium of his employees. He may also be banned from recruitment either permanently or temporarily.”


The issuance of iqamas (resident permits) will also be linked to insurance as the Passport Department will not issue or renew iqamas from June 2006 if they are not covered by health insurance.


The companies, which have been selected for the service, have already applied for licence from the Saudi Arabian Monetary Agency (SAMA), the Kingdom’s insurance regulator. Most of the applications are in advanced stages in the licensing process.


Dr. Saaty expected the Kingdom’s insurance market to triple from SR8 billion to SR24 billion within the next 10 years. At present insurance contributes only 0.7 percent of the gross domestic product (GDP) and Saaty expected it to reach 3.7 percent in five years once the companies are licensed and more businesses are insured.


Saaty has called upon authorities to expedite licensing of new insurance companies to protect the interests of both individuals and businesses. He argued that the formation of a single specialized authority would help speed up the licensing process. About 30 insurance companies have applied for licence. The government has allowed foreign insurance companies to open their branches in the Kingdom.

(Arab News)