INDONESIA just hosted the third Asean annual meeting of syariah economic experts in Jakarta, raising the question as to where syariah banking is going and how to avoid the heady heights of high finance that brought down the Western banks. Or will syariah banking fly too high and make the same mistakes?
Understandably Syafii Antonio, CEO of the Tazkia Group, wants syariah banking to go global. "To develop the syariah financial system, we have to go global. And for that we need to secure our transactions under syariah law. So the meeting discussed the idea of syariah-compliant currency exchange swaps, and the possibility of an Islamic single currency to back trade."
But this involves precisely the areas of derivatives, hedging and collateralisation which caused problems for conventional banks during and after the October 2008 crash and complex concepts like simultaneous term and reverse back-to-back murabaha to try to avoid riba (interest), gharar (uncertainty of value of underlying assets) or maisir (speculation).
The full complexities of secondary (reverse) murabaha and full cross currency swap structures have been described by Richard Tredgett of Allen and Overy and published in the financial press, for example in "Derivatives Week", along with advanced hedging mechanisms and profit rate swaps, total return swaps and fund/index linked derivatives.
But given the reservations felt by many Asean conventional and Islamic bankers about such financial instruments since the October 2008 crash in the US and Europe, is this the sort of thing we should prioritise when promoting the capacity of Asean Islamic banks and financial institutions?
Syafii acknowledged in the same meeting that the Indonesian government would need to treat syariah banking in Indonesia as an infant industry for at least 10 years.
The third Asean annual meeting attracted participants from six countries, Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore and Thailand. All of these countries are developing Islamic banking and finance. There is also interest in syariah banking in Cambodia and Myanmar with Muslim minorities. Muslim firms and traders are also active in the Lao PDR and Vietnam.
So everybody in Asean can benefit from Islamic banking and finance, which should be regarded as an ambassador of Muslim modernisation and a vehicle for economic and social development, in line with the aspirations of the Organisation of Islamic Conference (OIC) and the World Islamic Economic Forum (WIEF).
The disparities between Malaysian Islamic banking and finance and the comparative state of development of Indonesia and most Asean countries highlights that as yet there is no realistic strategy where syariah banking can reach adequate financial volume and significant market penetration in most Asean countries.
Muliaman Muliaman D Hadad, Deputy Director of the central bank recently underlined to an Indonesian Chamber of Commerce and Industry (Kadin) seminar in Jakarta that the Indonesian syariah banking industry has almost no chance of expanding capital deployment from three per cent of national banking capital to the target of five per cent without more capital, more people and a new strategy including lending to corporates and not just SMEs.
This could be built on four strong pillars, (i) a broad individual customer base including on-lending to small lenders, (ii) expansion of corporate lending in high growth and labour-intensive sectors, (iii) private sector bonds for company expansion and small infrastructure and (iv) large volume Islamic bonds to finance state budget deficits and large infrastructure.
All these require big increases in capital and capacity to handle clients, corporates, public-private partnerships and projects.
Only Malaysia, a decade in front of the pack, has anything like this delivery capacity, while Singapore and Brunei Darussalam, can take a different path, focusing on building regional financing partnership hubs, with their high capital resources and low populations.
Asean should therefore focus on building Islamic banking and finance on strong foundations and not waste time and energy on the syariah banking and finance equivalent of rocket technology.
You do not need to be a rocket scientist to work out that what Asean syariah banking needs first is feet on the ground, and much stronger foundations.
Terry Lacey is a development economist who writes from Jakarta on modernisation in the Muslim world, investment and trade relations with the EU and Islamic banking.
The Brunei Times
Thursday, May 28, 2009
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