Rob L. Wagner روب لستر واقنر

October 8, 2012

OP-ED: HSBC’s Dropping of Amanah Could Impact Loyal Customers

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By Rob L. Wagner

Arab News

8 October 2012

HERE’S some good news: HSBC bank will focus its Islamic financing operations in Saudi Arabia. Here’s the bad news: It’s dropping its Islamic banking operations in seven other countries, including the United Kingdom, and has already divested its assets in nearly 30 other countries.
HSBC’s reasons for getting out of the Islamic banking game in some countries is because of the pitiful state UK banks have been in since the global economic meltdown of 2008 and the restructuring efforts now underway to revive the industry. But HSBC, as a conventional bank, also could not really compete against the big Islamic banks.
A case in point was HSBC’s success in becoming the first Western global bank to sell $500 million sukuk, but still falling far short to become a significant competitor against the big Islamic banks.
HSBC and similar conventional banks offering segregated Islamic services also faced criticism from scholars who complained the traditional institutions did not go far enough in serving Muslim clients. And Islamic banks often said they faced unfair competition from the large global players.
It’s unknown whether the bank’s change in direction had anything to do with the scandal earlier this year in which a US Senate subcommittee determined that the bank violated regulations that led its affiliates to move drug trafficking funds and alleged terrorist financing to the US. HSBC acknowledged its failure in following financial regulations and promised to adhere to the rules.
The bottom line is that dropping its Amanah services in the UK allows HSBC to cut costs and transfer its Amanah employees to the main operations. Ultimately, however, the move will deprive the UK’s 2.87 million Muslims of banking based on principles that ban funds speculation, and interest on checking and savings accounts. Perhaps it’s a prudent cost-saving measure for HSBC, but it certainly does little to maintain a loyal Muslim customer base.
The wider implications of HSBC eliminating its Islamic banking services in the UK is whether conventional Western banks can serve Muslim communities with a relatively small customer base and either absorb the losses or earn some measure of a profit.
There are few banks in the United States, which has a Muslim population of just 1 percent, that are inclined to open Shariah-compliant accounts. The Michigan-based University Bank’s subsidiary, University Islamic Financial, has only a regional reach. And Standard Chartered Bank has offices only in California, New York, Texas and Florida. Ask a bank manager at JPMorgan Chase Bank or Bank of America for a Shariah-compliant account and you get only a blank stare in return.
Yet even in Muslim countries conventional banks offering Islamic products and services continue to struggle. In addition to the UK, HSBC, once a pioneer among Western financial institutions in offering Islamic services, pulled out of Bahrain, Bangladesh, the United Arab Emirates, Mauritius and Singapore.
Qatar had banned conventional banks from offering Islamic products to guarantee the “purity” of Islamic funds. And HSBC had only been offering Shariah-compliant services in Bangladesh less than two years before pulling out.
Jaap Meijer, who is in charge of equity research for Arqaam Capital in Dubai, told reporters recently that HSBC’s “Islamic activities in the affected countries were sub-scale so they decided to wind them down in an effort to reduce costs. Except for maybe the UAE, it’s not likely to have a big impact on the Gulf region.”
And that’s despite the fact that HSBC Amanah will retain 83 percent of its overall Islamic business revenue.
In Malaysia, HSBC still must go head-to-head with Standard Chartered Bank, which enjoys a solid foothold there. But the British bank is competing well against Malayan Bank and CIMB Group Holdings.
HSBC, operating through holding, Saudi British Bank (SABB), is also good position in Saudi Arabia. According to Bloomberg, HSBC helped sell $6.4 million sukuk in Saudi Arabia. It also served as the underwriter for SR 15 billion in a General Authority of Civil Aviation offering to fund the new Jeddah airport.
HSBC is also well established in Oman, sharing much of the funding market with BankMuscat.
By curtailing its Islamic funding operations elsewhere, HSBC can focus on Saudi Arabia and a select few other Muslim countries. However, missing from the picture is the low- and middle-income customers in non-Muslim countries who depend on Shariah-compliant banking. At the moment, there is no other conventional bank willing to step into the void left by HSBC, and Islamic banks have yet to demonstrate an inclination to reach out to non-Muslim countries.

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April 1, 2012

Saudi Consumer Debt Mounts

By Rob L. Wagner

The Media Line

1 April 2012

When Reem Muhammad sought a personal loan to pay off some lingering debts, a Saudi bank offered 100,000 riyals ($26,667). The price tag? Repayment of the loan, plus 33,000 riyals.

“I took the loan and repaid it, but I never knew what the 33,000 was for since it wasn’t interest,”  Muhammad, 38, told The Media Line. “But it sure felt like interest.”

Muhammad is one of thousands of Saudis taking advantage of Saudi Arabia’s healthy economy and banks’ increasing willingness to offer personal loans and credit cards. Her loan also illustrates the continuing debate in the Saudi banking industry whether some aspects of the loan system contravenes shariah, or Islamic law, that guides how Muslims conduct financial transactions.

Personal loans in Saudi Arabia jumped nearly 20-fold to a staggering 219 billion riyals in 2011, up from an estimated 11 billion riyals in 1998.  Loans included 27.7 billion riyals in property loans due in part to the passage of the 2011 mortgage law. Credit card debt in 2012 is estimated about  nine billion riyals.

Asher Noor, chief financial officer for the Riyadh-based AlTouq Group, a global investment firm, told The Media Line the increase in loans reflects Saudi Arabia’s strong economy.

“I find the increase in line with the growth of the Saudi economy, an emergence of an affluent middle class and creation of more high net worth individuals now than at any time in the past,” says Noor, who emphasizes he was offering a personal opinion. “The surge in personal loans is not just due to proliferation of credit cards in the Saudi economy, although plastic money has clearly made it easy to stack up debts. Real estate loans have also been a big reason for personal loan surge.”

Until about 2000, banks were reluctant to issue personal loans to individuals, preferring to limit their lending to large companies. Consumer credit card use was also relatively rare.

However, the demand for easier access to money has increased as the Saudi middle class has grown more affluent. Banks devised methods to offer credit cards compliant with shariah. Islamic law does not permit usury, charging or paying interest and conducting business contrary to Islamic values, such as operating a casino and selling pork or alcohol.

Saudis pay a fixed monthly fee on credit cards. Banks may require customers to have a savings account with a specific amount of money on deposit. Charges for late payments may be about 3% of the outstanding balance. Another way the card issuer earns a profit is to pre-purchase an item a customer plans to buy and then instantly resell it to him at a higher price.

Noor acknowledged there is “cause for concern” over the rapid increase in consumer loan and credit card debt, but the Saudi Arabian Monetary Agency (SAMA) has not allowed it to get out of control. “I think SAMA has not been asleep at the wheel and has kept the commercial banks in check with regulations like limiting loan to deposit ratios.”

SAMA in 2006 established regulations that total loans may not exceed 33% of the total salary of employees and 25% of the income of retirees. Nabil Al-Mubarak, executive-director of SIMAH, told the Arab News that, SIMAH’s policy labels card debtors as defaulters under two conditions: if they have not paid for six consecutive months and if the amount due is SR 500 and more.

Noor said the criteria to issue credit cards is heavily regulated in Saudi Arabia, noting that customers are rarely pre-approved and must prove their eligibility for credit cards. “There are SAMA regulations dictating the credit card and personal loan limits and the central database [Saudi Credit Bureau] SIMAH is monitoring defaults,” he said.

Noor said that given the large expatriate population, whose work and residence permits are linked, banks are very careful in credit card issuances and usually require having a bank account with them, salary transfer and employer letter before a card is issued.

“Since expatriates here are unable to leave the kingdom with credit card debts disproportionate to their earnings or end of service, the banks here have not struggled with staggering default rates as elsewhere,” Noor said.

Yet the explosion in obtaining credit cards and personal loans, and how banks charge fees, has led to consternation among some Islamic scholars whether the high fees are tantamount to paying interest.

Ahmed Alkady, a trainer at the Jeddah-based Islamic Development Bank, told The Media Line that he sees no difference between paying penalty fees and charging interest on credit cards.

“I don’t use or even recommend credit cards,” Alkady said, “It is a hidden type of interest as banks make you pay what they call a fine or a penalty for failing to pay them back on time. The same thing is applied in non-Islamic banks but they call it interest. I see no difference between the two unless you make sure you don’t use it for drawing cash. Or when you buy goods make sure you pay it back before the end of the time limit.”

Alkady also considers Muhammad’s 100,000-riyal loan as contrary to Islamic values with some Saudi banks skirting shariah-compliant regulations.

Islamic banks use an asset-based loan system, such as providing an automobile loan, in which the bank purchases the car, maintains ownership and then rents it to the customer. The customer makes monthly payments that add up to more than what the bank paid for the vehicle. Ownership is then transferred to the customer once all payments are made.

Alkady described Muhammad’s loan was tawreeq, or securitization, meaning the asset is made into financial tool like a share in a company. The transaction originates with an item, such as equipment or even property bought by the bank and then sold to the customer to be paid for on an installment basis. This allows the bank to raise the price of the item as a way of earning a profit while at the same time providing immediate liquidity for the borrower.

However, the Organization of Islamic Cooperation’s International Council of Fiqh Academy, a group of Islamic scholars, ruled in 2009 that tawreeq is “legal trickery” with roots in interest-based lending.

Alkady said the Islamic Development Bank followed with a similar ruling in April 2011. “The bank’s scholars have issued a decree in which they consider tawreeq un-Islamic simply because the bank is selling goods that it does not actually own,” he said.

Yet most Islamic banks worldwide embrace tawreeq, with many Islamic scholars in Muslim countries endorsing the practice.

Sami Al-Nwaisir, chairman of Al-Sami Holding Group, wrote in the Arab News recently that loans “favor the banks and their regulations” and “the unfair contracts by banks designed for their benefit alone, which victimize and suppress the individual through the systematic brutality of the one-sided agreement.”

Noor faults the banks for not educating borrowers. “Islamic banking is asset-based and borrowers need to understand that to better appreciate it,” he said. “Bankers, however, remain the culprit by complicating documentation and structures, and thus making it difficult for the layman to make a rational choice.”
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