CHAPTER 6 : ISSUES IN INTERNATIONAL BANKING ( 6.3 :<3: ISLAMIC…
CHAPTER 6 : ISSUES IN INTERNATIONAL BANKING
ISLAMIC BANKING ISSUES
:!?: 5)PUBLIC AWARENESS
:star: The Islamic product concept is feasible.
:star: with the availability of more hybrid financing modes than those recognized at present, it is bound to be more versatile and efficient
:star: due to unfamiliarity with the various Islamic modes of financing.
:star: The pace of development of Islamic banking can be expedited through the following:
:check: public education and awareness
:check: inclusion of Islamic banking concepts in school curriculum.
:check: making Islamic financing course a part of business administration program.
:check: offering full-fledged undergraduate program in Islamic financing
:!?:6) Training of banking Professionals.
:question: Pioneers in Islamic banking developed their financial instruments and thoroughly trained their staff
:question: there is a limited training institute and at the moment Malaysia depends on Islamic Banking and Finance Institute Malaysia ( IBFIM) to meet manpower needs of existing and future Islamic banks.
:question: there is enough material to offer short training course in Islamic banking.
:question: financial institution are mainly interested in the safe recovery of their principle along with the return.
:question:the nature of financial instrument will effect banking in two way:
:!: Islamic bankers will be forced to adopt an outreach approach in pursuit of economic applications of funds in the marketplace.
:!:follow-up of financing, such as delivery matters in trade-based financing
:!:: the need for aggressive marketing of Islamic financial products and the follow-up considerations will add a new dimensions to training program for Islamic bankers.
Audit instead of Reliance on
:question: this have was done through the delegating authority for the
matters to the respective
Boards, absolving Islamic bankers of their responsibility in
Boards have the authority to impose their viewpoint.
:explode: Vocabulary or term used for the types of Islamic financing product
:explode: Modus operandi of financial instrument and their documentation
:explode: Pricing formulas for Islamic financial product
(2) Vocabulary of Islamic Banking
:check: No standardized terminology for Islamic financing products
:check: Different international bank use different term among them
:check: Example bank use Murabahah to stand for financing, some label it Bai Bithamin Ajil
:check: Istina originally means manufacturing and delivery of something against advance payment
(3) Modus operandi of Financial Instrument and Documentation
:green_cross: Difficult to think of standardized format on documentation for all Islamic banking
:green_cross: Because daily practices of implementation may vary from institution to institution
:green_cross: There has to be some measure of standardization in financial instrument for speedy migration to Islamic financial system
(4) Pricing Formula for Islamic Financial Product
:warning: Any financing operation by Islamic bank will involve accommodation of interest
:warning: Mainly through pricing example, total financing, fee, commission, etc
:warning: security for financing also matter, but based on Islamic matter
:warning: Standard pricing formulas together with the Shariah Principle
:warning: Their development will also help the promotion of Islamic Financing in academic and professional circles
:!?:8) Finance Gap between Islamic Banks and Small Medium Enterprise (SMEs)
:question: a finance gap can be detected when one takes a careful look at the existing relationship between SMEs and Islamic banks.
:question: throughout a study conducted by Mohammad (2011), several factors were identified as contributing to the phenomena of 'finance gap'.
6.2 SUBPRIME CRISIS
:no_entry: Mid 2007, many experts believed that the crisis would be contained within the arena of mortgage issuers who had overloaded on subprime loans
:no_entry: subprime loan is also referred to as near-prim, non-prime, and second -chance lending
:no_entry: meaning, making loans to people who have difficulty maintaining the repayment schedule
:no_entry: while downturn in mortgage and housing markets have caused economic problems before and experts explain the current situation is unique
2. ROOTS OF THE SUBPRIME CRISIS
:no_entry: many experts and economists believe it came about through the combination of a number of factors in which subprime lending played a major part
3. HOUSING BUBBLE
:no_entry: Housing bubble is an economic bubble occurs in local and global real estate markets
:no_entry: it's defined by rapid increases in valuations of real property until unsustainable levels are reached in relation to incomes and other indicators of affordability
:no_entry: following the rapid increases are decreases in home prices and mortgage debt is higher than the value of the property
:no_entry: housing bubbles are identified after a market correction, which occurred in US around 2006
4.HISTORICALLY LOW INTEREST RATES
:no_entry: many economists believe US housing bubble caused in part by historically low interest rates
:no_entry: housing bubble was fundamentally caused by the decline in real long-term interest rates
:no_entry: mortgage rates are typically are set in relation 10-year Treasury bond yields, which in turn are affected by federal fund rates
:no_entry: the connection between lower rates, higher home values and increased liquidity that the higher home values bring the overall economy
:no_entry: in 2005, house prices, like others assets were influenced by interest rates
:no_entry: in some countries the housing markets is key channel of monetary policy transmission
THE RISE OF SUPRIME LENDING
:black_flag: some homeowners took advantage of the increased property values of their home to refinance their homes with lower interest rate and take out second mortgages against the added values to use for consumer spending.
:black_flag: with the collapse of the housing came high default rate on subprime
:black_flag: Alt-A is a classification of mortgages in which the risk profile falls between prime and subprime
:black_flag: the borrowers behind the mortgages will have clean history
:black_flag: mortgage itself generally will increase its risk profile
:black_flag: issues include higher loan-to-value and debt-to-income ratio
HOUSING MARKET CORRECTION
:black_flag: housing market correction will increase because of the over-valuation of homes during the bubble period.
:black_flag:estimates ranged from a correction of a few point to 50 percent or more from peak values.
DECLINING RISK PREMIUM
:black_flag:risk premium required by lenders to offer a subprime loan declined
:black_flag: this declined occurred even though the subprime borrower and loan characteristic declined overall.
:black_flag: instead, the decline of the risk premium led to lenders considering higher-risk borrowers for loans.
INTRODUCTION : International Banking Evolvement
🎈The role of bank has been evolving as countries move through various phases of economic growth as countries mature economically the credit role of banks diminishes and role of money and capital market becomes more important.
🎈This development has contributed to increased competitive pressures on banks especially in economically advanced countries and resulted in consolidation in banking industry (expansion in services and products).
🎈Another form of international banking is the agency where it is intermediate form of extension between representative office and branch.
🎈Indirect installation is also another form for example natural presence in the foreign country by collaborating with local institutions.
🎈The forms of collaborating could take such as connected bank,consortium bank,offshore bank and cross-border banking.
6.1 Asian Financial Crisis
💥They were 2 assumptions that could explain the causes of the Asian economies, currency, and financial crises of 1997-1998:
a) Sudden shifts in market expectations and confidence
b) Fundamental imbalance caused the currency and financial crisis in 1997
2.The Root of the Asian Crisis
💥Explanation about the multifaceted evidence on the structure of incentives
💥Highly focus in the context of regulatory inadequacies and close relation between public and private banking and financial institutions
💥At the corporate level, political force to maintain high rates of economic growth had led to a long tradition of public guarantees to private objects.
💥With financial and industrial policy also not forget political favouritism, market operated under the impression that the return on investment was somewhat insured against adverse shocks.
💥Such forces and beliefs has represented the foundations of a sustained process of capital accumulation
💥Borrowing form abroad to finance domestic direct investment should not raise concerns about external solvency
💥In 1997, before crisis, 7 of the 30 largest conglomerates could be considered effectively bankrupt due to interest rate fall in the industrial countries
💥However, investment rates and capital inflows in Asia remained high as the leading local banks borrow excessively from abroad and lend excessively at home 🏠 country
💥Studies that focused on structural distortion in the pre Asian financial and banking sectors:
a)Low supervision and weak regulation
b)Lack of incentive compatible deposit insurance scheme
c)Low capital adequacy ratios
d)Insufficient expertise in the regulatory institutions
e)Distorted incentives for project selection and monitoring
f)Outright corrupt lending practices
g)Non-market criteria allocation
h)Semi-monopolistic relations between banks and firms had restrained price signals
💥The adverse consequences of these distortion were crucially magnified by the rapid process of capital account liberalization and financial market deregulation in the region during the 1990s
💥The policy goal is to provide a large supply of low-cost funds to national financial institutions and the domestic corporate sector
💥The international moral hazard problem depended on the behaviour of international banks as it may have been the belief that short term interbank cross-border liabilities would be effectively guaranteed by either a direct government intervention or indirect financial support
💥By the end 1996, a share of short term liabilities in total liabilities above 50 percent was the norm in the region
💥The core implication of moral hazard is that an adverse shock to profitability does not encourage financial intermediaries to be more cautious in lending
💥The long period of stagnation of the Japanese economy in the 1990s has led to a significant export slowdown from the Asian countries
💥The sharp appreciation of the US dollar 💵 relative to the Japanese yen and European currencies has led to deteriorating cost competitiveness in most Asian countries
💥By 1997 the Asian countries appeared quite vulnerable to financial crisis either related to sudden switches in market confidence and sentiment or by deteriorating expectations
💥In 1997, the drop of real estate and stock markets led to the emergence of wide losses and outright defaults in the corporate and financial sectors
💥From 1997 summer onward, rapid reversals of financial capital inflows led to collapse of regional currencies amidst domestic and international investors panic