6.0 International Banking Evolvement (6.3 Islamic Banking Issues (Public…
6.0 International Banking Evolvement
The banking industry has been undergoing major consolidation in recent years, with a number of global players emerging through successive M&A.
A. Connected Bank
The foreigner bank decides its presence in the participial capital of the bank in the other country.
-This presence is subsidiary. The local bank maintains its name and the control in its administration.
Competition is generally considered a positive force in most industries; it is supposed to have a positivity impact on an industry's efficiency, quality of provision, product development and innovation
However, this issue has always been controversial in banking and financial sector, as the perceived benefits derived from increased competition have to be weighed against the uncertainties of potential instability.
Yet is is clear that the role of banks has been evolving as countries move through various phases of economic growth.
D. Cross-Border Banking
-Contrary to the offshore banking activities,in the cross-border banking transactions, the banking and financial institutions include themselves organically in the financial system of the country where they are located.
B. Consortium Bank
The consortium bank is a common MNC in the form of joint venture with shareholders from two or more banks of different nationalities
-It is an autonomous legal entity and in international joint venture,normally it is between a foreign MNC and the domestic firm
C. Off Shore Banking
The bank is installed in a foreigner country, in order to provide services not to residences of the local country
The state of installation places as the condition that the activities are offshore,which means they concern transaction in exchange between residents who are not physical or legal agents, from whom one is the foreigner bank or the responsible permitted native bank, that functions in the offshore market.
6.1 Asian Financial Crisis
There were two assumptions that could explain the causes of the Asian economies, currency and financial crises of 1997-1998
a. Firstly, sudden shifts in market expectations and confidence were the key sources of the initial financial turmoil, its propagation over time and regional contagion.
b. Secondly, fundamental imbalances causes the currency and financial crisis in 1997. Once the crisis started, market overreaction and herding caused the plunged of exchange rates, asset prices and economic activity to be more severed than warranted by the initial weak economic conditions.
The Root of Asian Crisis
The roots of Asian crisis explain the multifaceted evidence on the structure of incentives under which the corporates and financial sectors operated in the region.
-The roots focus is in the context of regulatory inadequacies and close relation between public and private banking and financial institutions.
At the corporate level political forces to maintain high rates of economic had led to a long tradition of public guarantees to private projects, some of which were effectively undertaken under government control, directly subsidized , or supported by policies of directed credit to favoured MNCs
Many studies focused on structural distortions in the pre-crisis Asian Financial and banking sector including :
a. Lax supervision and weak regulation
b. Low capital adequacy ratios
c. Lack of incentives-compatible
d. Insufficient expertise in the regulatory
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.
6.2 Subprime Crisis
experts believed that the crisis would be contained within the area of mortgage issuers who had overload on subprime loans in mid 2007
subprime loans refer to near prime, non prime, second chance lending
meaning, making loans to people who may have difficulty maintaining repayment schedule
would be first time downturns are driven by a credit crunch in non-banking sector of finance
Declining Risks Premiums
Study reported that average difference in mortgage interest rates between subprime and prime mortgages declined in 2007
Means that risk premium required by lenders to offer subprime loan declined
Declined occurred even though subprime borrower and loan characteristics declined in 2001-2006
Instead, decline risk premium led to lenders considering higher-risk borrowers for loans
The Rise Of Subprime Lending
Subprime borrowing was a major factor in increase in home ownership rates and demand for housing during bubble years.
US ownership rate increased from 64% in 1994 to an all-time high peak of 69.2% in 2004
Theses issues include higher loans loan-to-value and debt-to-income ratios or inadequate documentation of the borrower's income
The share of subprime mortgages to total origination increased from 9% in 1996 to 20% in 2006 according to Forbes
An estimated $1.3 b in subprime loans are outstanding
Housing Market Correction
There would be a housing market correction because over valuation of homes during bubble period
Estimates ranged from a correction of a few points to 50% or more from peak values
Began in 2001 and peak in 2005
Is an economic bubble occurs in local or global real estate markets
Defined as rapid increase in valuations of real property until unsustainable levels are reached
Generally identified after a market correction occurred in US in 2006
Historically Low Interest Rates
Economists believed US bubble caused by historically low interest rates
Housing bubble caused by decline in real long term interest rates
Mortgage rates typically set in relation to 10 year Treasury bond yields, that affected by federal fund rates
Connection between lower interest rates, higher home values and increased liquidity that higher home values bring to overall economy
Roots Of Subprime Crisis
There are number of theories as to what led to the mortgage crisis
Many experts and economies believe it came about through combination of a number of factors in which subprime lending played a major part
6.3 Islamic Banking Issues
Islamic product concept is feasible
With the availability of more hybrid financing modes than those recognized at present, it is bound to be more versatile and efficient
But it faces problem of general acceptability from non-Muslim and Muslim communities
Development Islamic banking can be expedited through following:
a. Public education and awareness campaign
b. Inclusion of Islamic banking concepts in school curriculum
c. Making Islamic financing course a part of business administration program
d. Offering full pledged undergraduate programs in Islamic financing
Training Of Banking Professionals
Lack of qualified manpower is one of the biggest hurdles in the advancement of Islamic banking
Pioneers in Islamic banking developed their financial instruments and thoroughly trained their staff
Some of the reasons for this gap are understandable
Some work has been done but a lot more is still needed especially on the fundamentals
There is enough material to offer short training courses in Islamic banking
Pricing Formulas For Islamic Financial Products
Any financing operation by an Islamic bank will involve accommodation of interests of the bank's principals, the bank staff and the fund-seekers
These concerns are addressed mainly through pricing
Security for financing also matters, but based on Islamic principles, it is not compulsory
Their development will also help the promotion of Islamic financing in academic and professional circles
Shariah Audit Instead Of Reliance On Shariah Supervision
Professional bankers took the lead in early phase of Islamic Banking
Islamic banking model emerged as " banking under Shariah supervision"
This done through delegating authority for Shariah matters to respective Shariah boards, absolving Islamic Bankers of their responsibility in Shariah violations
Shariah boards have authority to impose their viewpoint
Modus Operandi Of Financial Instruments And Documentation
It is difficult to think of standardized format on documentation for all Islamic banking and financial institutions in lieu of given Islamic financial instrument
This is daily practices or modus operandi of implementation may vary from institution to institution
Practical needs may not always be the same where chance for financial innovation
There has to be some measures of standardization in financial instruments system in Muslim world
Finance Gap Between Islamic Banks And Small Medium Enterprises (SME)
It can be detected when one takes a careful look at the existing relationship between SMEs and Islamic Banks
Several factors were identified as contributing to phenomena of "finance gap" or also known as grey zone within SME sector
Vocabulary Of Islamic Banking
There is no standardized terminology for Islamic financing products
Different international banks use different terms among them or from the local banks
Selective interpretation of Arabic terms creates confusion among the bank clients and also the public
This may also hinder popularization of Islamic banking
Standardization is urgently needed in the following respects:
a. Vocabulary or term used for the types of Islamic financing products
b. Modus operandi of financial instruments and their documentations
c. Pricing formulas for Islamic financial products