CHAPTER 6 : INTERNATIONAL BANKING EVOLVEMENT (Islamic Banking Issues…
CHAPTER 6 : INTERNATIONAL BANKING EVOLVEMENT
International Banking Evolvement
The banking industry has been undergoing major consolidation in recent years, with number of global players emerging through successive M&A.
Forms that this collaboration could take are:
:star: Connected Bank
The foreigner bank decides its presence in the participal capital of the bank in the other country.
:star: Consortium Bank
Common MNC in the form of joint venture with shareholders from two or more banks of different nationalities.
:star: Off Shore Banking
The bank is installed in a foreigner country, in order to provide services not to residents of the local country.
:star: Cross-Border Banking
Contrary to the off shore 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 located.
Asian Financial Analysis
There were 2 assumptions:
Sudden shifts in market expectation and confidence were the key sources of the initial financial turmoil, its propagation over time and regional cantagion.
Fundamentals imbalances caused the currency and financial crisis in 1997.
The Root of the Asian Crisis
The multifaced evidence on the structure of incentives under which the corporate and financial serctors operated in the region.
Focus in the context of regulatory inadequacies and close relations between public and private banking and financial institutions.
At the corporate level, political forces to maintain high rates of economic growth had led to along tradition of public guarantees to private projects.
Pre-crisis Asian financial and banking sectors including ;-
:fire: Lax supervision and weak regulation.
:fire: Low capital adequacy rations.
:fire: Lack of incentive-compatible deposit insurance schemes.
:fire: Insufficient expertise in the regulatory institutions.
:fire: Distorted incentives for project selection and monitoring.
:fire: Outright corrupt lending practices.
:fire: Non-market citeria allocation.
:fire: Semi-monopolistic relations between banks and firms had restrained price.
Referred as near-prime, non-prime and second-chance landing
Which is they making loan to people who have difficulty maintaining the repayment schedule.
Roots of The Subprime Crisis
There are number of theories as to what led to the mortgage crisis.
Many expert & economist believe it came about through the combination of a number of factor in which subprime lending played major part.
It is an economic bubble that occurs in local or global real estate market.
Historically Low Interest Rates
Many economics believe that the US housing bubble was caused in part by historically low interest rates
The housing bubble was caused by the decline in real long-term interest rates
Housing Market Correction
Adding to the growing crisis was the prediction by many economist and business writer 2006 and 2007 that would be a housing market correction because of the over-valuation of homes during the bubble period.
Estimated ranged from a correction of a few points to 50% or more on peak values.
Historical Low Interest Rates
Any economist believe that the US housing bubble was caused in part by historically low interest rates.
Declining Risk Premiums
A Federal Reserve study in 2007 reported that the average difference in mortgages declined from 2.8%points in 2001 to 1.3% points in 2007.
This means that the risk premium required by lenders to offer a subprime loan declined.
Islamic Banking Issues
:explode: The banking industry has been undergoing major consolidation in recent years, with a number of global layers emerging through successive M&A.
:explode: As countries mature economically the credit role of bank diminishes, while the role of the money and capital markets becomes more important.
Vocabulary of Islamic Banking
:explode: No terminology for Islamic financing products.
:explode: Example : Murabahah-financing via sale on deferred payment.
:explode: Istina'- manufacturing and delivery of something against advance payment.
:explode: Interpretation of Arabic terms creates confusion among bank clients and also the public.
Modus Operandi of Financial Instruments and Documentation
:explode: Daily practices or modus operandi of implementation may vary from institution to institution.
:explode: Practical needs may not always be the same where chance for financial innovation either in the form of new or hybrid products will remain open.
Pricing Formulas for Islamic Financial Products
:explode: Operations by an Islamic banking will involve accommodation of interest of the bank's principals, the bank staff and the fund-seekers.
:explode: Example : total financing, fee, commission, etc of financial products.
:explode: Standard pricing formulas together with the Shariah principles, are needed for those on the front desk for efficient working.
:explode: Concept is feasible
:explode: Faces the problem of general acceptability from non-Muslim and Muslim communities.
Training of Banking Professionals
:explode: Lack of quaified manpower in the advancement of Islamic banking.
:explode: Pioneers in Islamic banking developed their financial instruments and thoroughly trained their staff.
:explode: Example : lack of consensus on form and details of Islamic financial instruments and non existence of islamic reporting and accounting procedures.
Shariah Audit instead of Reliance on Shariah Supervision
:explode: In the early phase of Islamic banking, professional bankers took the lead but not well-versed in the Shariah.
:explode: Practical, this was done through the delegating authority for the Shariah matters to the respective Shariah boards absolving Islamic bankers of their responsibility in Shariah violations
Finance Gap between Islamic Banks and Small Medium Enterprises (SMEs)
:explode: A finance gap can be detected when one takes a careful look at the existing relationship between SMEs and Islamic banks.
:explode: Based on the analysis done, it was found that the two main players (i.e. Islamic banks and SMEs) possessed traits or characteristics that could lead them into the 'grey one' or area of being unsure about something or somebody.
:explode: Vocabulary or term used for Islamic financial products.
:explode: Modus operandit of financial instrument and their documentations
:explode: Pricing formulas for Islamic financial products.