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Getting the message across.

At last the message is getting through. "There is no area in Kleinwort Benson business that we are not prepared to modify and to construct according to Islamic banking principles. Nothing we do we are not willing to change in cooperation with the Islamic banks," says Richard Duncan, Head of Middle East Banking and the Islamic Banking Unit at Kleinwort Benson, a merchant bank with a long history of links with the merchant families of Arabia.

Indeed, Mr Duncan, and the rest of his Unit, are as familiar with their morabahas (cost-plus financing), ijaras (leasing) and mosharakas (equity financing) as most Islamic bankers are. But then Kleinwort Benson is but one of a growing number of Western conventional banks in London that are fast acquiring an international reputation in offering especially Islamic trade finance services for clients both in the Middle East, south east Asia, and takers, usually top Western and international corporations in Europe and as far a field as Latin America.

Banks such as Kleinwort Benson, Citibank International, ANZ Grindlays, and Midland Montagu are carving out a major niche market in London in short-term Islamic trade finance transactions and medium-to-longer-term Islamic leasing (ijara) involving mainly aircraft and shipping purchases.

All these banks have now set up specialised Islamic banking units operating separately from the rest of the Banks' conventional activities but drawing on their trade finance expertise and long-standing contacts in originating and structuring morabaha and ijara transactions related to commodities such as oil, petrochemicals, agricultural products, aircraft, tankers and capital goods.

In the case of Kleinwort Benson, the volume of its short term morabaha transactions in 1992 totalled a staggering $4bn, says Duncan.

Similarly, Citibank according to David Hightower, Vice President of its Corporate Finance Division, which incorporates its Islamic Banking Unit and Middle East Department, last year carried out 2,500 Islamic banking transactions, which average a few million dollars each.

ANZ Grindlays's volume of Islamic trade finance transactions has "increased quite substantially totalling about $400m in 1992".

Given the fact that the total funds involved in Islamic banking is estimated by the Cairo-based International Association of Islamic Banks to be between $30bn-$40bn and that in most cases it is Islamic financial institutions and investors with excess liquidity that have approached the above Western banks, it is hardly surprising that the likes of Kleinwort Benson and Citibank are now emerging as major competitors to the Islamic banks themselves in offering profit-and-loss (PLS) interest-free banking.

The banks bluntly stress that they do not offer Islamic products per se. What they do is originate and arrange transactions within the parameters set by their Islamic investors or Islamic banks. These transactions are then approved by the Shariah advisers of the investors or the banks involved.

They acknowledge they are in no position to judge whether a transaction is Islamic or not, hence the approval of the Shariah advisers, with whom the banks have now established a good working relationship.

Despite this Kleinwort Benson's Richard Duncan concedes that "a major block is the lack of a centralised Shariah authority in Islamic banking." This reflects the problem of differing interpretations by the Shariah advisers of different banks.

The stakes in Islamic banking are high and confusion frequently makes it that much more difficult to place billions of dollars of liquidity floating in the Islamic world.

Bankers both in London and the Muslim world would like the IDB to play a greater role in setting uniform standards in accounting and instruments.

However, the Western banks, which are just as much on the learning curve of Islamic banking as their Islamic counterparts, are adapting remarkably well and are even taking to the idea of submitting their transactions for scrutiny to a Shariah (Islamic Law) Council to vet if the transactions are permissable under Islamic interest-free principles.

Such is the commitment of these Western banks to developing their Islamic banking business, that some such as Kleinwort Benson are also acquiring an in-house R&D capability in developing new Islamic trade finance and other products.

Perhaps more importantly, some of these units are also researching products for the formation of an Islamic capital market, without which Islamic banking cannot progress beyond its current short-term activities. An Islamic capital market and interbank system would open vast new opportunities in both trade and project-related financing and in investment banking.

There is no doubt that Islamic trade products would have flourished had the country risk of most Islamic states been better. All the banks have their own in-housing risk rating system, and the choice whether to go for a transaction will depend on the country and the quality of the transaction and client.

There are significant signs though that the transactions are getting bigger and better in quality. All are busy eyeing the aircraft and tanker leasing market, especially at a time when Middle Eastern airlines are expanding their fleets, and the demand for oil transport facilities increases.
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Title Annotation:Islamic banking gets recognized by the western banks
Author:Parker, Mushtak
Publication:The Middle East
Date:Oct 1, 1993
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