Islamic Finance

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Bahrain's new Shamil Bank, an exempt company resulting from a June 2000 merger between flagship Faysal Islamic Bank of Bahrain (FIBB and Islamic Investment Company of the Gulf (IICG)), is unique in having full operating licenses for onshore commercial, offshore, and investment banking.

Jeddah-based IDB affiliate Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) has approved an Investment Insurance Facility (IIF) to cover a lease-finance operation against country risks to finance expansion of Kenana Sugar Company's processing factory in The Sudan. KSC is an Arab joint venture, and the US$15.5m project will be financed 74 per cent by IDB's Islamic Banks' Portfolio.

In 1999, Bank Negara Malaysia, in response to a moderate expansion of the sector in Malaysia, urged operators not only to explore new distribution channels as a means of cost reduction and efficient product delivery, but also to introduce new products and increase market penetration. Income from family and general

Indonesian firms are starting to break through with innovative ways of managing shari`a-compliant corporate pension funds to enable employers to concentrate on business. Principal Indonesia, a subsidiary of the US-based Principal Financial Group (a Fortune 500 companies corporation) has gained Indonesian Ministry of Finance approval to manage the Employees' Pension Fund of Bank Syariah Mandiri, with assets of Rupiah 632 million.

Islamic banking portals, many still under construction, are attracting serious investment, suggesting confidence in the Islamic finance sector. Caution is advised, however, given the history of failed Internet and .com ventures. The new B2B and B2C portals are mostly targeting Islamic financial information or the marketing of financial products. Though they acknowledge products are not numerous and regulation needs resolving, promoters are optimistic that the Internet will make financial products accessible to both institutional and retail investors now unaware or out of reach of them.

The success and expansion of Islamic banks in collaboration with the IMF will require that internationally-acceptable regulatory standards for Islamic banks be developed to promote capital market efficiency, ensure the safety of depositors' funds and shareholders' equity, and protect financial systems from instability. This is the message Dr Ahmad Mohamed Ali, President of the IDB, presented at the Development Committee meeting during the World Bank/IMF Annual Meetings in Prague in September.

Islamic banking represents both a burden and blessing to Australia, whose trading banks have learned to live with, and even profit from this complex system. Avoiding interest is the necessary condition for western bankers if they are to prosper in Islamic countries, which includes those with close ties to New Zealand, such as Malaysia.