Interview with Ahmed Al Khan on Islamic Finance

Ahmed Al Khan is the Head of Invesment Banking at GBCORP

The Islamic finance industry is in the midst of a phenomenal expansionary phase, exhibiting average annual growth rates of about 15 percent in recent years. This rapid growth has been fueled not only by surging demand for Shari’a-compliant products from financiers from the middle east, but also by investors around the world, rendering the expansion of Islamic finance a global phenomenon. Do you see this trajectory ongoing or leveling off in line with what’s taking place worldwide?

Not too long ago, Islamic banking was looked upon as a phantom more out of ignorance and a lack of awareness. However, the current global crisis has drawn positive attention to the fundamentals of Islamic banking, and is sure to generate greater awareness as well as help the Islamic banking industry gain global acceptance. The current crisis has also brought out the shortcomings of the conventional banking system and people are curios and eager to understand the profit sharing mechanism of Islamic banking.
This is an awakening for the entire globe to look at alternative banking systems. The regional Islamic finance market is likely to grow at a steady pace in the coming years, with the positive macroeconomic environment supporting the Islamic banking sector working in its favor.

There is currently more than US$800 billion worth of deposits and investments lodged in Islamic banks, mutual funds, takaful and Islamic branches of conventional banks. There are currently more than 300 Shari’a-compliant financial institutions spread across 51 countries, apart from 250mutual funds that comply with Islamic principles. Besides its wide geographical scope, the rapid expansion of Islamic finance is also taking place across the whole spectrum of financial activities, ranging from retail banking to insurance and capital market investments. In retrospect, does the average man understand what Islamic finance stands for and its far-reaching implications?

Conventional banking has been around much longer than Islamic banking and the average man has a better understanding of it. In a global perspective, on the contrary, the average man might not be aware of Islamic finance and its implications but in the midst of the crisis we see people everywhere are eager to know more about Shari’a banking. Islamic finance still has a long way to go in developing the sort of awareness that is required to reach the level of awareness conventional banking has attained. In the  Middle East, Asian and South East Asian countries,
some of which are the home ground of Islamic banking like Malaysia, a sizable portion of the population understand the fundamentals of Islamic Finance.

Conventional Banking investors and consumers are now more aware of what Islamic Finance stands for due to the variety of products and services that accompanied the growth.  The Islamic banking system is evolving due to standardization efforts, Basel II regulations, AOIFI developments and Islamic finance products crossing boundaries. This, along with other factors, has helped the growth of Islamic finance and its ability to cater to market needs.

What are your thoughts about the role of Islamic finance in the global investment landscape today?

Islamic banking is a banking system that catered to the Muslim community only and as liquidity in the region grew exponentially, Islamic finance grew globally. By going cross boundaries, it has capitalized on existing opportunities around the globe. The current distressed market has catalyzed this growth process so it will have a much bigger global presence and we see Islamic finance tapping into newer sectors in the industry and playing a significant role in global investment. The global Islamic finance industry is now worth more than US$1 trillion in terms of assets, having quadrupled in the last three years. Although this figure remains just a fraction of global assets, given a world Muslim population of around 1.5 billion people, the industry has enormous potential,
and some of the largest western-based banking, fund management and insurance groups have now launched banking facilities compliant with Shari’a law.

Given the present circumstances, what issues do you think will be the most important in Islamic finance in the coming years?

Transparency is the most important element. What caused the crash today is that conventional banking had developed very complex instruments without paying heed to the risk management aspects. In such situations it is important to have the proper regulatory systems in place. Islamic finance is still very basic but the focus is on standardizing the accounting practices and making it very transparent. In the past few years considerable progress has been made in all significant aspects of the Islamic financial services industry. The various segments of the industry and the related intellectual capital, institutions and policy initiatives have developed rapidly and attained a degree of maturity and international recognition. Further
growth of the industry is dependant on the establishment on new Islamic banks and the integration of the industry within the existing financial system with greater regulatory guidelines.

While analysts in Islamic finance disagree on many aspects of the industry, there is consensus on a couple of points; that Islamic finance is growing, and that in order to keep growing, there needs to be enough Islamic finance professionals to take on the load. What in your studied view is being done to address that?

What do you consider the main differences between Islamic and conventional finance?

The Islamic economic model has been developed over time, based on the rulings of Shari’a on commercial and financial transactions. One key Shari’a ruling on economic activities of Muslims is the strict and explicit prohibition of riba, most usually described as usury or interest. Shari’a scholars consider exchanging interest payment within the conventional banking system as a type of riba. In addition, the Islamic economic model is based on a risk and profit-sharing (and loss-bearing) philosophy making Islamic transactions similar to equity-based transactions in rewarding performance. Islamic finance is very clear on areas of operations with strict guidelines on all ethical and non ethical aspects and adherence to a code of conduct.

The Islamic financial system is still highly nascent when compared with the conventional financial system. Islamic financial institutions also do not have uniform financial reporting and disclosure standards, to the point that a few countries have adopted standards suitable to their local markets. Do you see that as a pro or a negation of sorts? And what area of Islamic economics and finance do you believe has great prospects, but are currently neglected by Islamic finance scholars?

There are a number of issues that will require a lot of work before the global Islamic finance market can claim to be anywhere near mature, this is clear. But with the willingness to evolve standardized practices and products in the Middle East, Islamic finance will certainly evolve and continue to establish a global presence in the years to come.

The present crisis underscores the need for regulation staying ahead of the curve and for continually upgrading the skills and instruments for financial regulation and supervision. But it is also important to understand that in trying to stay ahead of innovation, regulation should not get so stringent that it stifles innovation. The right lesson to draw is that markets and institutions do succumb occasionally to excesses which is why regulators have to be vigilant and constantly finding the right balance between attenuating risk-taking and inhibiting growth.

One area that has been neglected is the catering to the tax structures in western countries and western philosophies in buyouts, taxation, cost saving. Finding common ground and developing a unified approach is the key to enabling Islamic banking and finance reaching out globally. Islamic commercial jurisprudence consists of principle and rules that must be observed for transactions to be acceptable in Islam; and the Islamic law of contracts is at the heart of this.

One important principle is contractual certainty. Under this body of law, uncertainties or ambiguities that can lead to disputes may render a contract void under Shari’a. While some of these principles and rules are based on clear and explicit rulings of Shari’a, others are derived from Shari’a scholars’ interpretations and understanding of the law, known as fiqh, as set out in the Qur’an. These interpretations can and do differ between Shari’a scholars. Certain contractual terms deemed to be valid under Shari’a by the scholars of one school of fiqh may not be acceptable to scholars from another school. This has had significant implications for the development of Islamic finance.

Islamic finance is more about Shari’a as well as law than about business and management. Would you say that’s a fair supposition and why?

The richness of Islamic banking and finance andits acceptance at the global level speaks a lot about its inherent strengths. Shari’a laws are mandates/parameters we work under but Islamic finance is all about business because it is asset-based and all about maximizing profitability, especially when it comes to Islamic investment banking. Islamic investment banking is growing into a complex system where it not only focuses on financial aspects of buyouts but also on managing and turning businesses around.

According to Islamic business ethics, employees are the greatest assets of the business and their welfare should be given due attention. In your view, are they? And if not, how does one remedy that state of affairs?

Human resources is at the heart of all business enterprise and of course their welfare is paramount. This is not unique to Islamic banking but a standard practice to be followed and encouraged in all businesses.

Global banking corporation (GBCORP) is a leading investment bank incorporated in Bahrain, and operating in the GCC, Europe and Asia. It presently provides ethical banking services for individuals, families, corporate and government clients. In the present financial dilemma, how has GBCORP reacted to maintaining its position, aswell as sustaining its recognized stature?

The current global crisis has had limited intangible impact on GBCORP, because we are a new bank. But the market turmoil has been a learning curve for us in regards to our debt structure and pre qualifying our investments. It has made us shift our focus to strengthening our risk mitigation strategies. The challenge we are facing is in choosing the right markets or sectors to tap into at the right time.

In business circles, Bahrain is widely attributed to being the financial hub in the region. In fact, GBCORP has recently relocated to the new GBCORP tower at the leading financial district: the Bahrain Financial Harbour. Would you think that this pole position is one that would be sustained or would the baton be passed on as the region wakes up emulating the west in both calibers, as that of sustainability?

Bahrain has for long been recognized as a financial hub thanks to its liberal business friendly environment. Under the visionary leadership of His Highness Sheikh Salman bin Hamad Al Khalifa, Bahrain has adopted a very strong economic development agenda and framed transparent business friendly policies.

The Central Bank of Bahrain’s (CBB) has also gained an excellent reputation as a strong regulatory body and this is reflected in the growing number of financial institutions setting up offices in Bahrain. Currently, the Kingdom of Bahrain has over 400 onshore and offshore conventional and Islamic financial institutions, which according to the Economic Development Board is the largest concentration in the region.

The CBB applies the Basel II standards and encourages transparency across all areas for

all financial institutions operating in Bahrain, and this has been a key in attracting international businesses to the country. In addition to the above mentioned points, its liberal economic environment, highly-skilled local workforce and excellent connectivity to neighboring markets e.g. Saudi Arabia and upcoming link to Qatar, have all contributed to its success as a financial centre wherein the financial sector alone contributes to around 25 percent of its GDP.

In conclusion, Bahrain’s position as the financial hub of the region stems from its strong compliance and regulatory standards firmly established and monitored by the Central Bank of Bahrain and also its liberal economic and business friendly policies. Bahrain’s credibility has been established over the years and will in fact grow stronger in the years to come.

In the framework of its corporate social responsibility,GBCORP has become a key contributor to Bahrain’s Waqf Fund for research, education and training in Islamic finance, established by the Central Bank of Bahrain and other local Islamic financial institutions. Shouldn’t such a commendable exercise be the norm across the gulf pertaining to the other banking sector as well as financial institutions?

Corporate social responsibility [CSR] is the cornerstone of GBCORP’s commitment to the community and CSR practices among other organizations in the region are firmly gaining ground across all sectors, not just banking and finance. Having been founded no more than eight months prior, GBCORP was named the ‘best new Islamic investment bank’ in february of this year at a prestigious awards ceremony held in Dubai. Surely such an honor reflects the bank’s persona and high standards and professionalism outlined in the very beginning. The award is an honor that compliments our drive for a new era of global Islamic banking. GBCORP pursues a dynamic business model, primarily focusing on the core business areas of private equity, real estate, energy and infrastructure development, asset management, advisory services in corporate finance and capital markets and portfolio management services, backed by a management team with a cumulative experience and expertise of more than 30 years in international banking. Our aim is to provide our clients with global Shari’a-compliant investment opportunities whilst offering a professional and personalized service.

On the lighter side, had you not been in the businesses ‘of business’ that you had so excelled in so far, what alternate career path would you have been in?

I would have chosen something in psychology and sociology. I have always had a great interest in social sciences and would have rerouted myself into academics and educating in psychology studies.

Fortunately, I still have a chance to experience social sciences in my current career, where I feel dealing with clients involves behavior and social interaction and therefore the two, in some way, go hand in hand.