Date: April 21st, 2003

Title: The implications of globalisation for Islamic finance

Author: Professor Rodney Wilson, University of Durham, UK

Standardisation of Islamic financial products can come about by adhering to international regulations, whether from secularist institutions such as the IMF or BIS or from designated Islamic international institutions such as the IDB, AAOIFI or the IFSB. It can also result from the interchange of ideas by national Islamic banks at international conferences, which encourages the spread of “best” practice. Even more influential in standardisation has been the emergence of major multinational banks and fund management groups as providers of Islamic financial products either directly to their own clients, or indirectly to those of the national Islamic banks. As HSBC Amanah Finance typifies this type of initiative by a major multinational bank, it is perhaps instructive to examine its experience.

Despite its size as the largest United Kingdom based bank, with a significant presence in many Muslim countries from the Middle East and the Gulf to Malaysia, HSBC was a relatively late entrant to Islamic finance. Banks such as Citicorp, ABN AMRO, Deutsche Bank and some of the British merchant banks were involved from the 1980s, but HSBC only established its Amanah Finance division in 1998. In its mission statement HSBC Amanah Finance stresses its respect for the sanctity of the shariah, its professionalism, uncompromising integrity and strong customer focus. The aim is to build Amanah’s reputation amongst Muslim clients of HSBC who already use its financial products and potential internal and external clients. Initially the emphasis has been on cross selling Amanah products to existing HSBC Muslim customers who use its conventional financing facilities, the internal clients, rather than reaching external clients of other banks through marketing and advertising the Islamic products. Direct cross selling is cheaper, and usually more effective given the captive nature of the market.

For an international bank such as HSBC, product development is usually undertaken centrally, and then the products distributed through national subsidiaries. In the case of Amanah finance, the initial offerings were developed in London where the bank was based, but the intention was always to focus on HSBC clients in Malaysia and Saudi Arabia where the Saudi British Bank is 40 percent HSBC owned. For Malaysian and Saudi Arabian retail clients the leading products are those involving wealth management, in practice Islamic managed funds. Three Saudi British Bank branches have been initially designated as outlets for Amanah products, with local staff given appropriate training. For the United Kingdom and the United States the leading products are Islamic mortgages, but in 2002 the programme had only just started in the United States, and in the United Kingdom, because of the unfavourable tax treatment of Islamic mortgages and capital adequacy issues, the programme was still to be launched.

Credibility with Muslim communities internationally rather than within single countries is important for multinational banks such as HSBC. Reputations can be enhanced internationally by having shariah committee members from different Muslim countries. In the case of Amanah finance the advisors are Muhammed Taqi Usani of Pakistan, Shaikh Nizam Yaquby of Bahrain and Mohamed Ali Elgari of Saudi Arabia. All three are University Professors who combine academic scholarship with practical work on the shariah committes of a number of several banks, including in the case of Usani and Yaquby the Abu Dhabi Islamic Bank and Citi Islamic Investment Bank and in the case of Elgari the National Commercial Bank of Saudi Arabia, the Saudi American Bank and the Saudi French Bank. This multiple membership of shariah committees itself contributes to product standardisation.

The flagship Islamic wealth management product offered by HSBC is its Amanah Fund, which invests in equities globally subject to shariah screening. HSBC also acts as a third party distributor of other Islamic funds including the Al Ahli Global Trading Equity Fund and the Al Ahli Small Cap Trading Equity Fund offered by the National Commercial Bank of Saudi Arabia. For corporate clients leasing ijara finance is offered, deals in 2001 including $60 million for Malaysia Telekom Berhad, $61 million for Airbus Industry for aircraft for Emirates and £50 million for Hartwell Finance, a British vehicle leasing company. Murabaha trade financing in 2001 included $26 million for Vestel Dayanikli and DM 30 million for Vestel DIS Ticaret, both Turkish companies. Deals such as these have helped convince international companies of the viability and merits of Islamic financial products.

Creating a global market in Islamic securities
An important aspect of globalisation of finance has been the emergence of offshore financial centres that by definition serve international clients. In the case of Islamic finance, Bahrain has emerged as the leading offshore centre, a role that has been enhanced with the instigation of its Islamic money market. On June 13th 2001 the Bahrain Monetary Agency offered for the first time in the Gulf government bills that were structured to comply with the Shariah Islamic law. The bills were worth $25 million, and were in the form of three-month paper, referred to as Sukuk Al-Salaam Securities.

Although the Malaysian government has offered Islamic bonds for over ten years, governments in the Gulf have been forced to borrow in international markets rather than locally because of Islamic objections to trading in debt and interest based securities. Governments have issued paper that the local commercial banks have held to maturity, but not traded. This however restricts the liquidity of bank assets, and makes it more difficult for the government to raise finance directly from the public.

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Iqbal Khan, Islamic Finance: Opportunities in Community Banking, unpublished paper, Bank of England Conference on Islamic Banking, 7th – 8th May 2002, slides 1-6.
“HSBC: Heavyweight Contender”, Middle East Economic Digest, 30th August 2002. www.meed.com
www.amanahfinance.hsbc.com