In my view, the banks particularly the Islamic ones should focus on financing only asset backed projects involving real economic activity linked directly to trading, manufacturing and value-added industries. Moreover, the main focus should be on financing the SME (small and medium-sized enterprise) sector, which will generate employment opportunities and be a more stable sector due to their lower cost structures. I would also like to add that it is high time that all banks stop financing speculative activities in the derivatives and stock markets. And, regulators must take measures to ban such activities.
AHMED ALI SIDDIQUI:
The loss of confidence by financial institutions in each other has been a major feature of the present crisis, resulting in a reluctance to continue involvement in the inter-bank market. Assets used to back inter-bank lending, notably collateralized debt obligations, have become impossible to value, and are regarded as toxic. The dramatic fall in the price of bank shares reflects the lack of confidence, hence the desire to use government liquidity injections to re-capitalize by the banks. Restoring business and consumer lending, although desirable to stimulate the real economy and reduce job losses, is a secondary priority for the banks. It may seem perverse to use taxpayer funds to save the failing banks which caused the crisis, but there is little alternative in present circumstances. However, in the longer term, the challenge is to build a better financial system, and there are important lessons from Islamic banks in this respect, notably their adherence for the most part to a classic banking model that funded financing from their own deposits, and not from inter-bank borrowings. Prospects for a favorable outcome from the G20 summit are not promising, but those Muslim countries attending the April meetings, notably Saudi Arabia, Turkey and Indonesia, have the opportunity to present alternative long-term solutions based on Islamic financial principles and experience. Such solutions involve a fiscal stimulus through government spending on infrastructure, which benefits the real economy rather than simply monetary measures, which may not work. The fiscal stimulus is likely to be much less costly. An Islamic package will, however, involve significant regulatory changes to fix the financial systems, but this is arguably preferable to continuing monetary injections. PROFESSOR RODNEY WILSON Director of postgraduate studies, Durham University
When banks no longer extend credit and/or reduce existing credit facilities, their clients potentially suffer severe consequences, with the most extreme being potential bankruptcy. Under current economic circumstances, it is even more important for companies to have access to the right levels of debt and capital to tide themselves over. This does not mean that banks should be cavalier about lending money, but that they should continue the activity which is at the core of their service — identify the right opportunity and extend credit within the confines of a prudent framework. Using bailout funds to enhance capital is not to the benefit of anyone, whether it be the banks, the companies or the general economy. However, as long as the governments do not pose any conditions along these lines when providing quantitative easing or troubled asset relief, banks are highly unlikely to resume ‘normal’ lending practices. And, maybe it would be a good idea if governments focused on these issues rather than spending time and effort on whether or not the money spent on bonuses was legitimate. After all, let’s not lose sight of the fact that the bonus payouts were well below 0.1% of the total amount pumped into the banking system so far. DR NATALIE SCHOON Head of product management, Bank of London and the Middle East
Direct liquidity injections have a key role but are quite indiscriminate. In an era where liquidity is paramount, the banks simply hoard the cash and do not lend. Many prominent non-Islamic countries have used central bank repo mechanisms to provide liquidity in return for asset security (via securitization). There is a double benefit here as the bank can raise new funds as well as offload loans from the balance sheet. Also (a particular issue in GCC markets), securitization helps mitigate the asset/liability mismatch problem by providing matched funding. While investors are thin on the ground, governments can take these tradable securities on their balance sheet and act a bit more as an arm’s length investor. Ultimately, this portfolio also has the side benefit of helping grow the bond market. Those securitizations backed by tangible assets can help restart the Sukuk market in a big way. KHALID F HOWLADAR Senior credit officer, asset backed and Sukuk finance, Moody’s Middle East
It is not going to happen. Most central bankers are more worried that the bankers are adequately capitalized and are afraid that new loans are bad money in a declining market. Therefore, read their statements carefully: There will be more lending when the banks are well capitalized. But, putting government money into the banks is not their definition of the banks being well capitalized as yet. Be careful that the debt markets, from top to bottom, will be too quiet for the public good in 2009. ABDULKADER THOMAS President and CEO, SHAPE™ Financial Corp
Lending creates a “disconnect” with the underlying asset versus equity partnership financing where a permanent market correlated connection is established. Islamic finance does not allow lending for this reason, to ensure social justice with equal risks is shared by all parties through equity partnership financing. Banks should look at investment banking or equity partnership financing as an alternative to lending. Asset quality can be improved in this manner with liquidity being injected for equity partnership financing versus loans. OMAR KALAIR President and CEO, UM Financial Canada
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