The average size of an Islamic bank is often not large enough to conduct significant volumes of investment banking transactions. In combination with Islam’s strong focus on social and economic well-being, Islamic banks are in a perfect position to cater for local markets. Focusing on local and even small and medium-sized clients does not have the same exciting profile as being an international player, but it will provide a strong platform for future growth.
A solid home base will be able to provide a platform for further growth and eventually sustain national and international expansion. From a growth and strategic perspective, this makes perfect sense and the only thing the Central Bank of Lebanon (Banque Du Liban) appears to want to achieve is a flourishing Islamic financial industry which assists the local economy. In any case, due to the fact that there is no accompanying requirement for foreign institutions to limit their operations in Lebanon, the policy does not have the characteristics of protectionism.
DR NATALIE SCHOON
Principal consultant, Formabb
There are numerous cases worldwide of the same type of myopic demand for native investments. The California Public Employees Retirement System, CalPERS, as one of the biggest investors in the world with over US$237 billion in assets, is mandated to invest a minimum amount in California bonds, equities, real estate and private equity, which now total over US$21 billion, or 9% of the total. One has to ask, are these forced investments the best investments CalPERS can make, or are they the result of misguided political will?
Fortunately, California has a deep, rich economy and wise investors can usually find good investments. But, in a thin emerging economy dominated by very high risk investments, like Lebanon, one has to question such policies.
Central banks are rated for creditworthiness and their holdings are part of the formulation of national credit ratings. If a central bank is forced to absorb huge amounts of high-risk investments, the entire economy will suffer a ratings downgrade, making money dear and skewing economic development. In other words, these dysfunctional nationalist policies are a big obstacle to achieving economic growth, defeating the purpose for which they were meant.
JOHN A SANDWICK
Manager, Safa Investment Services
The policy of requiring Islamic financial institutions to invest a minimum of 50% of their assets in Lebanon is counterproductive. Beirut used to serve as a significant regional financial center, but such restrictions make it unattractive to place offshore business in Lebanon. There are no restrictions of this nature in the GCC, where Islamic banks are free to finance foreign clients. Clearly this gives centers such as Dubai and Bahrain a major competitive advantage compared with Beirut.
Financing opportunities in Lebanon are inevitably limited, most being in real estate where prices have been quite volatile. The industrial sector is small, mostly geared to serving the local market. Forcing Islamic banks to deploy most of their financing domestically lowers the cost of finance marginally, but is likely to have a minimal effect on economic growth. There are numerous studies that show that restrictions on financing harm growth while more liberal policies help. This applies as much to Islamic financing as any other form of financing.
RODNEY WILSON
Emeritus Professor, Durham University, UK; Visiting Professor, INCEIF