Sunday, September 26, 2010

Deloitte Survey on Islamic Banking


You may have seen press reports on a recently released Deloitte survey on Islamic banking.  In at least a couple of cases press reports implied that Deloitte was issuing calls for certain actions to be taken. What I think is the more appropriate characterization was that it was reporting the views of participants in its poll.

The poll itself appears to be a fairly standard exercise  - highly familiar to those of a certain rank in the business world who have email.  One receives a questionnaire and is asked to fill it out. I'm guessing the response rate is not high.  And in many cases the responses are crafted by someone junior to the "business leader".

Deloitte surveyed 40 IFIs and Islamic finance executives across the Middle East.  Well, actually with a focus on Saudi Arabia, Bahrain, UAE, Qatar and Lebanon (page 6).  Surprisingly, Kuwait - the home to KFH and other IFIs - is not included.  

It seems highly unlikely that the results of Deloitte's poll like others of this sort are statistically significant, though they do provide an impressionistic insight into issues.

Let's go to the survey.   

First Deloitte's summary.

Several key themes emerged in the results of this survey.  The first is a fair consensus on the need for an effective regulatory framework and good governance. The survey findings emphasize the importance of introducing new or revised regulatory measures–chief among them being Islamic accounting standards and risk management.  A second theme is the importance of adopting best practices and transparency in financial reporting. A great deal of the present industry shortcomings and performance shocks can be attributed to a lack of practice consistency and regulatory compliance. The necessity of adjusting investment strategies through diversification is a third theme of this report. A final theme is the need for investment in human capital and talent development to cope with the growth and industry challenges.
Now some details.

A.  Areas Requiring New Regulatory Action to Ensure Compliance and Best Practice
  1. Islamic Accounting Standards - 61%
  2. Risk Management - 61%
  3. Corporate Governance - 58%
  4. Shari'a Standards and Compliance - 55%
  5. Bank credit exposures -45%
  6. Conduct of Business and Professional Excellence - 42%
(AA:  It seems to me that the last point can be viewed as responsible for many of the shortcomings embodied in the above.  The smart ethical fellow doesn't need a rulebook to know what to do and to do it).
 
B.  Adequacy of Regulation of Islamic Finance
  1. Over regulated - 3% 
  2. Appropriately regulated -31%
  3. Under regulated - 66%
(AA:  And Deloitte apparently didn't survey Kuwaiti entities!!)

C.  Best Form of Shari'a Regulation
  1. Firm specific Shari'a boards - 43%
  2. A single regional Shari'a board -57%
(AA:  The single regional board model is used further East - Malaysia, Pakistan - as well as in the Sudan).

D.  Extent of Risk Management for Islamic Financial Products
  1. Exists in our organisation - 50%
  2. No specific Islamic risk management - 50%
Responses to this question further ranked risks in order of importance:  credit risk (66%), operational risk (60%) and market risk (53%).

E.  Do IFIs Lag Conventional Banks in Risk Management?
  1. Yes -    63.4%.
  2. Same -  20.0%
  3. No -      16.7%
F.  Corporate Restructuring and Capital Adequacy
  1. More than 50% of IFIs said they need more capital.
  2. 57% said that it was likely they would restructure a current Islamic debt over the next 12 months.
(AA:  Unfortunately, Deloitte did not provide more detail on the response to the second question.  This seems very very high.  I guess that it's either a problem with the sample or with the definition of "restructure".  Perhaps, this includes some non distressed rollovers or refinancings??)

G.  Change in Business Models
  1. 66% said that they expected a change in business models in the near future.
(AA:  Not surprising given the problems with previously "proven" business models).
 
H.  Most Relevant Business Models for Islamic Finance
  1. Retail - 45%
  2. Wholesale - 24%
  3. Domestic - 14%
  4. Cross Border - 10%
  5. Corporate - 7%
(AA:  A couple of interesting points here.  First, no mention of Islamic investment banking.  Second, a very low number for corporate bankingAgain I wonder if this is a problem with the sample or the construction of the question / set of options).

I.  Real Estate Exposure
  1. 66.7% of IFIs have REE up to 20%.
  2. 18.5% between 21% to 40%. 
  3. 7.4% between 41% to 60%.
  4. 3.7% between 61% to 80%
  5. 3.7% between 81% and 100%.
The survey covers additional sub topics on those listed above as well as a few other topics.

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