Islamic finance reaches China

Mosque in Ningxia Hui Autonomous Region in China

Ningxia to Spearhead Islamic Finance in China. With encouragement from the China Banking Regulatory Commission (CBRC), Ningxia Hui Autonomous Region is set to take the lead in trialling Islamic financial services in China. If the pilot project is successful, policy makers hope that Islamic financial services will gradually become available throughout North West China. Lu Suping, Chairman of the Bank of Ningxia’s board of directors, confirmed that the regulatory bodies had given the bank preliminary approval to go ahead with an Islamic Finance trial.

History of the Islamic Finance Initative

The idea of offering Islamic financial services was first raised at the end of last year by the Ningxia Hui Autonomous Region’s Peoples’ Government, but according to a source from Ningxia Branch of China Banking Regulatory Commission (CBRC), « it was only after many rounds of consultation that the trial finally gained support from the relevant departments. »

At the start of this year a special office was set up to undertake a feasibility study into the proposed trial. Lessons were drawn from the experience of both other countries and also Hong Kong in regard to the establishment of Islamic financial services. The results of the feasibility study have been presented to the CBRC and Ningxia Hui Autonomous Region’s party committee.

A source familiar with the matter revealed that, regulatory bodies had suggested that either a special department be established within the Bank of Ningxia or that special service windows capable of providing Islamic financial services be introduced at various branched of the bank. « In fact, due to disagreements about the scale of the pilot project, the CBRC finally decided to select Ningxia as a trial area. However, they plan to gradually enlarge the scale of the project, » the above source added.

The Islamic Finance Pilot Project

Details of how the project will proceed remain scant. According to Lu Suping, « we still haven’t formulated a detailed plan; the bank’s first priority is to establish a special branch, designed in an Islamic style, and capable of providing Islamic financial services to local Muslims. »

She also revealed that they planned to recruit a Muslim manager to run the branch. When questioned about the bank’s ability to support the pilot project in these uncertain economic times, Chairwoman Lu noted that the Bank of Ningxia currently had 34 branches, was well-governed and has an exemplary risk control system.

« Moreover, the bank already employs 200 Hui nationality workers, 13% of the total number. Hui employees also make up 12% of the bank’s management level staff, » said Mrs Lu.

« These Muslim employees provide the human resources required for the pilot project, » she added. Chairwoman Lu said preparations for the pilot project would be completed before the end of this year.

However, local banking watchdog remains cautious about the pilot project and has drawn attention to some of the difficulties that lay ahead for the bank. For instance, the scope of Islamic financial services goes beyond those laid out in the country’s commercial banking law and therefore the introduction of Islamic financial services will require special permission from various departments.

Furthermore, according to Islamic financial practice, financial transactions are calculated on the basis of the transfer of real assets, which will often meet problems to do with the duplication of tax and therefore will need to apply for some kind of preferential tax policy. Moreover, commercial banks lack experienced employees who are also familiar with Islamic doctrine. In order to study the operation of Islamic banks, the local government, the CBRC and Bank of Ningxia have organized an inspection tour of Malaysia and the United Arab Emirates in July.

Global Vision

The EO learned that local government has dreams of turning Yinchuan, capital of Ningxia, into a Islamic financial center on the mainland. This aim is revealed in the documents relating to the establishment of an Islamic bank in the government’s working report this year.

A source from Ningxia branch of CBRC revealed, the pilot project would provide Ningxia with many opportunities to join some international Islamic financial organizations. This raised the possibility of Ningxia establishing regional trade with these organizations and Islamic countries. « It’s possible in the future that Ningxia could introduce an Islamic investment fund or Islamic bonds to attract international Islamic investors into local economic construction, » the source added.

Source: Economic Observer, by Cheng Zhiyun, Translated by Liu Peng – July 2, 2009

china-yuanSimpfendorfer2 Ben Simpfendorfer

I was recently in Malaysia and spent a valuable hour with bankers from Maybank Islamic. In the process, I learnt something about Islamic finance that has implications for the entire region.

I had assumed that the bank’s Muslim clients would be the biggest buyers of Islamic wealth products. But it turns out I was wrong. It is the bank’s ethnic-Chinese clients who are account for nearly seventy percent of sales. How so? The bank’s Chinese clients are attracted by the straightforward design of Islamic wealth products. They are a far cry from the complex derivative products of the last few years that have made, and lost, a lot of money.

Take a “Structured Islamic Deposit”. It guarantees your initial investment, and then offers a return based on the performance of copper and wheat prices. Even a beginner can grasp the risks of investing in these two commodities. And Chinese investors like buying commodities. As a China economist, I am reminded of this fact daily.

Over the past six months, I have heard stories of Chinese manufacturers speculatively buying everything from copper, nickel, and iron ore, and storing it in warehouses around the country. It is a gamble. But they will have made a tidy profit in the past few months.

Now not everyone can afford to buy copper, let alone store the stuff in their backyard. However, it might be that the Islamic banks can offer Chinese investors the same wealth products on sale in Malaysia with a return linked to the price of copper, tin, or oil. If so, then China offers Islamic finance vast untapped opportunities.

There are a few obstacles. So far there are no Islamic banks in China. I heard from a Chinese banking regulator last year that officials were still shy about licensing a foreign Islamic bank. “It would take more time to assess the implications”, he said.

Maybe that time has arrived.

The Chinese Economic Observer is reporting that Ningxia province, a largely Muslim province in China’s west, will shortly trial Islamic financial services. The article says that the trial, if successful, will be expanded more broadly across the country.

There is still work to be done. Tax regulations in China do not favour Islamic finance. Officials claim there is a lack of qualified personal familiar with the principles of Islamic banking. IT systems also need to be overhauled. But it might be that foreign Islamic banks will find a warmer reception the next time they apply for a license in China. They could certainly lend a hand to Ningxia’s officials, helping to train their staff and overhaul their IT systems. Most importantly, they might just find a willing market for their own wealth products.

Neither do the products have to be labelled as Islamic. As Edwin Hitti, head of Hong Kong’s Arab Chamber of Commerce, said to me the other day, “You rarely hear Islamic terms used to describe financial products in the Middle East. There isn’t any need. It’s simply assumed that the product is Islamic”.

Maybank Islamic likewise sells their Islamic wealth products through the bank’s ordinary retail branches. Most ethnic-Chinese clients probably don’t realize what they are buying is in fact designed for Islamic clients. It certainly doesn’t have a “warning label” attached. They could adopt much the same approach in China.

From China to the Middle East there is a tendency to prefer investments that are tangible, whether it is copper or property. It could be that the financial links between China and the Middle East are stronger than many believe.

Source: Ben Simpfendorfer’s Silk Road Economy – August 26th, 2009

The New Silk Road200_300The New Silk Road is a ground-breaking analysis of the rise of the Arab world and its strengthening relations with China. The changes are not easy to observe. But Ben Simpfendorfer is one of the world’s leading experts on the region. He is the Chief China economist for a major global bank. Speaks Arabic and Chinese. And has lived in Beirut, Damascus, Beijing, and Hong Kong.

The New Silk Road is a mixture of analysis and first-hand accounts. It tells the stories of Arab traders in Chinese coastal cities. It explains why Arabic-speaking Chinese officials appear on Al Jazeera. It explores how Chinese traders are using Syria as an entry point to the Arab world. Each story is a thread in the new Silk Road easily overlooked by the English-language media.

The world’s centre of cultural and economic gravity is shifting. The East is rising again to challenge the West’s centuries-long dominance of global affairs. America has the most to lose, but Europe is also challenged. The New Silk Road provides a roadmap to the changes taking place. It is essential reading for anyone trying to understand what promises to be one of this century’s greatest stories.

The New Silk Road was published in April 2009 by Palgrave Macmillan. It will shortly be available in Arabic, simplified Chinese, and traditional Chinese.



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