Lack of interest

By Wang Xinyuan Source:Global Times Published: 2013-7-24 22:58:01

An empty business hall of a Bank of Ningxia branch, in Xi'an, Northwest China's Shaanxi Province Photo: IC

An empty business hall of a Bank of Ningxia branch, in Xi'an, Northwest China's Shaanxi Province Photo: IC


Islamic banking is relatively new in China and it poses certain difficulties, owing to strict rules about it.

"Those who eat riba will not stand [on the day of resurrection] except like the standing of a person beaten by Shaitan [Satan] leading him to insanity," says a verse from the Koran, the holy book of Islam, prohibiting riba, or the charging of interest on a loan.

In order to comply with the prohibition of interest, Bank of Ningxia launched an Islamic banking business in 2009 especially for local Muslims. But the future of the service remains uncertain due to slow progress and the small number of customers.

With the holy month of Ramadan starting on July 9, more Muslims have been praying in the Grand Mosque in Nanguan, Yinchuan, which is less than five kilometers from the headquarters of Bank of Ningxia in Northwest China's Ningxia Hui Autonomous Region.

Few customers

"Fewer Muslim customers have been seen in the bank these days due to the hot weather and the coming of Ramadan," said a manager at the Guangming sub-branch of Bank of Ningxia.

When the month of Ramadan begins, Muslims enter into a period of discipline and worship, fasting and praying during the time between sunrise and sunset.

Some devoted Hui bosses grant their staff a whole month off during Ramadan, said a credit officer at Bank of Ningxia, who declined to give her name.

The largest ethnic minority in Ningxia is Hui people, numbering around 2.5 million. In total, Hui reportedly account for half of the 20 million Muslims in China.

The credit officer said the bank's Islamic banking product targets small and medium-sized Muslim enterprises and individual business owners. It operates through a form of "cost-plus" or profit sharing rather than by charging interest in order to be compliant with Islam, she told the Global Times Monday.

The majority of the Islamic banking loans go to support Muslim customers' trade in cashmere, beef, lamb, sheepskin, agricultural products and milk, she said.

The bank purchases the commodities and then re-sells it to the buyer at a fixed profit as agreed by both parties. The property is registered in the buyer's name from the beginning, and the buyer makes installment payments to the bank.

But in fact, it's only a different form of interest, she said, and from a customer's perspective, they still have to repay bank loans with a certain amount of interest.

"Many [Muslim] businesses borrow from conventional commercial banks," she noted, despite Islamic rules about interest. Also, many Hui people are not aware of this form of Islamic banking.

Since it started in 2009, the Islamic banking product has attracted less than 50 million yuan ($8.16 million) in deposits, a very small amount compared with the total deposits of 56.08 billion yuan lodged with Bank of Ningxia in 2012, the Chinese version of Bloomberg Businessweek reported in May.

"Starting this year, we are not allowed to accept interviews on this [the Islamic business unit]," Zhang Wei, a member of staff at the headquarters office of Bank of Ningxia, told the Global Times Tuesday.

"The Islamic business unit is just a pilot program, and it may be shut down," Zhang said.

As the bank declines official interviews and releases no data about its Islamic business, it is hard to get a true picture of the product.

But an academic thesis written by a member of the bank's staff named Zhang Lida in 2011 indicated that as of June 2010, the bank had opened 116 Islamic savings accounts with 5.89 million yuan in deposits.

The bank had also lent 105 million yuan to Muslim customers, with an average profit rate of 33 percent, higher than the benchmark lending rate in conventional banks, according to Zhang.

Compared with conventional banking, the operational cost of Islamic banking is much higher, as bank staff need to do more due diligence work and checking.

If Islamic banking was subject to the same tax bracket as conventional banks, it would make very little profit, which would curb its development, Zhang wrote in his thesis.

There is also a lack of regulation and supervision designed specifically for Islamic banking, Zhang noted.

Islamic banking has gained in popularity in the global banking sector in recent years, partly because it was less affected by the 2008 financial crisis that saw the demise of some of the world's oldest financial institutions.

Islamic banking was less exposed to speculation and volatile markets than conventional banks.

Global Islamic banking assets with commercial banks are expected to reach $1.8 trillion in 2013, a 36 percent increase from 2011, according to a report released by Ernst & Young in December 2012.

Although Islamic banking is ­expected to grow at a faster rate in emerging economies given their dynamic growth and potential, some experts are skeptical about the development of Islamic banking in China. 

Less optimistic

"I don't see much room for the development of Islamic banking in China. The only benefit is to get support from Middle Eastern countries," Zhuang Guotu, director of the Center for Southeast Asian Studies at Xiamen University, told the Global Times.

Islamic banking provides a small amount of loans to support Muslim businessmen, which is needed, but what China needs most is to introduce capital and investment from Arab countries in China's central and western regions to build infrastructure such as power plants, airports and highways, said Ma Ping, director of the Institute of Hui Islamic Studies at the Ningxia Academy of Social Sciences.

Even in Gulf Cooperation Council members such as Saudi Arabia, conventional commercial banks still dominate, with Islamic banking assets accounting for less than 40 percent of the total, according to the Global Islam Finance Forum 2012.

Some Islamic bank outlets opened in Gansu and Qinghai provinces in the 1980s, but only a few elderly Muslims have accounts there, Ma said.

These devout Muslim customers do not accept interest on their savings, and the banks use the interest to buy daily necessities such as blankets and donate them to people in need so as to improve their image and draw more Muslim customers, Ma noted.

China does not possess the conditions to develop Islamic banking substantially for the time being, he said.

Another problem is that Islamic banking is subject to the same supervision as conventional banks in China, and it's harder for the product to guarantee a bank's credit and solvency, Zhuang said.

Posted in: Insight

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