United Kingdom Flat Growth and The Lending Scheme

Looking at the quarterly inflation report of the Bank of England(BoE) gives indication how dip the euro crisis and lack of willingness of banks to lend money is affecting the economy at large. The BoE in its report reduced the expected growth rate from 0.8% to 0% compared to what it was in the same period a year ago of 2%.

The reasons for this forecast of the growth forecast are obvious to all and sundry which are; the euro crisis , the weather which , the bank holidays as well as government cut in spending.

The Lending Scheme

The new £80bn lending scheme which officially started on 1st of August for drawings is to allow banks and building societies borrow money at a reduced cost from BoE and eventually lend to households and the businesses with the hope that it will stimulate the economy activities in the UK. Banks and building societies will have access to it for a period 18 months and there is no limit on what individual banks can borrow from the scheme but will be able to borrow up to 5% of  their previous lending to the real sector as at the end of June 2012.

The banks are to lend to the real sector of the economy but the concern here is that banks  might take the loan to boost their profit and balance sheet position rather than lending to the businesses that are struggling with funding. On the building societies perspective, instead of allowing the building societies to decide who to give these funds to, I think BoE should have attached some conditions to it by designating some aspect of the loan to first time home buyers who might not have large initial deposits to finance their mortgages.

Is Islamic Finance The Panacea?

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The principle of Islamic finance (Non-Interest Finance) focuses more on transparency of dealings, social responsibility through proper equitable distribution of wealth. The crisis in the Euro for the past couple of years with the conventional banks struggling to weather the storm looks promising for the Non- interest financing.

'Musharaka' which I largely believe is the major significant argument for Islamic finance is a financial activity where the bank or investor provides the fund for an enterprise but also participate in the managing of the firm. Profits earned on the venture will be shared between the parties based on the agreed ratio and the losses will be shared based on their capital contribution.

For instance, If conventional banks were required to share the profits and losses of their clients like the 'Musharaka', whether on business investments or mortgages which led to sub-prime crisis in 2008 they would be much more careful. This is because their financial returns would depend more on the performance of the projects that they finance. Interest-based lending substantially divorces financial institution from their customers risks and focuses only on the interest to be earned on the loan deal. In many cases, the banker who brings in the loan deal has already collected his or her bonus and sometimes retired by the time the deal goes bad and eventually causes problem for the entrepreneur and the bank.  

Budding entrepreneur with great business idea without collateral often fail to attract finance under the conventional system because of the interest based finance but Islamic finance has bridged this gap through profits and loss sharing.

Despite the prospect of Islamic finance, challenges abound as well. Some school of thought argued that Islamic finance instruments are only an hybrid version of the conventional instrument and that there is no significant difference. There is also shortage of qualified professional who specializes in Islamic instruments and also diversity in the laws and procedure in different countries where it's been practice. I believe if these challenges are eliminated, non interest finance can be the panacea for the financial crisis.

Islamic Finance - My Understanding

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A friend once asked me is Islamic Finance and banking for only Muslim? This prod me to write this short piece based on my understanding. Many people believed that since the name says 'Islamic' it simply has to do with Muslims. It is a financial system that allows all and sundry to participate irrespective of their religious beliefs.

Islamic finance and banking  sometimes called Non- Interest Finance can be said to be financial activities which is based on Islamic principles that forbids interest 'Riba' and financial speculation. It focuses more on risk and profit sharing which is the basic principle.

The major principles :

Non-Interest (Riba) : The conventional banking focuses on taking and giving interest  but in Islamic finance, it prohibits any payment above the actual amount of principal been borrowed.

Risk Sharing: It is financial system that focuses on profit, loss and risk sharing as well as participation of parties involved the transaction.

Investment in gambling and dealings in alcohol is prohibited.

Market prices are determined based on the forces of demand and supply and not on speculation.

Finally, non -Interest finance as I like to call it is centred on fair, transparency and risk sharing in all dealings. I will follow up this short piece with my personal opinion on Islamic finance and the financial crisis.

Financial Services Authority (FSA) and Libor Investigation

Does Libor come across to you as one of those financial jargon that is difficult to comprehend? In simple terms it is the interest or better still rate banks lend or borrow to each other on a short term basis and it is been calculated daily by financial data firm. They can be used to ascertain the condition of a country's financial system as well as the indication of a banks strength. These rates eventually affects you through the interest these banks charge on the credit card you have with them, interest you pay on your mortgages or the cost of borrowing from a bank as an entrepreneur.

FSA is the body that is tasked primarily with the responsibility to regulate the financial services industry in the United kingdom. Two of Its statutory responsibilities are to reduce financial crime and consumer protection but looking at the London Inter Bank Offered Rate Libor scandal, it looks like they are not alive to their responsibilities when needed.

It is appalling to know that it took American regulators (Federal Reserve Bank New York) to do the work of FSA, by identifying this scandal almost 5 years ago and informed FSA but the almighty regulator (FSA) did relatively nothing until it became widespread. It also took another American regulator the Commodity Futures Trading Commission (CFTC) to impose the first fine on Barclays before FSA woke up from its slumber.

The question that comes to mind is why the FSA did not perform its statutory responsibilities to the public after red flag been raised about improper conduct by the American regulator. Well the hope of the public is on the breakdown of FSA into 2 new regulators with definite responsibilities and powers to specifically regulate and supervise financial services industry in the United Kingdom.

Banco Santander: Dividend of diversification and Latin America

Banco Santander is one of the Spanish banks downgraded early this year due to the crisis rocking the Euro but most especially the crisis in the home country where it all started for the bank . The crisis in the home country did not have much impact on the firms profitability looking at her half year report 2012.

" The situation in the country worries me but the situation of the bank does not" those are the words of Emilio Botin the Chairman of Santander. Reading these words gave me the indication how diversification is helping Santander to weather the storm in Euro by looking at the Latin America as the saviour.

Banco Santander entrance into the Latin America has shown significant rise on its impact on the bank attributable profit. The 2012 half year result shows the Latin America contributing 50% of the group's profit with Brazil the major contributor taking 26% compare to UK's 13% contribution. While financial institutions like Royal Bank of Scotland (RBS) and Lloyds bank are struggling with their financial position, Banco Santander is hedging the Euro crisis by looking at the Latin America to cushion the effect.