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Islamic Banking

13 August 2004 financial timesWarren Edwardes interviewed by Jon Boone and Kate Burgess of The Financial Times.

Interview with Kate Burgess

"The retail Islamic banking market in the European Union of about 10 million is too substantial a market to ignore." says Warren Edwardes, CEO of financial innovation and risk consultancy Delphi Risk Management. "Only a few years ago several pure internet banks were launched. Established banks saw this threat and established internet operations as just another delivery channel. The approval of The Islamic Bank of Britain is sure to galvanise conventional banks in the UK, France, Germany and the Netherlands to establish their own retail Islamic Banking operations. "

Edwardes, a governor of the London based Institute of Islamic Banking & Insurance says that "London has long been a centre for Islamic banking innovation and will continue to be so alongside Bahrain, Dubai, Kuala Lumpur / Labuan and Kuwait. However, the positive support of the FSA and the Bank of England may be counterbalanced by a negative war related political fallout."

"To date there has been minimal supply of Islamic Banking products on a retail level and the products offered have been uncompetitive with conventional alternatives and other than HSBC's initiative from less well known institutions." Edwardes senses that "customers are risk-averse and whilst keen to transact Islamically they will be more likely to transact with well-established brand name banks than start-ups."

"In Malaysia a large proportion of Islamic Bank customers are Chinese Christians and Buddhists. They do so on ethical grounds and simply because they like the products offered. Many of the Islamic savings products have smoothed returns and are appealing when interest rates are low."

Interview with Jon Boone

"A major problem for Islamic banks is the lack of liquid instruments along with the difficulty in managing rate risk." feels Warren Edwardes CEO of financial innovation and risk consultancy Delphi Risk Management and a Governor of the Institute of Islamic Banking.

"Islamic banks investing in long-term assets are faced with a problem in that most of their deposit liabilities are very short-term leading to a massive liquidity problem. Liquidity management tools that are both flexible and undeniably Shari'ah compliant are lacking. Although Sukuks can be traded most are held to maturity. This lack of market liquidity is often seen as the major constraint to the development of an integrated Islamic financial system.

In terms of Asset / Liability Management there is a hedging problem for institutions that lend long term at fixed yield through Ijaras (easing) and finance through short term and therefore variable yield accounts. There is thus a pressing need for Islamic derivatives to address this gap problem. But most derivatives are deemed to be not Shariah compliant."

Warren Edwardes is CEO of Delphi Risk Management, the London-based financial product creativity, communication and control consultancy.

Warren was previously on the board of Charterhouse Bank and has worked in the treasury divisions of Barclays Bank, British Gas and Midland Bank. He first researched into what were later to be called "derivatives" in 1975 and was part of the team that executed one of the world's first currency swaps in 1981. Since then he has devised and transacted numerous structures that form part of the history of derivatives. Warren can be contacted via we@dc3.co.uk

Warren Edwardes <note  spelling of edwardes> is author of best seller "Key financial instruments: understanding and innovating in the world of derivatives" which includes an appendix on Islamic Banking.  see http://dc3.co.uk/kfi

Delphi Risk Management: Delphi creativity Delphi communication & Delphi control are the Innovation, Communication & Risk Management arms of Delphi Risk Management Limited 

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