The Bank received more than TT$2 million (US$1=TT$6.2) in deposits for the Islamic Banking Unit prior to the launch and the size of the Fund continues to grow much faster than we had anticipated, says CIB's President, Lennox Archer.
"We had been looking at developing a Unit that caters for the Islamic Community for a few years but were unable to identify the people with the right expertise to help us structure the programme and provide the necessary input and guidance from the Islamic community after the Unit becomes operational. So, when we were approached by the World Muslim League to develop the Unit, we were already prepared to move forward as the missing element to make the project a success was in place.
"An investment bank brings many advantages to the table that Muslims cannot get at traditional financial institutions or even credit unions," says Archer "We are also in a much better position than other financial institutions to develop Islamic Banking, as our structure is more flexible and not subject to as many statutory regulations.
"Traditional banks must deposit a statutory reserve, provide guaranteed returns and insurance for deposits as an integral part of their operations. Credit unions, which are another option, do not have the expertise in investment and risk management, in addition, government regulation of credit unions conflict with Islamic Banking, as they are restricted to lend only to their members. In addition, borrowers' access to funds is limited to their share balance and Government regulations prevent the institution from participating in equity-based lending or accepting profits if it surpasses the statutory interest payment limit.
In addition, this niche may be too small for many traditional banks and there are too many inherent conflicts between Islamic Banking and the traditional western style banking for mainstream bankers to even consider this option.
"The worldwide growth of Islam and the lifestyles practiced by its followers, have created a demand for special institutions that provide products and services that doesn't conflict with our religious beliefs," says Dr Waffie Mohammed, Director of the Caribbean and Latin American Office of the Muslim World League and member of the Banking Unit's Shari'a or Supervisory Board.
"Clearly, almost all of the financial instruments and institutions which dominate in the Caribbean use western style banking procedures that make them un-Islamic, as the underlying concept of Islamic Banking is the absolute prohibition of payment or the receipt of interest.
"Although in Islam, business activity and profit making are encouraged, Muslims are not supposed to engage in any activities involving additional payment over and above the amount lent," adds Mohammed.
He said that despite the absence of a guaranteed return on their investment and no deposit insurance coverage, the new banking facility represents a new opportunity for Muslims across the region.
Apart from Trinidad and Tobago, there are sizeable Muslim populations in Guyana and Suriname with smaller groups in the other Caribbean territories.
"The philosophy behind Islamic banking isn't new to Muslims in the region," says Mohammed, "but this would be the first time they would get an opportunity to manage their funds in a socially responsible way that ties in with their religious beliefs. Islam does not allow Muslims to accept interest payments but they are allowed to trade, invest and conduct business.
"Because access to the financial system was essential for business activity, many Muslims used the available banking services for deposits or savings, and would usually pass on the interest to charity or the needy. They were also forced to raise funding for business projects among themselves, as they were unable to access the financial support they needed from the existing banks.
"Financial institutions seeking to offer an Islamic Banking facility cannot operate on the basis of an ex ante rate of interest, but should adhere to a profit-sharing system in which the rate of return on financial resources is not known, neither is it fixed prior to the undertaking of the transaction.
"It is, therefore, equity-based, and the bank takes a stake in the investment project so it would be entitled to share proportionally in any profits or losses depending on the performance of their investments. It is hoped that this service will eliminate riba (usury) from all Islamic financial transactions, distribute fair dividends among the shareholders and investors, and ensure a broad-based ownership of shares and investment certificates to provide for an equitable distribution of income.
"Apart from the high level of interest shown by depositors, we are realising that there are just as many viable projects that would qualify for funding," says the Bank's Investment Manager, Michael Craigwell.
"Applications have been made for funding business, as well as residential projects and the facility is open to everyone as long as the project does not conflict with Islamic teachings.
"In line with global trends in the Islamic Finance Sector, the Bank will offer investments based on the ESCROW principle, which means that CIB and the Investor enter into a trust agreement to facilitate the investment. This trust agreement ensures that investments are handled in accordance with the international standards set by the Auditing and Accounting Organization for Islamic Financial Institutions."
The Bank accepts investments and distributes the funds among the various investment options available, with investors receiving a dividend from profits as they become available. The bank will manage the Fund for a fee.
The facility offers investments in stocks of approved companies listed on all major stock exchanges, joint-venture project financing, acquisition of real estate, land development, housing finance, leasing, trade financing and trade receivables financing.
Based on its 1999 financial results, Clico Investment Bank has an asset base of US$250 million with US$36 million under management and US$14 million in equity. Last year the Bank declared US$4 million in profits providing a 29 percent return on equity.
Islamic banking as an institution has been around for the past 25 years and has come a long way in that relatively short time, capturing a significant market share from their conventional rivals in many parts of the world.
Penetration rates of Islamic Banking services in Islamic countries range from five percent in Malaysia to 12 percent and 30 percent in Saudi Arabia and Kuwait respectfully. Overall the Islamic banking system manages more than US$100 Billion and is believed to be growing by up to 15 percent annually.