Basel III and Islamic finance: friend or foe?

20/11/2012 11:27 AST

HSBC previously had the largest Islamic banking operations of any western bank. There was some speculation that this pull-back was due to HSBC losing confidence in the long-term profitability of Islamic banking, or that it was not an efficient use of the bank’s capital, particularly as the bank needs to shore up to meet its own Basel requirements; however, the bank retains its wholesale Islamic banking operations and HSBC itself claimed that it would still retain 83% of its Islamic banking revenue after the substantial scale-back.

Barclays and Deutsche Bank are also understood to have scaled back Islamic finance operations, and there has been some speculation that Standard Chartered might be facing difficulties. Both HSBC and Standard Chartered declined to be interviewed for this article while Barclays and Deutsche Bank did not comment by press time.

Islamic banking commentators were quick to deny that this was because of any fundamental problem in Islamic banking, however. Shenoy says: “If conventional banks are moving away from Islamic finance, it’s not because of lack of attractiveness, it’s because they have to get their house in order in their home markets.” Though he did acknowledge that conventional banks could view that operating Islamic banking units or windows to be more expensive from a funding perspective given the restrictions on leverage. Shenoy also emphasises that “Basel III will allow an orderly growth of Islamic banks in light of the level playing field.”

One chief executive of an Islamic bank in South-east Asia commented that less involvement from foreign players would be bad news in that more diversity of players helps the market grow, but believes the problem is not severe. “We will miss them, but this is not the end of Islamic finance,” he says.

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