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United Arab Emirates Bailout?

Will cooperation within sectors or Islamic banking save the Emirates' and Gulf Arab markets?

Hazel Heyer, eTN Staff Writer  Apr 21, 2009

A United Arab Emirates-based real estate expert has called on industry professionals including government agencies such as RERA to help create a coordinated package of measures to kick-start the UAE property market. Government agencies, property developers, banks, insurance companies and brokers need to agree on a combined solution to support sustainable sales drive, according to Mohammed Nimer, CEO of mid-market property development company MAG Group Properties that is involved in AED3 billion worth of projects in the UAE.

“Each interest group is having a modicum of success, but it would be far more effective if all interested sectors worked together - from investment and development right through to the hand over,” he said.

Nimer welcomed recent moves such as HSBC bank raising its loan-to-value (LTV) ratio to 75 percent and the decision by other banks and developers to tailor repayment packages for buyers experiencing financial difficulties. HSBC re-entered the mortgage market recently. The bank, which all but pulled out of the home loan market in the UAE due to the liquidity crunch, now offers better-term (75 percent) financing on completed villas, 70 percent on completed apartments and 50 percent on off-plan units.

However, these isolated acts, although extremely positive, are what Nimer highlights. “In isolation these unilateral measures by individual organizations will have limited effect. For example, if a buyer can’t manage a 25 percent deposit the sale falls through. Easy payment terms are good news for existing investors, but they don’t address new sales,” explained Nimer.

Still many in the Arab world and elsewhere, including in the West wonder if Arab banks or the Islamic banking system will get us out of this economic mess. The Boston Consulting Group (BCG), in a recent study on Middle East-based banks, said that it expects to see healthy but reduced revenue growth over the next five years as the banks emerge from the economic crisis in a stronger position than many in the global industry. It added that banking revenues for the region's largest banks from 2005-2008 had grown by an average on 17 percent. While the global banking industry has been stumbling from one crisis to the next, leading Middle Eastern banks had performed consistently and strongly, the study added.

Some claim that the Islamic banks have survived the global financial collapse and thus, will be the saving grace. The argument is based on what was published in L’Osservatore Romano, the semi-official Vatican newspaper that said that banks should look at the ethical rules of Islamic finance.

In Europe, there are talks about EU banks jumping on the wagon for Islamic banking bailout. “The reason is the recent financial crisis which has led to the failure of the capitalist and socialist economic systems has the only solution, it seems in resorting to the Islamic economy,” said Wail Lutfi of Rose Al Yusuf news. He said the most prominent part of these talks focused on the Western confessions of the great success of the system of Islamic economy, which was not applied in the West before. The official Vatican paper, L’Osservatore Romano, published what is interpreted as an invitation to adopt Islamic financial styles “for they include moral principles that would create trust between clients and banks in Europe.”

“There is nothing in this that makes me happy, especially if we remember a similar campaign encouraging the concept of Islamic economy in the 1980s in Egypt,” Lutfī said. “This campaign led to the crisis of Egyptian capital investment companies that manipulated these Islamic concepts to fool thousands of Egyptian families who trusted such companies and lost their money.”

Despite this, banks in Europe started to call on Muslim investors to invest their money in Western banks guaranteeing that they would follow Islamic economic concepts that are based on varied interests depending on the world’s financial conditions.

But Ahmad Qurah, chairman of an investment bank in Egypt, said that the financial crisis does not differentiate between Islamic banks and commercial ones. The prompt merger of banks implemented by the Central Bank protected Egyptian banks from the effects of the financial crisis. Also, the absence of new investments and lending has provided liquidity.

Meanwhile, Iman Matar of Rose Al Yusuf reported that a bank operating in Egypt has launched the first Islamic credit card which is based on al-murabahah -- a particular kind of sale, compliant with Shariah, where the seller expressly mentions the cost he has incurred on the commodities to be sold and sells it to another person by adding some profit or mark-up thereon which is known to the buyer.

Will cooperation within sectors or Islamic banking save the Emirates' and Gulf Arab markets?
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