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The growth rate of Islamic Banking (or Sharia compliant financial services) over the last few years has been very large, with most of the British high street banks now offering at least a few appropriate products. The Australian market, at the moment, seems empty. I think this is the result of a few problems in the Australian market, not least its size. Setting up a division to chase what may only be a small market would seem to be overkill. The regulatory framework is also written around the presumption that interest will be taken and received on each transaction – although it may appear that many banks are now making more from fees than they are giving away in interest.
Other regulations don’t help – the mortgage laws here, with duty payable on each transfer of ownership (which tends to happen twice in an Islamic “mortgage”, rather than the once in a traditional mortgage) and the consumer credit laws will both need to be re-visited to make this a bit more workable.
The establishment of the IFSB (Islamic Financial Services Board) and the publication of their Basel II style standards should help on the regulatory side. Perhaps the Australian Government should take on the challenge of converting them into local regulations, following the FSA example.
All-in-all, an interesting challenge for the Banks – and it would be a good way for the government to demonstrate that they are welcoming to other banking traditions.
Feel free to make any comments or ask any question you like – just two rules: Keep it clean and keep it relevant.
Westpac’s plans to “perhaps” increase its offshoring is interesting. The published information seems to do everything but discuss which functions may be transferred – but if the number is fairly precise (400 in this case) the function they are looking at would be fairly certain. As both a customer and an occasional consultant to Westpac I just hope it is not a customer facing area.
While I do not have a problem generally with offshoring I have experienced this from a customer’s point of view while trying to deal with the Royal Bank of Scotland on a private banking matter. It was difficult, to say the least. They did not have the capacity to deal with a situation that was not on their sheets and they had no real idea of how to contact an actual branch to talk to branch staff.
If this is going to be done, it has to be done properly or the customers just feel like they are not why the bank is there. This is not good for any business.
On the other hand, the FSU just seems to want to grandstand on this. The sooner they start trying to work in a globalised economy and understand that this is going to happen and working with the banks on this the sooner they will be consulted early. The banks do not talk to them because they know that the response will be “little Australia” and “poor, oppressed worker” headlines, rather than reasoned discussions.
Update – NAB is joining in according to today’s Australian – no link to their site, but finextra carries it as well
Further Update – Indian bank workers have problems with this too. They differentiate for the western protests in this way:
However the Indian unions say their protest is different from that of workers in richer Western countries who have lost jobs to India. RJ Sridharan, general secretary of AIBOA, told the Financial Times that India is a labour-oriented country “so we need more jobs that are secure” and that developed countries “have fewer hands to work”.
. I think that idea would give the FSU apoplexy.
Two important papers on the BIS website today. The paper on sound credit risk assessment and valuation for loans should be an interesting one for those managing the credit risk areas and the one on the use of the fair value option for financial instruments also promises to be interesting for treasury and finance staff.
Give them a read and pass comments.
There is little doubt that residential lending is a major component of banks' lending activities. The current slowdown in price growth gives rise to some concern that negative equity will start re-emerging on a large scale. It has already started to appear on a small scale. What implications does this have for banks?
Firstly, it is important to note that this is not a general phenomenon. The sunshine states (those with large mineral wealth) continue to experience a boom and house prices there have not (yet) even peaked. Secondly, most banks and other lenders have limited their exposure by not exceeding 80% LVR except where LMI is used. This means that they are not exposed until at a minimum 20% of the property's value has been lost.
However, given the high propensity for people to re-mortgage and use mortgage equity withdrawals, it should be expected that a reasonable proportion of lending is towards the upper end of the LVR scale, and therefore exposed. Home lending has also become progressively less profitable for the banks as brokers, and better informed consumers, have eroded margins.
Given current capitalisation and profitability ratios I do not expect that, under any forseeable scenarios, any of the major, or regional, banks will have any serious problems. The interesting thing will be to watch for unusual movement among the smaller players in NSW, Victoria and Tasmania if the housing prices there continue to dip. Some of them may have problems and may seek to merge if things start to get ugly.
Short piece today on Bobsguide about banks underestimating the costs of Basel II implementation. This has been endemic across the industry and is fairly typical of any regulatory project. Is anyone aware of a major bank (or other institution) who has got the cost of a major regulatory project right at any stage, short of the end of the project? I think the article is SAS trying to explain to its clients why this has cost more that originally estimated.
It is a fair call from them, I should add. Banks are always difficult to price things for.
APRA have released their update to the prudential standards in response to AIFRS. Have a look here. I have not gone through them myself yet, but lets hope they are better that the transitional provisions which essentially required ADIs to account under the old standards.
The main changes are (apparently) to APS 111 on the measurement of capital and APS 220 on credit quality. Both of these would have had their major changes emanating from AASB 139 (Financial Instruments, Reconition and Measurement).
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