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Hello, and thank you for visiting my Seeking Alpha profile. I am a recent graduate from Boston College, with a economics degree. While there, I focused on studying financial markets of all stripes. Professionally, I am engaged in due diligence research for Private Equity clients. Personally, I... More
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Kelsey Lescop's Seeking Alpha Blog
  • Comply! : Muslim Banks Have Dodged The Subprime Bullet, But Can They Miss One Of Their Own Making?

    With a sour economy and and populist anger at the banking sector at a boil, advocates of Islamic finance are billing it as the righteous alternative to a greedy Western system.

    Islamic finance emerged in response to the desire of Muslims with rising wealth to comply with their faith in financial dealings. Scholars who specialize in Islamic finance examine assets for compliance with Islam'ssharia law. These scholars are paid by banks to provide judgment, but differences in interpretation have led to hiccups in the industry.

    Three fundamental tenants of sharia law in finance are: the prohibition of interest, the sharing of profit and risk between counterparties and the requirement for all products to have an underlying, tangible asset.

    Malaysia pioneered the concept of Islamic banking, with the first sharia compliant financing for pilgrimages to Mecca in 1962. Malaysia is also the leader in issuance of sharia compliant bonds, or sukuk, with about one third of the $82.2 billion market. With billions of petrodollars to invest, Middle Easter countries have become a pillar of the 15% per year growth of Islamic assets over the past decade. Globally, the total value of sharia compliant assets is estimated between $700 billion and $1 trillion. Great things are expected for the sector in liberal Muslim economics like Indonesia as well as Western countries with large Muslim populations. BNP Paribas, a French bank, launched the first ever issuance of corporate sukuk in Europe in the summer of 2009. In 2004, the UK certified its first sharia-compliant retail bank, the Islamic Bank of Britain.

    Islamic banking avoided the hammer's head of the economic crisis due to minimal exposure in residential real estate and derivatives markets. This dodge has lent the sector some moral credit over its besieged Western counterparts. In reality, the financial whiz kids who design sharia-compliant assets are right now working on the creation of Islamic derivatives.

    Islamic banks are not immune to the liquidity drought of the current crisis and they are heavily reliant on commercial real estate and construction projects. Corrections in Middle Easter property values could have a serious impact on Islamic financial institutions tied up in these markets.

    The sector has largely resisted efforts to regulate and standardize, on fears that rigidity would hamper creative growth. Arguments over interpretations of sharia could lead to incidents like that in 2008, when comments by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), a respected industry body, briefly ground the sukuk market to a halt. The AAOIFI declared that two popular types of sukuk violated the spirit of sharia law, leading to a substantial drop-off in issuance of these bonds.

    Still, only a small fraction of the word's 1.3 billion Muslims have turned to Islamic banking for their financial needs. As developing economies bloom and Muslims turn away from conventional banking, the sector can expect a sunny forecast. However, without serious regulation and old-fashioned prudence, Islamic banks could one day be in the same boat with the rest of the banking pariahs. Regulation is a must for the long term success of any business sector, including a religious one.

    Feb 11 10:40 PM | Link | Comment!
  • Change To Spare: How A Growing Industry Of Micolenders Is Banking To The Masses

    In the late 1970's Muhammed Yunus brought microfinance into the developing world via his home country of Bangladesh. His operation, Grameen Bank, was and continues to be enormously successful. In the 1980's, Grameen attempted to branch into the southern United States, but their lending model failed in a market where the primary need was for job training and placement. Grameen stayed away until reopening its American operations in New York in 2008. American microfinance remained under the radar until the Clinton Administration, when welfare policies shifted away from cash transfers and towards achieving development goals. Since then, domestic microfinance has grown at a healthy clip.

    What we call microfinance in the US is dramatically different from the model that came out of Bangladesh. Micro lending in the developing world means loans of around $100 or less, which are distributed to mutually guaranteeing groups of people, overwhelmingly women, who use the money to buy very basic capital goods or pay for living necessities. For example, a loan may be given to a group of women who use the money to buy a sewing machine, which they share, and use the proceeds made from selling goods to repay the loan.

    In the United States, a micro loan is considered anything under $35,000, although loans tend to fall in the $1,000-$10,000 range. Lending is more often distributed to existing small businesses or employed individuals looking to create a secondary income. American borrowers have resisted the peer lending model, and as a result, domestic lenders focus on using collateral or guarantors to support loans. Funding is typically allocated for capital upgrades, like a new painter's van or an interior renovation at a hair salon.

    All of these characteristics come with the caveat that when the borrower originates from a country where the developing-world model of microfinance is prevalent, they prefer to work with a similar model. Thus, Grameen's new office in New York exclusively uses the peer lending model and caters almost entirely to immigrant borrowers.

    The important distinction between the nature of microfinance in the United States versus Bangladesh has to do with scope relative to the economy. Grameen, with assets of just under $1.5 billion, represents 1.4% of the Bangladesh's nominal GDP. In the United States, microfinance is administered by tiny lenders who manage to serve only a fraction of the 45 million Americans who have limited or no access to mainstream financial services. An important part of the lenders' mission is to create a credit history for their clients and provide financial and business education.

    Oftentimes the loan itself is merely a part of a broader package that includes counseling, group support, workshops, access to online resources and credit building schemes. Yanki Tshering of the Business Center for New Americans (BCNA), describes micro lending as "private client financial services for a low-income clientele." The future of microfinance in the United States depends on whether or not this approach can either attract the interest of bulge bracket banks or create a few industry champions that grow to accommodate the domestic market.

    And thus we arrive at the Holy Grail of microfinance: profitability. For now, very few American micro lenders have achieved profitability outright, and those that have are still dependent on low-interest funding from banks, notably Citibank, or funding from various federal and state agencies. Grameen has managed to attain profitability by virtue of volume. Its large size allows it to live off of miniscule margins, and it's peer-lending model puts the onus of administration on the borrowers.

    Profitability will allow the sector to attract more qualified talent, which is a challenge for American lenders. More importantly, profitability allows lenders to outgrow the confines of their current capital pools, which are limited by government budgets and appetite for charity among banks and wealthy donors.

    As long as profitability eludes domestic micro lenders, the sector will continue to remain small and function primarily as a conduit for people to integrate into the mainstream system. If profitability can be achieved and stabilized, the sector has the potential to become a staple of the American financial services industry.

    [i] These changes were effected through the signing of the Riegel Community Development and Regulatory Improvement Act (1994), The Personal Responsibility and Work Opportunity Act (1996), and reform of the Community Reinvestment Act via regulatory and legislative changes in 1995 and 1999.


    Feb 11 10:39 PM | Link | Comment!
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