Islamic Bank - Why is it Still in Business?

[Oxx]

Just been reading that the Islamic Bank of Thailand has a capital adequacy ratio of -20% (yes, minus), as against the Bank of Thailand's minimum of +8.5% (0.5% more than required under Basel III). To rectify this it requires a cash injection of 24 thousand million baht (equivalent to 674 million US dollars). Operating losses last year were 39 million baht (admittedly better than the previous year's loss of 162 million baht). The cumulative net loss is 4.6 billion baht. Non-performing loans total 40 billion baht. Attempts to find a partner to help have (perhaps not surprisingly) failed. So, why is this apparent basketcase of a bank still in business? Why hasn't the BoT shut it down on capital adequacy grounds alone?

[55Jay]

I'm not a banker but my take is it was established as a State enterprise for political expediency, and is being kept alive for the same reason.

A few years old but there are some opinions about why Islamic banking hasn't taken off here. http://investvine.com/thailands-struggle-with-islamic-finance/

[fletchsmile]

To answer the question on why "BOT" hasn't shut the bank down, I believe historically as a Specialised Financial institution it comes directly under the Ministry of Finance for supervision rather than BOT. So I don't think BOT has the authority.

Normal commercial banks are supervised and examined by BOT. MoF did assign BOT as the bank's examiner.

I believe there were also plans for BOT to become its direct supervisor as well in 2016, but I'm not sure where they are up to on that.

For its financial status, simply put it has more liabilities than assets and negative equity. i.e. it owes more than it has assets to pay for

As for

why is this apparent basketcase of a bank still in business?

answers on a postcard please

Edited June 2, 2016 by fletchsmile

[KhunOr]

That 2013 article linked in the post above explains their situation quite clearly I think.

Meanwhile they are a State owned bank (started in 2003), and account holders are covered by BOT deposit guarantees.

I checked them out a couple of months ago when they were offering 2.6% pa interest on a two year fixed deposit with interest paid into a savings account every month. About the best deal going at the time.

Edited June 2, 2016 by KhunOr

[koolkarl]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

[Oxx]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

Since they're not actually making a profit, I guess they aren't hypocrites.

But no, the Koran doesn't prohibit profit, but it does prohibit charging interest on loans. Fortunately, Islamic scholars have come up with schemes to get around this rule, so to all intents and purposes they do charge what amounts to interest, but in a sharia-compliant way.

[williamgeorgeallen]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

Since they're not actually making a profit, I guess they aren't hypocrites.

But no, the Koran doesn't prohibit profit, but it does prohibit charging interest on loans. Fortunately, Islamic scholars have come up with schemes to get around this rule, so to all intents and purposes they do charge what amounts to interest, but in a sharia-compliant way.

great answer. only one true prophet. could not find a pic of the guy to attach however.

[Naam]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

little do you know

[kingstonkid]

I think part of the reason is the word Islam. There is a definite optic that would be used if this bank were closed.

I think they are hping that they can either

a. turn it around

b. the Islamic community will help out

Then again a lot of the other Thai banks are not doing that great either.

[F4UCorsair]

They've threatened to kill anybody who questions their liquidity!!

[MockingJay]

Why are they still in "business"? Someone has to handle/channel the funds from Saudis to the people who blow up things, duh!

[fletchsmile]

The 2013 article above explains why Islamic finance isn't that popular in Thailand.

It doesn't address though the extremely poor financial performance of the bank at all.

The bank's PPOP (pre provision operating profit) has been a small loss in recent years as operating expenses of ball park 2.32bn (bank only) exceeded operating income of 2.32bn in 2015. Similar picture for 2014. That's arguably where the Islamic factor kicks in - a small loss operating loss struggling for business and critical mass.

Why it's in such poor shape though is down to very poor financial management particularly on the credit side, and the massive accumulated non-performing loans (NPLs). NPLs are running over 40%+. So almost 1 in 2 loans on their books is bad/ doubtful.

They incurred 4.6bn of bad debt expenses in 2015 and 9.4bn in 2014. That's where the huge losses come from and why it has wiped out the shareholder value and their capital base.

On the subject of deposit rates:

IBank is not covered by the deposit protection act.

It's one of around 8 specialised financial institutions that are state owned and not covered by the DPA. As Ibank is largely state owned its deposits are implicitly guaranteed by MoF and the government. Note the word implicitly not explicitly.

So yes they sometimes offer what might appear "good" rates on deposits. Take into consideration the financials, the way the bank is run, no DPA and reliance on an implicit govt guarantee and it should be clear why.

Cheers

Fletch

[nahkit]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

Since they're not actually making a profit, I guess they aren't hypocrites.

But no, the Koran doesn't prohibit profit, but it does prohibit charging interest on loans. Fortunately, Islamic scholars have come up with schemes to get around this rule, so to all intents and purposes they do charge what amounts to interest, but in a sharia-compliant way.

When it comes to paying out interest to customers, they define it as profit-sharing rather than an interest payment.

Not sure how they can do that and keep a straight face with a bank that's losing money hand over fist though.

[NickJ]

deleted

Edited June 3, 2016 by NickJ

[simple1]

There are a number of articles talking to compliance to Basel 111 in the Asia region, including Thailand, an example below

http://www.financeasia.com/News/403310,basel-iii-not-seen-as-good-fit-for-asia-banks.aspx

Fitch rating for IBank...

https://www.fitchratings.com/site/pressrelease?id=995230

Edited June 3, 2016 by simple1

[NeilSA1]

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

Since they're not actually making a profit, I guess they aren't hypocrites.

But no, the Koran doesn't prohibit profit, but it does prohibit charging interest on loans. Fortunately, Islamic scholars have come up with schemes to get around this rule, so to all intents and purposes they do charge what amounts to interest, but in a sharia-compliant way.

When it comes to paying out interest to customers, they define it as profit-sharing rather than an interest payment.

Not sure how they can do that and keep a straight face with a bank that's losing money hand over fist though.

By any other name, they are actually paying interest. They are in fact hypocrites.

[swerver]

That 2013 article linked in the post above explains their situation quite clearly I think.

Meanwhile they are a State owned bank (started in 2003), and account holders are covered by BOT deposit guarantees.

I checked them out a couple of months ago when they were offering 2.6% pa interest on a two year fixed deposit with interest paid into a savings account every month. About the best deal going at the time.

A Muslim Bank paying INTEREST?????????? Allah better doesn't get a hold of that.

[Shiver]

Maybe there was something lost in translation about prophet/profit. Whatever the case, for you and I, so far as I'm aware it is technically illegal to operate a business while insolvent. We're talking banks here though, and they all have a hill to fly their respective kites on.

I thought the koran states that it is against Islamic law to make a profit.

If so, what hypocrites.

[Goanna]

As with everything islam, according to that article, they want tThai laws to change to suit sharia. Any other people change to suit their new country. Not make the new country change for them. Think about that.

[stevenl]

As with everything islam, according to that article, they want tThai laws to change to suit sharia. Any other people change to suit their new country. Not make the new country change for them. Think about that.

New country? Laws change?

Don't let bigotry get in the way of the facts.

[Goanna]

As with everything islam, according to that article, they want tThai laws to change to suit sharia. Any other people change to suit their new country. Not make the new country change for them. Think about that.

New country? Laws change?

Don't let bigotry get in the way of the facts.

Exactly my point. Politically correct people blindly supporting a religion because they think they are hard done by.

Being naive is no substitute for facts champ.

[simple1]

As with everything islam, according to that article, they want tThai laws to change to suit sharia. Any other people change to suit their new country. Not make the new country change for them. Think about that.

New country? Laws change?

Don't let bigotry get in the way of the facts.

Exactly my point. Politically correct people blindly supporting a religion because they think they are hard done by.

Being naive is no substitute for facts champ.

All you're doing is falling for the trap of the OP to encourage Muslim / Islam bashing so let's stop the nonsense. It's a bank established by the Thai Ministry of Finance as a State Enterprise.

If you have an issue write to the Thai Minister of Finance, but before writing would suggest you first familiarise yourself with the Thai Constitution regards Islam, applicable laws and the support of the highest institution in Thailand. Muslims have resided in today's Thailand for centuries. FYI an example document of the history of Islam in Thailand is provided at the URL below.

http://www.slideshare.net/ikhwanng/history-and-politics-of-the-muslims-in-thailand

[Ulic]

For me if this is what they are reporting (assets vs. liabilities) what is the real truth. As I

understand it Many Thai banks keep old bad loan assets on the books at inflated prices

when they are in fact crumbling ruins from the 97 Asian banking collapse. So not really

sure.

[stevenl]

As with everything islam, according to that article, they want tThai laws to change to suit sharia. Any other people change to suit their new country. Not make the new country change for them. Think about that.

New country? Laws change?

Don't let bigotry get in the way of the facts.

Exactly my point. Politically correct people blindly supporting a religion because they think they are hard done by.

Being naive is no substitute for facts champ.

Yes, if you look at the facts you'll see that your 'message' here is nonsense.

[Kwasaki]

As for

why is this apparent basketcase of a bank still in business?

answers on a postcard please

My postcard... Re post # 18 :- " Maybe there was something lost in translation about prophet / profit."

[JaseTheBass]

That 2013 article linked in the post above explains their situation quite clearly I think.

Meanwhile they are a State owned bank (started in 2003), and account holders are covered by BOT deposit guarantees.

So, if the BOT (or whoever) shut them down then the BOT would be liable for the bad debt.

I think I know why the BOT hasn't shut them down...

[KhunOr]

Just providing an update for those interested in IBANK. Latest pertinent info I can find (29 April 2016) from a Fitch announcement:

The Ministry of Finance will transfer its supervisory and inspection authority over IBANK to the BOT in Q2 2016. Fitch expects this move to improve supervision and transparency and ensure that IBANK is monitored more closely in line with the regime for commercial banks. Furthermore the MOF plans to establish a Fund similar to the Deposit Protection Agency for commercial banks. IBANK will be required to remit cash to this Fund to be used to recapitalise in the event that they encounter financial difficulties.

Bottom line: "Fitch maintains the view that the state will continue to provide extraordinary support <to IBANK and other SFIs> given their key policy roles."

[patyh]

Just providing an update for those interested in IBANK. Latest pertinent info I can find (29 April 2016) from a Fitch announcement:

The Ministry of Finance will transfer its supervisory and inspection authority over IBANK to the BOT in Q2 2016. Fitch expects this move to improve supervision and transparency and ensure that IBANK is monitored more closely in line with the regime for commercial banks. Furthermore the MOF plans to establish a Fund similar to the Deposit Protection Agency for commercial banks. IBANK will be required to remit cash to this Fund to be used to recapitalise in the event that they encounter financial difficulties.

Bottom line: "Fitch maintains the view that the state will continue to provide extraordinary support <to IBANK and other SFIs> given their key policy roles."

But, once IBANK is pass over to BOT, and BOT requires IBANK to contribute to the DPA.. Will IBANK be able to pay up?

[KhunOr]

Another update.

Today I discussed the situation directly with the manager and staff at a Chiang Mai branch. They were very helpful. It was explained to me that without any doubt, customer deposits of ANY amount were guaranteed by the MoF (note not the BoT).

Then I called the IBANK call center to get a second opinion. I asked the same questions but didn't tell them I'd already spoken to branch staff. I was told exactly the same answer. Both bank staff and call center staff are adamant that customer deposits are guaranteed come what may.

I'm satisfied with that and with the Fitch review.

Their deposit rates are currently better than any other bank that I could find. A 2-year fixed deposit, paying interest to a savings account monthly, is 2.6%. Note that the rates are going down from 1 July. I was told that the new 2-year deposit rate (their best rate) will be 2.0%. They also offer 3 and 6 month deposit rates (lower).

[B1TcoinLife]

Another update.

Today I discussed the situation directly with the manager and staff at a Chiang Mai branch. They were very helpful. It was explained to me that without any doubt, customer deposits of ANY amount were guaranteed by the MoF (note not the BoT).

Then I called the IBANK call center to get a second opinion. I asked the same questions but didn't tell them I'd already spoken to branch staff. I was told exactly the same answer. Both bank staff and call center staff are adamant that customer deposits are guaranteed come what may.

I'm satisfied with that and with the Fitch review.

Their deposit rates are currently better than any other bank that I could find. A 2-year fixed deposit, paying interest to a savings account monthly, is 2.6%. Note that the rates are going down from 1 July. I was told that the new 2-year deposit rate (their best rate) will be 2.0%. They also offer 3 and 6 month deposit rates (lower).

They can offer whatever rates they wish....to attract new customers

Whether they go insolvent and you get your cash back is another matter....

Before the last recession I was getting about 7%