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Islamic Finance Stands Strong in Hard Times
Global Arab Network - The Middle East Association
While Islamic banks have not been immune to the effects of the global financial crisis, they are less exposed. Nadine Marroushi considers how they might provide an alternative safe haven to conventional banking...

It has been a tumultuous year for conventional banking, where an over-exposure to debt has contributed to recessions in the world’s largest and hitherto most stable economies. The Islamic finance industry is also feeling the pinch, but the long-term prospects are not bad, particularly if it uses this opportunity to promote what distinguishes it from conventional banking, namely that interest rates (riba) and speculation are prohibited. Moody’s Investors Service November 2008 report says that “in times of crisis, clients may find it more comfortable doing business with an Islamic bank: such institutions are perceived as focusing on the basics of financial intermediation and depositors may therefore view them as safer havens less prone to excessive financial innovation.”

Global Islamic banking assets grew around 27 per cent in 2007 and in 2008 growth of 20–30 per cent is expected. But 2009 is forecast to be a tougher year, with expected growth in the range of 10–15 per cent.

On the upside, Islamic finance continues to enter new markets, with France emerging as the latest European country to jump on the bandwagon, following the boom in the United Kingdom. It has a market size of $700 billion and growing. Other emerging frontiers include Africa, where 37 Islamic financial institutions (IFIs) already operate, and East Asia, such as Brunei, Indonesia, Singapore and Japan. Malaysia has long been a traditional and highly successful centre, rivalling its other stronghold in the Gulf Cooperation Council’s (GCC’s) member states.

Crisis encourages new focus
With plummeting real estate prices in the GCC countries, views are mixed as to whether IFIs will rethink their reliance on the sector. Since sharia finance does not permit pure lending, credit is linked to a tangible asset, which in most cases is real estate. While conventional banks in the Gulf have their exposure to the property market capped, IFI exposure is not, which means that lower house prices will cause losses. But analysts are bullish, with none foreseeing IFIs getting into serious trouble; in the event they do, governments will step in to the rescue.

The collapse of Dubai’s largest Islamic mortgage lenders, accounting for 67 per cent of the Emirate’s home lending, is a case in point. Amlak Finance, 45 per cent-owned by Emaar Properties, and Tamweel, 20 per cent-owned by Dubai Islamic Bank, were the first to fail following the slump in Dubai’s real estate market. The banks are being nationalised and brought under the umbrella of a new entity called Emirates Development Bank.

Durham University professor, Rodney Wilson sees this as a positive move and told the MEA that since IFIs haven’t been relying on wholesale markets to raise mortgage finance, but have raised funds from their own depositors, they are less likely to fail. Wilson also does not see IFIs significantly moving away from real estate finance: “The problem is that some institutions, like Kuwait Finance House, are pretty good at real estate finance and to move away to something else is not so easy given their staff
and expertise.”

The Dubai International Financial Centre’s Islamic finance head, Nik Thani, sees a different trend for 2009: “The DIFC will look to promote other areas of Islamic finance, such as Islamic funds and project finance. We’re hoping that in 2009 IFIs will move away from a reliance on real estate finance. We want to encourage other areas of opportunity,” he said. Thani also said that “since 99 per cent of the global financial market is non-Islamic, there’s an opportunity to capture some of it.”

Sukuk down but still growing
The November 2008 postponement of the world’s first sterling-denominated sukuk by the UK Treasury came as a disappointment, but not as a shock to the industry. The government is instead focusing on improving legislation, such as removing stamp duty land tax on sukuks. Wilson says: “It is not connected to developments in Islamic finance, but larger developments affecting the Treasury and UK debt financing.” In terms of London’s position as a global centre for Islamic finance, he said that “there aren’t that many obvious alternatives and of course London is a centre partly because of the historical connections with the Gulf and the English language”.

One concern for Wilson is how to get the sukuk markets revived. According to rating agency Standard & Poor’s (S&P) September 2008 report: “Total issuance stood at about $14 billion in the eight months to 31 August 2008, down from $23 billion during the same period in 2007.” This is due to conditions in the global markets, but also comments by the Bahrain-based Accounting and Auditing Organisation for IFIs about the sharia-compliance of some sukuks, which is believed to be causing delays as issuers reconsider how they structure their sukuks. Despite the slow start, S&P expects total issuance to have reached $20–25 billion in 2008.

Global Arab Network

This article was first published in Business Focus (Issue 2, 2009), a Middle East Association publication produced by Newsdesk Media Ltd.


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