Islamic finance escapes worst of crisis

The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.


The Islamic finance industry has been relatively, although not completely, immune to the effects of US subprime problems, the ensuing credit crisis and global economic downturn.

“I have not found any Islamic bank that has lost money by exposure to toxic assets – because they were forbidden,” says Humayon Dar, chief executive of BMB Islamic, one of the biggest managers of alternative investments for Muslims.

Indonesia easily raised $650m (£397m, €459m) recently with the first global dollar-denominated sukuk Islamic sovereign bond of 2009. The issue was oversubscribed, and set an encouraging example for Bahrain’s expected $1.5bn-$2bn of sukuk in May 2009.

Nevertheless, issuance of sukuk – or Islamic bonds – fell by more than half in 2008, to $20bn. But difficulty raising money was inevitable as the financial crisis led investors to shun debt, whatever their religion.

There is evidence that what happens in the world of conventional finance affects the Islamic financial world with a time lag. The first signs that US problems were worse than expected, and could have international repercussions, emerged in the middle of 2007.

“All of a sudden there was a lack of liquidity,” Mr Dar says.

“Mainstream markets started to fall at that point, but that struck Islamic banks only in September 2008, [although] they were affected indirectly.

“Because they did not lose money, they are in a relatively better position than their [conventional] counterparts.”

As a result, Islamic banks have more funds as compared to conventional lenders. They have not had to rebuild their balance sheets in a panic, or seek emergency help from governments.

“Once the opportunities are there in the market, they will be able to capture them in a better way than their traditional counterparts,” says Mr Dar.

Western banks have been active in Islamic finance – both institutional and personal – for a while now. They often have superior marketing skills to regional competitors.

But that has not guaranteed success. “They haven’t done as well as fully fledged Islamic banks have done,” Mr Dar says.

“There’s a perception in the Islamic world that they are in Islamic finance because they are making money. Once they are not, they will wind up their operations.”

Muslims, he says, are more likely to trust in fully fledged Islamic banks that will stay in the sector through thick and thin.

But at the same time, some Middle East banks have relied on what he calls a “sharia premium” – expecting Muslims to bank with them simply because they are Islamic, and failing to provide competitive services. That is changing.

“Even in Gulf Co-operation Council countries, there is an indication the sharia premium is going down,” he says. “Islamic consumers are becoming more demanding.”

Islamic banks should also learn from western counterparts such as UBS and HSBC on issues of corporate social responsibility. “This is something that western banks have excelled at,” he says.

“You pick any Islamic bank. They don’t have a well defined corporate social regime that they must follow. They have been charitable.

“But corporate social responsibility isn’t just about charitable giving. It’s about all the stakeholders. You have to be seen to be serving the community.”

Mr Dar is particularly critical of Islamic institutions that have seen a big rise in profits in recent years and kept the money to themselves.

“It’s wonderful to be profitable, it’s even more wonderful to be equitable in your distribution of profits,” he says. “Islamic banks should be distributing benefits among stakeholders.”

Depositors should receive more money as a result of banks’ bigger profits, he says, and he is particularly critical of overpaid executives. “If the benefits are going to bankers in the form of bonuses, then you are not really benefiting all the stakeholders.”

source : cibaif

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