Islamic banks warned against cloning models

MANAMA: The Islamic finance industry needs to develop new models and make sure it is in a position to withstand an economic slowdown, the Central Bank of Bahrain (CBB) governor warned yesterday.

Newer entrants to the industry have merely tended to copy the strategies they see being successfully pursued by their more established rivals, Rasheed Al Maraj warned delegates at the Euro World Islamic Banking Conference (Euro WIBC) in London yesterday.

"If I may say so, there is a high degree of cloning of business models," he said.

"As a result, a very high percentage of Islamic banks have a strategy that is heavily weighted towards real estate and asset finance.

"They tend to be project-driven and do not have a steady source of bread and butter revenue to tide them over any downturns in economic activity."

He said that asset-based business models favoured by many Islamic banks have not been tested in a downturn.

"We need to remember that a business model which looks robust in conditions of rising asset values and abundant liquidity may not be so when the economic environment changes," he warned.

"The industry needs to respond to these challenges by developing a greater diversity of business models, more diverse and stable income sources, and more rigorous risk management and stress testing techniques to assess its preparedness to deal with any downturn in economic activity.

"As a central banker, I am inevitably preoccupied by risk, especially when it could potentially impact on a significant sector of the financial industry."

He said the asset base of Islamic finance contrasted with that of conventional banks with their extensive loan books, overdraft and credit card facilities which provide steady revenue to cover their overheads even in today's challenging markets.

"The cloning of business models in Islamic finance leads to financial institutions becoming exposed to the same economic and industrial sectors," he said.

"The Islamic banking sector as a whole is highly exposed to the property sector - real estate, commercial property and construction - and as events in the advanced markets have recently reminded us, this sector can and does experience significant cycles of activity."

He said that in spite of these challenges, the Islamic financial industry continued to offer enormous opportunities for both Muslims and non-Muslims alike.

"We at the CBB have a continuing commitment to facilitating the development of the Islamic financial services industry," he added.

"We will continue to ensure that all financial institutions in Bahrain adhere to the very highest international standards. Where necessary we will play our part in adapting those standards to the needs of the Islamic financial services industry," he said.