Islamic finance industry 'bucks global downturn'

Gulf Daily News: Islamic financial institutions have escaped relatively unscathed from the severe downturn which is affecting most conventional financial institutions. This certainly presents the industry with an opportunity to continue its successful growth of recent decades, Central Bank of Bahrain (CBB) Governor Rasheed Al Maraj told delegates at the opening of the AAOIFI World Bank Conference on Islamic Banking and Finance.

But he warned against complacency, particularly because a large proportion of the industry was involved in real estate.

"While Islamic financial institutions have been largely sheltered from the present crisis, it is inevitable that they will be affected to some degree, as they are part of the wider global economic system," he said.

"The effects of the global financial crisis on the real economy has the potential to transmit shocks to Sharia-compliant institutions as well.

"This means that there must be a very high priority placed on sound management and risk management practices at Islamic financial institutions.

"The sensational growth of the industry in recent years, combined with high levels of liquidity, has meant that Islamic banks have not needed to fight for funding or ideas.

"New entrants to the industry have merely tended to copy the strategies they see being successfully pursued by their more established rivals.

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

"The downturn in global economic conditions will provide these business models with a stern test," he said.

"Project-driven business strategies will be affected by the reduction in global liquidity and the slowing of global economic growth.

"Islamic financial institutions will need to plan and prepare for these more challenging operating conditions.

"The industry needs to respond to this challenge 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," he added.

The CBB has issued guidelines stating that Bahrain banks should have a maximum of their lending in real estate.

Speaking on the sidelines of the conference, he said that Bahrain banks did not have too much exposure.

"We have not really decided which level exactly we will adopt. Obviously we do not want to create a negative impact."

Asked if the bank's regulations on real estate holdings would be implemented by the planned January 1 deadline, he said that depended on the progress they made.