Islamic Banks More Resilient

ZAWYA:Islamic finance has proven to be more resilience to the world's economic crisis as London consolidates its position as a key western center, according to a financial services organization.

In a new report, the International Financial Services London (IFSL) found that Islamic banks had been "less affected than many conventional banks as they are prohibited from activities that have contributed to the credit crunch, such as investment in toxic assets and dependence on wholesale funds"...Continue Reading

Islamic banks less vulnerable to credit crisis

Islamic finance and banking services are shielded against turmoil such as the recent credit crunch because Islamic financing is purely asset-based financing compared to interest-charged financing by the commercial banks, an industry analyst has said.

Oliver Agha, global head of Islamic finance at DLA Piper Middle East, said yesterday that Islamic banking services are also based on partnership bases, which implies sharing of risks and profits. So the vulnerability of credit crisis is very low and this saves Islamic financial institutions from high risks, as they will own part of the assets of a wide range of products.

“Islamic finance underlines three main principles; prohibition of excessive uncertainty, interest and investing in haram, or not permissible, products,” Agha explained. “For Islamic mortgage, it is based on partnership or leasing the property. So there is no loan in Islamic mortgage, it is an equity-sharing with each party bearing the risk of equity ownership.”

Agha told Emirates Business that Islamic finance and banking is growing by around 30 per cent annually and this rate will continue during the next few years.

“Major global financial institutions are still suffering from the aftermath of the credit crisis and their expected growth rate is very low. Islamic financing is getting momentum and some estimates show Islamic finance reached $1 trillion,” he said.

“The increasing growth in Islamic finance will also create the need for new and innovative Islamic products. The industry is still new and needs a lot of support. The increasing interest and demand for Islamic products will encourage specialists to create such new products.”

Agha explained that the increasing money supply and liquidity in the GCC region would create major opportunities for Islamic banks. “The real issue is Islamic banks need consolidation and merger to establish giant financial entities. We see a lot of Islamic banks and financial institutions, but also global conventional banks are creating Islamic divisions. Global banks have long experience and strong products. Regional Islamic banks should consolidate to face the increasing competition.”

He also highlighted the issue of differences among Islamic scholars regarding Shariah compliant products.

“We need unified standards and Fatwas about different Islamic products to ensure the compliance of all products. We need to unify the perspective on vital areas so every product can be regulated. However, Islamic financial services are still in the primary stages and it will need time to reach the standardised stage.”

Islamic Banking Assets Worth RM147 Bln Last Year

KUALA LUMPUR-Islamic banking assets in Malaysia at the end of last year stood at RM147 billion, accounting for 12.3 percent of the total banking assets in the country, said Deputy Finance Minister Datuk Dr Ng Yen Yen.

The size of the outstanding corporate sukuk market meanwhile, was at RM150 billion as at December last year, she said here after witnessing the signing of a memorandum of collaboration between Islamic Banking and Finance Institute Malaysia (IBFIM), Kuala Lumpur Chinese Assembly Hall (KLCAH) and the Authority of Shenyang of China.

"Out of the total Malaysian capital market bonds approved, 55 percent were Islamic bonds. This shows the way Islamic finance is moving forward (in Malaysia) since efforts to grow the segment were established in 1983.

"And today we are considered the world's top expert in Islamic finance, where Malaysia is providing consultancies to many other countries on Islamic finance," said Ng.

There were eight full-fledged Islamic banks established in Malaysia as at the end of last year.

The spread of Islamic finance was also notable from the listed companies in the local stock exchange, with 86 percent of the 853 companies being syariah-compliant, she added.

In her keynote address, Ng however said in order to grow Islamic finance further, people should change the view that it is only for Muslims.

"Islamic finance is another financial instrument for global financial participation; be it banking, insurance, bonds, assets management and such," she added.

Islamic finance is the fastest growing segment in finance globally with an average annual growth of 15-20 percent, and it is foreseen to grow continuously, said Ng.

Thus the collaborative agreement signed today which will see IBFIM helping to introduce Islamic finance to Shenyang, the largest city in northeastern China with a population of 7.2 million, is aimed to benefit not only the Muslims there but the entire Chinese community, she added.

"Shenyang is the first `spot' in China to be so futuristic and visionary to take up Islamic finance as one of its future finance direction.

"With over US1 trillion (US$1=RM3.23) of global total Islamic finance assets to date, China itself has now come to participate in Islamic banking because they know that is where the future is and where many opportunities will be," she added.