Islamic finance could appeal to investors damaged in the credit crisis; new sovereign sukuk

Continued woes in the conventional financial system may make Islamic finance attractive as the industry has not been significantly affected by the credit crisis. A few issuers have delayed sukuk issues, but there have been no writedowns since Islamic financial institutions do not participate in any of the markets for products that were at the center of the credit crisis. Islamic financial institutions had no exposure to toxic products like CDOs and Auction Rate Securities because they do not pass the relatively conservative Shari'ah screens adopted by the industry. The Reuters article linked to did note one way where Islamic finance may be more risky than conventional finance—Shari'ah screens exclude several asset classes, reducing the possibility for diversification. One asset class that is heavily overweighted in the GCC region is real estate. Mohamed Damak at Standard & Poors comments: "A correction of the real estate sector would impact Islamic banks involved in this business line. Islamic finance is not immune from risk"

The Indonesian sukuk could spur greater development in the Indonesian sukuk market. As of July 31, there were 4.18 trillion Indoonesian Rupiah ($488 million) in sukuk outstanding, comprising about 5% of the total corporate debt market. In Malaysia, by contrast, sukuk account for nearly 1/3rd of total outstanding corporate debt.

Islamic finance practitioners in the UK expect the number of Islamic investment banks based there to double to 10 in the next five years as part of the international growth of Islamic finance, growing by an estimated 15 percent per year.

Malaysian bank Hong Leong is the first to receive a license to offer Islamic banking services in Hong Kong. Two other banks, Standard Chartered Bank and Royal Bank of Scotland, announced plans to begin offering Islamic banking through subsidiaries in Malaysia. Standard Chartered has received a license and RBS plans to apply for a license.

RGE Monitor analyst Rachel Ziemba provides an analysis of the recent Moody's report on Islamic finance, particularly relating to the influence of GCC sovereign wealth funds in the Islamic finance industry.

An Israeli lawyer working in London suggests that cooperation between Israelis and Palestinians could be helped if Israeli banks began offering Islamic finance or even a sukuk.