Tuesday, January 06, 2009

Islamic finance 'not immune' to credit crisis--Moody's; Standardization at the DIFC

Reuters came out with an article today (in response to a Moody's report [pdf]issued last week) to pierce the mistaken impression that Islamic finance is 'immune' from the credit crisis. This is something I have tried to emphasize as a note of warning (including in my 'Expert Opinion' column in Business Islamica magazine ('No room for complacency: Islamic finance faces its own risks', December 2008, pp. 24-25). Although there are a number of factors that helped Islamic finance avoid some of the most egregious products in the credit crisis, they are not immune from spillover effects in the property and equity markets, as well as general economic conditions. The Reuters article describes:
"Moody's said Islamic financial institutions in the Gulf showed strong resilience during the global financial turmoil, but that they are not risk-immune due to a shortage of liquid instruments and the lack of an Islamic interbank market. [...] Islamic banks now stand in the same firing line as their non-Islamic counterparts, facing a slump in equities valuations and a slump in Gulf real estate, to which they are heavily exposed. Even though Islamic banks avoided the speculative investments and complex financial instruments that derailed Western banks, their balance sheets still show a mismatch between assets and liabilities, and they depend more on short-term maturity liabilities than conventional banks."
Now that there is more awareness from prominent sources like Moody's and Reuters (and talk of a post-bubble Dubai), I feel a little freed up from trying to be the Cassandra and go back to writing about the aspects of Islamic finance that are the most promising.

A consultancy, Minhaj Shariah Financial Advisory (MSFA), has been named to organize a Shari'ah board for the Dubai International Financial Centre (DIFC). The Shari'ah board will provide Shari'ah rulings for companies at the DIFC and also "approach government entities and encourage the Central Bank to appoint a Shariah board to monitor the country’s banking sector". This is a positive step for the GCC region along the lines of the central Shari'ah Advisory Council in Malaysia. Unlike Malaysia, the central government will not appoint a board which decides on which products are halal and which are not and individual institutions will still be able to appoint their own Shari'ah boards, I think this is a huge step towards providing some standardization in the application of Shari'ah to financial products because it will provide comparability in 'fatwa standards' because the scholars issuing the fatawa will be the same across the companies which approach it.

Dubai-based Noor Islamic Bank is postponing its global expansion plans in the wake of the credit crisis. The Investment Dar, the Kuwaiti investment company which bought Aston Martin in a large Shari'ah-compliant leveraged buy-out in 2007, may sell 10% of the company to a Saudi investor.

As the sukuk market recovers, Turkey plans to issue its first sukuk using the ijara structure. Foreign Policy has an article about Islamic finance that provides a balanced look at proponents and critics of the industry.

Barron's has an article about the Shari'ah-compliant commodity funds being developed. Foreign policy has a balanced article about the Islamic finance industry and, in particular, the role of Shari'ah scholars.

The Islamic Financial Standards Board released a draft of new standards. The IFSB is a standards setting body based in Kuala Lumpur. It will be accepting comments over the next five months. l

1 comment:

Dubai Properties said...

Immune is not the word right no but rather exposure is what is the current scenario.