Do Islamic financial institutions avoid high leverage?

The Bank of London and the Middle East (BLME) is launching three new funds, a fixed income fund, a distressed real estate fund and an equity fund. If these funds are well capitalized, they could benefit greatly from the economic difficulties created by the credit crisis and provide another avenue by which the Islamic financial industry gains prominence. I did find one sentence in the article to stretch a little (emphasis mine): "BLME will capitalise on an increasing appetite for Islamic finance, which protects investors from the risk of excess leverage and prevents exposure to toxic assets, short selling as well as derivatives, amid a collapsing global financial system." In general Islamic finance should protect investors from excess leverage, however, as I commented in recent post, this has not always happened: one of the factors mentioned in S&P's downgrade of Arcapita Bank was that they "view[ed] Arcapita's leverage as high".

Kuwait's Islamic financial sector is helping support the country's financial system as the conventional financial institutions run into trouble. However, there are still concerns about lax regulatory oversight in the Islamic financial industry in the country and The Investment Dar requested $1.1 billion from the government to help it refinance its short term debt and may sell part of its 50% stake in Aston Martin, purchased in 2007. The government of Kuwait has announced it will issue a sukuk backed by the banks' assets to support the banking system. In a difficult economic climate and following the developments in the financial system last fall, it strikes me as puzzling that Kuwait's financial sector is healthy with concerns over transparency in the industry while it is requesting $1.1 billion from the government and selling recently investments that it announced with great fanfare (I saw a presentation that included music from a James Bond movie along with the first slide of the presentation which read 'Bond, Islamic bond', a reference to Bond's preference for Aston Martin cars) less than two years ago. Also, two directors quit Boubyan Bank, which is partially owned by The Investment Dar, without providing explanation.

Other News

• Indonesia issued its first sovereign sukuk, which will yield 12%
  
• Despite being of relatively similar sizes, Malaysia's bond market receives less attention, according to an article in The Star. The share of sukuk in the entire bond market has risen to 36.2% from 28.9% in 2005.
  
• After its rating was confirmed by S&P (although the outlook fell to negative from stable), Gulf Finance House says it is looking at making acquisitions.