In the case of Islamic banks, they may not necessarily offer this additional capital in a Shari'ah-compliant investment; banks will either take the capital (offering the rationale that it was only taken to ensure the survival of the institution) or close its doors if it cannot find other sources of capital. As I understand it, most Shari'ah scholars would find this outcome unpleasant, but ultimately approve it on the basis of necessity (darura).
An article in The National (UAE) describes the additional risk held by Islamic financial institutions in a collapsing property market:
"The problem is particularly acute because of the off-plan model adopted in the Emirates, where a buyer signs up for a home but pays only 10 per cent until it is built. Under Islamic finance, the bank stumps up all the instalments to the developer during the construction period, but does not start recouping its outlay until after the building is complete, which can take three to five years. Banks typically finance 90 per cent of the purchase and are liable for all instalments to the developer during the construction phase, while the buyer pays nothing.
Under the Islamic model, the lender takes all of the equity risk, while the end-user signs a separate lease agreement with the bank. This exposes Islamic banks to potentially greater liabilities than conventional mortgage banks. As prices continue to fall, there is a large and growing incentive for property buyers and banks to foreclose on home finance.
There's an article that doesn't present much new information, but is one of few to focus on the Islamic home finance co-operatives, an institutional form that started predominantly in Canada and have been largely ignored in articles about Islamic finance in the U.S. Despite their small size, they provide arguably a better model (at least in terms of demonstrating the risk-and-reward-sharing that Islamic finance claims to espouse) than the lenders which sell Islamic loans to Freddie Mac and Fannie Mae.
The Islamic finance industry in the U.K. is larger than in Pakistan when measured by total assets, according to a new report from the International Financial Services London, an organization that promotes London's financial industry. The entire report, Islamic Finance 2009," is available as a PDF and the Excel versions of the tables in the report are available from IFSL's website. Other highlights include:
- "The Islamic finance industry has felt the influence of the credit crunch and downturn in the global economy in 2008, with a drop in Sukuk issuance and a fall in the value of equity funds. Islamic banks, however, have been less affected than many conventional banks because they are not exposed to losses from investment in toxic assets nor have they been dependent on wholesale funds, as they are prohibited from these activities."
- "Western countries in Europe and North America. Countries such as the US, France, Germany and the UK each have indigenous Muslim populations of between one and five million. Moreover, the customer base in Western countries is not necessarily restricted to Moslems: other customers may be attracted by the ethical and environmental basis of Islamic finance."
- "Islamic banks, like conventional banks, need to have appropriate capital and adequate access to liquidity and manage risks appropriately. This includes managing their exposure to bad debts arising from the general downturn in business."
- "Sukuk issuance fell away during 2008 to an estimated $20bn. Key contributing factors were a decline in asset valuation, a lack of liquidity and a lack of market confidence. [...] Although market activity has fallen away, particularly in the second half of 2008, the long term prospects for Sukuk are positive once markets recover."