An article in Asian Investor magazine discusses another consequence of the shortage of sukuk: takaful asset management. Most takaful companies face significant problem in investing the premiums they receive in Shari'ah compliant ways and in many cases end up overexposed to equities compared with sukuk, in stark contrast with the investment profiles of conventional insurers. This creates an additional risk for takaful companies because equity values are more volatile than traditional fixed income products that comprise the bulk of conventional insurers' investment portfolios.
Zeti Akhtar Aziz, the governor of Bank Negara, Malaysia's central bank, describes the risks facing the Islamic financial system with greater clarity than I have seen elsewhere:
"the global financial crisis has highlighted several structural weaknesses and imbalances in the international financial system. Whilst Islamic finance is not insulated from the effects of the current environment, the Shariah principles and values that underlie Islamic finance provide an important underlying foundation. [...] As it becomes part of the financial globalization process, Islamic finance has however become increasingly exposed to the systemic implications of external developments...its potential for sustaining financial stability and... how robust is the industry to external shocks."The solutions she proposes are very straightforward to describe, but far more difficult to implement: global regulatory coordination, the development of an international interbank liquidity management market (a 'lender of last resort'). Finally, she describes the strengths of Islamic finance in a way that eschews the simplistic "Islamic finance is based on real economic activity" explanation that abounds from other sources. She elaborates that Islamic finance is seen as a facilitator of the real economy and the links between financial and productive flows acts as a check that limits excessive leverage, imprudent risk taking and speculative activities.
However, even Islamic finance is not immune from global economic shocks nor dumb lending decisions, although the risk profile of many Islamic financial products like mudaraba, musharaka and ijara, provide banks with greater incentive to do more extensive due diligence into the use of funds they provide. They will bear a greater risk of loss in many of these financing structures than they would as a conventional senior secured creditor. Her explanation should provide the beginning of a discussion that should not degenerate back into unsupported declarations that 'Islamic finance is immune from crisis' or 'Islamic finance is inherently more stable than conventional finance'. Even if they were true, they would be unhelpful in progressing the discourse into areas where improvements in the Islamic financial industry could benefit practitioners, regulators and consumers.
Another article talks with a few people about the exposure of Islamic finance to the credit crisis. A Netherlands-based author, Abdul Gafoor, describes something that I have been saying as well: "Islamic banks] go mostly for real estate and that kind of thing. And when real estate prices go down, [their portfolios] also go down. It depends on whether they invested directly in real estate or through securities. Here, you cannot make a general claim [about the strength of Islamic banking]. It depends on each individual bank -- how they behaved." Neil Miller, a lawyer with Norton Rose also observes that "The thing about Islamic banking, at the end of the day, in some respects, it is going back to banking the way it used to be done. So it is very much based on relationships, on analyzing risks, and understanding the risk and the relationships in the specific projects or company that you are looking to finance and getting comfortable with that." It is another example of what I think should be the focus in journalism about Islamic finance: avoid denials of problems and work to improve the resiliency of the Islamic finance industry in the future.
Although this is not a new announcement, the Financial Times reports on the possibility that The Investment Dar, the troubled Islamic investment bank in Kuwait, will sell at least part of its stake in Aston Martin which it acquired in a Shari'ah-compliant leveraged buyout in 2007.
The lack of secondary market liquidity in sukuk markets may affect or delay the issue of new sukuk. If pricing in the secondary markets are distorted by illiquidity, new issues may be priced less favorably for issuers.
World Islamic Economic Forum
The WIEF concluded with the issuing of the Jakarta declaration which includes a section on Islamic finance:
OVERCOMING GLOBAL FINANCIAL CRISIS:An editorial in the Jakarta Post says the country could benefit from Islamic finance through attracting funds from the oil-rich GCC, although the same conditions apply as with attracting conventional funds: Legal certainty and reasonable returns The Philippines Stock Exchange may launch a Shari'ah-compliant equity index while Thailand is planning the launch of its own next month.
- Support the efforts of the OIC to accelerate greater regional economic cooperation through the effective implementation of its 10 year Plan of Action.
- Support the Islamic Development Bank (IDB) Task Force for Islamic Finance and Global Financial Stability to promote Islamic Finance and Banking as a viable alternative to the conventional financial system.
- Call upon Governments and Islamic banks to expand Shariah compliant micro-credits.
- Support the call for effective regulations in the global financial industry to mitigate risk and failure.
- Support the establishment of Islamic Banking Training centres with harmonised standards.