Sunday, May 10, 2009

RGE Monitor stress tests the Islamic finance industry

RGE Monitor has an article providing an informal stress test of the Islamic finance industry and it provides only a stitching together of a few themes that I have mentioned on this blog.

Capitalization of IFIs:
"Preliminary estimates for the sector (but not individual banks) suggest that most are relatively well capitalized but most still have relatively small market shares. Moreover the rate of growth of Islamic bank assets and of funds placed in Sharia-compliant securities and funds is likely to be significantly slower than many predicted in 2008 as slower growth and tighter liquidity restrict the funds to be invested."
Impact of asset prices on Islamic finance:
"The core of Islamic finance stipulates that financial transactions should be backed by real assets - In practice, real estate and sometimes commodities. As a result, Islamic banks are greatly exposed to the ongoing property sector downturn and a phase of price correction especially in the GCC. Thus any stress scenario should factor in at least another 40% drop in property prices in Dubai and considerable drops in other markets. Islamic banks operating in advanced economies like the UK or the US are also exposed to such property declines. However, at least in the U.S. the community banks focused on Islamic finance may suffer fewer delinquencies than their counterparts given a reluctance to lend to subprime borrowers and lack of securitization."
Exposure to global credit markets, liquidity and Shari'ah-compliance issues:
"The absence of liquid Sharia-compliant asset classes does create a challenge to managing liquidity among the Islamic financial institutions. Moreover many securities are based off of libor providing a vulnerability to global credit conditions. Following the liquidity crunch, global sukuk issuance worldwide reportedly declined to $20 billion in 2008, compared with more than $40 billion a year earlier. Nonetheless, although the liquidity crunch of 2008 and pressure on most asset markets contributed to a drop in the global level of sukuk issuance (as it did to conventional bond issuance and equity public offerings), it was not the only factor. Concerns about the Sharia compliance of several sukuk structures contributed to lower demand even before liquidity conditions worsened in the gulf. This uncertainty as well as the regulatory issues will be a check to growth until resolved."


Other News

No comments: