Toby Birch

Articles:

By Ehtesham Shahid • Feb 26th, 2009

failed to seize the initiative; they have been woefully unprepared and lacking imagination. Some say they do not have the ambition to become a more widely used alternative.

Still, the Islamic finance industry has achieved noticeable growth, generating impressive numbers in recent years. The value of assets under management in Islamic finance grew to an estimated $700 billion last year, and is forecast to hit $1 trillion in 2010. Moody’s Investors Service puts its annual growth at 15 percent, making it one of the fastest growing financial industries in the world.

Countering contagion. To begin with, opinion is divided on whether Islamic financial institutions (IFIs) and investors have avoided the global financial meltdown. Most say they have, so far, be-cause of the prohibition on repackaging and trading debts, as well as a ban on derivative instruments such as credit default swaps (CDS). These principles kept IFIs away from “toxic assets” that drowned institutions in the West.

Kifah Salameh, a private banker in Geneva, says Shari’ah-compliant investors don’t hold stocks and debts as do conventional financial institutions (FIs), buffering them from the immediate contagion. “The absence of exposure to hedge funds preserves them from another contagion channel,” he says.

A World Islamic Banking Conference (WIBC) Competitiveness Report, released in November, said IFIs are less debt reliant and more dependent on customer deposits for liquidity, limiting their exposure to credit markets.
They may even benefit from the turmoil. Humphrey Percy, the chief executive officer of Bank of London and the Middle East (BLME), says Shari’ah-compliant principles help ensure the industry is not exposed to the same risks as conventional banks. “With risk now at the forefront of everyone’s mind, a growing number of companies and investors are looking towards Islamic finance as a viable alternative to conventional finance.”
Others back up this argument with specific examples. “IFIs would not have allowed derivatives and options and sophisticated types of treasury or structured products,” says Hassan Jarrar, the head of origination and client coverage for wholesale banking at Standard Chartered Bank in Dubai. “There are still many things that are not allowed in Islamic banking such as the use of overdraft facility.”

But that’s where the advantages may end, because if the global financial system has suffered due to inherent flaws and a lack of regulation, Islamic finance has done itself more harm than good by becoming more like conventional banking services.

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