Islamic finance not immune to global woes
DUBAI (Reuters) - Islamic banks and financial institutions are not isolated from a global credit crisis, which is plaguing conventional lenders, although they have been barely bruised so far, bankers said this week.
But falling property and commodity prices and slowing economies are starting to affect the sector.
"The problem is these physical assets, be it commodities, be it equities, stock markets, stocks, be it real estate, their prices were affected and this is where Islamic finance is affected," Henry Azzam, chief executive for Middle East and North Africa at Deutsche Bank, told the Reuters Middle East Investment Summit.
Falling prices in mainly Muslim countries in the Middle East and Southeast Asia are likely to affect the Islamic finance market due to heavy reliance on such assets to support deals.
Stock markets across the Gulf Arab region have plunged over the last few weeks, as bourses have tracked global markets lower, with Dubai .DFMGI down more than 50 percent so far this year and Saudi Arabia .TASI down more than 45 percent.
"For me, we heard many people saying that if you are an Islamic bank you will not be affected," said Amani Bouresli, professor of finance at Kuwait University.
"I don't think it is a matter of conventional or Islamic, I think it is a matter of management."
Bond sales have almost dried up in the second half of this year as the global credit squeeze has raised borrowing costs, prompting many Gulf borrowers to shelve sukuk, or Islamic bonds, sales as banks become more reluctant to lend.
Mohamad Alchaar, secretary-general of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) told a conference in Dubai last week that only $14 billion worth of sukuk had been issued so far this year, compared with $40-50 billion last year.
"There are lots (of deals) in the pipeline but all of them are frozen for the time being ... we are talking about IPOs, we are talking about sukuk ..." Azzam said.
Sukuk are designed to comply with an Islamic ban on the receipt of interest. Instead, returns are derived from underlying physical assets, such as property.
But despite the exposure of Islamic finance sector to the global financial crisis, many investors see it as safer than conventional finance, with sharia-compliant products still in demand, and a more attractive option.
"Islamic banks now are the ones that are overflowing with liquidity because ... people want to keep there money in Islamic banks," Ahmad Alzabin, chairman of Kuwait's Aviation Lease & Finance Co (ALAF.KW) (Alafco) said.
Major Gulf Islamic lender Kuwait Finance House (KFIN.KW) (KFH) said it was going ahead with expansion in the Gulf and in Asia, due to demand for Islamic banking.
The bank is also considering expanding into Hong Kong where the government had invited it to explain the business model of Islamic financing.
"Whether it's Islamic or not is not going to be the differentiator," said Hazem Shawki, managing partner at Egyptian bank EFG-Hermes. " What does make a difference is that there is a lot of demand for projects to be sharia-compliant."
(Reporting by Jason Benham; editing by Hans Peters)
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