Islamic banks face risks abroad - Moody's

MANAMA May 11 (Reuters) - Islamic banks face new risks as they increasingly leave their safer home markets to expand abroad, ratings agency Moody's said in a report released on Monday.

Only a few larger Islamic banks such as Kuwait Finance House (KFIN.KW) or Dubai Islamic Bank DISB.DU have so far sought to grow outside their home markets.

Many smaller banks still benefit from the low penetration of Islamic banking products in some Muslim countries, such as Indonesia or Turkey.

But in the more mature markets, such as Malaysia, Sudan and most countries within the (Gulf Arab region), "low-hanging fruits have already been picked," the report said. In these markets, banks need to compete with conventional banks over customers or venture into new markets.

Growing outside home markets offers the long-term benefit of diversification, but brings short-term risks, the report said.

"Until Islamic banks have seasoned their overseas operations and demonstrated that they are able to deliver stable earnings, increased risk profiles may outweigh any benefits," it said.

It said international markets are less familiar to Islamic banks and would be more volatile.

Moody's also said that while Islamic banks are similar to their conventional peers in the underlying economics, they bear some unique risk features.

It said their liabilities are concentrated, as a relatively small number of Islamic banks participate in the inter-bank market for which instruments compliant with Islamic law are still being developed.

"Liquidity management is structurally more challenging at Islamic banks because there is still a significant shortage of liquid instruments, despite the efforts of the various central banks to provide a variety in which Islamic banks can place their surplus cash," the report also said.

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(Reporting by Frederik Richter; Editing by Erica Billingham)