Product lack hits Islamic lenders' growth-Moody's

MANAMA, Aug 11 (Reuters) - The growth of Islamic lenders is hampered by a lack of products to absorb abundant liquidity in their markets, said ratings agency Moody's.

Moody's said its ratings on Islamic banks were stable thanks to ample liquidity, high profit margins and conservative approach to lending.

"(Islamic banks) benefit from abundant liquidity, which is a very positive factor in an economic downturn," Anouar Hassoune, a vice president at Moody's said in the statement late on Monday.

"However, if such excessive liquidity is left underutilised, the lack of an innovative range of assets could slow growth during and economic boom."

The nascent Islamic finance industry is still developing many of the products used by their conventional peers. Moody's said Islamic lenders also lacked long-term sources of funding. "This awkward situation is largely due to the fragmentation of the Islamic finance industry and the varying opinions among Islamic scholars on the legitimacy of sharia-compliant products," Hassoune said.

"(Islamic banks') underdeveloped funding portfolios are not nearly sufficient to maintain their performance and allow them to develop into a dominant regional financial industry."

Islamic banks, which cater to investors who want to avoid paying or earning interest, which is prohibited under Islamic law, mostly rely on short-term customer deposits for funding.

Moody's said banks needed to develop better corporate governance and risk management to deal with the mismatch between assets and liabilities on their balance sheets. (Click on [ID:nISLAMIC] for more Islamic finance stories and ISLAMIC for a speed guide) (Reporting by Frederik Richter; Editing by Rupert Winchester)