Islamic banks take share of the pain

Islamic prohibitions against fixed interest and most complicated financial instruments have helped Islamic banks avoid the avalanche of derivative debt losses that have wreaked havoc across the world financial system.

Islamic prohibitions against fixed interest and most complicated financial instruments have helped Islamic banks avoid the avalanche of derivative debt losses that have wreaked havoc across the world financial system. Devout Muslim investors have also fared better when buying global equities that do not violate Islamic principles. Shariah screening has shielded them from exposure to over-leveraged corporates, conventional banks, gaming companies and sellers of alcohol such as hotel groups, all of which have suffered from precipitous drops in value. The FTSE All-World Index has shed 42.3 percent over the past 12 months, while the shariah-compliant version of the index has lost 37.6 percent over the same period. But have investors in Gulf-based Islamic banks enjoyed a better time than shareholders in conventional ones?  Evidently not. Since oil prices peaked last July, regional Islamic banks have shed 45 percent of their value, compared with a 39 percent slide of their conventional brethren, according to Nomura, the Japanese investment bank.  As markets have picked up in recent months, Gulf Islamic banks have climbed 11 percent, while conventional banks have risen 10 percent. “The fact is that overall they haven’t performed that differently,” says Tarek Fadlallah, Executive Director of Nomura in Bahrain. “You have good and bad Islamic banks, just like you have good and bad conventional banks.”  On one side is Al Rajhi Bank, a conservative Islamic lender in Saudi Arabia. The world’s largest Islamic bank has lost only 22 percent of its value since July and now has a higher market capitalization than Citigroup.  In contrast, Dubai Islamic Bank, the world’s oldest Islamic bank, has seen its shares tumble 72 percent over the same period, partly because of alleged scandals and concerns about its real estate exposure. Both banks have still reported profits that would now be the envy of many western financial institutions, although DIB’s results have been tempered by some heavy writedowns related to the alleged scandals. But the global economic crisis hit the Gulf region later than developed markets and some economists say it is still to feel the full effects of the worldwide recession. Indeed, analysts warn that Islamic banks could be more exposed to effects of the credit crunch in the future than conventional institutions, with their exposure to property held up as a crucial risk.  There are exceptions but most Islamic banks have a higher exposure to flagging real estate markets than conventional institutions. This is because of the restrictions on investments in many asset classes and the shariah requirement to have a physical asset underlying all Islamic transactions. Link: http://www.cibafi.org/NewsCenter/English/Details.aspx?Id=3195&Cat=0