Islamic banks could be facing new pressures in the wake of the financial crisis that hit Dubai last month.The Islamic financial system expanded around the world during 2009 thanks to the relative immunity it appeared to enjoy as the conventional banking business was engulfed by the crisis triggered by a meltdown in the US housing market about 18 months ago.
However, the image of the booming Islamic finance sector seemed to have been marred by the state-run Dubai World conglomerate move at the end of November to ask creditors of two of its flagship real estate firms-Nakheel World and Limitless World-for a standstill on debt worth 59 billion dollars. The two subsidiaries are run according to Islamic law through the issuance of billions of dollars worth of sukuks.
Some analysts expect the Islamic finance industry will now be forced to face a key test as a result of the uncertainty created by the Dubai World debt crisis.
But Hanaa Hunaiti, professor of Islamic Economics at the Amman Arab University for Higher Studies, believes the problem has nothing to do with Islamic finance.
"Nobody said that the problem was because of sukuks, which as a matter of fact can lead either to profit or loss according to Islamic law," Hunaiti told dpa.
"I believe it is a short-lived ordeal that certainly will be dealt with in a satisfactory manner, given the assurances made by UAE officials that the emirate will be able to repay all its debts," she said.That said, however, other analysts believe the focus of Islamic finance could now shift away from Dubai to Saudi Arabia, Qatar and Bahrain in 2010 pending the settlement of the Dubai World debt crisis and as the uncertainty it caused in global markets.
Highlighting a possible shift away from Dubai, the Saudi chambers of commerce released a report this month saying it expected investment funds to change their direction from Dubai to Saudi Arabia. "An opportunity now exists for Saudi Arabia to lead the forthcoming wave of the Islamic finance industry in the Gulf as the kingdom possesses all qualifications of this leadership, including the necessary infrastructure and guidelines," the report said.In the meantime, however, the widely perceived view that Sharia-compliant financial institutions had managed to largely side-step the global credit crisis has helped to present the Islamic financial industry to many non-Muslim investors in the world as a safe haven from speculative excesses.
"We have reports that countries like France, Australia and Japan are now mulling the introduction of Islamic banking into their financial systems," Musa Shehadeh, General Manager of the Jordan Islamic Bank told the German Press Agency dpa.
"These countries are reportedly considering the amendment of their laws to incorporate the Islamic finance system and adding Islamic banking to the curricula of their universities," he said.
Investors traumatised by the credit crisis apparently found comfort from the stricter rules imposed on lending by Islamic law, which considers the payment of interest as usury, thus banning the structures and financing methods that quickly unravelled during the US mortgage crisis at the end of 2008, Shehadeh said.
According to a study published in November by the Banker Magazine in association with HSBC Amanah, Islamic finance continued double digit growth despite global crisis in 2009.The survey, that covered top 500 Islamic financial institutions, showed that assets held by fully Sharia-compliant banks or Islamic banking windows of conventional banks rose by 28.6 per cent, to 822 billion dollars from 639 billion dollars in 2008. This result contrasted sharply with a Banker study released in July which showed that the world's top 1,000 conventional banks achieved an annual asset growth of just 6.8 percent."
The Islamic finance industry continues to build a solid track record: the compound annual growth rate for 2006-2009 is 27.86 per cent, with assets forecast to hit 1.033 trillion in 2010," the study said.The six Gulf Co-operation Council (GCC) member states remained the dominant segment of Islamic finance, with 353.2 billion dollars or 42.9 per cent of he total global aggregate, according to the study.Iran remains the largest single market for Shariah-compliant assets, accounting for 35.6 per cent of the global aggregate.
Outside the Middle East, Malaysia is by far the largest player, accounting for 10.5 per cent of the global aggregate, but other markets are expanding rapidly. Britain now accounts for just under 2.5 per cent of the world's Shariah-compliant assets." Apparently, Islamic finance sectors are attracting larger amounts of investment funds against the backdrop of being the least affected as a result of the global financial crisis," said Salah Shalhoub, professor of Islamic Financing at the Dhahran-based King Fahd University for Petroleum and Minerals.
"Demand has also substantially increased for Islamic tools and bonds, known as sukuks, due to the shortage of liquidity that can be obtained from conventional banks," he added.
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