Islamic finance stakes its claim

Edie Lush

17 October 2009

Banking governed by Koranic principles is a rare growth market in a shaken financial world, says Edie Lush — but is it really more stable than its Anglo-Saxon equivalent?

The clash of civilisations between the Muslim world and the West takes many forms. Even on the financial front, there are deep differences of philosophy in relation to money, debt and profit. But at a time when the Anglo-Saxon mode of banking is flat on its back after the credit crunch, its Islamic counterpart is gaining wider acceptance, and even laying claim to be a more stable alternative.

The requirements of Islamic finance — lower proportions of debt to equity, a condition that the lender share profits and losses with the borrower, and a focus on transactions based on tangible assets — mean that Islamic banks have not become entangled in the toxic debt instruments that sideswiped Western banking giants. And while most of the West’s banks were in crisis, Islamic finance continued to grow — by about 15 to 20 per cent in each of the last four years.

Islamic traditions of trade financing can be traced back many centuries, but the first modern bank to operate according to sharia principles drawn from the Koran, Dubai Islamic Bank, did not open until 1975; today, more than 300 such banks operate in some 75 countries. In Asia and the Gulf Co-operation Council (GCC) countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) Islamic banking assets and wealth under management have reached $736 billion.

Meanwhile, Moody’s expects the market in sukuk (Islamic bonds, designed to give investors effective ownership of the underlying assets that are financed) to rise to $123 billion in outstanding issuance this year, despite a fall in new issues by some 56 per cent in 2008 compared to 2007, and some high-profile recent defaults.

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