The Effects Of The Global Crisis On Islamic Banking

The Effects Of The Global Crisis On Islamic Banking

Like their interest-based counter-parts, Islamic banks have been badly affected by the global economic crunch which has already caused the property markets in the GCC region and elsewhere in the world to stagnate. Dubai’s property market, which until mid-2008 used to be the most booming in the GME,

now is the worst sufferer of the crisis (see gmt24GCC-BanksDec8-08).

It was only in July 2008 that Moody’s Investor Service foresaw a golden era for Islamic banking and shari’a-compliant finance. It then “conservatively” estimated the global potential of the Islamic banking market at $4,000 bn, compared to $700 bn at the time – most of it in the GCC region. With such potential, Moody’s then said, it had become clearer why governments, eager to please their Muslim populace, were encouraging more Islamic banks to start up and expand outside domestic markets.

Yet the Islamic banking industry brings with it a new set of risks for managers to handle. These institutions are hamstrung by the lack of a viable Islamic inter-bank market. While deposits may be redeemed immediately, Islamic bank assets are usually backed by real estate, and are therefore illiquid. This forces Islamic banks to hold more cash or liquid assets than conventional peers to pare illiquidity risks.

The Islamic al-Hilal Bank in Abu Dhabi and Noor Islamic Bank of Dubai then were new and in a good position to ease liquidity requirements because of the financial muscle of their backers, the local governments of Abu Dhabi and Dubai. But the Dubai government now is in crisis and awaiting a bail-out from the emirate of Abu Dhabi.

By mid-2008, Alinma (or al-Inma’) Bank in Saudi Arabia had launched with a capital of SR15 bn ($4 bn) raised in an initial public offering (IPO). In Bahrain, the Saudi tycoon Saleh Kamel, who controls the Shari’a-based Dallah Albaraka Banking Group, was then reported to be planning to found an $11 bn institution called Ummar Bank in 2009. No progress has since been reported of Kamel’s plan.

High oil prices were the main factor to the growth of Islamic banking in recent years. It was said in mid-2008 that Islamic banks with hefty balance sheets were not only to gain more retail customers through extensive branch networks, which were often capped in the GCC region for international banks such as Standard Chartered and HSBC, but also were to capture a larger slice of the vast infrastructure finance projects then planned in the region.

Anouar Hassoune, a banking analyst at Moody’s, in July said: “There’s an indirect but powerful link between the Islamic financial industry and the performance of the oil market. As long as oil remains expensive, which is our base-case scenario, Islamic banking will keep on growing successfully”. Now, however, the situation is quite different.

In mid-2008, al-Hilal Bank followed on the heels of the Dubai government-backed start-up, Noor Islamic Bank, where various government agencies and Dubai dignitaries contributed Dh3 bn in initial capital. Both institutions had stressed that this was but the beginning and had talked of regional and even global ambitions. The FT on July 8 quoted Sameer ‘Abdi, head of Ernst & Young’s Islamic finance division, as saying: “This could get very exciting. Size matters. The smaller Islamic banks are doing well, but in niche markets and with niche products, not as universal banks”.

Yet the speed and scale of the start-ups then were already creating risks: lack of the human resources to run such banks. The new entrants and the expansion plans of existing large Islamic banks, such as Dubai Islamic Bank, Kuwait Finance House and al-Rajhi Bank in Saudi Arabia, were in mid-2008 straining the dwindling stock of bankers familiar with Islamic finance. ‘Abdi said: “The new institutions are struggling, as are the older ones, which are losing talent to the newcomers”.

The FT then quoted ‘Eissa Muhammad al-Suwaidi, the bank’s chairman, as saying: al-Hilal Bank found it “very, very difficult to recruit” the staff it needed. There was some ‘bartering’ involved”. Al-Hilal and other banks had thus been forced to recruit staff from conventional banks, both regional and international, and to retrain them in the principles of shari’a-compliant finance. Now, however, some of them are down-sizing and more lay-offs are expected in the coming months.

SOURCE: http://www.allbusiness.com/banking-finance/financial-markets-investing-securities/11731053-1.html