May 28 2009
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Financial crisis presents opportunity for Islamic banks
The report The development of Islamic finance in the GCC, authored by Professor Rodney Wilson (1), points out that the Islamic banks have been less adversely affected than the major international banks by the 2008-9 crisis, making them more attractive to investors.
Gulf Cooperation Council(2)-based investors in conventional banks have seen the value of their investments plummet. These include Prince Waleed's Kingdom Holdings in Saudi Arabia, which holds five per cent of Citibank, and the Abu Dhabi and Qatar Investment Authorities, which hold significant stakes in Barclays. In contrast, the value of the Saudi Al Rajhi Bank and Kuwait Finance House (KFH) investments in retail Islamic banking affiliates in Asia has been much more resilient.
Professor Wilson, who wrote the report for LSE's Kuwait Programme on Development, Governance and Globalisation in the Gulf States, said: 'There has been much questioning of the values underpinning the conventional financial system, and the search for alternatives means that Islamic banks are likely to receive more attention, especially as their raison d'être is morality in financial transactions, based on religious teachings.
'The increasing international respect for Islamic finance has been noted in the GCC, and this should encourage local acceptance by both governments and bank customers, not least because no Islamic bank has failed in the crisis and required a substantial government bail-out'.
Islamic banks have been somewhat insulated from the current financial crisis because, in contrast to their conventional counterparts, they do not borrow in interbank markets, their funds coming instead from their own deposits. They also did not hold toxic collateralized debt obligations because they are not allowed to hold interest bearing securities.
According to the report the GCC is well positioned at the heart of the Muslim world to serve as an Islamic finance hub linking Europe, Asia and Africa. The spread of subsidiaries of GCC-based Islamic banks illustrates that this is starting to happen.
Furthermore a global economic recovery is likely to benefit the GCC as oil and gas prices rebound, resulting in fresh liquidity being pumped into Islamic banks to fuel further expansion.
Despite being a reluctant supporter of Islamic banking to date, the report argues that Saudi Arabia could become the global leader in the Islamic finance industry worldwide if the Saudi Arabian Monetary Agency (SAMA) and the Capital Markets Authority become more proactive in promoting the industry. This would bring significant benefits to its economy including employment creation in the King Abdullah Financial District where, for example, although a grand mosque is included in the plans, there is no mention of Islamic finance in the vision.
The value of shariah-compliant assets in the GCC is over US$262.6 billion when the figures for Saudi Arabia, Kuwait, the United Arab Emirates, Bahrain and Qatar are aggregated. With total shariah-compliant assets worldwide amounting to around $640 billion at the end of 2007, this implies that the GCC countries accounted for around 41 per cent of the total.
The Islamic finance industry encompasses retail and investment banking, insurance, fund management and the issuance and trading of shariah (consistent with the principles of Islamic law) compliant securities. Shariah prohibits the payment of interest on loans (Riba or usury), as well as investing in businesses that provide goods or services considered contrary to its principles (Haram or forbidden) such as pork, alcohol or gambling.
The London School of Economics and Political Science (LSE) studies the social sciences in their broadest sense, with an academic profile spanning a wide range of disciplines, from economics, politics and law, to sociology, information systems and accounting and finance.
The School has an outstanding reputation for academic excellence and is one of the most international universities in the world. Its study of social, economic and political problems focuses on the different perspectives and experiences of most countries. From its foundation LSE has aimed to be a laboratory of the social sciences, a place where ideas are developed, analysed, evaluated and disseminated around the globe. Visit http://www.lse.ac.uk for more information.
(1) Professor Rodney Wilson, Faculty of Islamic Studies, Qatar Foundation and Durham University School of Government and International Affairs.
(2) The Gulf Cooperation Council (GCC) member states are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates
A pdf of the report The development of Islamic finance in the GCC is available from the LSE press office
For more information please contact:
London School of Economics press office
T: + 44 (0)207 849 4624
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