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Tuesday, 5 February 2008

Credit turmoil flight boosts Islamic banking: Credit Suisse

GENEVA (Reuters) - The credit crisis is boosting Islamic finance, a senior Credit Suisse banker said, luring investors in search of assets not tainted by the turmoil hitting other parts of financial markets.
But the industry needs more liquid instruments before it can offer wealthy Muslim investors asset allocation that is as effective as traditional investing, the head of the Swiss bank's Islamic investment business told Reuters.
"If you invest in Islamic finance products, you tend not to be sensitive to developments in interest rates," Zurich-based Fares Mourad said on Monday.
"I've seen asset managers in the United Kingdom who are saying that they would like to include Islamic investments in their total asset allocation," he said.
Islam bans charging interest, making sukuk -- or Islamic bonds -- immune to the big swings in interest rate expectations the credit crisis has caused in bond markets.
Sukuk is also a safe haven for investors because it is backed by safe physical assets from which returns are paid to bondholders rather than interest, Mourad said.
"It's adding steam to the engine," he said.
Credit Suisse, the world's fourth-largest wealth manager, said its Islamic banking business was growing at a double-digit pace, though staffing so far was modest, with seven people in Dubai and two based in London and Switzerland each.
Mourad declined to give financial details.
Controversy over a contract that is widely used to underpin Islamic finance products -- so-called commodity murabaha -- was no major concern, Mourad said.
Islamic scholars had urged banks to come up with other ideas, but not banned the contract wholesale.
"It's a desire from the scholars to find innovative products, rather than sticking to the old murabaha. It's not the legitimacy of murabaha that was ever questioned."
In a commodity murabaha deal, a bank uses excess liquidity to buy a commodity, usually a metal, which it sells at a marked-up price. The buyer then sells the commodity on again at a spot price, owing the bank the mark-up.
That way, the bank has made a profit, while the buyer has secured financing from the bank.
Ijarah, Arabic for leasing, was one such alternative, Mourad said, offering an agreement in which banks lease an asset to a client for a specific time at a specific price.
Islamic asset allocation was not as efficient as that in a traditional portfolio, Mourad said, because sukuk markets did not have the same reach as fixed income -- typically a large part of a wealthy client's portfolio.
"All the sukuks we're seeing are floating rate notes and they fall into the money-market ... you wouldn't find a sukuk which goes out to 10 years, is tradable, is liquid and is accepted in the market," Mourad said.
Investors often put their money into real estate, to compensate for the lack of a secondary sukuk market.
Of Credit Suisse's Middle-Eastern client base, some 20 percent insisted on putting their money into Islamic finance assets, while some 60 percent preferred the products over traditional finance if the return was the same.
The remaining fifth was not interested.


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