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Sunday, 19 October 2008

Islamic banks hope for Gulf property stability

With their ban on interest, the Gulf Islamic banks that managed to avoid the types of debt that proved so damaging for their conventional counterparts are now praying the global crisis will bypass their property holdings.

Islamic banks, which manage an estimated US$1 trillion (Dh3.67 trillion) worldwide, do not have the same flexibility as conventional banks in managing balance-sheet risk, bankers say. For instance, they cannot reduce exposure to the property market by using derivatives.
So Islamic bankers were intense in their scrutiny of last week’s Cityscape property fair in Dubai. But even the unveiling of a planned 1km-high tower failed to allay their fears that the boom in Gulf property may be grinding to a halt.

The fate of Islamic banks in the region is closely tied to the property markets, as they are required to underpin transactions with physical assets due to the ban on interest, which is viewed as usury under Islamic law.
“Islamic banks may initially have been viewed as less impacted because they are unable to invest in the instruments that caused the current instability some 18 months ago,” said Danie Marx, the head of treasury and capital markets at European Islamic Investment Bank.

“However, as the instability drags on and the second-phase impact of the crisis spills over into the region – either as restricted liquidity or adverse movement in asset prices, for example in real estate – it could start to hurt them.”
Confidence in the Gulf property market has been hit by the global financial turmoil, and there are signs that a five-year property boom is set to slow.

As the global credit crisis intensifies, liquidity has begun to tighten, even in the world’s top oil-exporting region, which is flush with cash after six years of rising oil prices.

The chief executive of Malaysia’s CIMB Islamic Bank, one of the leading Shariah lenders, said that some Gulf Arab Islamic banks could fail as frozen credit markets and slumping property prices took a toll, although government aid should save the industry from a prolonged downturn.
But some bankers question whether Islamic banks can access emergency funds set up by governments the way conventional banks can, due to the ban on interest.

The Government more than doubled its initial rescue package for banks to almost $33 billion (Dh121.2bn) on Tuesday, and bankers say its promise to guarantee deposits has restored confidence in capital markets.

However, while the UAE has not released details of how its second cash injection will work, the initial Dh50bn facility made additional liquidity available to banks only at rates of interest above the repurchase rate.
“The fact that we have not seen instability in the capital adequacy of Islamic banks does not mean that it cannot happen,” Mr Marx said.

Figures are scarce, but Islamic banking operations of international banks have a significant market share compared with regional and solely Shariah-compliant players, attracted largely by the region’s cash.

“The rationale behind the move of western banks into Islamic banking was to tap the region’s deep pockets,” said a Dubai-based Islamic banker at an international bank. “Now the market is shut.”
Such grim comments by bankers contrast sharply with statements made by Gulf government officials, who have sought to assure investors that Islamic banks are sheltered from the financial storm.

The Bahraini finance minister Sheikh Ahmed Al Khalifa said last week that most of the country’s banks had invested in the booming region rather than complex foreign assets, and Islamic banks had no exposure to the global crisis.
The Islamic bond, or sukuk, market is seen as a measure of both the extent to which Islamic banking has been hurt as well as when it will begin to recover.

Mohammed Damak, a financial banking analyst at Standard & Poor’s, said the liquidity crunch did have an impact on the global sukuk market. In a report published last month, the agency said global sukuk issuance was about $14bn in the first eight months of the year, down from $23bn during the same period last year.
Despite these short-term concerns, there is an argument that the region’s basic economic strength and strong growth – as well as governments’ increased readiness to provide liquidity – could offset the impact on Islamic banks of any fall in property prices in the region.

“There is no fundamental shift in the sukuk market. People are just waiting for the right levels to place their deals,” said Afaq Khan, the chief executive of Standard Chartered Saadiq, the group’s Islamic banking business.
“The point is the Islamic liquidity has not gone to another market.”

Mr Damak agreed, saying: “I do expect the Islamic banking industry to grow as rapidly as before, by around 10 to 15 per cent per year.” (Reuters)
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