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Friday, 10 October 2008

Islamic finance - less exposed to credit crisis


With global banks going bust every other day as the credit crisis spreads, Islamic finance institutions - which have remained resistant to its effects - are being mooted as more secure.
Based on Islamic or Shariah law, which forbids the charging of interest, Islamic finance may even be a strong contender for an alternative banking system, says FNB and WesBank CE of Islamic finance Ebi Patel. Risk is shared between the customer and the bank on agreed terms.
"Where banks that fell victim to the crisis effectively traded in paper, Islamic finance has to be underpinned by tangible assets," says Patel. Such a system, if Shariah-compliant, would not succumb to a credit crisis.
But not all Islamic financial institutions have been unscathed. In SA, Futuregrowth Albaraka, a Shariah fund, has lost 30,4% in the past 12 months.
Patel believes Islamic banking, which has a strict credit-rating system, could receive more attention internationally than in SA. There are eight Shariah funds in SA (up from two in 2003) with a total net asset value of R5,93bn, or about 1% of the industry, according to the Association of Collective Investments. The biggest is Oasis Crescent Equity Fund. Islamic banking under Absa, FNB/Wesbank and Albaraka has a net asset value of more than R3bn.

Islamic Bank of Britain says it had seen significant growth in customers who are not Muslim since the onset of the turbulence on financial markets.
Absa Islamic Bank MD Ahmed Moola says the features of Islamic banking products create an inherent resistance to the current crisis, though they do not insulate them completely. Its products include investing in listed equities with a limit to the amount of debt it could carry. Responsible lending has helped the sector to be less exposed, says Moola.
He says their core customer base is still Muslim, but there has been some interest from the rest of the market.
Stanlib economist Kevin Lings says: "It's unfortunate that the average investor does not know how Islamic finance works, because they could benefit from the diversification." He says including a Shariah fund in a mixed portfolio may enhance its overall performance. Though less exposed, Islamic finance is not immune to crises and would be affected by a general economic slowdown, he says. Econometrix economist Azar Jammine says the sector has to attract a critical mass before it draws broader interest.
The industry has grown by 18% annually, says Patel. Globally, the assets of Islamic banking grew by 20,5% in 2006.
Uwaiz Jassat, MD of Islamic insurance group Takafol SA, says the industry's reach within the Muslim population is low because it is relatively new.

National treasury, recognising that there are 400m Muslims in Africa, recently proposed positioning SA as the continent's Islamic financial hub.
Moody's Investors Service estimates Africa's Islamic financial market is potentially worth about US$235bn.
Treasury is considering introducing a regulatory environment for Islamic banking to ease its operations flow. This is crucial if SA hopes to attract Middle East investors, says Moola.

(Financial Mail/10Oct08)

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