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Thursday, 25 December 2008

Islamic banks 'largely insulated' from financial crisis

ISLAMIC banks have largely dodged the financial crisis, thanks to their low exposure to toxic assets like sub-prime loans, and may rebound faster than other sectors once the global outlook strengthens.

That is the view of two key players in the sector here, who both see strong growth ahead.

Mr Vince Cook, chief executive of The Islamic Bank of Asia (IB Asia), a Singapore-based unit of DBS Group Holdings, told The Straits Times: 'While we're not immune...we're also not seeing any of the Islamic banks having the problems you're seeing at some of the bigger investment or conventional banks.

'So I think the recovery may come quicker for Islamic banks.'

Mr Syed Abdul Aziz Syed Kechik, chief executive of OCBC Al-Amin Bank, agreed: 'Islamic banks may bounce back faster once the global outlook strengthens as they are ultimately designed to safeguard themselves from over-exposure to risks associated with excessive leveraging and imprudent risk-taking.'

Mr Cook said IB Asia has also avoided the flagging property sector in Gulf states like Dubai, unlike some other Islamic banks.

'We're in a fortunate position where we're still young enough not to have entered into that particular piece of the market,' he said.

IB Asia was launched last May to help DBS tap into capital flows and investments between the Middle East and Asia - two regions which Mr Cook believes will remain the fastest growing regions despite the ongoing crisis.

OCBC Al-Amin Bank started as a full-fledged Islamic bank in Malaysia on Dec 1 after operating under OCBC's Malaysian subsidiary for the past 13 years.

Islamic banking, which follows syariah or Islamic law, forbids payment of interest, speculation or investment in businesses such as gambling and alcohol.

The ban on interest earnings and the lack of Islamic structured products shielded such banks from assets like the sub-prime loans that have caused such havoc at many conventional banks.

'We expect the international economic environment to remain challenging in 2009, even for Islamic banking,' said Mr Abdul Aziz.

'Still, it is noteworthy that Islamic finance continued to demonstrate its evolution and strong growth over 2008 as most banks had significantly lower or no exposure to toxic assets (like) sub-prime loans.'

Mr Cook echoed the point: 'The Islamic sector was not caught directly by sub-prime; the principals of syariah would not have allowed us to participate in that type of product.'

He also feels that the man in the street might take a fresh look at Islamic banking after the woes encountered at conventional banks.

He said IB Asia is considering introducing simpler syariah-compliant structured products that will differ from conventional ones.

'But we want to wait till the dust settles from the fallout from the conventional side before launching anything,' said Mr Cook.

He added that IB Asia could offer syariah-compliant products for heartlanders through POSB, another DBS vehicle.

'I can think of no technical impediment; but we definitely have received enquiries and there is a level of interest.'

Mr Cook said IB Asia could extend its reach to markets such as Hong Kong, Taiwan and even China, without making additional investment thanks to the reach of DBS' Asian franchise.

'There are a couple of things in the wealth management and consumer finance side which we can do jointly with DBS and in a number of countries as well,' he said.

OCBC is also looking to enhance its Islamic banking presence beyond Malaysia and Singapore.

'While most of OCBC's existing engagement within the region has centred on conventional banking, many customers have shown keen interest to explore opportunities in Islamic banking,' said Mr Abdul Aziz.

'With OCBC Al-Amin Bank, we will continue to enhance our position in the market through the promotion of various Islamic finance products....We are also looking at widening our product range through innovations, especially in the area of treasury and structured products.'
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Alfalah Consulting-Kuala Lumpur: www.alfalahconsulting.com 
Islamic Consultant & Trainer: www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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