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Saturday, 7 November 2009

Islamic Banks Weather Global Crisis

LONDON — Thanks to its ethical low-risk approach, Islamic banks have managed to weather the global financial crisis, achieving high growth rates in 2009, a new study has found.
"A conservative approach to risk and close links between the financial sector and real assets has helped shield the sector from the worst of the credit crisis," Brian Caplen, editor of the Banker Magazine, said in the study cited by Agence France-Presse (AFP).

The study, commissioned by the London-based magazine and a unit of HSBC Bank, said Islamic finance institutions have overcome the crisis that harshly hit conventional banks.

A financial firestorm swept the US and the world in September 2008, after the demise of Lehman Brothers, one of the Wall Street giants.

It has knocked down many major companies worldwide, causing mounting job losses, falling household wealth and forcing consumers to hold back on spending.

The study attributes success of the Islamic banks to rules that forbid investing in collateralized debt obligations and other toxic assets that caused the financial crisis.

The rules of Islamic banking and finance read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets.

Islam forbids Muslims from usury, receiving or paying interest on loans.

Transactions by Islamic banks must be backed by real assets -- not shady repackaged subprime mortgages.

Shari`ah-compliant financing deals resemble lease-to-own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.


Due to its safety, the Islamic finance industry is building a “solid track record," on the global market, the study says.

“At the moment there is a great demand for capital guaranteed or capital secured products," David Dew, Deputy CEO of HSBC Amanah, told Reuters.

The study notes that assets held by Shari`ah-compliant banks or the Islamic units of conventional banks rose by 28.6 percent to 822 billion dollars in 2009, up from 639 billion dollars in 2008.

This contrasts sharply with the stagnation in the conventional banking sector.

A Banker's survey of the top 1,000 world banks published in July showed annual asset growth of just 6.8 percent.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.


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