Saturday, Nov 29, 2008

Gulf News

Dubai: Gulf-based Islamic banks, which have displayed resilience amid the current global financial turmoil, will see a slowdown in asset growth next year, ratings agency Moody's said in a report.

Globally, the Islamic banking sector grew about 27 per cent in 2007 and this year's growth rates are expected to be 20-30 per cent.

The report noted that early signals of financial performance and liquidity in the fourth quarter of 2008 so far portend a slowdown.

However, 2009 is likely be a tough year for Islamic banks. Moody's said it expects that the growth rate of their combined assets "will decelerate, probably in the range of 10 per cent to 15 per cent".

Most Islamic financial institutions have seen their reputation benefit from the current financial crisis, reflecting their conservative approach to business, a proximity to their domestic and regional deposit franchises, balanced and ordered appetite for growth and focus on basics of banking as opposed to innovation.

"All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress," Moody's said.

It said "one obvious reason" for their ability to weather the storm is embedded within the core principles of Islamic banking that prohibit both speculation and interest rates.

Islamic banks steered clear of toxic repackaged credit instruments in which many conventional banks dealt and suffered in the wake of the US subp-rime mortgage meltdown.

But Islamic finance institutions will also be affected by the global financial crisis as they "do not operate in isolation from their local, regional and even international environments".

The report said as the financial crisis turns into a real economic downturn, asset quality will deteriorate and Islamic banks' high exposures to the property sector could turn out to become "a curse rather than a blessing".

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