MOODY'S: IFIs show ‘impressive resilience’ to crisis

By Habhajan Singh
Islamic financial institutions (IFIs) in the Gulf Cooperation Council (GCC) countries showed "impressive resilience" to the crisis to date due to the core principles of Islamic banking which prohibits both speculation and interest rates, according to Moody's Investors Service.
Another contributing factor to IFIs in the Middle East displaying strong resilience amid the current global financial debacle is their strong growth and typically conservative approach, the international rating agency added in a "special comnment" report released last week.
The resilience of Islamic banks has become a hot topic in the financial market with a number of conventional banks reeling from the effects of the credit crisis. Jurisdictions like Hong Kong continue to show interest in making inroads into Islamic finance.
In a recent speech, Hong Kong Monetary Authority (HKMA) deputy chief executive Eddie Yue said that the Islamic finance industry is in many ways fortunate to be at an early stage of development during this turmoil. Nonetheless, Moody's notes that IFIs do not operate in isolation from their local, regional and international environments.
"They have therefore been facing three series of cyclical challenges, reflecting their current structural strengths and weaknesses," it said. Firstly, they are finding it more difficult to manage their short-term liquidity. Secondly, their investment portfolios, which are concentrated on illiquid and cyclical asset classes, have been impaired, and finally, their access to long-term funding has been postponed, forcing them to reduce the maturity profile of their assets, the report said.
However, Moody's expects that such constraints will prove only temporary and that Islamic banks have the capacity to weather the storm.
In the report entitled "Gulf Islamic Banks Resilient Amid Global Credit Woes", Moody's said global Islamic banking assets grew around 27% in 2007 and a growth of 20%-30% is expected this year as well.
"Although 2009 will likely be a tough year for Islamic banks, they benefit from a number of buffers: their credit portfolios have been essentially domestic, with limited pressure on asset quality so far; they have strong retail platforms, with high customer loyalty and deposit stability; and their high capitalisation and ample core liquidity often provide a relatively high amount of confidence to counterparts," says Anouar Hassoune, Moody's vicepresident and senior credit officer and author of the report.
As a result, Moody's expects IFIs in the Gulf region to be able to continue growing, albeit at a slower pace, before resuming a more rapid growth, most probably within 18 months. Paradoxically, it said the IFIs' reputation has benefited from the current crisis, reflecting their conservative approach to business, a close proximity to their domestic and regional franchise, their balanced and ordered appetite for growth, and focus on the 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. "As a result, in the shortterm, in times of crisis, clients may find it more comfortable doing business with an Islamic bank," said Hassoune.
(By Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)