Moody’s: Islamic banks not unduly challenged by oil price drop

THE worldwide fall in oil prices and the global economic crisis has affected the Islamic finance industry, but the institutions' accumulated liquidity and capital will help them withstand these pressures, says Moody's.
The rating agency said the drop in oil prices poses two key challenges for the Islamic finance industry.
First, there is still a vital link between oil prices and Islamic banks as most of the latter operate in hydrocarbon-exporting economies.
As they face increasingly limited funding sources, Islamic banks will find it more difficult to grow going forward. Second, oil liquidity has been a major driver of the disintermediation process in the Islamic finance industry.
"With reduced oil liquidity, not only have sukuk issuances been slowing sharply, thereby depriving Islamic banks of much-needed longterm funding, but pricing on such instruments has been distorted," says Moody's vice president and senior credit officer Anouar Hassoune.
However, in a statement, Moody's believes such concerns are not unduly significant given that, in previous benign periods, Islamic banks have accumulated asset liquidity and capital on their balance sheets.

(This story appeared in The Malaysian Reserve on Mar 2, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)