Islamic banks have weathered sub-prime crisis well: Regulators

ISLAMIC banks and financial institutions managed to avoid the fallout from the sub-prime crisis, largely because they refrained from investing in toxic assets that were deemed 'un-Islamic', reports The Straits Times (May 08, 2009).
And this prudence has put Islamic finance in good stead with investors looking for safe havens, said Professor Rifaat Ahmed Abdel Karim, secretary-general of the Kuala Lumpur-based Islamic Financial Services Board (IFSB), the report added.
The IFSB is an umbrella group of Islamic financial regulators. It was formed in 2002 and counts Saudi Arabia, Qatar, Indonesia, Bahrain, Sudan, Pakistan and Singapore as members.
Prof Rifaat, who is in Singapore for the IFSB summit this week, told the Singapore daily that a lot of lessons could be learnt from the financial crisis.
"What I think people have realised is that Islamic banks have a model that they can study,.
"They provide not an alternative to conventional finance, but a model to financial institutions which others can learn," he said, adding that he is under no illusions that Islamic finance can replace the now discredited Wall Street financial services model.
"When you say 'be an alternative', it means to say to replace it. I don't think that would happen," he said.
The report goes on:
Instead, the global crisis has highlighted the strength of the Islamic methods of banking and finance, where syariah-compliant rules govern the business model, behaviour and practices of Islamic banks and financial firms, he added.
For instance, a basic rule of Islamic finance prohibits Islamic bankers from dealing in second-hand interest-bearing mortgages, or from even engaging in trading debt instruments.
'They're not allowed to participate in what you call toxic assets like sub-prime mortgages,' Prof Rifaat said.
He said that while Islamic banks have avoided the worst excesses of the toxic-asset problem because they never invested in certain asset classes, some Islamic banks could still be hurt as the impact of the global crisis spreads.
'It all comes down to risk management. You've to have proper risk management and proper governance and practices so that an institution doesn't fall down,' he said.
'The point is that you really need good risk management practices and good governance, whether it's an Islamic financial institution or otherwise.'
When the economy weakens, Islamic banks may suffer too.
'If we now move from a financial crisis to an economic crisis, then Islamic banks might be affected like any other banks,' he said.
'For example, if a country is export-oriented and there's a decline in exports, businessmen or firms will not go and ask for financing from banks, including Islamic banks.'
He thinks Islamic finance will become stronger with more products and services on offer, and also more banks.
(This article was first published in The Straits Times.)