‘Shariah banks may face severe liquidity crunch’

by Habhajan Singh
Islamic banks are perceived to have less exposure to assets of lower credit rating compared to their conventional counterparts but they are still expected to face a severe liquidity crunch across sectors, says a Kuwaitibased research outfit.
The research house also noted that the rising demand and increasing popularity of Shariah-compliant products have contributed to the growth of Islamic finance, citing the rise in demand for Shariahbased products from various infrastructure projects including petrochemical complexes, housing and construction.
"Despite this, however, the ongoing economic recession, which has led to a severe liquidity crunch across sectors, especially in construction and real estate, is likely to significantly impact the performance of the sector," Taib Research said in a recent note on Boubyan Bank, one of the three Islamic banks in Kuwait. The other two are the Kuwait Finance House (KFH), which has a presence in Malaysia, and the International Bank of Kuwait (IBK).
According to the research note, competition is likely to intensify with commercial banks, attracted by Islamic finance, venturing into the same sector. In addition, the global sukuk market suffered a double blow recently with controversy surrounding the sector's compliance to the Shariah principles and a decline in the sector due to the liquidity crisis.
Taib Research noted that there has been a decline in the number of sukuk issued in 4Q08 to US$584 million (RM2.05 billion), the lowest since 4Q02. The research house expects the Kuwaiti banking sector to witness slower growth in 2009 as economic activity remains low.
"The real estate sector is already under pressure with recessionary forces leading to slackened demand and a price correction, thereby implying lower credit growth for banks. "However, at the same time initiatives by the government in the form of stimulus package of 1.5 billion Kuwaiti dinars (RM18.39 billion) do provide hope for the future," it said.
Commenting on Boubyan, the research house said the bank seems to be heavily burdened with assets of low credit rating as evident by huge provisions set aside by the bank in 2008 and 1Q09.
Kuwait has been looking for Islamic financial services as an alternative to conventional financial institutions, which have been struggling with high debt levels and falling profits in a period of global recession, the report noted. Shariah-compliant financial services have depicted a healthy growth in Kuwait over the past few years, emerging as a competitive force for conventional banks and investment houses.
The Kuwaiti Islamic finance sector was dominated by KFH until 2004 as it was the only Islamic bank, a position which necessary amendments paved the way for other Islamic institutions to commence operations.
In 2008, a legal framework to govern the sector was designed. The Islamic finance sector has been enjoying a healthy growth rate since its inception. The net profit of the Islamic banks bounced somewhat in 1Q09 mainly led by improved performance by KFH, while KIB and Boubyan continued to report losses during the quarter, the report said.

(This story appeared in The Malaysian Reserve on Aug 3, 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)