Islamic finance and banking services are shielded against turmoil such as the recent credit crunch because Islamic financing is purely asset-based financing compared to interest-charged financing by the commercial banks, an industry analyst has said.
Oliver Agha, global head of Islamic finance at DLA Piper Middle East, said yesterday that Islamic banking services are also based on partnership bases, which implies sharing of risks and profits. So the vulnerability of credit crisis is very low and this saves Islamic financial institutions from high risks, as they will own part of the assets of a wide range of products.
“Islamic finance underlines three main principles; prohibition of excessive uncertainty, interest and investing in haram, or not permissible, products,” Agha explained. “For Islamic mortgage, it is based on partnership or leasing the property. So there is no loan in Islamic mortgage, it is an equity-sharing with each party bearing the risk of equity ownership.”
Agha told Emirates Business that Islamic finance and banking is growing by around 30 per cent annually and this rate will continue during the next few years.
“Major global financial institutions are still suffering from the aftermath of the credit crisis and their expected growth rate is very low. Islamic financing is getting momentum and some estimates show Islamic finance reached $1 trillion,” he said.
“The increasing growth in Islamic finance will also create the need for new and innovative Islamic products. The industry is still new and needs a lot of support. The increasing interest and demand for Islamic products will encourage specialists to create such new products.”
Agha explained that the increasing money supply and liquidity in the GCC region would create major opportunities for Islamic banks. “The real issue is Islamic banks need consolidation and merger to establish giant financial entities. We see a lot of Islamic banks and financial institutions, but also global conventional banks are creating Islamic divisions. Global banks have long experience and strong products. Regional Islamic banks should consolidate to face the increasing competition.”
He also highlighted the issue of differences among Islamic scholars regarding Shariah compliant products.
“We need unified standards and Fatwas about different Islamic products to ensure the compliance of all products. We need to unify the perspective on vital areas so every product can be regulated. However, Islamic financial services are still in the primary stages and it will need time to reach the standardised stage.”
Islamic banks less vulnerable to credit crisis