Islamic banks have been largely shielded from the US mortgage crisis, which may even open doors for expansion beyond traditional strongholds in Arab and Asian markets, Bahrain's central bank governor said.
Islamic banks should have shunned collateralised debt obligations linked to subprime, or high risk, mortgages because such complex instruments do not comply with Muslim law, Rasheed Al Maraj told the Reuters Islamic Finance summit on Monday.
Islam bans lending on interest and trading of debt. Scholars vet every stage of a transaction to ensure compliance with sharia, or Islamic law, making it unlikely that risks were lurking in the balance sheets of unsuspecting lenders, he said.
"In Islamic banking, there is no black box that needs a genius to unwind it," Maraj said. "Many of these conventional products that have been under stress lately are very complex and need special risk management tools
"In Islamic banking you will not have this kind of thing. Some of these products would not be sharia accepted."
Global conventional banks from Citigroup to UBS have written down more than $80 billion in credit market losses since October as defaults on subprime mortgages triggered a credit crisis that threatens to tip the US economy into recession.
By contrast lenders in the Gulf and Malaysia, the global hubs of Islamic finance, have barely reported any subprime related losses. Bahrain-based Arab Banking Corporation, a conventional lender which has an Islamic arm, on Sunday reported a 38 per cent fall in 2007 net income on subprime writedowns.
"From the financial results, we have not had any kind of indication that there have been any damages to the balance sheets as a result of this."
"This does not mean that Islamic finance is risk free. We still have some concern about the concentration of risk ... There is a lot of focus on real estate," Maraj said, adding that tools to allow Islamic lenders to hedge risk should be developed.
The subprime crisis could provide the Islamic banking industry with greater opportunity for growth, both from conventional retail customers looking for an alternative, and also from the collapse of Western asset prices.
"Maybe Islamic banking will be a safe bet for them," he said.
"I think opportunities exist in the United States and Europe as a result of this financial distress. The high valuation of the assets will come down." (Reuters)
Islamic banks shielded from subprime