.net - Khaleej Times) Islamic Financial Institutions, or IFIs, in the Gulf region show resilience in the face of economic turmoil and will resume rapid growth soon, a top rating agency said.
Standard & Poor's believes that the outlook for Islamic finance
in the Gulf region this year will remain strong despite the ongoing global financial crisis.
While total global sukuk issuance more than halved to $14.9 billion in 2008 from $34 billion in the previous year, the S&P is still optimistic about the future of the Islamic finance in the region.
Shariah-compliant assets now total about $700 billion, after growth exceeding 10 per cent annually during the past decade. Dubai
-based Zawya, a Middle East business
information company, in its recent first quarter report for 2009, revealed that the global sukuk issuance fell 37 per cent in the first quarter compared to the same period in 2008.
While global financial market disruption, the liquidity crunch, slowing economies, and sharply falling stock markets have adversely affected recent performance at numerous financial institutions around the world, the S&P believes that IFIs have felt the repercussions less because Shariah law prohibits interest-based financial products.
In other words, IFIs did not invest in some impaired asset classes that have hampered many conventional banks' financial profiles and performance.
"The sukuk market suffered heavily in 2008 but we believe the outlook for asset-backed sukuk is positive, despite the doubts raised by the disruption in global financial markets and in structured finance," said Mohamed Damak, credit analyst at S&P Ratings Services.
"When economies begin pulling out of the downturn, we expect Islamic finance to resume its rapid growth. The long-term pipeline for sukuk issuance is healthy, and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries."
Damak said Islamic financial institutions have remained somewhat insulated from the global financial downturn because Shariah law strictly prohibits them from handling interest-based instruments.
The knock-on effects of the current economic slowdown, however, are pressuring Islamic financial institutions and creating new obstacles for their development, he added.
In the next few quarters, the anticipated slowdown in loan growth, inflated cost of funding
, and increase in cost of risk also stand to test IFIs' performance, the credit rating agency said.
According to S&P, most IFIs should be equipped to weather this financial downturn and keep the effects on their financial profiles at manageable levels.
However, like their conventional peers, IFIs stand to post weaker financial performance and asset quality indicators, in our view, in the coming quarters.
The S&P sees the real estate sector slide as one of the chief sources of risk for IFIs. The rating agency has taken various negative rating actions over the past three months on both conventional and Islamic banks, largely because of the impact of the deteriorating economic landscape on these entities.
The S&P lowered the long-and short-term counter-party credit ratings on Dubai Islamic Bank to 'A-/A-2' from 'A/A-1' and revised the outlook to negative from stable. It also revised the outlook on Sharjah Islamic Bank to stable from positive and Gulf Finance House to negative from stable.
Shariah principles prohibit IFIs from handling interest-based products, which are the main foundation of structured financial instruments.
Consequently, IFIs have no exposure to these instruments.
Moreover, the S&P's notes that IFIs, unlike certain of their conventional counterparts, have not had to book write-downs corresponding to the falling market value of these assets.
Events over the past 18 months have triggered a sharp decline in available liquidity around the globe.
Investors have adopted a wait-and-see stance, reducing their risk appetites and seeking higher returns.
Like their conventional peers, IFIs were ill prepared, according to S&P, to enter an environment where liquidity became scarce and cost of funds increased.
By Abdul Basit
` omar1.1 mfn