Islamic banks may not be insulated from ‘aftershocks’

By Habhajan Singh
MALAYSIAN Islamic banks have escaped subprime related banking troubles but may not be insulated from the aftershocks of an economic contraction, says a senior central banker.
"We may be insulated from the toxic assets, but we may not be insulated from the second round effects," said Bank Negara Malaysia (BNM) deputy govenor Datuk Mohd Razif Abd Kadir, making reference to a potential impact on Islamic banks in the event of the economy slowing down.
"We don't have a banking problem. What we have is an economic problem, more so since we have an open economy," he said at the soft launch of the new premises of the International Islamic University of Malaysia's (IIUM) Islamic banking institute in Kuala Lumpur on Mar .
The soft launch of IIUM Institute of Islamic Banking and Finance (IIIBF) was officiated by IIUM rector Prof Datuk Dr Syed Arabi Idid. The institute is headed by Prof Dr Ahamed Kameel Mydin Meera as its dean.
In his presentation, Mohd Razif echoed sentiments expressed earlier by central bank govenor Tan Sri Dr Zeti Akhtar Aziz who had said that the second round effects will be felt as the economic contraction produces further strain on the financial sector, and that the Islamic financial system will not be immune to these developments.
In a recent speech at an Islamic finance conference in London, Zeti noted that in the current global financial crisis, the initial tightening of liquidity and the subsequent breakdown of the functioning of the financial markets precipitated stress and insolvency in the financial sector. She added that the credit crunch that followed has resulted in catastrophic damage to the global economy.
Under the current challenging environment, Mohd Razif said that Malaysia can play a role in educating the global financial community with regards to Islamic finance, especially by highlighting key Shariah principles at work in Islamic finance.
"People are looking at us, to learn from us," he told the audience made up of Islamic finance industry executives, Shariah scholars and teaching staffers from IIUM.
Mohd Razif noted that many countries, including those without a large Muslim population like Singapore, Hong Kong and Japan, are joining the Islamic finance bandwagon and instruments like sukuk are becoming more and more popular.
"Sukuk has become an important asset class, not just for issuers, but also for investors. Islamic papers are now much sought after," he said.
Malaysia remains the world's largest sukuk market, accounting for more than 37% of global sukuk issuances in 2008. On the local front, BNM statistics show that the Islamic banking sector recorded double digit growth over the last eight years with an average annual growth rate of 20% in terms of assets.
As at the end of 2008, Islamic banking had a 17.4% share of the banking sector. The assets share of the takaful industry grew at 23% per annum in the past five years, with family and general takaful capturing 11% and 7% respectively, of the overall insurance sector.

PHOTOGRAPH, from left to right: Dr Syed Arabi, Dr Ahamed Kameel and BNM's Mohd Rafiz.
(This story appeared in The Malaysian Reserve on Mar 23, 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)