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Thu 26 Feb 2009 12:04 PM

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Moody's backs Islamic banks to emerge stronger

Rating agency says Islamic finance industry will rebound after being hit by fall in oil price.

Although the Islamic finance industry has been hit by the fall in oil prices, accumulated capital will help insulate it from the turmoil in financial markets, and the sector will emerge stronger once markets rebound, Moody’s said on Thursday.

“There is still a vital link between oil prices and Islamic banks as most of the latter operate in hydrocarbon-exporting economies. As they face increasingly limited funding sources, Islamic banks will find it more difficult to grow going forward,” said Anouar Hassoune, co-author of the report.

Reduced oil liquidity has also led to sukuk issuances slowing sharply and distorted pricing, he noted.

The previous oil boom saw strong growth in the Islamic finance sector, with banks accumulating asset liquidity and capital on their balance sheets, which will provide them with a cushion in the current downturn.

“Large capital bases are helping to buffer asset price declines and possibly also higher delinquency rates in credit portfolios,” Hassoune said.

Islamic banks are currently also using their core asset liquidity to continue growing their credit portfolios, despite scarcer funding sources, he added.

“Moody’s believes that, as an industry, [Islamic finance] can now demonstrate a track record of resilience and may even emerge stronger from the crisis provided some conditions are met -- namely, more innovation, enhanced transparency, more robust risk-management architecture and culture, and better training.”

At the close of trading on February 24, the global Dow Jones Islamic Market Titans 100 Index, which measures the performance of 100 major Shariah compliant stocks globally, had lost 5.80 percent in the month to date.

By comparison, the Dow Jones Global Titans 50 Index, which measures the 50 biggest companies worldwide, posted a loss of 7.24 percent.

The Dow Jones DFM Titans 10 Index, measuring the 10 largest and most liquid stocks listed on the Dubai Financial Market gained 4.47 percent in the period.

The Dow Jones Islamic Market Kuwait Index posted a loss of 12.12 percent. Its conventional counterpart, the Dow Jones Kuwait Composite Index, was down 10.01 percent.

The Dow Jones Islamic Market GCC Index lost 4.43 percent, versus a 6.74 percent decline in the conventional Dow Jones measure.

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