Although the US is declining relatively as the engine of global economic activity, a recession will inevitably have adverse consequences for the economies of the GCC and Southeast Asia, where Islamic banking is well established. Oil revenues remain a determinant of Islamic banking growth, and a serious recession in the US will reduce oil demand, prices and revenue even if China and India continue to import larger amounts of oil. The impact will be slower growth of Islamic banking balance sheets as deposits slow, with less Islamic financing, but not an absolute decline. There will also be a further decline in the value of the dollar if the US enters recession, especially as further interest cuts are made to bring about a monetary expansion to mitigate the effects of the recession. This will reduce the value of Islamic financial assets, most of which are dollar-denominated or valued in currencies pegged to the dollar. The subprime crisis has already had a negative impact on Sukuk issuance since last August, and recession would delay its recovery. However, in the longer term, the dollar should rebound, partly because the widening fiscal deficit in the US to prevent a deep recession will have to be offset eventually by monetary policy tightening. Shariah compliant investors should not write off the US, as the economy will remain for the foreseeable future the first in the world, and there will still be opportunities for capital gains and Shariah compliant income. Indeed, with lower stock prices currently, it may be a good time now to buy US assets in anticipation of a post-election recovery whoever succeeds the Bush presidency.
PROFESSOR RODNEY WILSON
A recession in the US would affect Islamic banking industry by stifling growth for the short term. The recent credit crisis has affected many new product launches by our company with other banks as they are preoccupied with the downturn in the markets and, thus, have held off any new Islamic finance product launches. The US’ role in international banking has been diminishing over the last few decades. However, as the largest economy still, a recession would have a small negative downturn in the Islamic banking industry. OMAR KALAIR CEO, UM Financial Canada
The Islamic banking industry will easily weather the US recession primarily due to the large gap between the respective economies. There is very little linking the two, and economic growth in Arabia and most other Muslim regions is exogenous to whatever is happening to the US consumer and homeowner. However, one can easily imagine the Islamic banking community suffering its own credit crisis. Too many assets have been put into venture capital, cleverly disguised as private equity. The culture of credit analysis is not yet widespread in the Islamic banking community. We see many Islamic banking institutions falling over themselves in an effort to get into businesses where they have little human capital or experience. History repeats itself. In time, there will be what the famed economist Joseph Schumpeter defined as ‘creative destruction’, where old business practices are destroyed in a wholesale cleaning process, with new technologies and resources deployed in an all-new effort to replace the past. The Islamic banking industry is too new to have experienced one of these creative destruction cycles, but it will come, without any doubt. JOHN A SANDWICK Managing director, Encore Management SAx
A recession in the US is likely to have an impact on the financial industry in general and the Islamic finance industry in particular. Firstly, the US is, on a global scale, one of the largest users of oil in the world and a recession might result in reduced demand for oil which in turn has an impact on the price. Due to the fact that the main oil-producing countries are also the main providers of funds for the Islamic banking market, a decline in their income will have an effect on the available funds in the market. However, as the dependency on oil in these countries declines, the economic impact of a changing oil price will be less volatile. Secondly, the majority of Islamic financial instruments are priced in USD. A weakening of the dollar and a change in the benchmark rates will have an impact on the cost of funds, the ability to raise sufficient funds and the ability to repay. NATALIE SCHOON Head of product development, Bank of London and the Middle East
Apossible US recession would affect the Islamic banking industry just as it would affect the global financial markets. From a debt issuer’s/obligor’s perspective, credit spreads of export-based firms dependent on US imports will widen with a probable reallocation of credit portfolio by Malaysian banks. Middle Eastern Islamic banks may not shuffle their credit portfolios to a great degree, as a number of GCC-based export-oriented companies are either directly/indirectly supported by governments. We would also see Islamic banks demanding higher returns from companies that carry credit ratings similar to that of US subprime mortgages. ASIM BASHARULLAH Head of corporate and investment banking, Al Rajhi Bank
It is another confirmation that Islamic finance, particularly equity-based instruments, offers more suitable tools for a sustained economy. Once again, it is showing that interest fluctuations could throw an economy off the track and recovery might need several cycles. JAMIL AL-JAROUDI CEO, Sokouk Exchange Centre (Tadawul)
Islamic banking is part of global economy, not isolated from or ring-fenced within it. As such, Islamic banking will also be affected. The degree of effect depends on the individual country; status of Islamic banking in that particular country and a particular bank’s business focus in that country. KHALID MAHMOOD BHAIMIA Managing director, Hong Leong Islamic Bank
The initial impact of the US recession is that a new generation of problems will restrict activity in the global banking system. Since the participation of the global banks is important from a capacity and skills perspective, this will mean that credit restrictions in the west will affect the east, conventional and Islamic. Indeed, this is already being felt in the Gulf states and Sukuk markets. Subsequently, there will be new and attractive opportunities in the US for investment as the market reorganizes. But since credit will not be restored as quickly as it has been cut off, the market will be more open to Islamic investors and financiers. ABDULKADER THOMAS CEO and President, SHAPE — Financial Corp
As long as the world’s savings are denominated in USD, the US economy is a key consumer and there is sufficient financial intertwining between the economies worldwide, every sneeze of Uncle Sam will affect lives around the world. Very concrete: Provided that the issue has been sufficiently isolated by now, some consumer spending will downsize, some investments and deals will be postponed, some capital will be reshuffled and interest rates adjusted. Securitization plans are being stalled and ratings procedures are being revised. Noteworthy, but indirect influence. On the other hand, some people might become more interested in Islamic banking as a safe haven for this kind of bubble burst if they only knew how few (if any) ‘write-offs’ there have been caused by the subprime crisis. PAUL WOUTERS Partner, Bener Law Office
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