The last year has been difficult for both Islamic banks and Islamic capital markets as the credit crunch resulted in a widespread recession, which in turn brought a sharp downturn in oil prices and tumbling property markets in the Gulf Cooperation Council states. The major achievement for Islamic banks was simply to survive in this difficult climate, and to their credit, none had to seek the government bailouts that were all too often required by their conventional competitors. Amlak and Tamweel PJSC of Dubai had to merge, but their survival was never threatened. Sukuk issuance fell substantially from its peak in 2007 to below its 2006 level, but there have been no defaults on Sukuk obligations compared to those with conventional securities. No Sukuk are toxic. The last year has been a torrid time for investors in Shariah compliant funds, which have on average declined by one quarter in value. However, most have outperformed their conventional equivalents, partly because the latter had significant exposure to riba-based banks, whose share prices have declined disastrously. It is hard to be optimistic for 2009, with any significant upturn having to wait until 2010. However, recession is a time for reflection and taking stock. The debate over Shariah-based versus Shariah compliant products intensified in 2008. Expect to see new Shariah-based structures appearing in 2009. The new year may be a time for fresh thinking and innovation, with the seeds being planted which will strengthen the inevitable recovery in Islamic finance activity.
PROFESSOR RODNEY WILSON
The year 2008 was without doubt one of the most tumultuous years in the history of finance. Interestingly enough, the crisis in the conventional banking world has resulted in increased interest in the principles of Islamic finance. Earlier in 2008, we saw the new AAOIFI Sukuk rules that many have blamed for the reduced issuance of Sukuk during the year, but is that true? Sukuk issuers, like other borrowers, have seen spreads widen over the year and are putting off attracting new money as waiting may lead to a better deal. Towards the end of the year, we saw that the Islamic finance industry is also indirectly hampered by the credit crunch, and that Islamic investors are not completely immune from the effects. However, the liquidity implications for Islamic banks are on a completely different scale to their conventional counterparts, and the sub-prime mortgages and related toxic assets are not part of the Islamic bank’s balance sheet. For 2009 there is likely to be a further focus on the underlying principles. At least during the first half of 2009, I strongly believe that Islamic banks can use the current situation in their favor, while the conventional institutions will still be sorting out their issues. They should not become complacent though; once you have your client relationship, you will need to keep on working on it. DR NATALIE SCHOON Head of product management, Bank of London and the Middle East
The biggest development was the global credit crisis and the questions that it raises — still unanswered. These questions are compounded by the stunning collapse in commodity prices. They are best summarized as one question: How can Islamic banks manage in times of extreme uncertainty? The year 2009 holds the risk of more uncertainty, especially in the real estate markets. ABDULKADER THOMAS President and CEO, SHAPE Financial
Last year — 2008 — was in many ways a “wake up” call for Islamic banking and finance. Having survived the initial shock waves (which destroyed many Western financial institutions and markets), Islamic banking and finance also started slowing down, out of sheer nervousness in some cases and due to some exposures in other cases, which could potentially have a bad effect on some Islamic institutions as in the case of their Western counterparts. In my view, 2008 marked the end of a honeymoon period for Islamic banks and financial institutions. The slowdown in Islamic capital markets, especially Sukuk, was the most significant development (or anti-development) in 2008. In 2009, growth (in terms of number) of Islamic banks and financial institutions will face a slowdown. It is expected that some small institutions will merge with similar banks or be acquired by bigger banks. The establishment of new Islamic banks will not be as easy as it has been in the last five years. Overall, a tough year for the Islamic financial industry! DR HUMAYON DAR CEO, BMB Islamic
Having correctly predicted this development, my prediction for 2009 is that a complete reversal of polarity of the financial system will commence, leading to transition from the current deficit-based system of credit intermediation to a disintermediated asset-based financial architecture. We will see “peer to peer” mutualized credit, and “peer to peer” revenue and risk sharing investment through unitization — both within partnership-based legal frameworks. Both will be immediately recognized by Muslims as self evidently Islamically sound. CHRIS COOK Principal, Partnerships Consulting
While I hope 2009 will be a better year for Islamic finance, I foresee some significant challenges. Weakening economic conditions, particularly the real estate market in Dubai, will challenge the industry to find alternative investments to promote greater diversification of assets on Islamic banks’ balance sheets. I believe there is a possibility for an Islamic bank to fail, which will test the resiliency and capital adequacy standards of the industry which I hope are strong and should be aided by the conservative behavior of Islamic banks. On a hopeful note, the Sukuk market should rebound, particularly in the second half of 2009, as the backlog of issues delayed by the credit crisis come to market. If oil prices recover from their low levels, there could be enough Sukuk issued that demand for them exceeds supply. If enough buyers come into the market it could drive prices up to a level where a secondary market for Sukuk begins to emerge, most likely on the Dubai or London markets. Finally, the growth of Islamic finance in countries where Muslims are a minority will continue to grow as Islamic finance becomes more developed and regulatory and tax regimes become more accommodative. The countries where I anticipate the most growth are the UK, France, Germany, Canada, Hong Kong, Singapore and Japan with slower growth in the US, India, Indonesia and Turkey. BLAKE GOUD Principal, SharingRisk.org
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