Riyadh, Asharq Al-Awsat – Have you ever seen how a reed bends in the wind? It curves and twists in the direction as the wind, aided by the flexibility of its stalk, and the strength of its roots. Yet after the storm abates, the root returns to its original upright position, standing tall with pride and dignity. I find a strong resemblance between the way that a reed bends in the wind, and the way that Islamic banking has handled the storm of the international financial crisis which has hit the entire global economy, including the Islamic banking sector. We have seen how the tempest of this crisis has bankrupted many prestigious financial institutions as if they were merely leaves on the wind. In fact some conventional financial institutions are still struggling to survive today.
In the past – with the intensification of the global financial crisis – there was much talk about the stability of the Islamic banking system, and its ability to surmount this crisis. However questions have been raised about the Islamic banking industry’s actual ability to withstand the global financial crisis, particularly if this crisis extends into the real or physical economy that Islamic banking is based upon. Reports dealing with this issue have come to light that highlight the slow development of the Islamic banking industry [during the financial crisis], especially with regards to sukuk bonds. These reports underline the hardships and the decrease in profit that some Islamic banks are experiencing.
However in spite of this pessimism, and despite these bleak prospects, I am certain that the Islamic banking industry will get through this crisis with a minimum of losses, and that it will regain its momentum – at the latest – by the middle of the year. This is something that I stated clearly in many of my articles and media interviews regarding this crisis. I based my speculation upon several factors, such as the fact that most Islamic financial institutions do not have dealings with the cause of the crisis, namely, its poisonous assets; consequently they have remained immune to direct losses. The majority of Islamic banks also have sufficient liquidity [to get through the crisis] bearing in mind that this liquidity is either in the form of its accounts and therefore free, or in the form of speculation, in which case the risk applies to the bank itself. Add to this the honourable clients of the bank who have a proud history of supporting their banks in times of need which is something that was established during previous crises. Many of the Islamic banking assets also enjoy financial surplus, and do not suffer from a lack of liquidity, especially those in the Gulf region.
This is why I am confident in the strength of the Islamic banking industry, and I have faith that a return to growth is very logical. In fact Islamic banking – as per usual – surprised everybody with its speedy recovery and its return to growth, especially in the Gulf region where the reports on the performance of Islamic banking during the first quarter of 2009 show noticeable growth in profit and assets. The prices in the stock market also increased in value witnessing growth of 73 percent, according to a statement by Najat Al-Suwaidi, Chairman of the Board of the Arab Company for Investment. [TAIC].
According to a Standard Poor report issued in April 2009, the global market indexes that are compatible with the provisions of Islamic Shariaa law perform better than conventional market indexes. The sukuk market is also beginning to pick up again following the sharp decline it suffered in 2008 which saw loses of over 54 percent from the year before.
The Indonesian government has sold sukuk bonds totalling 650 million dollars at an initial interest rate of 8.8 percent after reducing this from 9.25 percent as a result of the demand from investors. According to Asian sources these sukuk bonds are underwriting investment of nearly 4 billion dollars, whilst according to the Thompson Reuters Company this represents the first issuance of the dollar this year.
Dar Alarkan, a real estate company operating in Saudi Arabia has stopped the issuance of its local sukuk which are worth around 750 million riyals [200 million dollars]. This contradicts the predictions of some who anticipated that the sukuk market in the Gulf States would only resume its activity in early 2010. The Islamic Development Bank also intends to issue sukuk bonds this year worth one billion dollars. It is expected that by the end of the year the overall value of sukuk bonds issued will reach an estimated 10 billion dollars.
As for the growth of the Islamic banking industry as a whole, this industry is still – despite the crisis – developing at an annual rate of between 15 and 20 percent, according to a statement by the Chief Executive of an Islamic bank affiliated to Standard Chartered Bank. The Islamic banking industry is also on the threshold of geographic expansion, and the crisis has opened up new markets to this industry, for example France, where the Dallah Albaraka group intends to open the first Islamic bank in the country later this year. According to Paris Europlace, for the first time in history Islamic sukuk bonds valuing 1.3 billion Euros will also be issued in France this year.
By withstanding this [global financial] crisis and demonstrating a return to growth, the Islamic banking industry is proving to everybody that it is the future of the financial industry.