SINGAPORE (Reuters) – Some Gulf Islamic banks could fail as frozen credit markets and slumping property prices take a toll, but government aid should save the industry from a prolonged slowdown, a leading sharia lender said on Tuesday.
Islamic banks have hardly felt the chill of the credit crisis so far, but some industry experts warn that the $1 trillion industry will not be spared from the fallout as prices of commodities, property and oil slide. All are core drivers of the Islamic financing sector.
Sharia lenders in the Gulf would be harder hit by the credit rout than Asian banks due to their greater direct exposure to the property market, said Badlisyah Abdul Ghani, chief executive of Malaysia’s CIMB Islamic Bank.
CIMB Islamic is the world’s top arranger of sharia bonds. The lender is part of CIMB Group, which is listed on the Malaysian stock exchange through Bumiputra-Commerce Holdings.
“The sovereign-backed Islamic banks are very safe and they will be supported by the sovereign if they have problems in liquidity,” Badlisyah told the Reuters Wealth Management Summit in Singapore.
“But for privately owned banks, they would feel some difficulty. Whether or not they’re going to fail is anybody’s guess but the expectation is that some will.”
PROPERTY BLOW UP
Badlisyah warned that a deterioration in Gulf property markets could have implications for lenders in the region.
“So when the property market blows up, definitely you will see problems in that market,” he said.
But he said Asian Islamic lenders are expected to fare better because they have less direct exposure to property markets and funds that invest in real estate.
Kuwait Finance House, the Gulf’s third-largest lender, said on Tuesday it is aiming to raise $600 million in funds from Middle East investors in 2009 to buy ships, stakes in private firms and properties in Asia, despite the current market turmoil.
“Of course raising funds is not going to be easy, but this is the best time because if you have the money, then things are very cheap,” said the Islamic bank’s Singapore chief executive Lim Boh Soon at the Reuters summit.
Lim said most of his own investments are in cash and equities and currently favors gold, and warned that the recent rebound in global equities was likely temporary.
“Personally I think it’s a bear trap. This crisis is worse than the Asian financial crisis as it’s on a global basis,” he said, adding that he expects the downturn to last for the next 18-24 months.
SIGNS OF TROUBLE
Islamic finance, which frowns on the speculation and excessive risk taking espoused by conventional banks, has been touted over the last year as a safe haven as credit woes rock global financial markets.
But a rash of Islamic bond sale cancellations and poor earnings by some big Gulf banks hint at trouble.
The United Arab Emirates government agreed on Sunday to take measures to shield its economy, promising to protect banks from credit risks. Last month, the UAE central bank launched a $13.6 billion emergency facility to help keep interbank lending moving.
Badlisyah said a collapse of an Islamic lenders in the Gulf could hurt the industry, although any slowdown was unlikely to be prolonged.
“At the end of the day, there is a clear agenda on the part of various governments in the GCC (Gulf Cooperation Council) to develop the Islamic financial market both from a political perspective as well as a commercial perspective,” he said.
“They cannot afford to allow this market to fail.”
Sales of sharia bonds, or sukuk, have already been hit by turmoil in broader credit markets, with global new issuance this year seen easing from over $20 billion in 2007, Badlisyah said.
“You’d probably be lucky to close the year with $16-$17 billion,” he said, referring to new sukuk issuance in 2008. New sales next year would be about the same or just slightly better than this year’s level, he added.
About $2 billion of infrastructure sukuk in the Middle East that CIMB Islamic was arranging have been delayed because of ailing financial markets, Badlisyah said.
He said CIMB Islamic would increase its assets from 16 billion Malaysian ringgit to 30 billion ringgit by year-end.
“We do have approved facilities not drawn as yet so they will be drawn before year-end,” he said. “A lot of drying up in the sukuk market is transforming into corporate banking deals.”
Its financing-to-deposit ratio, which is like the loan-to-deposit ratio for conventional banks, is about 26 percent and the bank wants to increase it to 60-70 percent over the next six months to a year, he said.