Islamic Finance : Is it a safe haven or irrational exuberance?

Islamic Finance : Is it a safe haven or irrationalexuberance?

Kuala Lumpur: Global financial markets are in turmoil but in the strangely calm world of Islamic finance, no one looks like jumping out of a window any time soon.

As conventional credit markets seize up, forcing the world’s biggest banks to write off billions of dollars and panicking stock markets, Islamic lenders and underwriters continue to do brisk business.

New issues of Islamic bonds, or sukuk, have slowed down but growth remains close to vertical: in the third quarter, $37.3 billion (Rs1.46 trillion) in sukuk was issued, double the amount issued a year earlier, according to the Islamic Finance Information Service.

In the budding Islamic financial capitals of Dubai, Bahrain and Kuala Lumpur, bankers still have a spring in their step.

“It is a safe haven for investors," Salman Younis, who heads the Asian operations for Kuwait Finance House, said when asked about the conspicuous calm in Islamic credit markets. “We are investing in real assets, we are not investing in paper assets," he said after signing a deal to finance a luxury condominium project in the country.

Islamic law forbids payment of interest and requires transactions to involve a specific real asset, such as a property or a commodity. Sukuk-holders, unlike conventional bond holders, are often technically owners of an asset, not lenders. “When you securitize a trillion dollars worth of subprime mortgages, you don’t know which city, or which particular district, you are (invested) in," Younis said.

“But here," the ex-Citigroup executive added, referring to his condominium deal, “you can touch and feel the asset."

Even so, there are doubts that the sukuk market can long remain an oasis from the turmoil in conventional credit.

One senior Islamic bank even wonders if the exuberance surrounding Islamic finance is becoming irrational.

“I think there’s a peculiar situation where there is too much liquidity in the market, arising from petro-dollars," said Badlisyah Abdul Ghani, head of Islamic banking for Malaysia’s CIMB bank, one of the biggest dealmakers in sukuk. “As far as the market is concerned, the impact of sub-prime is the same between Islamic and conventional. It’s just that the behaviour of market participants is somewhat irrational, given the fact there is this critical need to have Islamic assets."

Badlisyah feels the storm in conventional markets will pass before it has time to shake the sukuk market, but he says sukuk have too many ties to regular credit markets to ever insulate them from a sustained global credit squeeze.

Global banks such as Citigroup Inc., HSBC Holdings Plc. Barclays Plc. and Deutsche Bank are not only buying sukuk for institutional clients, they are also marketing sukuk issues. REUTERS