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GCC remains dominant in Islamic finance

GCC remains dominant in Islamic finance
Abdul Jalil Mustafa | Arab News Available at: http://www.arabnews.com/?page=6&section=0&article=131017&d=11&m=1&y=2010&pix=business.jpg&category=Business

AMMAN: The Islamic financial system gained additional popularity in 2009, thanks to the relative immunity it enjoyed from the fallout of the financial crisis. The widely perceived viewpoint that Shariah-compliant financial institutions had passed the global credit crisis nearly unscathed is presenting the Islamic financial industry to many non-Muslim investors in the world as a safe haven from speculative excesses.

“We have reports that countries such as France, Australia and Japan are now mulling the introduction of Islamic banking into their financial systems,” Musa Shehadeh, general manager of the Jordan Islamic Bank said. Investors traumatized by the credit crisis apparently found comfort from the stricter rules imposed on lending by Islamic law, which considers the payment of interest as usury, thus banning the structures and financing methods that quickly unraveled during the US mortgage crisis at the end of 2008, Shehadeh said.

According to a study published in November by the Banker Magazine in association with HSBC Amanah, Islamic finance continued double digit growth despite global crisis in 2009. The survey, that covered top 500 Islamic financial institutions, showed that assets held by fully Shariah-compliant banks or Islamic banking windows of conventional banks rose by 28.6 percent to $822 billion from $639 billion in 2008.

This result contrasted sharply with a Banker study released in July which showed that the world’s top 1,000 conventional banks achieved an annual asset growth of just 6.8 percent. “The Islamic finance industry continues to build a solid track record: The compound annual growth rate for 2006-2009 is 27.86 percent, with assets forecast to hit $1.033 trillion in 2010,” the study said.

The six Gulf Cooperation Council (GCC) member states remained the dominant segment of Islamic finance, with $353.2 billion or 42.9 percent of he total global aggregate, according to the study. Iran remains the largest single market for Shariah-compliant assets, accounting for 35.6 percent of the global aggregate.

Outside the Middle East, Malaysia is by far the largest player, accounting for 10.5 percent of the global aggregate, but other markets are expanding rapidly. The United Kingdom now accounts for just under 2.5 percent of the world’s Shariah-compliant assets. “Apparently, Islamic finance sectors are attracting larger amounts of investment funds against the backdrop of being the least affected as a result of the global financial crisis,” Salah Shalhoub, professor of Islamic financing at the Dhahran-based King Fahd University for Petroleum and Minerals, told the Dubai-based Arabic version of the CNBC television.

“Demand has also substantially increased for Islamic tools and bonds, known as sukuk, due to the shortage of liquidity that can be obtained from conventional banks,” he added. However, the image of the booming Islamic finance seemed to have been marred at the end of November with the declaration by the state-run Dubai World conglomerate that it was asking creditors of two of its flagship real estate firms-Nakheel World and Limitless World – for a standstill on debt worth of tens of billions of dollars.

The two subsidiaries are run according to Islamic law through the issuance of billions of dollars worth of sukuk. Some analysts expected Islamic finance to be at risk as a result of the Dubai World debt crisis, but Hanaa Hunaiti, professor of Islamic Economics at the Amman Arab University for Higher Studies, believes the problem has nothing to do with Islamic finance. “Nobody said that the problem was because of sukuk, which as a matter of fact can lead either to profit or loss according to Islamic law,” Hunaiti said.

“I believe it is a short-lived ordeal that certainly will be dealt with in a satisfactory manner, given the assurances made by UAE officials that the emirate will be able to repay all its debts,” she added. However, other analysts suggested the focus of Islamic finance could be shifted from Dubai to Saudi Arabia, Qatar and Bahrain in 2010 pending the settlement of the Dubai World debt crisis. This vision was supported by a report issued recently by the Saudi chambers of commerce which expected investment funds to change their direction from Dubai to Saudi Arabia. “An opportunity now exists for Saudi Arabia to lead the forthcoming wave of the Islamic finance industry in the Gulf as the kingdom possesses all qualifications of this leadership, including the necessary infrastructure and guidelines,” the report said.

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