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Islamic banking gets the blues
Ultraconservative investing methods were supposed to make Islamic finance immune to the financial crisis. So what happened, asks Trends magazine.
February 3, 2010 3:55 by Sarah Abdullah
Before the global crisis, liquidity had been a nonexistent problem, with Arab banks earning revenue on the back of high oil prices, increase in capital flows, and expansion of the private sector, the study pointed out.
The study explained that, despite these advantages, the banks’ ties to world financial markets ensured they, too, were affected when credit dried up, and have been unable to obtain loans to continue financing development projects.
The way to combat the liquidity crisis, the study said, is three-fold. First, Arab banks, both conventional and Islamic, are expected to more closely monitor local banking institutions’ ability to withstand credit risk.
Second, they have to adopt monetary and financial policies that support the provision of liquidity in the market to ensure continued economic growth. Third, there should be further monetary and banking cooperation between Arab countries.
“The culture of indebtedness is not encouraged in Islam. Borrowing, though permissible, is used sparingly and only when really needed. These features … shield against excessive borrowing. Interest-based borrowing is also prohibited in all forms,” the Islamic Development Bank’s Ali says.
Healing the Scars
Though not unscathed by the global turmoil, Islamic finance is witnessing promising growth.
Islamic finance services volumes are growing at more than 20 percent a year, ahead of its conventional counterparts, according to an Ernst & Young report.
Shari’ah-based indices like the Dow Jones Islamic Market Index have outperformed conventional indices.
“The crisis has exposed the feeble foundations of conventional finance, whose proponents are themselves looking for an alternative financial system. However, a radical change requires a strong will,” Ali says.
“Simply understanding the need for change is not enough.”