Islamic Banking in 2009, industry at a crossroads

Noor Investment's press conference on the sixth of January was set up to announce the creation of Noor Takaful, the latest Islamic insurance firm.

But in fact, Noor had two messages, with the second no less important than the first: Noor Islamic Bank (NIB) will put its planned expansion abroad on hold in order to focus more on domestic affairs.

NIB was created almost a year ago, and it was announced at the same place, in the 27th floor ballroom of the Burj Al Arab.

But twelve months ago the future was looking much brighter. Stock indices were advancing all over the GCC. Conventional banking got into trouble step by step, but Islamic Finance did not follow.

The launch of NIB was followed by other new Islamic banks, Ajman Bank and Hilal Bank in Abu Dhabi. Commercial Bank of Dubai also launched its Shariah finance-section 'Attijari Al Islami' (Islamic commerce) in September 2008.

Drop in global Sukuk

The shock came after Ramadan, when it became clear that the liquidity crunch also weighed heavy on the issuance of Sukuk. Global Sukuk volume dropped by 60% to $15bn between January and October compared to the same period in the previous year.

Ongoing discussions about the Shariah-compliance of certain Sukuk, triggered by renowned scholar Sheikh Taqi Usmani, Chairman of the board of scholars at the AAOIFI (Islamic accounting organisation), also sent volumes down.

An increasing 'copy-paste-mentality' is regarded as a threat to the industry. 'Who needs an Islamic hedge fund?', was a frequently heard question asked at Islamic finance conferences in 2008.

A justified point. Islamic Banks, by nature, bear lower risks than their conventional counterparts since they do not invest in any loans (due to the prohibition of interest (Riba)) and do not trade options, futures or hedge funds (because gambling is banned as well). But, if Islamic banks merely label conventional products as 'halal', they manoeuvre themselves into the conventional risk class.

Return to Islamic values

Risk-aversion will stay high during the first half of 2009, although stock markets show some sign of relief. During the last month of the Annus horribilis (2008) only Asian indices of the Dow Jones Islamic Market (DJIM) Index advanced.

'Ex oriente Lux', lights comes from the East, again. And while Western banks reduce staff in their home markets, they are building their teams up in the Middle East and Asia.

Swiss giant UBS will establish a presence in Qatar and Riyadh this year. Credit Suisse is looking for 200 relationship managers until 2010 for its branch in Singapore, the international Islamic finance centre of the Far East.

Watch for more Islamic banks in the GCC to put their expansion strategy on hold, as Noor Islamic Bank has, and focus on their basic mission: To provide a non-interest, non-conventional, ethical style of investment.

See also:
Are Islamic banks the financial institutions of the future?
Saudi Arabia sees launch of Islamic real estate