Islamic mega-bank prays for support

April 6, 2009

BAHRAIN/– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –

Islamic finance is about to get its first mega bank if Sheikh Saleh Kamel has his way.

The billionaire chairman of Bahrain-based Al Baraka Banking Group is head of an alliance hoping to launch a $10 billion Islamic bank before year-end. He will have his work cut out. Islamic banks may have avoided the worst of U.S. sub-prime dross, but Islamic banking has risks of its own.

Islamic finance has enjoyed a benign decade. It has been growing at a 20 percent-odd clip since the turn of the century, with assets of $600 billion at the end of 2008. Moreover, Islamic banks avoided the complex collateralized debt polluting most western banks, thanks to Shar’ia restrictions on riba (interest).

Those western banks have been struggling to repair their ravaged balance sheets, with governments often the only (unwilling) investor.

Al Baraka itself has held back from IPO plans that have been in the offing for several years. But Adnan Youseff told a regional TV station this week that Sheikh Kamel is “accelerating the finalization process.”

But investors are taking a risk if they assume that Islamic finance is a whole lot safer than its discredited western counterpart. After all, most Gulf banks are heavily exposed to real estate. As Spanish and Irish banks have found to their cost, it is little consolation to avoid complex U.S. sub-prime debt if you are hammered by a local property bust.

More generally, Islamic banks have yet to test the central tenet of Islamic banking-that depositors are co-investors who share in the risks that they take on. In practice, like U.S. money-market funds, they strain every sinew to ensure they don’t “break the buck”, or give customers back less than they deposited.

But big real-estate write-downs could mean that banks do not have enough to repay deposits in full. That would test depositors’ loyalty. And many Islamic banks, like their western counterparts, have lent long. Therefore, if depositors turn away from their local banks, they could face a liquidity squeeze just as acute as when wholesale markets closed to western banks in August 2007.

After all, depositors do have a choice. There is already a mega-bank offering Islamic finance. It’s been in the Middle East for more than a century. It’s global. And it’s about as safe as banks come. It’s called HSBC.

– At the time of publication, Margaret Doyle did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund. –

10 comments

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There can never be a supranational Islamic banking institution because then it becomes ribaa, since they will involve in various currencies which are already fiat and based on Ribaa.Muslims countries are not very good examples of free economies and therefore such institutions can be mis-used by those wielding power.Only localised banks that cater to local people and that use barter or some sort of trading can be Islamic in true sense of the word. Islamically the rich should assist the poor in becoming free and self empowered.Everything else is a money making scheme, no different from the Western banks.

Posted by Gulamhusen | Report as abusive

kind of negative review for islamic banks, even after so much lost in the market on the basis of interest and laverage. not only muslims but world need different system. Not to mention HSBC lost money as well and came up with right issue of shares. well hope west got its printing press for currency after all.

Posted by shabbir | Report as abusive

I wonder how much Margaret Doyle is being paid to HSBC advertisement. It’s quite difficult to conceive this article as being anything but.

Posted by Hefni | Report as abusive

We in India have seen a mix or private banks become national and the tenets of banking has been unsury.The basic tenet of Islamic banking is your money cannot grow without risks or hardwork. I guess lots of us are totally fine with it.We should laud banks like HSBC who have taken a lead, and set an example and become successful as well.

The Islamic banking system is as risky or even riskier than the conventional banking system , because is totaly based on assets intermediation. The asset could be a real estate, commercial asset or commodity.The financial crisis has touched much of the assets markets. So the Islamic banking is facing a large decrease in its assets collateral which makes the islamic finance much riskier in the crisis.Not to mention the poor risk management and hedging tools used in Islamic Finance.Sameh,Islamic Banking Expert.

Posted by Sameh | Report as abusive

The Christian Bible also advises against collecting interest on loans. Maybe this is where we all have gone wrong building a society and system that revolves around this- spending what we don’t have and making the poor, poorer.

I think Islamic Banking is probably the way to go. We’ve seen successfully micro financing banks in South Asia who come close to the purpose of existence of Islamic banking which is help people in need and the idea of profit sharing is perfect. Risk is little and considering 10 Billion $’s are being pumped into one big bank tells us that the future might head in that direction.

Posted by Mus | Report as abusive

“– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –” Is this posted on all articles about religion, or just certain subjects/authors…

Posted by Alex Holding | Report as abusive

April 7th, 2009 9:18 am GMT – Posted by Alex Holding“– Margaret Doyle is a Reuters columnist. The opinions expressed are her own –” Is this posted on all articles about religion, or just certain subjects/authors…Of course she has to put this note up when writing about Islam or Muslims….I am sure she has no desire to be blown up by a suicide bomber.

Posted by matt | Report as abusive

You want to know why he is a billionaire? Take a look at the financing…it’s basically the same as interest except they use material belongings. He’s a billionaire and the people are dirt poor. The west has a much better banking system. Just look at the living standard from the west to the mid east. Like duhhhhh.

Posted by herself311 | Report as abusive