It’s not just traditional western banks that are hurting — the recession is hitting Islamic finance hard, too.

The industry, which operates according to Islamic law and hence has an in-built conservative investment strategy, is seen as relatively insulated from the financial crisis. But some executives at the Reuters Islamic Banking and Finance Summit are not so sure.

Islamic finance should still be able to combat the crisis better than conventional banks but big problems loom if liquidity remains tight. In fact Sohail Zubairi, head of consultancy Dar Al Sharia, reckons they’re facing up to a crisis scenario that could include forced consolidation and layoffs.

“There is a real threat to the business of Islamic banking,” Zubairi told Reuters reporters at the summit in Dubai. “If the liquidity does not return, we will not be able to continue doing our business.”

Yousif Khalaf, head of Ajman Bank, thinks the situation is so bad that growth and profitability are off the menu for this year.

“What is more important is survival and, to some extent, continuity,” he said. “People want to make sure they survive.”

PHOTO CREDIT: A labourer walks inside Sheikh Zayed mosque in Abu Dhabi April 7, 2009. The mosque, one of the world’s largest, is named after Sheikh Zayed bin Sultan al-Nahayan the founder and first president of the UAE who is also buried there. REUTERS/Ahmed Jadallah

Despite the global slowdown Islamic banking will continue to grow as multinational banks trim investments and sovereign wealth funds inject cash.

Professor Mahmoud El-Gamal, Chair of Islamic Economics at Rice University, says that despite the global economic slowdown Islamic banks will likely continue to see good growth because multinational financial institutions have had to cut back on lending in the Middle East and Sovereign Wealth Funds, eager to advocate Islamic financial growth, will likely inject the sector with cash.

Speaker: Mahmoud El-Gamal Chair of Islamic Economics, Rice University Presenter: Ruben Ramirez New York

This week we had the opportunity to speak with Mohsin Khan, Senior Fellow at the Peterson Institute for International Economics and the former head of the Middle East department at the International Monetary Fund, ahead of the 2009 Reuters Islamic Banking and Finance Summit. I asked him why he thought that the once red-hot market for Islamic bonds had slowed to a trickle. Khan says some of the largest issuers of Islamic bonds, or sukuk, were real estate developers and the reason corporations are reluctant to buy or issue sukuk these days is due in large part to the continuing decline in the value of real estate in Dubai. Click below to listen:
Kahn on sukuk issues from Reuters TV on Vimeo.

Mohsin Khan, former head of the Middle East department at the International Monetary Fund, says the Islamic banking industry could benefit from consolidation by reducing the number of sharia boards, or groups of Islamic scholars, that each bank employs in the Middle East to decide whether or not investments comply with Islamic law. I spoke with Khan earlier this week ahead of the 2009 Reuters Islamic Banking and Finance Summit that kicks-off on April 13th in Dubai, Bahrain, Kuala Lumpur and London. Click here to listen:
Kahn on consolidation from Reuters TV on Vimeo.

Nasser al-Sheikh, chairman of the Dubai-based mortgage lender Amlak Finance, says he is aiming for a 70 percent rise in 2008 profit on increased lending at home and contributions from foreign operations.

Sheikh told Reuters Islamic Finance summit in Dubai that Amlak would be “more aggressive” in its core business.

Hussain al-Qemzi, Noor Islamic Bank chief executive, tells Reuters Islamic Finance summit that Islamic banks are now part and parcel of the global banking industry. Qemzi is seeking to expand his United Arab Emirates-based bank to become the world’s largest Islamic bank in five years. 

 Asif Mumtaz, regional head of HSBC’s Islamic finance arm HSBC Amanah, called for more innovation to move Islamic banking further towards the industry’s mainstream. Mumtaz told a Reuters Islamic Finance summit in Dubai that there remained plenty to do in the areas of regulation and human development.

Geert Bossuyet, managing director, regional head of Middle East structuring at Deutsche Bank, sees the volume of Islamic bond sales in Gulf Arab countries could reach $20 billion this year. Bossuyet told the Reuters Islamic Finance summit in Dubai he expected the market to pick up in the second half of 2008 with the fourth quarter the most promising.