According to Moody’s, the IFIs’ resilience is not only thanks to their strong growth and typically conservative approach, but also because the core principles of Islamic banking have protected them from elements of the crisis.
Global Islamic banking assets grew around 27 per cent in 2007 and growth of 20-30 per cent is expected this year.
Anouar Hassoune, a Moody's Vice-President/Senior Credit Officer and author of the report, said, "Although 2009 will likely be a tough year for Islamic banks, they benefit from a number of buffers: their credit portfolios have been essentially domestic, with limited pressure on asset quality so far; they have strong retail platforms, with high customer loyalty and deposit stability; and their high capitalisation and ample core liquidity often provide a relatively high amount of confidence to counterparts."
As a result, Moody's expects IFIs in the Gulf region to be able to continue growing, albeit at a slower pace, before resuming more rapid growth, most probably within 18 months.
Paradoxically, IFIs' reputation has benefited from the current crisis, reflecting their conservative approach to business, a close proximity to their domestic and regional franchise, their balanced and ordered appetite for growth, and focus on the basics of banking as opposed to innovation.
Hassoune said, "All these factors, which used to be perceived as weaknesses before the credit crisis began, are now being used as shields against the potential damages of imported stress. As a result, in the short term, in times of crisis, clients may find it more comfortable doing business with an Islamic bank. Such institutions are perceived as focusing on the basics of financial intermediation, and depositors may therefore view them as safer havens less prone to excessive financial innovation."
Another critical reason for IFIs' impressive resilience to the crisis to date relates to the core principles of Islamic banking: both speculation and interest rates are prohibited. The sub-prime crisis has been largely driven by a number of factors that in combination led to risks that were again magnified through the use of complex, often highly structured financial products, all of which were explicitly riba-based: it is only natural that Islamic banks have steered clear of such activities.
Nonetheless, as Moody's explains in its report, IFIs do not operate in isolation from their local, regional and even international environments. They have therefore been facing three series of cyclical challenges, reflecting their current structural strengths and weaknesses. First, they are finding it more difficult to manage their short-term liquidity.
Second, their investment portfolios, which are concentrated on illiquid and cyclical asset classes, have been impaired. Finally, their access to long-term funding has been postponed, forcing them to reduce the maturity profile of their assets. However, Moody's expects that such constraints will prove only temporary and that Islamic banks have the capacity to weather the storm.
Moody's Special Comment – entitled ‘Gulf Islamic Banks Resilient Amid Global Credit Woes’ – discusses in greater detail the challenges facing IFIs in the region amid current conditions and their capacity to withstand the pressures. It also provides a summary rationale of Moody's ratings for each of the rated Islamic banks as well as an overview of their financial performance for the first nine months of 2008.