Rated Gulf Islamic Banks And Takaful Companies Resilient In Global Market Dislocation But Facing Risks

PARIS, Gulf Islamic financial institutions and takaful companies are feeling the repercussions of the current global financial market disruption less than most of their conventional counterparts because Sharia law prohibits interest-based financial products, according to a new report by Standard & Poor's Ratings Services. "IFIs didn't invest in the structured products that have hampered many conventional banks' financial profiles and performance," said Standard & Poor's credit analyst Mohamed Damak in the report, titled Rated Gulf Islamic Financial Institutions And Takaful Companies Have Shown Resilience To Global Market Dislocation, But They Are Not Risk Immune. "And most IFIs should be equipped to weather the financial downturn and keep the effects on their financial profiles at manageable levels." We expect takaful and retakaful insurers to continue to resist the toughening market environment. We attribute their resilience to sufficient liquidity flows--in part due to reportedly higher new business--to service normal claims levels, and to capital adequacy, which, despite being affected in the current climate, remains supportive of the ratings across the sector.Still, Standard & Poor's notes the squeeze that market conditions are putting on many Islamic banks and takaful insurance companies. "We see the liquidity dry-up, mounting pressure on the real estate sector in the Gulf Cooperation Council countries, the sharp correction in regional stock markets, and certain investments made by IFIs--mainly investment banks--in European or U.S companies and real estate as the main sources of stress," said Mr. Damak. Like their conventional peers, IFIs stand to post weaker financial performance and asset quality indicators, in our view, in the coming quarters. We believe that rated IFIs' financial performance will deteriorate because we expect them to book some market-related provisions covering their exposure to the dropping values of stock markets and to Sharia-compliant investment products (mainly sukuk notes and funds). The anticipated slowdown in loan growth, the inflated cost of funding because of tight liquidity, and the increased cost of risk in the Gulf region also stand to test IFIs' performance and constrain their growth. Liquidity management is challenging for IFIs due to the lack of liquid Sharia-compliant asset classes. We understand that IFIs' instruments for managing liquidity are scarce compared with those of conventional counterparts. "In our view, IFIs could take advantage of the current challenging times to innovate and broaden the offering of acceptable instruments for liquidity management," said Mr. Damak.Following the liquidity crunch, total sukuk issuance worldwide reportedly declined to $14.9 billion in 2008, compared with more than $34.3 billion a year earlier. Still, we continue to foresee long-term positive prospects for the sukuk market, with sustainable growth poised to come from the increasing popularity of Sharia-compliant financial instruments, governments' increasing openness to Islamic finance around the world, substantial investment and financing needs in the Gulf, and issuers' desire to tap investors from the Middle East and Muslim Asia.

(Zawya)