Moody’s sees huge global potential for Islamic banking industry

KARACHI: Islamic banking industry has an immense global potential to grow to $5 trillion from the current $950 billion as both individual depositors and companies have shown willingness to adopt Shariah compliance, an international rating agency said in its report on Tuesday.

“A combined use of securitisation and derivatives offers considerable scope for reducing the risk exposures of Islamic financial institutions (IFIs) and thus improving their overall creditworthiness,” said Moody’s Investors Service in its report.

However, the Islamic finance industry needs to develop its own innovation phase and not imitate conventional derivative instruments to maintain their special status and Shariah-compliant approach, the report said.

Despite the recent gloomy global economic environment, the Islamic finance industry’s total assets rose to new heights in 2009, rising to $950 billion, it said.

Moody’s estimates the potential of Islamic banking industry at around $5 trillion, as it continues to expand globally.

“In this context, IFIs are continuing to deliver Shariah-compliant returns whilst, at the same time, focusing on efficiently mitigating the associated risks through a new risk management approach, including the use of derivatives,” says Anouar Hassoune, Moody’s vice president, who authored this report.

“If employed with care, derivatives can enhance efficiency in IFIs through risk mitigation, thereby making them more competitive as well as appealing to customers. However, their application in Islamic finance is highly controversial for reasons of speculation and uncertainty, two practices forbidden under Shariah,” explains Hassoune.

The varying scholarly opinions in the world of Islamic jurisprudence on the legitimacy of derivatives has so far translated into a total ban on these instruments in some countries and actual implementation — albeit on a limited scale — in others, he said.

“IFIs aim to utilise derivative instruments to hedge against the risk and to improve risk monitoring practices.

However, they are keen to do so in a Shari’ah-compliant manner, rather than imitating conventional derivative instruments in order to avoid losing their special status as Shariah-compliant banks, which makes them very attractive to a large population of Muslims,” Hassoune added. “For this reason, a new innovation phase in the industry is critical.”

Source The News