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Financial crisis  has limited impact on sharia finance


October 8, 2008

Financial crisis  has limited impact on sharia finance

Islamic finance has not felt the full brunt of the global credit crisis that has rocked conventional banks, thanks to its profit-sharing requirements and insistence that assets underpin transactions, Reuters quoted Malaysia's central bank chief as saying.

Malaysia, along with the Middle East Gulf, is a leading hub for Islamic finance, which shuns interest-based lending and investments in gaming, alcohol and pornography in favour of profits reaped from partnerships and ethical investments.

"Islamic finance has, thus far, remained positive, despite the current challenging global financial environment," Zeti Akhtar Aziz said in a speech at a sharia banking congress in Boston on Monday. The text was released on Tueday.

"The sharia injunctions require that the financial transactions be accompanied by an underlying productive activity thus giving rise to a close link between financial and productive flows."

Islamic banks are also required to share profits and losses arising from projects, prompting lenders to undertake the necessary checks to ensure that a venture is sound, Zeti said.

The global Islamic finance industry, valued by the Asian Development Bank at $1 trillion, has been regarded by some investors as a safer alternative as the sharia forbids complex, opaque financing structures similar to subprime loans that triggered the U.S. housing collapse.

Still, uncertainties in global markets have had an impact on Islamic transactions, Zeti said.

"While Islamic finance by its very nature only engages in transactions that have underlying tangible productive activities, the slower overall growth and the increased uncertainties have affected pricing and activity in certain market segments," she said.

Some companies, including Kuwait's Abyaar Real Estate Development Co and Malaysia's Perisai Petroleum, have either put on hold or scrapped plans to sell Islamic bonds, citing tougher market conditions. Last month, the United Arab Emirates central bank launched a $13.62 billion emergency facility to remove liquidity constraints in the interbank market.

Zeti said more than $14 billion of Islamic bonds, or sukuk, were issued globally up until August this year. A record $47 billion of sukuk were issued last year, she said.

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