Islamic banks showing their strength in troubled times

The global financial crisis demonstrates some of the inherent strengths of Islamic financial services. As France’s Minister for the Economy, Industry and Employment Christine Lagarde commented at a recent forum in Paris, in the face of the current crisis, global leaders need to establish “new principles for the international financial system, based on transparency, responsibility and moderation. In this sense, Islamic finance is calling out to us.”

Islamic finance does not allow interest payments, short selling and contracts considered excessively risky, which rules out sub-prime mortgages, collateralized debt obligations and credit-default swaps, some of the practices that led to the current crisis. As Saleh Al Tayar, Secretary General of the Franco-Arab Chamber of Commerce, commented at the Paris forum, “If global banking practices were based on Islamic practices, then we wouldn’t be seeing the kind of crisis we are living through now.”

Abu Dhabi’s Islamic banks coping with crisis

Abu Dhabi Islamic Bank (ADIB) is an example of an Islamic financial institution that is progressing as others fail. ADIB achieved a net profit of AED 216.5 million (USD 59 million) for third-quarter 2008, a growth of 57.8 percent over the same period in 2007, while earnings grew by 41.1 percent. According to a January 29 news release, the bank’s fourth-quarter results even beat analysts’ forecasts, representing a 73.4 percent growth in income over the quarter to reach USD 78.38 million after the bank sold some investments and boosted lending.

Tirad Mahmoud, ADIB’s CEO, commented at a recent banking event, “We have no exposure to the sub-prime market, which has sheltered ADIB from much of the turbulence we have seen recently on the international stage. Our strategy is clear: we are building a high-quality asset base which will provide a source of long-term sustainable business growth. Our liquidity remains excellent.”

ADIB recently confirmed an AED 1.45 billion (USD 0.39 billion) financing agreement for a joint venture to support the development and expansion of Zayed University’s campus in Abu Dhabi. The bank also plans to open six new branches in the UAE by April 2009 and will expand in other markets. “The economy has changed, the market is tougher, but opportunities are there and we will capitalize on that,” Mahmoud said.

Abu Dhabi National Islamic Finance (ADNIF), the Islamic banking division of National Bank of Abu Dhabi (NBAD), is also weathering the financial crisis well. The bank recently arranged an AED 334 million (USD 91 million) facility for Sino Gulf Investments’ tower project in Abu Dhabi’s Capital Center development, and Moawia El Amin, head of ADNIF’s Corporate and Commercial Division, said that ADNIF has grown significantly over the past 18 months.

Abu Dhabi’s government-owned Al Hilal Bank, formed last year, may not break even in 2009 and may slow its overseas expansion due to the global crisis, but has announced it will grow organically in the UAE this year, while another new Abu Dhabi Islamic bank, Ajman Bank, has announced, “Our key model is to acquire and grow.”

Islamic financial institutions around the world now handle around USD 700 million in assets and have been growing by 20 percent to 30 percent per year. In 2009, they are expected to focus even more strongly on risk aversion, but their recent performance during a global crisis will surely lead to even stronger growth for Islamic finance in the future.