Islamic finance has proven to be more resilient amid financial crises, but experts believe that more can still be done to manage risks.
Despite Islamic banks’ high liquidity, namely; in the form of cash, the industry still lacks the necessary depth to manage risks effectively, commented Jaseem Ahmad, the secretary general of the Islamic Financial Services Board.
Islamic banks needed to manage the risks in the financial system ahead of any possible crisis or downturn, business advisory firm PricewaterhouseCoopers (PwC) warned at the weekend.
Mohammad Faiz Azmi, global leader of PwC’s Islamic finance team, said: "Risk management is an issue which cannot be ignored by any financial institution, but Islamic banks in particular need to establish risk management credibility as they aspire to move into the mainstream of the financial system."
Islamic banks should diversify into areas such as asset management after real estate industry investments caused them greater losses during the credit crisis than conventional banks, according to McKinsey & Co Inc.
One third of the assets of Islamic banks in Qatar are “directly exposed in some way to real estate” compared with 15 percent for other banks, Amer Afiouni, Islamic finance associate principal at the consulting firm, said in Singapore.
Few took notice outside certain coteries of specialist bankers and lawyers, but the launch of a 42 page master documentation for derivatives that comply with Muslim religious principles could have a far-reaching impact on the Islamic finance industry.The International Islamic Financial Market (IIFM), a Bahrain-based Islamic capital markets body, and the International Swaps and Derivatives Association (ISDA) have for the past four years been working on standardised documentation for derivative instruments that comply with sharia, or Islamic law.
Islamic financial bodies, which adhere to religious proscriptions against interest, have a market potential of at least US$5 trillion ($5.43 trillion), Moody's Investors Service said.
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