Islamic banking escapes financial fallout

Islamic banking has largely escaped the fallout from the global financial crisis, thanks to rules that forbid the sort of risky business that is felling mainstream institutions.

The rules of Islamic banking and finance read like a how-to guide on avoiding the kind of disaster that is currently gripping world markets.

Islamic law prohibits the payment and collection of interest, which is seen as a form of gambling, so highly complex instruments such as derivatives and other creative accounting practices are banned.

Transactions must be backed by real assets - not shady repackaged subprime mortgages - and because risk is shared between the bank and the depositor there is an incentive for the institutions to ensure the deal is sound.

Investors have a right to know how their funds are being used, and the sector is overseen by dedicated supervisory boards as well as the usual national regulatory authorities.

But experts say that because of its heavy reliance on property investments and private equity, the booming 1 trillion dollar global industry could be hit if the turmoil worsens and real assets start to crumble.

[Straits Times]

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