Islamic banks can exploit rivals’ misfortune

24 October 2008
Sharia-compliant institutions that have struggled to compete in terms of pricing are back in vogue.

Amid all the bad news, there are still some opportunities in the banking sector. Funding is difficult and expensive to find, but the banks that can keep their clients will be well placed to emerge even stronger.

While growth in the Middle East will slow, it is still expected to outpace Europe and the US, making it one of the few regions that are still attractive to international financial institutions.

However, the structure of the bailout packages from Western governments means that some banks will be forced to focus on their domestic markets.

Those that have not had to access government funding, such as HSBC, will be well placed to take up the slack.

The other main winner is likely to be Islamic banking. Sharia-compliant banks such as Al-Rajhi Bank and Kuwait Finance House, which have long struggled to match conventional banks in terms of pricing, are now finding their business model is back in vogue.

Using deposits as a source of funding and keeping debt levels to a minimum are newly popular principles for conventional banks, but it is what Islamic banks have always done.

As the world tries to untangle itself from the current financial mess, Islamic banks are well placed to take advantage of others’ weakness.

The biggest questions, though, will be how much business is there to do and whether it is still too risky to do it. The banks might take a larger share of the market, but the market itself is likely to be smaller.

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