MANAMA - With their ban on interest, the Gulf Islamic banks that managed to avoid the types of debt which proved toxic for their conventional counterparts are now praying the global crisis will bypass their property holdings.
Islamic banks, which manage an estimated $1 trillion worldwide, do not have the same flexibility as conventional banks in managing balance sheet risks, bankers say. For instance, they cannot reduce exposure to the real estate market by using derivatives.
The fate of Islamic banks in the region is closely tied to the property markets as they are required to underpin transactions with physical assets due to the ban on interest, which is viewed as usury under Islamic law.
”Islamic banks may initially have been viewed as less impacted because they are unable to invest in the instruments that caused the current instability some 18 months ago,” said Danie Marx, head of treasury and capital markets at European Islamic Investment Bank.