Sharia law provides sub-prime shield

While financial institutions virtually throughout the western world have been sent reeling by the fallout from the sub-prime crisis, Islamic banks have been largely shielded because Islamic law precludes the use of complex financial instruments.

That is the bottom line of an analysis provided to the Reuters Islamic Banking and Finance Summit by Bahrain’s central bank governor, Rasheed al-Maraj.

He said that Islamic banks should have shunned collaterised debt obligations linked to sub-prime or high risk mortgages because such complex instruments do not comply with Muslim law.

“In Islamic banking there is no black box that needs a genius to unwind it,” Maraj said. “Many of these conventional products that have been under stress lately are very complex and need special risk management tools.

“In Islamic banking you would not have this kind of thing. Some of these products would not be Sharia-accepted,” he said.

Maraj suggested that the sub-prime crisis could provide the Islamic banking industry with greater opportunity for growth, both from conventional retail customers looking for an alternative, and also from a collapse of Western asset prices.