Dubai Woe Hits Reputation of Islamic Finance; ANALYSIS

Article excerpt

Byline: John Foster

AS DELEGATES at the annual World Islamic Banking Conference gathered in Bahrain, something of a pall fell over the conference centre in Manama.

This showpiece event, packed with bankers from the Gulf, the Levant, the Maghreb, Pakistan and India, South East Asia and the City of London, has always been a bit of a back-slapping, self-congratulatory affair. Every year key speakers triumph the great strides that Islamic finance has taken in the past 12 months and extol the virtues of faith-based banking.

Up until recently the growth of the sector was phenomenal. The sector is worth about $800 billion globally and has grown at an annual rate of 10%-15%. Islamic finance has not just blossomed in its heartland, the Arabian Peninsula, but down in South East Asia.

Islamic banks such as CIMB were more than giving the conventional banks a run for their money on the retail banking and investment banking fronts. New firms were springing up all over the world in those halcyon days before Lehman's fall from grace.

The City of London was being quietly Islamized with the arrival of Muslim money in the guise of Savile Row-suited veterans like David Testa, who set up Qatari-backed Gatehouse Bank in 2008. This was the fifth Islamic banking licence granted in the UK and it seemed the persuasive call of the muezzin had made its way to the top table in finance and government in Britain.

The Brown and Balls double-act at the Treasury championed the cause of Islamic finance, promising that Britain would be the first major Western nation to issue a sovereign Sukuk, or Islamic Bond. Then, Gordon Brown moved next door to No.10 and Ed Balls moved to Schools, and the enthusiasm for Islamic finance at the Treasury waned.

But this was the exception as opposed to the rule, and the world's bankers "filled their boots" with corporate and sovereign Sukuk -- such as Dubai's now notorious $3.52 billion Nakheel Islamic bond, the world's biggest Sukuk.

The enthusiasm that bankers and investors had for Sukuk, most notably from the start of the credit crunch, was down to the fact that Islamic finance had been marketed as a low-risk endeavour. The industry argued that it was savvier than its competitors on Wall Street and in the City, as Islamic economics was an ancient system that was highly riskaverse, transparent and ethical. Last year at the WIBC conference, Rasheed Mohammed al Maraj, Governor of the Central Bank of Bahrain, was declaring to a rapturous audience -- with just a hint of Schadenfreude -- that Islamic finance was immune from the credit crunch, although he did add the caveat: "This does not mean that Islamic finance is risk free. We still have some concern about the concentration of risk. There is a lot of [industry] focus on real estate."

Fast forward a year on and Islamic bankers are as popular as the rest of the banking profession. The global financial industry has been in the intensive care ward throughout 2009 as it was slowly being nursed back to health. …