This might be a good time for investors to pick up a copy of the Koran. Stocks and other investments that adhere to sharia, or Islamic law—though hardly unscathed—have fared better than the broader market. That's thanks largely to rules that forbid investing in collateralized debt obligations and other toxic assets that have caused the carnage in conventional financial circles.
A big part of the appeal of Islamic finance is its simplicity. Speculation is taboo under sharia, and there's a ban on assessing interest because the Prophet Mohammed said debts must be repaid in the amount that was loaned. Money proffered must be backed by collateral, and if financial instruments are traded, they generally have to sell for face value, which deters banks from repackaging debt. "This is one way to keep both feet on the ground," says Rozali bin Mohamed Ali, head of an Islamic finance university in Kuala Lumpur.
That doesn't mean Islamic finance won't suffer in an economic downturn. Because they must hold collateral, Islamic financial institutions tend to have more real estate assets than Western banks do. So far, sharia-compliant banks—mostly in the Gulf region—haven't suffered because housing prices there have held up relatively well. But if those markets were to dive, there could be trouble, says Mohamed Damak, a credit analyst at Standard & Poor's (MHP). "Banks most exposed to [real estate] will feel an impact if there is a sharp correction—whether they are Islamic or conventional," he says. Particularly vulnerable may be Dubai Islamic Bank, where two former executives have been detained in a real estate scandal and 30% of assets are tied to property. DIB Chief Financial Officer Mohamed Al-Sharif acknowledges the 30% exposure but says the bank won't suffer because "we only go after prime locations."
Via BusinessWeek.
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