Islamic banks not unduly challenged by oil price drop and crisis, Moody's reports: AmeInfo

According to Moody's, the drop in oil prices poses two key challenges for the Islamic finance industry.

Anouar Hassoune, a Moody's Vice-President/Senior Credit Officer and co-author of the report, says:

'Firstly, there is still a vital link between oil prices and Islamic banks as most of the latter operate in hydrocarbon-exporting economies. As they face increasingly limited funding sources, Islamic banks will find it more difficult to grow going forward. Secondly, oil liquidity has been a major driver of the disintermediation process in the Islamic finance industry. With reduced oil liquidity, not only have sukuk issuances been slowing sharply, thereby depriving Islamic banks of much-needed long-term funding, but pricing on such instruments has been distorted.'

However, Moody's believes such concerns are not unduly significant given that, in previous benign periods, Islamic banks have accumulated asset liquidity and capital on their balance sheets. They are currently also using their core asset liquidity to continue to grow their credit portfolios, despite scarcer funding sources. Moreover, large capital bases are helping to buffer asset price declines and possibly also higher delinquency rates in credit portfolios.

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