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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Oil Liquidity Crunch Likely to Retard Islamic Banking Growth: Khaleej Times

Rocel Felix

DUBAI - Growth in Islamic banking is likely to slow because falling oil prices are squeezing long-term sources of funds in many Muslim countries, Moody’s Investors Service said on Thursday. “There is still a vital link between oil prices and Islamic banks, as most operate in hydrocarbon-exporting economies,” said Anouar Hassoune, a Moody’s vice-president. “As they face increasingly limited funding sources, Islamic banks will find it more difficult to grow moving forward.” Due to decreasing revenues for oil-exporting nations, banks have issued far fewer Sukuks, and the pricing on these instruments has become distorted, Hassoune said in a report. Until crude prices took their drastic plunge in prices last July, revenue from oil exports fuelled a rapid growth in Islamic banking, which is now estimated to be worth $17 billion worldwide. “Oil liquidity is a key driver of Islamic banks’ growth because Islamic banks contribute to the recycling of such liquidity in the economy,” Hassoune said. “Less oil revenue will mean less appetite for banks to issue and carry Sukuks, at a time when the Sukuk market needs more issuances to itself become more liquid and suffer less from price distortion.” Limited long-term funding will also make it more difficult for Islamic banks to properly match the maturities of their asset and liabilities, and they will likely be forced to hold more assets with shorter maturities.

For more on this article, please click on the following link: Oil Liquidity Crunch Likely to Retard Islamic Banking Growth: Khaleej Times