Property reliance, money mkt woes plague sharia banks

Islamic finance needs to address its over-reliance on real estate and the lack of a robust money market which puts the industry at risk, a top Malaysian central bank official said on Wednesday.

Islamic financial markets were billed as a safe and moderate alternative as conventional banks plunged into a crisis, but a slump in property prices in the Middle East has hit some sharia financial institutions.

Bank Negara deputy governor Mohd Razif Abd Kadir said Islamic financial markets would not be spared the effects of the global downturn, despite escaping the earlier subprime crisis.

'Based on the economic environment that is down, it will be affected,' Razif told Reuters on the sidelines of an Islamic finance conference.

Bank Negara, together with the capital market regulator, oversee the country's Islamic bond market, which is the world's largest.

Razif earlier said in a speech that the Islamic finance sector needs to deal with several shortcomings.

'There are a lot of issues that need to be addressed, for example the link to economic activity also has got its shortcomings because they are too focused on real estate for example,' he said.

'In the absence of a money market that is also a source of risk.'Some countries lack strong Islamic money markets, he said. Razif said the Islamic industry needs products that can compete with conventional instruments.

'Sharia issues alone are not adequate,' Razif said. 'If you are sharia compliant but you are not competitive, in a matter of time even Islamic banking customers will shy away.'

Source: Reuters 6 May 2009