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Moody's: Recovery of GCC Islamic Investment Banks Depends on Improved Risk Management

Global Credit Research - 22 Sep 2010

Paris, September 22, 2010 -- A recovery of the tarnished Shari'ah-compliant investment banks (SCIB) would require that lessons from the crisis -- such as the need to improve risk management -- be applied, says Moody's Investors Service in its Special Comment on this troubled banking sub-sector. The global financial crisis had brought about a near-collapse of the SCIB model, with a handful of spectacular mid-crisis defaults of a few SCIBs further severely undermining the SCIB model.

"A potential rebirth of this sub-sector is likely to take a different form from the pre-crisis model," says Anouar Hassoune, Vice President - Senior Credit Officer in Moody's Financial Institutions Group. "Specifically, Moody's expects SCIBs to evolve away from being the preserve of boutique investment houses created by individual investment bankers. Instead, Moody's believes that the SCIB concept could re-emerge in the form of specialised business lines of larger Islamic banking groups seeking to diversify."

Moody's new report explains how, in the years before the crisis, a handful of key SCIBs diversified the sector by moving away from pure banking intermediation and into more sophisticated investment/merchant banking lines of business, like private equity, asset management, brokerage, infrastructure and structured real-estate finance, as well as advisory, corporate and project finance -- thereby laying the groundwork for an SCIB sector. These developments and innovations meant that -- just before the crisis -- Islamic finance was poised to enter a new era that would bring Islamic finance closer to the profit-and-loss sharing, asset-backed and real-economy financing ideals, which traditional Islamic universal banks had not previously been able to handle fully.

Specifically, Moody's report says that Islamic finance was on the cusp of moving beyond its sole focus on raising cheap murabaha or wakala deposits (so as to recycle them into safe, stable and expensive retail and corporate loans) -- and to adopt a greater emphasis on risk-taking instead. However, the onset of the financial liquidity crisis prevented the dawning of this new era, and almost led to the collapse of the SCIB model.

This report reviews developments from 1997-2007, identifies the three groups that were central to the inception of the SCIB model and assesses the impact of the crisis. It also analyses the prospects for this sub-sector and the possible rating ranges that the (as yet unrated) SCIBs might attain under Moody's rating methodology.

The new report, entitled "GCC Islamic Investment Banks: Mid-Crisis Collapse to Force Improved Risk Management", is now available on www.moodys.com.

NOTES TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1020; Daniel Kolter in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7 495 228 60 60; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-3758-1350; Hector Lim in Sydney +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Leon Claassen in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 237 9536; or visit our web site at www.moodys.com

Paris
Anouar Hassoune
VP - Senior Credit Officer
Financial Institutions Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Limassol
Mardig Haladjian
General Manager
Financial Institutions Group
Moody's Investors Service Cyprus Limited
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's France SAS
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Moody's: Recovery of GCC Islamic Investment Banks Depends on Improved Risk Management
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