ISLAMIC BANKS NEED CAPITAL INJECTION - NEWS!!!!

NEWS! NEWS! NEWS!

The Islamic Bank of Britain is operating in the red so far in 2009, after having posted a loss in 2008.

If you listen to some promoters of Shariah-Compliant banking, you’d have the impression that Islamic banks have all been untouched by the financial crisis. But, that certainly is not the case in Dubai, as we have noted recently. In Qatar, that country’s regime has just injected a huge sum of capital to shore up its banking sector, including two large Islamic banks.

Surprise? Well, I am not.

My main reasons are as follows :

1) Despite the fact that Islamic banks do not deal in interest, they are part of the global financial market that has tie up with interbank interest etc etc

2) They deal with real estate assets and everyone knows that during economic turmoil, the values of these assets are declining

3) Most of the Islamic banks mode of financing are murabaha-based (where profit rate has been fixed upfront), not profit and loss sharing like mudharaba and musyaraka

Therefore, these Islamic banks will be affected by the economic crisis, they are not invincible. However, the impact is not as great as their conventional counterparts.

It is hoped that people out there are interpreting the situation correctly and do not judge and conclude that if they are not dealing with interest, they are deemed to be invincible. One must remember that Islamic banks are still in its infancy stage (only been in business about 3-4 decades ago) as compared to the conventional banking. Despite the difference of philosophy behind each banking system, their paths are still intertwined one way or the other as Islamic banking has yet to develop to its true potential and according to its full Shariah requirement.