ISLAMIC FINANCE MARKET REBOUNDING?

Excerpts from Business Week (Associated Press)

The roughly $700 billion Islamic finance market is expected to "resume its rapid growth" after taking a drubbing last year because of the global financial meltdown, a leading international credit rating agency said Tuesday.

Standard & Poor's said while global sukuk issuances fell by over 50 percent in 2008, to $14.9 billion, compared to the previous year because of the global financial crisis, the outlook for Islamic finance remains strong and the market is expected to rebound. Sukuk are bonds structured to avoid paying interest, in line with Islamic law.

The report offers another indication of broader expectations that the Middle East, as a whole, is better positioned to withstand the strains of the global recession. While growth rates in the region are projected to fall sharply, oil exporters -- despite the current slump in crude prices -- are tapping into an earlier oil-revenue cushion to boost spending and support local financial institutions hit by the meltdown.

"When economies begin pulling out of the downturn, we expect Islamic finance to resume its rapid growth," said S&P Ratings Service credit analyst Mohamed Damak. "The long-term pipeline for sukuk issuance is healthy, and the market is attracting interest from an increasing number of issuers in both Muslim and non-Muslim countries."

The Islamic finance market -- which focuses on investments and financial tools compliant with Sharia or Islamic law -- has gained strength over the past decade, driven by a sizable push by the oil-rich Gulf Arab nations.

Like other financial institutions, Islamic banks sustained losses linked to the current meltdown. But they have been more insulated than others because of Islam's ban on handling interest-bearing financial instruments. In general, Shariah-compliant financial instruments are structured through cost-plus transactions, leases or by tying payments to returns on core assets.

Those guidelines have helped insulate Islamic finance institutions from the kind of problems that led to the subprime mortgage meltdown in the United States, that served as the catalyst for the current global crisis.

The market for Islamic finance products has exploded over the past decade, spreading both in and outside the Muslim world as investors look to meet demand for investment tools viewed as religiously acceptable by Muslims.

The Central Bank of Bahrain on Tuesday said Islamic banking assets held by banks in the Persian Gulf island-nation increased by 50 percent in 2008 to $24.6 billion compared to 2007 levels. Since 2000, Islamic banking sector assets in Bahrain -- a regional hub for this business -- increased by 1,280 percent, the central bank said.

While noting the growth prospects for the Islamic financial services sector, S&P also cautioned that the current global meltdown is creating new obstacles.

"We see specific sources of risk stemming from the deepening economic slowdown in many countries, scarce liquidity, pronounced stock market declines, and plummeting real estate prices," Damak said, adding that the ratings service had "taken some negative rating actions on some Islamic banks over the past six months to reflect these adverse changes."

In a separate sign that investors still see opportunity in the region, one of the world's biggest private equity firms said this week it is beefing up its presence in the Gulf.

New York-based Kohlberg Kravis Roberts & Co. said it got permission to operate in the Dubai International Financial Center and will use the office there as a hub to scout private equity and infrastructure deals throughout the Middle East and North Africa.

The DIFC is the regional home to many of the world's top financial companies, such as Goldman Sachs and Morgan Stanley, although addition of new members had slowed in recent months as the financial crisis grew more severe.

Meanwhile, London-based Barclays Bank on Tuesday named a chief executive of investment banking and investment management for the Middle East.

In appointing John Vitalo to the position, Barclays noted that "many of the largest sovereign funds are based in this region as well as high net worth individuals." Vitalo will add the new position to his role as CEO of Barclays-affiliated Absa Capital in Johannesburg.