Islamic bankers are learning the hard way that no financial market is immune to international turmoil. A report yesterday by the Islamic Finance Information Service said that the issuance of Islamic bonds had fallen 54 per cent in the first half of this year compared with the same period last year. "The drop in issuance confirms that Islamic finance has become intertwined with global financial markets and is in no way an isolated market," the report said.
The knock-on effect of ailing financial institutions has been felt across the GCC, with some institutions in the region directly linked to failures on Wall Street. Amiri Capital, an Islamic asset management company, has delayed its planned Shariah fund of hedge funds because of the collapse of Lehman Brothers. Lehman was lined up to act as prime broker for the fund, the first of its type. Richard Ellis, the co-founder of Amiri Capital, said the fund would still go ahead, once new partners were found.
"No one is immune or insulated from the pressures abroad - the international finance community is more inter-related than ever," said David Pace, the chief financial officer of Unicorn Investment Bank, a Shariah-compliant firm based in Bahrain, with offices around the world. "Even in Islamic banking, where demand has not waned, it now takes longer to do deals, everything has slowed down, but at least we can still can get deals through."
However, financial institutions are continuing to press ahead with Shariah-compliant products. Salama, part of the Takaful Group, an Islamic brokerage, partnered with BNP Paribas Investment Partners last week to launch BNP Paribas's first Shariah-compliant fund, the Global Equity Optimizer. The first Shariah-compliant hedge funds, valued at US$250 million (Dh918m) were launched in June on the Al Safi alternative investment platform by Barclays Capital and the Dubai Multi Commodities Centre Authority.
And yesterday, Commercial Bank of Dubai launched its own Islamic banking services. "There's been a shift in public demand over the past two years for simpler product structures that are clear, unlike the riskier products that were repackaged over and over, and have now caused chaos in the financial world, said Peter Baltussen, the bank's chief executive. "And in distressed times, we are now able to offer financial products that are in line with people's thinking as the Islamic finance market continues to develop."
Mr Baltussen said that the Shariah-compliant sector should make up 10 per cent to 15 per cent of business for the Commercial Bank of Dubai next year. As financial institutions brace themselves against troubled markets in the region, many agree that the credit crisis is likely to continue for at least another six months. And some are congratulating themselves that they did not get caught by the subprime credit crunch.
"Part of it was luck and part lack of understanding," said Ahmed al Janahi, the deputy chief executive of Noor Investment Group. Foreign and domestic financiers alike are hoping for a return to normality. "There's no doubt that western institutions will revert back into sukuk and pension funds in a big way once liquidity returns, but it's still disappointing that in the region people continue to invest outside rather than inside, even during these difficult times," Mr Pace said.