Moody’s identifies weaknesses in Islamic banking that may pose threat
Moody’s Investors Services has published a report which reveals that Islamic banking, cited as more resistant to the negative consequences of the credit crunch, faces its own set of particular difficulties.
Entanglement and displaced commercial risks are considered to be the most serious financial risks Islamic banks face. This is a byproduct of the very nature of Islamic lending arrangements and will not likely be changed.
The report also states that the Islamic banking business model makes the firms subject to other non-financial risks.
These risks include the possible perception that an institution may not be compliant enough with Shariah principles. An example of this reared its head in 2008 when Shariah authority Mufti Taqi Usmani declared that most Islamic bonds, or sukuk, were actually unislamic. The sukuk market dried up substantially in the wake of that opinion.
The promoters of Shariah-Compliant Finance are hard at work spinning the Moody’s report as old news are wide of the mark, as this article from Asharq Alawsat newspaper attempts to do: