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February 5, 2008

Islamic banking largely unaffected by subprime woes

by Richard Kilner

Story link: Islamic banking largely unaffected by subprime woes

Yesterday Governor Rasheed Al Maraj of the Central Bank of Bahrain informed the Reuters Islamic Finance summit that Islamic banking institutions had not taken up complicated collateralised debt that was related to high risk mortgages as the methods involved were not compatible with Islamic law.

As a result, Islamic banking has been far less exposed to the subprime mortgage crisis than their non-Islamic counterparts.

Their lack of writedowns and losses could clear a path for Islamic banking to expand beyond Arabia and Asia, its traditional strongholds.

In order to ensure that all transactions are fully compliant with sharia law, scholars overlook every part of each deal.

This methodical approach has meant that there are almost never hidden risks that can be suddenly unearthed.

The governor went on to say that he did not expect prices to be affected by the credit crunch, and that the bank will renew $350m of five year Islamic bonds before July.

A pair of Islamic bonds that expire in April and May will be combined into one, and will be priced at 30-35 basis points above Libor.

 

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