Islamic finance well positioned for GCC recovery

Published December 17th, 2009 - 11:14 GMT

NCB Capital, the investment banking arm of National Commercial Bank, Saudi Arabia’s largest bank, believes that Islamic finance, an increasingly important element of the GCC financial sector, is well positioned to lead the way in the region’s pending economic recovery.

Speaking at the World Islamic Banking Conference in Bahrain today, Dr Jarmo Kotilaine, Chief Economist of NCB Capital, said, “Islamic capital markets seem to have performed well in terms of returns compared to conventional markets and they have weathered the current financial crisis well.  This is attributed to their inherent ethical and non-speculative nature.”

Dr Kotilaine noted that in 2008, the S&P500, GCC Composite and Europe 350 Composite had worse returns than their Shariah counterparts and that so far this year the performance of the Shariah-compliant indices has been better than the conventional indices.

“The global crisis has to a significant extent been a crisis of leverage and financial complexity.  Taken together, the prudent macroeconomic policies of the GCC governments combined with the simplicity of Shariah-compliant finance have acted to lessen the impact and begin to lead the region out of the downturn.”

There are, however, factors that are restraining the growth of Islamic finance including differences in Shariah interpretation, lack of standardization in approaches and a thin secondary and Islamic interbank market.  Nevertheless the fact that Islamic finance is effectively an example of principles-based regulation means that investors can take comfort in a high degree of compliance with certain widely-recognized values and principles.

Dr Kotilaine concluded, “Thanks to aggressive policy responses and the improving global economic environment, the GCC economy is likely to rebound to sharp growth in 2010.  Indeed we predict the Saudi Arabian economy will grow by 3.8% in 2010 while the UAE should return to 1.6% growth. Islamic intermediaries are well positioned to capitalize on and drive this recovery.”

Other opinions from NCB Capital’s Economics team can be read at

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