SE Asian syariah banks risk crisis

SOUTHEAST Asian syariah banks are vulnerable to a similar crisis that hit conventional lenders as a push for market share creates acceptance of risky products forbidden by Islam, a religious adviser said yesterday.

Strict lending rules and rigorous demands for transparency have shut out opaque structures and shielded Islamic banks from the worst of the financial crisis.

But this austerity has also kept the US$1 trillion Islamic finance sector relatively small despite a boom in Gulf petrodollars which propelled the sector into the limelight.

There are now concerns that banks' pursuit to win more investors could prompt the industry to compromise its strict principles to make its products more appealing.

Southeast Asian Islamic banks are especially susceptible to a crisis due to their use of derivatives and options although any difficulty would not be on the same scale as that which hit Western banks, said syariah adviser Said Bouheraoua.

"Most of the problems in the Western countries is based on speculation, on derivatives and options," said Said, an Algerian scholar who advises Malaysian syariah lender Affin Islamic Bank, which is part of banking group Affin Holdings.

"Most of it is debt, transfer of debt or making profit from debt."

Middle Eastern syariah scholars tend to frown on the use of derivatives and options, seeing them as a form of gambling, which is banned under Islam.

These differences between financial centres over the use of derivatives and option are due to varying interpretations of Islamic law. Malaysia, which has the world's largest Islamic bond market, follows the Shafi school of Sunni Islam and is the most flexible in interpreting Islamic law in finance.

Saudi Arabia, with its Wahhabi form of the Hanbali school, is the strictest, while the Gulf states chart a middle course.

Syariah advisers must give their stamp of approval before a product can be sold as an Islamic instrument. They sit on the boards of Islamic financial institutions and are experts in Islamic law and international finance.

Pressure to keep up with conventional banks' wider range of products is driving Islamic lenders to imitate their interest-based peers, Said said.

"Because of the lack of creativity especially in Southeast Asia Islamic banks are trying to duplicate or Islamise (banking products)," Said said.Reuters