2 May 2009

East Africa: Islamic Banks Safe From Crisis

Nairobi — Islamic banks might come out unscathed from the raging global economic crisis thanks to their unique business model.

Experts in Islamic banking now claim the current global economic downturn would never have happened if the banking sector had pegged its business on the Islamic model.

Gulf African Bank, which is one of the banks operating in Kenya under strict Islamic banking law, says all of their operations have not felt any heat from the meltdown. The CEO, Najmul Hassan says none of the 375 banks that practice Islamic banking has been affected by the crisis so far.

"The reason for this is that Islamic banking does not go into the products that got these banks into the current downfall. Look at Societe Generale, it lost billions in speculative transactions; Somitu Corporation lost because it was speculating on prices of copper. These are the very things that Sharia banking disallows," Hassan explained.

He noted that Islamic banking is based on neither speculation nor interest but on real growth.

"All the trading that happens in this world is not interest-based; there is real trading taking place. Some assets are purchased, you add value, and you sell them out. That is what Islamic banks do," he said.

Hassan explained that Islamic banks buy assets, add value and sell them on deferred payment and make their profit from taking part on real economic activity in a society as opposed to conventional banks which make money on fractional lending which he described as 'paper business'.

Speaking during the first ever Islamic banking conference in Kenya, Hassan noted that the biggest challenge for Islamic banking in the country was demystifying the concept.

"Most people stereotype us and make our banking concept look like we discriminate people on grounds of religion. This is not the case because we are open to everyone," he said.

His comments come at a time when most banking institutions in Kenya, especially those with connections to the Western economies are on high alert. Some have tightened their lending terms while others have raised the value of collateral.

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