Islamic finance tipped to benefit from turmoil

The unprecedented market volatility could spark renewed vigour in Islamic banking and Shariah compliant products, BDO Stoy Hayward says.

The accountancy and financial adviser firm claims investors will seek alternative financial products with less risk in markets it describes as the most volatile since the 1930s.

Dan Taylor, head of banking at BDO Stoy Hayward, says: “As the risk profile of Islamic banks is generally lower than conventional western banks, this presents a more solid option for both retail and institutional investors and suggests that dealings with Islamic financial institutions will grow dramatically as people switch to more secure products in this environment.

“Further growth of Islamic banking in the UK will also be attributed to their more conservative approach to financing, as the risks are shared with the investor, much like the private equity model. In addition, it is more difficult for Islamic financial institutions to use leverage; therefore their risk profile is naturally lower.”

According to the firm, Islamic banks are among the few financial institutions that still have significant sums of money available to finance individuals and corporations. In contrast, it claims, their Western banking counterparts hit hard by the credit crunch continue to constrict their lending policies.

Currently 20 major international banks operating in the UK have set up units to provide Islamic financial services and have been joined by five stand alone Islamic banks. There are five Islamic financial institutions in Switzerland, while France and Luxembourg each have four.

“In light of the market turmoil, we could expect the number of stand-alone Islamic financial institutions present in the UK to double over the next three years, further reaffirming London’s position as the pre-eminent centre of choice for the provision of Islamic Finance,” adds Taylor.