The religion-based system’s attitude to risk stands it in good stead compared to Western banks.
Islamic finance is set to be a big winner in the current financial crisis, BDO Stoy Hayward said today.
The financial advisor claimed that the religion-based system retains large amounts of money available to borrowers. This is in contrast to mainstream lenders, many of whom depend on inter-bank loans for revenue and have therefore been forced to make cutbacks due to the frozen money markets.
Invented in the mid-20th century by muslims looking for a system of finance that was in-keeping with the tenets of their religion, Islamic finance also has a radically different attitude to risk than other forms of banking. Commonly, the system works on a “risk-sharing” model. For example, Islamic insurance works by policyholders paying into and claiming from a central pool, which is used by all – in contrast to the common Western model. With usury from loans banned by Islam, the leverage – or, more simply, the amount of money owed – by Islamic financial institutions also tends to be lower.
Speaking to FT Advisor Dan Taylor, head of banking at BDO Stoy Hayward, explained: “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.
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