REUTERS: KUALA LUMPUR - Islamic banks are struggling to develop hedging tools as religious differences cast doubt on the use of derivatives, exposing the industry to risks of increased volatility as markets deteriorate.
Strict rules on transparency and simpler deal structures saved sharia lenders from the worst of the current credit crisis, but their ability to survive future shocks is in question because they have few instruments to guard against wild swings in currency and interest rate movements.
"To the extent there are not enough sharia-compliant liquidity and risk management products, then clearly Islamic finance would be disadvantaged compared to conventional banks and would be less able to manage their liquidity risks," said Hussein Hassan, head of Islamic structuring at Deutsche Bank (DBKGn.DE).
The $1 trillion (694 billion pounds) industry bans banking structures that are vague or ambiguous to avoid exploitation -- a rule which some argue shuts out the use of common hedging instruments such as currency and interest rate swaps and futures contracts.
But as more markets embrace Islamic finance, and the need for risk protection increases, there are growing attempts to find sharia hedging tools. >>> By Liau Y-Sing | Thursday, February 5, 2009
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