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Since the summer of 2007, the global financial system has
been going through a period of turbulence. The economic
fallout of the subprime mortgage crisis and the attendant
dislocation of structured finance in the US caused a major
reassessment of risk across all asset classes and markets
worldwide and an implosion of the banks' balance sheets,
contributing to a global economic slowdown, according to
the IMF, 2008, Global Financial Stability Report, World
Economic and Financial Surveys.
The impact of the current credit crisis on Islamic banking
appears to be limited so far, but the lack of asset diversity
clouds short-term prospects. Write-downs at conventional
financial institutions, following the meltdown of the US
housing market, have already reached close to $500 bn, while
assessing the exposures of financial institutions and devising
means of crisis resolution due to differing and incomplete
disclosure of activities have become more difficult. These
circumstances in wider credit markets have not left Islamic
finance completely unscathed. With the credit crisis that
erupted last year still hobbling the US economy, investment
banks and finance houses, still reeling from the housing
sector meltdown, are seeking capital infusions from sovereign
wealth funds and other institutional investors. At the same
time, Shariah compliance has traditionally resulted in overdependence
on equity and real estate investment, restricting the potential
of risk diversification from a wider spectrum of available
assets. Overall, however, Islamic banking and finance have
remained on the sidelines and have been so far relatively
unaffected by the global financial turbulence.
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