Liquidity woes menace Islamic banks

By Thomas Atkins and Asma Alsharif

DUBAI (Reuters) - Islamic banks hit by the real estate downturn face a crisis that could include layoffs or more rescue measures if liquidity does not improve, with some players aiming simply to survive instead of grow, leading bankers said on Monday.

Sohail Zubairi, chief executive of Dar al-Sharia consultancy, said sparse liquidity continued to dog lenders and that worse could be in store if conditions do not improve by the third quarter.

"Anything is possible in this scenario," he told the Reuters Islamic Banking and Finance Summit in Dubai. Dar al-Sharia was set up in July 2008 by Dubai Islamic Bank to provide financial and legal expertise for the Islamic finance industry.

Zubairi's assessment, echoed by others at the summit, reflects how the West's financial woes have also punished portions of the Islamic sector, once thought protected due to its conservative nature and ban on speculation.

"There is a real threat to the business of Islamic banking," Zubairi said, referring to the Islamic lending sector overall. "If the liquidity does not return, we will not be able to continue doing our business."

Yousif Khalaf, chief executive of Ajman bank, said bankers were more focused on survival than profitability and that more losses were likely to come to light in 2009.

"Growth and profitability are no longer important objectives for 2009. What is more important is survival," he said. Ajman bank listed in June last year and has had to reverse plans to expand outside its home in the United Arab Emirates.

Khalaf said the extent of the crisis was likely to emerge only later in 2009 as losses from the real estate sector emerge.