Islamic banks have been largely shielded from the U.S. mortgage crisis, which may even open doors for expansion beyond traditional strongholds in Arab and Asian markets, Bahrain’s central bank governor said.
Islamic banks should have shunned collateralised debt obligations linked to subprime, or high risk, mortgages because such complex instruments do not comply with Muslim law, Rasheed al-Maraj told the Reuters Islamic Finance summit on Monday.
Islam bans lending on interest and trading of debt. Scholars vet every stage of a transaction to ensure compliance with sharia, or Islamic law, making it unlikely that risks were lurking in the balance sheets of unsuspecting lenders, he said.
“In Islamic banking, there is no black box that needs a genius to unwind it,” Maraj said. “Many of these conventional products that have been under stress lately are very complex and need special risk management tools
“In Islamic banking you will not have this kind of thing. Some of these products would not be sharia accepted.”