An Introduction to Islamic Finance: Theory and Practice

Performance of Islamic Financial Services 237

Figure 11.3 shows the sector allocation of two indices and reveals that
the Islamic index has almost no allocation to the fi nancial sector, which
confi rms our earlier assessment that Islamic indices have done better in the
crisis period when investors suffered losses due to problems in the fi nancial
sector whereas Islamic investors had no exposure to that sector.
An S&P study found that, in the fi rst nine months of 2008, commercial
Islamic banks continued to exhibit strong profi tability, reporting an average
return on assets (ROA) of 3.1 percent. These banks appear to have benefi ted
from the supportive economic environment that prevailed in the fi rst half of
2008, from their good effi ciency and from the low cost of risk. In line with
the Islamic principle that all transactions must be backed by a real asset, one
of the preferred asset classes of Islamic banks is real estate. Studies show
that the total direct exposure to the real estate sector for IFIs is equivalent
to about 20 percent of total lending, which is high and increases the IFIs’
exposure.^4 With deteriorating market values, IFIs can face problems in pass-
ing the losses to investors/depositors unprepared to face this reality. IFIs
will have to wait and hope for a rebound in these values to achieve modest
returns for their investors/depositors.
In 2009, the Islamic International Rating Agency (IIRA) conducted a
survey of key Islamic banks to assess their liquidity position and concluded
that although they were not entirely immune from the impact of declining
real estate values and restricted real estate lending, these banks were less

FIGURE 11.3 Comparison of sector allocation of S&P 500 and S&P Shari’ah 500
Source: S&P (2009)

0.90%

2.25%

24.68%

0.26%

21.43%

10.04%

7.46%

10.06%

4.13%

18.79%

4.32%

3.98%

17.98%

10.81%

15.28%

12.80%

8.77%

9.71%

3.33%

13.02%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00%

Utilities

Telecom Services

Info Tech

Financials

Healthcare

Consumer Staples

Cons. Discretionary

Industrials

Materials

Energy

S&P 500

S&P Shari’ah 500