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Liquidity woes menace Islamic banks

DUBAI - Islamic banks will face a crisis scenario by the end of September that could include forced consolidation if liquidity does not return to the financial sector, a leading banker said on Monday.

Sohail Zubairi, chief executive of Dar al-Sharia consultancy, said retail lending will be hit first if bank funding remains sparse through the third quarter but that worse could be in store, including a possible bank collapse.

“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 finance industry.

“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.”

“Our problem is the liquidity. We haven’t lost anything. We have been making profits. But we are suffering because of the lack of liquidity,” he said.

Layoffs await the sector as well, he said.

Islamic banks are unlikely to lead the consolidation process themselves and political leaders will probably show the way, as has already happened with the proposed merger of mortgage lenders Amlak and Tamweel, Zubairi said.

“Islamic banks will not take any voluntary measures at all,” he said. “Islamic banks need to get bigger and one way could be a merger.”

But to date, Islamic bank executives have denied any intent to merge, Zubairi said.