A while ago, Yusuf al-Qaradawi said that the world should switch to an Islamic finance system, as its divine ordinances would prevent speculation, boom and bust. It seems Standard & Poor's, the rating agency, partially agrees.

Islamic Financial Institutions (IFIs) "didn't invest in the structured products that have hampered many conventional banks' financial profiles and performance," said Standard & Poor's credit analyst Mohamed Damak in a report, titled Rated Gulf Islamic Financial Institutions And Takaful Companies Have Shown Resilience To Global Market Dislocation, But They Are Not Risk Immune. "And most IFIs should be equipped to weather the financial downturn and keep the effects on their financial profiles at manageable levels."

However, the agency does warn that IFIs are exposed to the liquidity crunch as well. It is particularly acute for IFIs as there are less short-term instruments with which to manage liquidity. I'd add that an absence of long-term instruments is also a problem. Virtually all sukuk, or Islamic bonds, have been short or medium term, and the banks could really do with some 10-20 year issuance.

S&P's does mention the real estate risks, but this is where I feel the nascent industry could well face some very, very serious problems. Islamic finance is, at its core, asset-backed finance, and while most IFIs are conservative, they have all piled into real estate, and have lent a lot to contractors, developers and homeowners, all of which are struggling right now. Watch this space...