Islamic investment banks are too dependent on real estate for their investment activity and they need to diversify into other asset classes such as Islamic private equity and venture capital in order to weather economic crisis, says a new report.

According to "Islamic Investment Banking 2009," published by Yasaar Media and co-published by Unicorn Investment Bank and Doha Islamic, the Islamic finance industry has seen significant shrinkage since the onset of the global financial crisis as the values of investments and deposits have declined in line with global markets.

One of the biggest declines in the crisis has been the value of real estate assets which have tumbled across the globe. The over-reliance of many Islamic investment banks on real estate means that the underlying values of their portfolios have declined too, it said.

The report goes on to argue that a greater diversification into other asset classes would have helped diminish the impact of some of these losses and enabled banks to weather the storm in better shape.

Areas that are particularly ripe for Islamic investment activity include both Islamic private equity and venture capital. Islamic venture capital is a virtually unexplored region of Islamic investment banking and could be set for quick growth when the turnaround comes, the report stated.

Author of the report, Paul McNamara, editorial director of Yasaar Media, said, ‘The fact is that not enough Islamic investment banks have delved into a diverse range of asset classes and as a result the industry is not as robust as it could be."

"While not every bank will want to be involved in every area of investment, a healthier spread of asset classes and diversification away from real estate can only serve to produce an industry that is less prone to market dips and more prone to healthy and sustained profitability," he added.

Yasaar Media is a specialist media house that focuses exclusively on the Islamic finance domain.-TradeArabia News Service