LONDON: Islamic finance is soaring around the world owing to an influx of petro-dollars from the Middle East and growing demand by investors, both Muslim and non-Muslim, according to analysts.
The Islamic finance sector, compatible with Sharia law based on the holy Quran, is now worth between 300 and 500 billion dollars, economists estimate, compared with 200 billion dollars two years ago.
The number of Islamic retail banks and investment funds number in their hundreds and Western financial institutions are increasingly offering products that comply with Sharia law, including Citigroup, Deutsche Bank, HSBC, Lloyds TSB and UBS.
Islamic finance bans the earning and payment of interest and forbids investment in businesses linked to the alcoholic drinks and gambling sectors.
Japan will be the first major industrialised country to issue Islamic bonds if the Japan Bank for International Cooperation goes ahead with a recently-announced plan aimed at attracting money from oil-rich Muslim countries.
“The (Islamic finance) industry is doing better than ever,” said Rodney Wilson, director of postgraduate Islamic studies at Durham University, northeast England.
“There is a lot of money flowing into the Islamic finance institutions and conventional banks which are also offering Islamic finance products. It’s obviously related to the high price of oil and the money flowing into the Gulf” countries, including Saudi Arabia, Kuwait and the United Arab Emirates.
Rapidly-growing investments into the Persian Gulf region are increasingly complying with Sharia law.
Among the current projects being backed by Islamic investment include the building of a so-called economic city north of Jeddah in Saudi Arabia at a cost of 27 billion dollars.
Islamic finance is also enjoying strong growth in southeast Asia. Earlier this month, the central bank of Malaysia said it planned to conduct Islamic financial business in international currencies to help increase investment from abroad.
Modern Islamic capitalism was created in Egypt during the early 1960s, with the introduction of savings accounts. It was not until the 1990s, however, that it really took off, with the development of Sharia investment funds.
One area of Islamic finance which is burgeoning is the bond market, with much of the investment coming from non-Muslim overseas investors, according to a recent study by a London-based law firm.
During the first half of 2006, the value of issued Islamic bonds, or sukuk, more than doubled to 4.585 billion dollars, according to Trowers and Hamlins, whose offices abroad are based mainly in the Persian Gulf region.
The Kuwait Finance House earlier this month launched the first sukuk in China to finance construction of a power station, whose profits will be shared among investors.
“There has been a huge inflow of oil wealth into Islamic investment funds which are, naturally enough, seeking Islamically-compliant vehicles, such as sukuks, in which to channel funds,” said Neale Downes, a partner at Trowers and Hamlins.
“Foreign investors represent an increasingly dominant segment of the market for Islamically-compliant debt. What is really significant is that they are now comfortable buying corporate sukuk and not just those issued by sovereign borrowers,” he added.
The German regional state of Saxony, which in 2004 launched the first European sukuk, has seen its initiative mirrored by the World Bank and the Texan oil company, East Cameron Partners.
Even the most opaque of finance sectors are today seeking to join the Islamic bandwagon.
The International Swaps and Derivatives Association has recently signed a deal with the International Islamic Financial Market, based in Bahrain, to define Islamic standards.
Meanwhile the leading Islamic speculative fund, Algo Al-Qayyim Fund, was approved in February to operate on the British island of Jersey.
And according to a study last year by London South Bank University, the European property market is the preferred investment arena for Islamic funds.—AFP
