DAMASCUS: Islamic banking, once a curiosity, is growing phenomenally, grabbing the lion’s share of business in key markets such as the Gulf, the head of an organisation tracking the system said on Tuesday.

Assets of Islamic banks rose by an average of 24 per cent a year over the last decade and are at least expected to maintain this growth in the next few years, Izzedine Khojah, secretary general of the General Council for Islamic Banks, told Reuters.

“Growth accelerated after the 2001 attacks on the United States. We used to see banks with $40-$70 million capital each; now we hear of $1 billion and more,” Khojah said on the sidelines of an Islamic banking conference.

“Islamic banking has proved the ideal model for the needs of Islamic societies; we are no longer talking about fragments. Governments and central banks have taken the lead in supervising Islamic banks and encouraging growth of the system,” he said.

Khojah pointed to Syria, which passed Islamic banking and insurance laws last year. The country’s first Islamic bank, set up by Kuwaiti investor Ali al-Zumai, is expected to open this year, as well as several insurance companies.

Lebanon, a regional deposit magnet for decades, passed similar laws a few years ago, although conventional banks still dominate the system.

Islamic banking operates by sharing profit or loss between the bank and its clients, instead of interest , which is forbidden by Islamic law.

Under the system, the bank works closely with clients on financing, such as jointly setting up projects with the aim of selling them to third parties.

“Success came through raising the mantra of sharing profit and loss and furthering Islamic principles; we now have an industry with its own standards and tools and supervision that is being improved,” Khojah said.

Banks and Muslim governments have recently set up an arbitration authority and an organisation to streamline accounting standards.

A rating agency has been also established, Khojah said, adding that work is under way to harmonise principles under which the banks operate, with each bank still having its own religious supervisory body.

There are an estimated 300 Islamic banks and financial institutions worldwide holding $300 billion in assets that are predicted to grow to $1 trillion by 2013, Khojah said.

Deposits grew by 13.7 per cent per year from 1998-2003, while in the Gulf deposit growth reached almost double that in the last few years. Profits in the system grew by 50 per cent in 2003 and return of equity was over 15 per cent.

The fastest growing region has been the Gulf Cooperation Council, a region seeing windfall oil revenue, with 60-70 per cent of new deposits there going into Islamic banks.

Western banks have been also starting Islamic operations. Gulf appetite has prompted BNP Paribas to expand its operations in Islamic finance and place it at the centre of the French bank’s Middle East retail strategy.

“To attract clients, Gulf companies advertise they only use Islamic finance for funding; there have been always reservations about using conventional banks, and now there is an alternative,” Khojah said.Fast growth however has not been without hitches, Khojah said.

“There are definitely challenges. Conventional banking has been around for four centuries and we are only three decades old,” Khojah said.

“The objective of Islamic banking was to prove itself,” he said. “Now the goal is to improve quality of services, seek specialisation and come up with new products at lower cost.”—Reuters