Islamic banks eye western world

The New Age

Islamic finance is slowing as the global financial crisis hits its hubs in Malaysia and the Gulf, but the sector now has a chance to move on to Western economies seeking to boost their financial centres.
Regulatory differences still plague efforts to build cross-border Islamic banking, and harmonisation among different schools of thought is one of the nascent industry’s main obstacles as it looks to grow in European countries with large Muslim communities.
‘There is a need for petrodollars in the West so more countries will be pandering to the rhetoric of Islamic finance to try to recycle petrodollars to their own financial capitals, be that London, Singapore or Kuala Lumpur,’ said Mahmoud El-Gamal, chair of Islamic Economics at Rice University.
In a sign that cultural barriers may be coming down, some experts see sovereign wealth funds injecting cash into global financial centres with the aim of advocating Islamic finance.
As the industry expands into non-Muslim or secular states, the need to educate others about the sector has become greater.
With much high-flying banking talent available after the collapse of the Western banking system, a shortage of staff with Islamic finance knowledge may no longer be a challenge.
But with crisis comes opportunity. The easing market has provided scholars, lawmakers and bankers a window to reassess structures including the sukuk, known as Islamic bonds, which are still under the spotlight as different bodies debate on how compliant instruments are with Islamic law.
Sukuk, once the industry’s hottest product, have dried up, with the Gulf Arab region seeing no issues in the first quarter of 2009.
Activity in the Islamic loan sector is picking up with two Dubai government entities managing to refinance about $2.8 billion through Islamic instruments in April, but experts remain unconvinced the market will return to its previous highs.
‘There has been a sharp slowdown in Islamic financing,’ said Mohsin Khan, senior fellow at the Peterson Institute for International Economics in Washington.
‘So much so that last week last, when Dubai’s Department of Civil Aviation renewed $600 million, eyebrows went up thinking it was a big deal, but relative to a couple of years ago it isn’t.’
Next week, Reuters journalists in London, Dubai, Bahrain, and Kuala Lumpur will bring together the industry’s heavy hitters to ask them how they will overcome those challenges, and where they see future opportunity.
Interviewees at the Reuters Islamic Banking and Finance Summit include the chief executive of Bursa Malaysia, a senior official of the UK treasury, some of the world’s largest Islamic financial institutions as well as regulatory and ratings agencies.
Demand from the world’s 1.3 billion Muslims for investments that comply with their beliefs has soared, and assets that comply with Islamic law range between $700 million and $1 trillion, with some estimates seeing assets growing to $1.6 trillion by 2012.
‘Islamic finance instruments were structured the same way as conventional finance instruments so I think it was propaganda to say they were insulated,’ said Gamal. ‘In 2009, Islamic finance could grow faster because many multinational banks had to cut back quite a bit on lending...’
Islamic law bans interest, and bond holders are paid returns derived from underlying assets. Investing in sectors such as alcohol, pornography and gambling is also prohibited, and deals must also be structured so that risk and reward is shared.