High aspirations: Islamic finance on the rise.
Excess liquidity and the tidal wave of petrodollars flooding into the Middle East are causing a surge of interest in Islamic finance. The growth rate of the industry is now approaching 20%, driven partly by Islamic investors seeking more ethical forms of investment. According to consultant KPMG, some banks are reporting even higher growth rates, such as Arcapita Bank in Bahrain, which reported year-on-year balance sheet growth closer to 40% in 2006.
Malaysia has also witnessed significant growth in Islamic banking, with the number of Islamic bank branches growing six-fold from 126 in 2004 to 766 in 2005, according to Malaysian central bank figures. KPMG says Islamic investment vehicles are also on the rise in new markets such as Syria, Lebanon, the United Kingdom, Turkey and Canada.
The UK already has the Islamic Bank of Britain and the European Islamic Investment Bank. The UK financial regulator, the Financial Services Authority, is reportedly considering two new Islamic banking license applications.
Future growth and product innovation in Islamic finance is expected to encompass asset-backed securities such as sukuk, project financing, derivatives, private equity and retail banking beyond mortgages.
Challenges remain, however. Particularly demanding will be the creation of products such as derivatives, swaps, options, repos, ETFs and hedge funds. KPMG also says that faster uptake of Islamic financial products is being hampered by the issue of regulatory capital and risk weightings under Basel II, a shortage of Shariah scholars and the fact that different scholars interpret Shariah laws differently.
The Islamic financing industry is also facing allegations that it is linked to terrorist financing. According to a recent New York Times article, Dar al-Maal al-Islami Trust—a Bahamas-incorporated holding company with a portfolio of Islamic banks—is a defendant in a consolidated $1 trillion lawsuit brought by the families of those who died in the September 11 attacks on the World Trade Center. It has been accused of aiding terrorism alongside other Muslim institutions also named in the suit.