Even as banking segments like securitizing subprime mortgages and financing leveraged buyouts suffer from the current crisis, Islamic finance is seeing spectacular growth.
Islamic law, or Shariah, prohibits the payment and receipt of interest, emphasizing profit sharing instead. It also bans investment in businesses like tobacco, alcohol and gambling.
Over the past year, Shariah-compliant assets have grown almost 30 percent, to more than $500.5 billion, according to analysis of the industry on a global scale, published this month by The Banker with input from a business consultancy, Maris Strategies.
That growth outstrips most other business segments in financial services and looks set to continue as banks – including Western banks like Standard Chartered and Goldman Sachs – feed increasing demand from the world’s 1.6 billion Muslims.
A major factor in the boom has been the high price of oil leading to increased wealth in the Gulf Cooperation Council states and Iran, among others. In addition, countries like the United Arab Emirates, Saudi Arabia and Malaysia aim to broaden government revenues and create jobs by making their capitals centers for Islamic finance.
The industry is in its adolescence when it comes to issues like transparency, accounting and ratings, with very different standards being used. This also means that The Banker’s analysis probably understates Shariah-compliant assets.
“Islamic banks in the U.K. differ in their accounting operations from banks in Bahrain, which in turn differ from banks in Malaysia and Indonesia,” said Nabeel Shoaib, global head of HSBC Amanah, the Islamic finance unit of the global bank HSBC. “Standardization in Islamic finance is necessary to avoid fragmentation and to ultimately create a new asset class that can fully compete with conventional finance.”
Disagreements among scholars on what is Shariah-compliant and what is not impedes progress. Shariah is not a set of codified laws, but a set of interpretations based on the Koran, and it follows that rulings are affected by personal beliefs and cultural influences, noted Joe DiVanna, managing director of Maris Strategies.
There is also a shortage of experienced Shariah scholars because of the huge growth in the Islamic finance industry in recent years. And those scholars need to look at ever more sophisticated products that are starting to emerge – Shariah-compliant hedge funds and equity-linked structured baskets in which the stocks selected are Shariah-compliant.
The Banker study underlines that the vast majority of the uptake comes from customers under 30 who are interested in their cultural and religious identity. Yet there is often a trade-off, since in many markets, conventional savings products can provide better value. This should be less and less the case as more Islamic products are developed, providing one of the main areas of growth for the industry.
In addition, growth will come from providing services to high net worth Muslims and, at the opposite end of the wealth scale, to the many Muslims who do not have access to bank accounts. A form of microcredit that avoids interest payments is an obvious area.
In terms of countries, Iran has the most Islamic finance assets, with $155 billion, as all institutions must be Shariah-compliant, and it has a large population of 71 million. In Saudi Arabia and Malaysia, the banks and insurance companies can offer conventional products as well.
What is surprising in terms of country rankings is that Britain, a non-Muslim country, albeit one with about two million resident Muslims, is the 10th largest measured, with $10.4 billion in Shariah-compliant assets.
This is largely because HSBC Amanah, which has $9.7 billion in these assets, is headquartered in London. But it also reflects the City’s role as a premier global financial services center, with the British government playing a supportive role in the development of the industry.
Britain is intent on becoming the first Western government to issue Islamic bonds and has been exploring the options available, although it looks as though plans to issue them in the first half of 2008 will not be realized because of the need for complex new regulations that comply with Islamic law.
Only last month, Citigroup announced a steep 57 percent drop in net earnings for the third quarter, to $2.38 billion, amid worsening problems in areas like subprime and leveraged loans and fixed-income trading. On Monday, a day after the chief executive resigned, it reduced its third-quarter earnings to $2.21 billion after correcting the value of some securities.
But its Islamic finance unit is going strong: Last year, Citigroup, based in New York, was ranked ninth in underwriting Islamic bonds and loans; this year it is ranked first with a 12.5 percent market share and $4.5 billion of deals, according to Bloomberg.