Islamic finance expands as wealth grows
DUBAI - The market for Islamic finance and banking is growing rapidly in the Gulf thanks to burgeoning wealth and attractive financial instruments.
Studies have put the total value of Islamic equity funds in the Gulf region at around 30 billion dollars (19.5 billion euros), said Khaled al-Masri, partner in asset management at Dubai-based Rasmala Investments.
“Investable wealth in the Gulf Cooperation Council is growing by one of the highest rates in the world ... This increase is being met with more product providers and products being launched in the GCC market,” he said.
The Islamic finance industry worldwide is worth around 700 billion dollars, Moody’s Investors Services estimated in a February report.
Economies of the six GCC member states -- Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates -- have been enjoying remarkable growth over the past few years on the back of record oil prices.
The robust economic performance has inflated local wealth in this Muslim region where many might prefer to seek profit through investments that do not contradict their beliefs.
The basic principle of Islamic finance is the prohibition of Riba (usury), which is correlated with interest in today’s banking.
Islamic funds are also banned from investing in companies associated with tobacco, alcohol, pornography, pork or gambling, all considered taboo by devout Muslims.
Some 125 Islamic equity funds are based in the GCC out of around 320 globally, said Mark Smyth, UK-based managing director of Failaka Advisors, an Islamic fund research company.
“Increasing familiarity with Islamic products combined with the presence of longer and more established funds seems to be driving the current growth, combined with strong returns,” Smyth told AFP.
Islamic finance provides a “solution for investors and consumers who want to adhere to sharia-compliant principles in their investment and consumption decisions,” said Masri, referring to principles in line with Islamic law.
He also pointed out that the sukuk (Islamic bonds) have become appealing at the corporate and government levels as a tool to raise finance, which in turn increased the size of the sector.
A report by the US-based Morgan Stanley investment bank published by the local press in February put outstanding issued sukuk at more than 90 billion dollars worldwide.
Moody’s report put this figure up at 97.3 billion dollars at the end of 2007, expecting the market of Islamic bonds to hit 200 billion dollars by 2010.
It said that the majority of issued sukuks came from Malaysia, which is vying to promote itself as an Islamic finance centre, and the Gulf region.
The UAE had nearly 30 issues of sukuk in 2007 raising about 11 billion dollars, while Saudi Arabia came second with nearly six billion dollars raised with about 15 issues, it said.
“The growth of sukuk as a credible financing tool for regional corporate and state bodies is an important factor” in expanding the Islamic finance market in the GCC, Masri said.
In addition to sukuk, Islamic retail banking is flourishing in the GCC through the launch of full-fledged Islamic banks or the opening of Islamic windows in conventional retail banks.
Noor Islamic bank, which has a market capitalisation of 3.16 billion dollars, according to its chief executive officer Hussein al-Qemzi, was the latest to start operations in Dubai early this year.
“There are more than one and a half billion Muslims around the world, which contributes to the rising demand for banking institutions which offer sharia-compliant services,” Qemzi told AFP.
These services include providing finance to consumers to buy assets ranging from cars to houses, through several schemes like lease-to-purchase and profit-sharing plans, which are presented as free of interest charges.
But these Islamic products, which were first sought to help pious Muslims in managing their wealth, are now being used by non-Muslim clients.
“This can particularly be seen in the UAE mortgage market where many of the important providers offer sharia-compliant products that are being consumed by a large expatriate population which is not necessarily a natural consumer of these products,” Masri said.
Mortgaged assets in the UAE were valued at 12.6 billion dollars in mid-2007, according to a report by EFG-Hermes investment bank. Housing mortgages amounted to 4.9 billion dollars.
“Investors have strong faith in Islamic alternatives, which proved to be credible, steady and socially responsible, regionally and globally,” Qemzi said, explaining the growth in this “lucrative” market.
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