Interest free Islamic banking takes roots

Kuala Lumpur: Rising oil wealth is lifting Islamic banking - which adheres to the laws of the Koran and its prohibition against charging interest into the financial mainstream.

Big banks, including Citigroup, HSBC and Deutsche Bank, as well as financial capitals like London, Tokyo and Hong Kong, are all going into the Islamic banking business. An estimated 300 Islamic financial institutions hold at least $500 billion in assets, an amount that is increasing more than 10 per cent a year.

In addition to Islamic loans, there are Islamic bonds, Islamic credit cards and even Islamic derivatives. Loans and bonds that conform to the Koran are already available in the US. And Britain, Japan and Thailand are contemplating issuing Islamic bonds of their own.

"This is an industry on its way from a niche industry to becoming a truly global industry," said Mr Khawaja Mohammad Salman Younis, the managing director for operations in Malaysia for Kuwait Finance House, the world's second-largest Islamic bank, after Al Rajhi Bank. "In the next three to five years you'll see Islamic banks coming out in Australia, China, Japan and other parts of the world." In Islamic banking, financiers are required to share borrowers' risks, meaning that depositors are treated more like shareholders, earning a portion of profits. Financing deals resemble lease to own arrangements, layaway plans, joint purchase and sale agreements, or partnerships.

The stampede into Islamic finance is mostly an effort to tap an estimated $1.5 trillion of funds sloshing around the Middle East, largely from higher oil prices.

By some estimates, as much as $800 billion of Arab money has moved from the United States and Europe to other regions. Those investments have helped ignite an economic revival throughout the Muslim world at a time of increasing religious conservatism among Islam's 1.6 billion faithful.

A result is expanding demand for financial services that adhere to Islamic law, or Shariah.

Last year, Saudi Arabia's largest lender, National Commercial Bank, overhauled its entire retail business to make it Shariah compliant. Malaysia has emerged as a centre for the industry's development. Here, even non-Muslims are taking advantage of a growing range of Islamic products offering competitive returns.

Source: International Herald Tribune