Islamic finance banks on expansion

The Islamic finance industry could double in size in the next five years but it is deeply divided about whether it should seek to duplicate conventional banking products as it grows. The industry's combined balance sheet could grow to US$2 trillion (Dh7.34tn) by 2015, said Rushdi Siddiqui, the global head of Islamic finance at ThomsonReuters, the information provider.

So far, only between 3 per cent and 5 per cent of Muslims worldwide do their banking with Sharia-compliant institutions, which offers large growth potential. "There are 1.6 billion Muslims and 95 per cent have no access or have not heard of Islamic finance," Samad Sirohey, the chief executive at Citi Islamic, the Sharia-compliant arm of Citibank, told the International Islamic Finance Forum in Dubai.

Islamic banks, for example, have barely tapped the microfinance market. "We have not yet reached our real audience," said Moinuddin Malim, the chief executive officer at Mashreq Al Islami, one of the oldest Islamic banks in the region. "We need to develop microfinance to enable communities to thrive in their own right and bring living standards to them." Another key driver of growth will be new products and tools to mitigate risk, Mr Siddiqui said. However, the use of derivatives remains a highly divisive issue.

Half of the participants polled at the Islamic summit favoured their use, while one third was strictly opposed. "We have to face reality. It is very important to have a broad range of [risk management] tools to compete with the conventional industry," said Ahsan Ali, the head of Islamic origination at Standard Chartered Saadiq, the UK bank's Sharia-compliant unit. "If you enter, for example, 15 to 20 years of project financing, it impossible to do so without hedging."

One of the key questions is whether Islamic Law permits hedging and short-selling, key instruments for hedge funds. Many Sharia scholars consider short-selling prohibited, but some scholars have accepted certain short-selling techniques. Mr Malim argues that regulators should push the industry to remain true to its roots of sharing risk."The industry should go to the purest form of Islamic finance rather than mimicking the products we have in the conventional space."

He said many Sharia-compliant structures such as the murabaha and ijara, which are commonly used for Islamic bonds, were designed only to achieve short-term goals. But they were not true to the principles of risk-sharing such as for example, mudarabah and musharakah, two types of commercial enterprise partnerships. The musharakah is widely seen as the purest form of Islamic financing. In terms of growth potential, experts still see a large potential in Sharia-compliant asset management, which is still in its formative stage and mostly offers plain funds. "There will be more diversity and that will make people pull their money out from under their mattresses," Mr Siddiqui said.

A greater streamlining of Islamic finance products would help the industry grow, Islamic bankers say. A majority of bankers welcomes applying universally accepted standards to key Islamic finance products, a poll at the summit showed. This would boost conventional participation in the sector, although any such standardisation is likely to take long. The scarcity of Sharia scholars slows innovation. In addition, the industry should agree on a checklist that has to be ticked off when designing a product, which would speed up the process and boost consistency.

Different regulatory approaches pose another hurdle. While Malaysia has a central body that assures products comply with the Sharia's understanding of risk sharing and risk participation, other jurisdictions leave it to the banks and their boards to decide on compliance. "This makes products [from different jurisdictions] compete head on," said Mr Malim. Saudi Arabia, the biggest Islamic banking market, does not have specific regulations. More than 90 per cent of consumer banking in Saudi complies with Sharia.

uharnischfeger@thenational.ae